Q1 2025 Novanta Inc Earnings Call
Gary: Good morning. My name is Gary and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Incorporated's first quarter 2025 earnings
Gary: All lines have been placed on mute to prevent any background noise After the speakers remarks there will be a question and answer session To ask a question you may press star then one on your telephone keypad To withdraw your question please press star then two
Please note, this event is being recorded.
Gary: I would now like to turn the conference over to Ray Nash, corporate finance leader for Novanta. Please go ahead.
Gary: Thank you very much. Good morning and welcome to Novanta's first quarter 2025 earnings conference call. This is Ray Nash, corporate finance leader for Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthijs Glastra, and our Chief Financial Officer, Robert Buckley.
Gary: If you've not received a copy of our earnings press release issued today, you may obtain it from the Investor Relations section of our website at www.novanta.com. Please note this call is being webcast live and will be archived on our website shortly after the call.
Gary: Before we begin, we need to remind everyone of the safe harbor for forward-looking statements that we've outlined in our earnings press release, shoot earlier today and also those in our SEC filings. We may make some comments today both in our prepared remarks and in our responses to questions that may include forward-looking statements.
Gary: These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations, and in forward-looking statements made today represent our views only as of this time.
Gary: We disclaim any obligation to update board looking statements in the future even if our estimates change, so you should not rely on any of these board looking statements as representing our views as of anytime after this call.
Gary: During this call, we will be referring to certain non-GAAP mantle measures.
Gary: A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release.
Speaker Change: To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliation promptly on the investor relations section of our website after this call. I'm now pleased to introduce the Chair and Chief Executive Officer of Novanta, Matthijs Glastra.
Matthijs Glastra: Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta achieved a successful first quarter of 2025.
Speaker Change: Hitting our expectations for sales on profit, continuing our organic growth bath and delivering strong capital performance, while effectively navigating a challenging environment.
Speaker Change: In the first quarter, we delivered $200 to $33 million in revenue, which represents organic growth of 2% and reported growth of 1%.
Our orders grew 3% year-over-year [inaudible]
Speaker Change: Adjustment gross margins were 46% in line with expectations and adjusted the bit that was $50 million.
Speaker Change: We generated a robust 32 million dollars of operating cash flows in the quarter, continuing our streak of delivering strong operating cash flow conversion of above 120% of the net income for the eighth consecutive quarter.
Speaker Change: These strong results reflect a strength of an event as business, culture, and tea. I'm especially proud of our team's resilience and discipline, execution in this volatile environment, while deeply embedding an event a growth system in our culture.
Speaker Change: In addition to our strong financial performance, I'm pleased to announce the successful closure of a small strategic tuck-in acquisition at the start of April , marking our first acquisition of 2025.
Speaker Change: We continue to work on a large pipeline of additional acquisition opportunities, which remains a top priority for Novanta this year.
Speaker Change: Before I dive into the market environment, I want to emphasize that Novanta's diversified business model with more than 3,000 customers with exposure to high growth medical life signs in advanced industrial markets has consistently demonstrated resilience across various geopolitical and macroeconomic scenarios.
Speaker Change: Our strategy focused on winning a market with long-term secular tillings such as precision robotics and automation, advanced minimally invasive and robotic surgery, and precision medicine.
Speaker Change: Many applications within these markets are still in the early stages of their adoption cycles, offering significant long-term growth potential.
Speaker Change: We forge deep and long-term partnerships with leading OEM customers in these markets addressing their most challenging problems with our innovative proprietary solutions and technologies.
Speaker Change: Our as-of-life business model drives high-cissual conversion and growth, which we re-invest into business and acquisitions, creating long-term, sustainable, and consistent cash flow growth and shareholder value.
Speaker Change: Be sure to pursue their winning growth strategy, focus on where we play and how we win, and our deployment of the Neventa Growth System is what drives our performance, no matter the environment.
Speaker Change: With that said, let me make a few comments on the market environment and how Novanta is responding to the dynamics we see. Our social healthcare markets continue to thrive with strong patient procedure growth and hospital spending driving high single-digit growth in our advanced surgery business.
Speaker Change: We expect to grow faster than the healthcare market in 2025 from new product launches with an end surgical robotics and minimally invasive surgery applications.
Speaker Change: These products are quickly adopted because they enhance patient safety, improve surgical throughput, and help meet new regulatory requirements.
Speaker Change: We are reconfirming $50 million with incremental new product revenue for 2025, predominantly driven by our next generation smokey evacuation, insurgulators, and next generation endoscopic pumps.
Speaker Change: In addition to strong new product allowances within our medical devices markets, we're also seeing strong demand for a new product allowances supporting so-called physical AI applications such as warehouse automation, precision robotics, humanoids, RFID and EUV lithography solutions, and other technologies that support a near-suring of manufacturing.
Speaker Change: We're confidently pushing forward with our investments in innovation and commercial excellence in his markets.
Speaker Change: Despite this beck drop of strong secular growth drivers, in a new term, it's fair to say that the macroeconomic environment we're dealing with today is one of the most uncertain and volatile that we've seen since the early days of the COVID-19 pandemic.
Speaker Change: Since her last call, trade war uncertainty and tip for debt retaliatory responses dramatically escalated.
Speaker Change: Decides in timing of terrorist, their resolution, or retaliatory responses are largely unknown at this point. This uncertainty drives reluctance by our customers' customers to make capital investments.
Speaker Change: which results in poor visibility for our R.O.O.E.M. customers, particularly in industrial and life sciences markets.
Speaker Change: Novanta has responded well to similar situations in the past and is even better prepared today. Over the past few years, we have enhanced the scalability and resilience over operations since this is supply chain.
Speaker Change: Reduce reliance on Chinese imports and strengthen our each out of China strategy, including local teams, supply chains, and $50 million in locally manufactured product revenue.
Speaker Change: This is later a foundation that we can use to accelerate further manufacturing network optimization.
Speaker Change: In recent quarters, we also strengthen our organization and leadership. For example, our new code, chief operating officer roles allow us to respond to these situations in a more cohesive, nimble and rapid way.
Speaker Change: In the first quarter, we onboarded a new global hat of supply chain with deep expertise in our markets, technologies in the Novanta Grow system.
Speaker Change: Additionally, we welcome the new Global Hand of the Novanta Gross System, who brings with him best-of-class experiences in training from them are afforded.
Speaker Change: So while the trade and tariff changes in place right now have currently increased our manufacturing cost by approximately $20 million annually.
Speaker Change: We expect to mitigate this impact through a multi-pronged strategy that allows us to still maintain our full year 2025 EBDA guidance. We issued in February of this year.
Robert will go into 30 details on our approach shortly.
Speaker Change: While addressing short-term terror mitigation, we remain steadfast in our focus on our top three priorities for an event in 2025 as discussed in our last call.
Speaker Change: First, rep or plan new products and achieve the 50 million dollars of growth from new products this year. Second, deliver strong profit margin and cash flow performance by driving the Novanta growth system deep into our culture and operations.
Speaker Change: This now includes implementing a tile response plan to counteract their headwinds and market demand disruptions.
Speaker Change: And third, acquire additional companies that fit or strategy at attractive returns and in a manner that evolve her portfolio to secular growing and resilient markets and business models.
Speaker Change: Now I'll return to the first quarter to give more details on our results and strategic growth metrics.
Speaker Change: In the first quarter, medical market sales made up 55% of total Novanta sales and advanced industrial markets made up 45% of total sales. Sales to both Ed Markis grew low single-digit year-of-year despite the short-term uncertainty in the industrial space.
Speaker Change: We remain confident in our long-term exposure to sexually growing niches in the Zen market. Aventa is positioned in many attractive applications and enabling technologies, supporting the so-called physical AI applications, ensuring and year-suring of manufacturing, which is driving robotics and automation investments, particularly due to labor costs and labor shortages.
Speaker Change: Many of these applications and enabling technologies are still in the early stages of their adoption of cycles offering significant long-term growth potentials, or the mid-to-high single-digit organic growth.
Speaker Change: In the first quarter, we saw solid design win activity, particularly in our automation enabling technology segment where design win grew by strong double digits, as customers continue to work on next generation platforms despite the market turbulence.
Speaker Change: Some examples of recent design wins include warehouse automation robotics, RFID solutions, advanced semiconductors, laser-edited manufacturing, micro-machining, and also humanoid robotics.
Speaker Change: Also in the first quarter, new product sales groups based strong double digit year of a year and our vitality index climbed to just below 20% of total sales. With the anticipated ramp of new products, we expect these metrics to further improve over the course of the year.
Speaker Change: To highlight a few new product examples for you, first, all major customers have now launched for second-generation, smoke-evecuation, in-surflator products with favorable market
Speaker Change: The market reception, regulatory drivers, customer orders, and customer engagement of these products give us confidence, these new products rams are on track despite the turmoil
Speaker Change: Next, we're very excited about recent launches that further expand our lead and ultra-precise high density and high safety motion control on sensing product lines.
Speaker Change: Tired at where Azure Domation and Human Oils, where Novanta has unique proprietary technologies. Examples include our Denali and Everest Safe server drive, the drives which enable embedded safety of precision robots in Azure Domation and Human Oils at the industry leading power density.
Speaker Change: We're also excited about our next year's Axiom Vero, four-store sensors with excellent noise immunity and high stiffness, providing robots with a sense of touch which is critical in these applications.
Speaker Change: The benefits are smarter planning and reacting, faster motion via quicker response times, compression of goods to fill goods more efficiently, and the ability to handle clubs, cluttered, unpredictable environments.
Speaker Change: In April , Moventa acquired Keon, an integrated RFID solution provider based in Barcelona, Spain. Keon combines proprietary RFID hardware with AI and AMS cloud-based software to offer real-time inventory and asset management.
Speaker Change: As a long-term Novanta customer, Kion is a market leader in providing retail stores and warehouses with precise location data within an inch of accuracy.
Speaker Change: Inventory Trace Ability and Predictive Insights, Improving Revenue, Customer Experiences, Improffability with Reduced Stockouts.
Speaker Change: This acquisition aligns with Novanta strategy to expand into intelligence and embedded software-based subsystems and solutions.
Speaker Change: Kiel Marxer first entry into AI and ANS cloud-based software, integrated with proprietary RFID hardware, and fills a crucial software integration gap for better penetration into the medical market, including hospitals.
Speaker Change: This technology aims to improve traceability, reduce costs, enhance space and outcomes, and improve staff and base and experiences.
Speaker Change: Well, medical customers have longer design in cycles. We are excited about T.O.'s impact on retail customers and expect a rapid market adoption driving double-digit growth.
Speaker Change: Though the near-term impact on Novanta's sales on profit is small, we anticipate significant contribution to overall growth from 2026 onwards.
Speaker Change: Looking beyond this transaction for 2025, acquiring new technologies and businesses remain at top priority for our team.
Speaker Change: We continue to have a large and exciting pipeline of additional targets. Valuations are more attractive, and we believe that the near-term microeconomic environment is an added catalyst to increase actionability.
Speaker Change: Our balance sheet is well positioned for additional transactions while maintaining our historical discipline on both cash returns on financial leverage.
Speaker Change: To conclude, I'm very pleased with our first quarter performance. We met sales and profit expectations, exceeded cash flow expectations, and effectively navigated disruptive market events.
Speaker Change: We're well positioned and are leading in to seize new growth opportunities in 2025 amid trade uncertainty and volatility.
Speaker Change: Our new product rams are on track for 2025 and we're confident in achieving our goal of 50 million dollars of incremental new product sales
Speaker Change: with revenue expected to grow further in the following years. Additionally, this environment presents opportunities for attractive new acquisitions as demonstrated by the Keon acquisition.
Speaker Change: With that, I'll turn the pro over to Robert to provide more details on our operations and financial performance. Robert
Robert Buckley: Thank you, Matthijs. Our first quarter, 2025 non-GAAP adjusted gross profit was 108 billion or 46% adjusted gross margin compared to 107 million or 46% adjusted gross margin in the first quarter of 2024, adjusted gross margins per flat year of year in line with our expectations.
Robert Buckley: For the first quarter, R&D expenses were $23 million or approximately 10% of sales. First quarter, SNA expenses were $46 million or roughly 20% of sales. Adjusted EBITDA was $50 million in the first quarter, 21% adjusted EBITDA margin, demonstrating growth of 1% year over year.
Robert Buckley: On the tax run or non-GAAP tax rate for the first quarter was 20% versus 16% in the prior year. Our tax rate increased year over year due to changes in terms of just a little mix of pre-tax income and pillar two implications.
Robert Buckley: Our non-GAAP adjusted earnings per share was 74 cents in the quarter, flat versus the prior year. Our free cash flow was a robust $32 million, exceeding expectations and demonstrating strong cash conversion capabilities from strong networking capital management.
Robert Buckley: We ended the first quarter of a growth set of 392 million and with a growth leverage ratio of 1.9 times. Our net debt was 286 million giving us in that leverage ratio of approximately 1.4 times.
Robert Buckley: Following the Keon acquisition, we expect our second quarter gross leverage ratio to be slightly above two times and our net debt leverage to remain below two. This gives a sample capacity for further acquisitions.
Robert Buckley: In the first quarter, we also re-purchased approximately $6 million worth of comments share. Novanta share re-purchased strategy is focusing on acquiring the stock when the value of the stock is more attractive than both internal investment and acquiring businesses in our acquisition pipeline. Our methodology is based on a cash return on investment. In our view, the stock valuation is currently attractive.
Robert Buckley: But we will continue to balance acquiring our stock with a strategy of maintaining and upcash to fulfill our acquisition strategy and expectations.
For the first quarter, Novanta booked a bill with $0.88.
Robert Buckley: Bookings were up 3% year-of-year. We saw slowdown in customer booking activity in the month of February due to increased short-term uncertainty caused by customers from global trade disruptions.
Robert Buckley: While we expect the near term ordering behavior for our customers to remain volatile, orders for the month of March and April did recover and climbed both sequentially and year-over-year.
Now it turns details of the operating segments.
Robert Buckley: In the Automation Enabling Technology segment, first quarter sales grew by 5% year-or-a-year, driven by continued strength in the robotics and automation business unit.
Robert Buckley: The Book to Bill in this segment for the first quarter was 0.90 and bookings were up 16% year-over-year.
Robert Buckley: Adjust the gross margins in this segment were 49% up 70 basis points year-of-year, driven by favorable product mix and strong productivity in our factories.
Robert Buckley: Design went into this segment. We're up strong double digits year-over-year, driven by good execution in our sales teams, the win-new sockets, and I'm covering customer platforms.
Robert Buckley: New product revenues also grew strong double digit year-of-year, and the vitality index was in the mid-teens percent of sales up versus the prior year and in line with expectations.
Robert Buckley: The medical solution segment experienced a revenue decline of 3% the year of year. The organic decline was caused by a precision medicine business unit which serves the life science market.
Robert Buckley: This market experience both disruptions from tariffs and a significant disruption from funding cuts at the U.S. National Institute of Health, which allocates out more than 40 billion annually to the life science industry.
Robert Buckley: While we expect uncertainty and life science to remain for the rest of the year, we are pleased to see strong double-digit growth in our advanced surgery business unit partially offsetting the decline.
Robert Buckley: Advanced surgeries saw high levels of demand for minimum evasive surgical equipment driven by both robust and market dynamics and new product launches.
Robert Buckley: The overall medical solution segment saw a book to bill of 0.85 in the first quarter and the bookings were down 10% year-over-year, caused solely by our precision medicine business unit.
Robert Buckley: However, the vitality index in this segment was nearly 25% of sales for the first quarter, showing a strong double digit growth in new product sales the year over year. This reflects the ramp of our new product launches in the advanced surgery business unit.
Robert Buckley: Adjust the gross margin and segments were 44% in the quarter versus 45% in the prior quarter. The decrease is mainly driven by product mix.
Now turning to our outlook and guidance.
Robert Buckley: Speaking first about tariffs and global trade disruptions, we see this situation impacting our business in three different ways. First, the impact of tariffs on supply chain, which increases the material cost of our products.
Robert Buckley: Second, the impact of reciprocal tariffs from China on U.S. manufactured products shipped to China, which impedes our ability to economic leadership products to Chinese customers from the United States.
Robert Buckley: and third, the impact of weakness in global capital spending caused by the tariff uncertainty, which results in companies deferring investments.
Robert Buckley: Starting with the impact on our supply chain, we believe we can largely mitigate and avoid these costs We have calculated the growth annual impact is approximately 20 million of additional costs based on the tariffs currently in place [inaudible]
Robert Buckley: However, our teams have responded quickly and effectively with a playbook home over the last five years. For starters, they pivoted the second-source vendors who are not subject to the tariffs. Second, we move some manufacturing to other regions to avoid importing into the United States. [inaudible]
Robert Buckley: Third, we work with Customs offices to implement duty exceptions and drawbacks and fourth, we implemented price increases and tariff surcharges to customers.
Robert Buckley: The combination of these actions have both reduced the overall tariff cost to Novanta by nearly 50% and have largely mitigated the remaining impacts of tariff on our profitability.
Robert Buckley: The next topic is reciprocal tariffs from China on U.S. manufacturer product ship to China. Novanta ships approximately $45 million annually a product from our U.S. manufacturing facilities to Chinese customers.
Robert Buckley: For the remainder of 2025, we were expecting to ship approximately 35 million of revenue to China from our U.S. factories.
Robert Buckley: As of today, these shipments are on hold and the revenues deferred due to the magnitude of the terror supply to our products which exceed the hundred percent However, we are aggressively working on mitigating this impact as quickly as possible and are making solid progress [inaudible]
Robert Buckley: For starters, we intend to accelerate our in-China for China manufacturing strategy, which means manufacturing product for the China market in China.
Robert Buckley: Today, we have more than $50 million of products made in China for the China market and we expect to double that in 2026.
Robert Buckley: Second, we will establish duplicate manufacturing lines in our European manufacturing facilities. Shipments from European factories are not subject to reciprocal tariffs from China.
Robert Buckley: Third, we are working with our customers to ship chronic to their non-tariff space manufacturing centers.
Robert Buckley: And fourth, we are working with customers on tariff exceptions and free trade zones to eliminate the impact of on our customers.
Robert Buckley: These actions are being taken to both mitigate the risk of reciprocal tariffs on the nearly $35 million of US manufactured products shipping to China, as well as the de-risk threat of potential reciprocal tariffs from Europe .
Robert Buckley: I'm roughly 250 million of U.S. manufacturer products shipping to our European customers from U.S. factories.
Robert Buckley: While EU reciprocal tariffs have not been implemented, we still feel shifting to a regional manufacturing model will permanently eliminate any further risk without materially impacting our overall costs over the long run.
Robert Buckley: Many of the solutions to this challenge will take time to fully implement, but we've already begun this work and are seeing solid progress.
Robert Buckley: To further accelerate our efforts and mitigate potential shortfalls in our progress, we have expected to implement proactive cost containment actions by the end of the second quarter.
Robert Buckley: This program will target approximately $20 million of annualized cost savings to partially offset the profit impacts of tariffs and custom revenue deferrals, as well as to accelerate our long-term manufacturing footprint strategy.
Robert Buckley: In the final area we are focused on is dealing with the near-term weakness in global capital spending caused by the uncertainty for the trade war and the US government spending cuts
Robert Buckley: Since June of 2022, much of the manufacturing capital spending markets have been in a recession. As such, our cost structure and our operating model have already been adjusted for this new environment.
Robert Buckley: We will continue to focus on embedding the romantic growth system deep into our culture and our way of working to generate productivity, to decrease complexity, and to accelerate our strategy.
Robert Buckley: Also, we'll continue to focus on innovation by launching new products to generate demand at a week's spending environment.
Robert Buckley: Our customers recognize that even in weak spending environments new products that dramatically improve productivity safety quality and create breakthrough innovation for their customers will generate demand.
Robert Buckley: We also continue to invest in less capital-sensitive markets, such as the medical device market and software and we are leveraging our acquisition model to acquire new businesses to accelerate these efforts [inaudible]
Robert Buckley: Taking the consideration of all these factors, let me now share guidance.
Robert Buckley: For the full year of 2025, we remain confident in our strategic response plans and mitigation efforts, which positions us to navigate uncertainty and volatility effectively.
Robert Buckley: Our focus on delivering on our profit commitments and driving long-term growth remains unwavering. Based on this, we reiterate our full year 2025 guidance for adjusted EBITDA.
Robert Buckley: However, given the heightened uncertainty and volatility, we are in an environment that makes long-term revenue predictions challenging beyond the second quarter. At such, we will only be issuing quarterly revenue guidance until visibility improves.
Robert Buckley: For the second quarter of 2025, we expect gap revenue in the range of 230 million to 240 million which represents a year-over-year change of reported revenue of down 2% to up 2%.
Robert Buckley: This range is much larger than we would normally guide purely because of the potential for further disruptions caused by the current environment.
Robert Buckley: However, it's important to highlight that as of today, our revenue is currently forecasted at the top end of this range and if the environment does not change materially from today, we would expect to remain there.
Matthijs Glastra: As Matthijs mentioned, we are excited to see that several of our end markets are demonstrated solid growth right now despite the market dynamics. We see this especially in medical devices, semiconductor equipment, and certain precision robotics categories.
Matthijs Glastra: The trends in patient procedural growth and healthcare remains robust and investments in AI remain strong and some of the trade disruptions are even driving more investments in robotics and RFID to allow customers the better adapt to the changing dynamics.
Matthijs Glastra: This is a testament to our diversified and resilient business portfolio and our focus on high growth sector growing in markets.
Matthijs Glastra: At the segment level in the second quarter, we expect automation enabling technology segments to range from flat to low single digit decline year over year.
Matthijs Glastra: driven by a deeper decline in precision manufacturing as that business unit is
Matthijs Glastra: More immediately impacted by the trade conflict between US and China, partially offset by continued growth in robotics and automation.
Matthijs Glastra: Our medical solution segment is expected to show low to mid-single digit growth as we continue to ramp new products in the advanced surgery business. We also expect to see some sales benefit from the Keon acquisition in the second quarter, but the range is hard to quantify at this point.
Matthijs Glastra: This will be partially offset by continued weakness in core precision medicine products
Matthijs Glastra: Moving on to adjust the gross margin for the second quarter, we expect to be approximately 45.5% to 46.5% while moving quickly to protect margin and profit with tariff response playbook, our efforts will be partially limited in the second quarter by the timing of when these actions take full effect.
Matthijs Glastra: We expect R&D and SGNA expenses in the second quarter to be approximately 68 to 70 million. Depreciation expense, which was approximately 4 million in the first quarter, will be similar in the second quarter.
Matthijs Glastra: Stock Compensation Expense, which was $7 million in the first quarter, will be approximately $9 million in the second quarter.
Matthijs Glastra: The increase in the quarterly stock compensation expense is driven by retention and incentive It's equity grants associated with the key on transaction as well as the in-quarter impact of a one-year $15 million grant
Matthijs Glastra: which clists best in 12 months, that we are issuing as part of our Terra Response Playbook.
Matthijs Glastra: We're adjusted EBIDA for the second quarter and we expect the range of 50 to 55 million.
Matthijs Glastra: This range includes the estimated impact of cost containment actions that have outlined.
Matthijs Glastra: Interest expense, which was slightly below six million in the first quarter, will be roughly six million in the second quarter, inclusive of the impact of the new borrowing of the Keon acquisition. We expect a non-tax rate to be 22% in the second quarter. The tax rate is in line with prior guidance.
Matthijs Glastra: Deluted weighted average shares outstanding will be approximately 36 million shares. There's eluded earnings per share. We expect a range of 68 cents to 78 cents in the second quarter.
Matthijs Glastra: Finally, we expect second quarter cash flow to remain strong and ought to achieve a similar or better rate of cash conversion to that of the first quarter.
Matthijs Glastra: And as I already mentioned, we expect a gross debt leverage to be slightly above two times and a net debt leverage to remain below two times, putting us in a solid position to execute additional acquisitions this year.
Matthijs Glastra: As always, this guidance has not assumed any significant changes to foreign exchange rates versus the end of the prior quarter. However, given the current recent volatility in foreign exchange markets, the impact of exchange rates may have a more meaningful, positive impact on our reported revenue results than we have experienced in the past.
Matthijs Glastra: In summary, we remain focused on our priorities, executing our tariff playbook and continue to work diligently to support our customers with the successful launch of multiple new product platforms this year.
Matthijs Glastra: In addition, the fundamentals of our business remain strong, the long-term strategy and business model remain intact.
Matthijs Glastra: and we are focused on attracting an array of long-term high growth and markets. Our diversified portfolio is giving us resilience.
Matthijs Glastra: We believe we have the strongest management operational teams in decades.
with Strong Improve in Playbooks for Successfully Navigating Uncertainty
Matthijs Glastra: With the new hires to support an institutionalized and advanced growth system operating model, we believe we are well positioned and navigate the uncertainty and seize opportunities in this market.
Matthijs Glastra: As a company, we remain focused on controlling what we can control and executing with excellence on our strategy and top priorities no matter what the market environment brings.
Matthijs Glastra: This concludes our prepared remarks. We'll now open the call up for questions.
We will now begin the question and answer session.
Matthijs Glastra: To ask a question, you may press star then one on your telephone keypad.
Matthijs Glastra: If you are using a speaker phone, please pick up your handset before pressing the keys.
Speaker Change: Our first question today comes from Lee Jagoda with CJS Securities. Please go ahead.
Hi, good morning.
Good morning, ladies.
Speaker Change: So just starting with the acquisition, it looks like the opera payment is around $75 million dollars including the stock portion.
Speaker Change: Can you kind of give us a little sense for the potential revenue contribution or a trailing revenue number and then I assume it will be dilutive in the short term to EPS but how should we think about it from an EBITDA perspective?
Speaker Change: We would expect it to be slightly accretive to earnings per share in the first year, so it's a profitable business. It gets a little difficult to predict the actual revenue at this point.
Speaker Change: largely because of the ramp of project-based business that they currently have.
Speaker Change: So you're right, we paid around $66 million upfront for the business. There's a $22 million earn out and there's some equity grants that we're given as well to incentivize them that have longer term cliff-festing associated with them.
Speaker Change: But I would say that the impact on revenue we're bringing a little careful about just because they've never been a public business, they've never closed quarters before and they were located.
Speaker Change: in an area where they haven't really kind of focused in on that. And so we're just being careful about that. But we do expect it to be a more material impact or revenue in 2026. And the possibility of it being more meaningful this year remains something that we're looking for in the second half of the year.
Speaker Change: And to the extent you were a meaningful percentage of their cost of goods, can you talk to that and then I guess are there other things that they bought from other vendors that you also supply that you can be more embedded with their technology?
Speaker Change: Yes, so I would look at it in strategic sense in two ways. One is they were customer of ours and so this does solidify the relationship that we have with them where we were supplying them with four key components.
Speaker Change: into their market. It obviously allows us to displace anybody else who's currently supplying them. And it allows us to better serve their existing customer base, which is strong and growing and doing quite well, and they built significant backlog around.
Speaker Change: The second is that it gives us the technology, particularly around their software which is a cloud-based AI solution that
allows us to implement [inaudible]
Speaker Change: A similar type of solution into some of our end markets, warehouse automation and healthcare. Now it takes longer to do that in the healthcare market, it obviously will take a little bit longer to do that in warehouse automation, but it's a strong technology that's easily deployable given the application specific nature of their technologies.
Speaker Change: Got it. One more for me and I'll just hop back in just in terms of the the 20 million and annual cost savings. Can you kind of bucket that cost savings in terms of where things?
Speaker Change: are coming from and how nimble you can be about reinstituting those costs if and when demand picks up and I am a little confused whether that was part of the discussion around tariff mitigation or incremental to that tariff mitigation.
Stuff.
Speaker Change: It's what gives us, so what I would say is $20 million gives us confidence that we will achieve the full year even on numbers that we've already communicated back in February .
Speaker Change: Those actions allow us to really solidify that. Now you're right in that there are a handful of actions
Thank you.
Speaker Change: that are deferrals of investments in prioritization around investments that we might add back if the environment materially changes are improved.
Speaker Change: But there are some actions embedded in there that are really pulled forward of what we plan to do in future years.
Speaker Change: and the example of that being the regionalization of our manufacturing footprint. This is something that we have been planning on for some time. The environment gives us an ability to do that, which will allow us to permanently avoid any sort of trade disruptions on a go-forward basis once that structure is fully implemented.
Speaker Change: So the $20 million of annual cost savings will be pulled this quarter, we will execute on that that will allow us hit the EBITDA.
Speaker Change: There are some investments we'll put back if the overall business does a lot better than we were expecting or if the trade environment effectively calms down. But I would say that for the most part, we're looking at this as incremental savings.
Got it. Thanks.
Speaker Change: The next question is from Brian Drab with William Blair. Please go ahead.
Speaker Change: Hi, thanks for taking my questions. Just one thing that I think that I missed, I just couldn't type fast enough. Did you say that you're trending toward the high end of the 2Q revenue guidance range?
Correct!
Yeah, so we're currently trending.
Speaker Change: at the 240 number. And I would say that, you know, that the, you know, our bottoms up roll off is sitting there right now. There's obviously, you know, just this morning, the announcement of a possible reciprocal terror from the EU, depending upon how negotiations unfold. And so just given the environment.
Speaker Change: We thought that the line of broader range was a little bit more downward bias than we normally would have done in an historical basis and so I think that was a prudent call to make but at the same time I think it's wise to point out that we're sitting around the top end of the range right now.
Speaker Change: Got it. And then can you talk a little bit more about which customers and end markets you're seeing the deferrals in? We're seeing most of those delays either geographically or end market in application.
Speaker Change: Well, the most important one is, of course, the deferrals of our U.S. based production to China. That's the most significant.
Speaker Change: The element of Love Robert, Tina's Prepared remarks stated so that's...
Speaker Change: If nothing changes for the full year, that's a $35 million impact that we're just mitigating now. That might improve who knows, but that's as of today, that is the single largest one. Secondly,
There is uncertainty because nobody knows.
What to invest where and when?
Speaker Change: because the environment is not cleared up, right? So that in itself creates deferrals of investments.
Speaker Change: and those are particularly true in life sciences, which you can see in our precision medicine as well as the broader industrial space.
Speaker Change: And so that's basically what you're seeing. There's a small automotive bonnet that we have within robotics and automation. And of course, is in fact a sedozer. I would say widely
Speaker Change: Publicized Elements. Again, we're not losing any slots, our customer relationships are strong, we're innovating and introducing new products, but our OEM customers have cool visibility right now, particularly those two markets.
Speaker Change: On the positive side, we do see, again, in the advanced recovery market, really a buoyant and thriving market, and so we're doubling down there, and we see in our precision robotics and automation markets, which I highlighted in a warehouse and automation and related
Speaker Change: I'm going to throw a donation in other related markets, actually some sort of strong pool. And so we come to each push there. So it really depends on the end markets, but yeah, hopefully that provides some some
Yeah, absolutely.
Speaker Change: Are you still you know you said I think in the in the press release and I can't remember so they said on prepare remarks but the new product revenue.
Speaker Change: is on the right track still. Are any of these customers, though, that you're launching those products with? Are you going to see any deferrals of the launches or orders in? No, we talked about that 50 million specifically today.
Speaker Change: Yep, yeah, no, we did Brian in our prepare for March today. I'm more than happy to repeat that. I mean, the majority is, you know, as a reminder, the majority of new product revenues of incremental $50 million are in the medical device and market. So that market is going to strong.
Speaker Change: And what we said is that actually the majority of these parts have been introduced by our customers. The reception is very good. The orders are flowing.
Speaker Change: So we feel very good about these launches and the momentum.
Speaker Change: And in addition, and that's a smaller impact, but nevertheless we're equally excited.
Speaker Change: that in the whole area of whereas automation and precision robotics including but it's still a small piece of humanoids. We have unique proprietary technologies. It's a very active market right now.
Speaker Change: And so we see buoyant potential there, particularly around the design wind side right now. Revenue is starting to kick in a little bit more meaningfully in a second now.
Speaker Change: But all at all, we feel good about the $50 million result because they're kind of in markets that have cool independent of today's uncertainty.
Speaker Change: Okay. And do you have last question? Do you have any way of knowing how much of your revenue is?
Directly and directly tied to NIH spending.
Speaker Change: The way I would think about it is the precision medicine portion of our medical solutions has exposure to that market and
whereas exposure to the sensitivities around NIH funding.
Speaker Change: It's obviously certain multionic markets are still on the research phase.
Speaker Change: Things like even some of the DNA phase sequencers are are driven by some research investments and so anything that's being any funding is going predominantly to academia for research purposes and any sort of investments around that have been deferred at the same. So that's what we're going to do today.
[inaudible]
Speaker Change: Yeah, yeah, on top of that, of course, related in the genomics market, you have some additional
Speaker Change: I would say dynamics in terms of China's blacklist thing of a customer.
Speaker Change: There was already, and before the NIH cuts, there was just a general life science capitol spending pullback where at least hesitancy.
Speaker Change: And so yeah, there were multiple dynamics there that are on top of the NIH cuts that makes that a weaker than you know, than usual environment.
Speaker Change: Right. Okay. I'm understood. I guess I'm just trying to figure out if this is, you know, like, 5% of revenue, you know, is there any way to try to help us with a sizing of it? I understand the markets that have the exposure. That's helpful, but, um,
Speaker Change: and any more specific sizing of it that you could give us.
Speaker Change: Well, without you, you can see the precision, I take it at the percent of the precision medicine business unit revenue. So, you know, arguably
Speaker Change: It's difficult to get an exact number because you're asking us to determine what our customers' percent of their revenue goes to academia. That gets a little difficult for us to have that sort of visibility. But if you just take the precision medicine business unit...
Speaker Change: Sure, terrorists have an impact generally speaking when it comes to capital spending, but the bigger impact would be any sort of cuts in an age funding, or just the general disruptions that causes that industry and the referrals associated with that.
Yeah, that's helpful. Okay, thanks very much.
Alright
Speaker Change: The next question is from Rob Mason with Beard, please go ahead to the next question.
Speaker Change: Good morning, Matthijs, Robert. This is a good morning, Rob. I just wanted to circle back real quick. Make sure I'm clear on the
Rob Mason: your discussion around tariff. So the 20 million and annualized cost savings implemented by the end of the second quarter, effectively I guess assume that 10 million of savings in the second half offsets what you have not already mitigated on the sourcing side is that correct?
Rob Mason: Yeah, I would say that it's not so much on the sourcing I think the sourcing piece of it we already have under control now so I don't think we [inaudible]
Rob Mason: We will need to take additional actions to offset any of the impact associated with the sourcing. We can, the teams have already mitigated half of the exposure.
Rob Mason: We are doing surcharges to our customers for some of the costs associated with that, but the teams are working pretty aggressively through a number of different strategies to mitigate it. So as it stands today, I would say that the impact of tariffs on our supply chain, which is effectively the 10% global as well as the China tariffs, does not have a material impact on our profitability.
Rob Mason: for the remainder of the year. And there's obviously a profit associated with that. If we're unable to mitigate...
Rob Mason: A portion or the majority of that, the cost actions are in place in order to offset that and allow us to accelerate our efforts to permanently resolve that situation.
Rob Mason: It takes a little bit of time to really fully enact that timing in fact is really what we're mitigating.
Rob Mason: Yeah, let me speak about the broader strategy, and then Robert could speak about the CapEx piece. I mean, listen, UNI spoke as separately raw that, you know, just consolidating our manufacturing base. It is a strategy that we were already pursuing, and that was to some extent in flight. So, you know, since in the last few years, we've moved considerable production kind of in China for China, we're more than halfway, we're accelerating the other half as we
speak.
Rob Mason: So that's really what you need today, or 35 million, Ray.
Rob Mason: is going to go there and work to Europe and then to China. The second piece is that
Rob Mason: We had a manufacturing conservation footprint strategy, regardless of pre-deteriffs that was already in flight.
Rob Mason: It so happens that we're just changing order a little bit so that we're accelerating the in region for region benefits.
Rob Mason: And so that's what we're doing. And so that's the second piece of it. And so we're consolidating production into a larger manufacturing site, which of course will ultimately improve scalability resilience, but also has the benefit of the region for region.
Rob Mason: So that's really the plan that was in flight, but of course, yeah, it takes a little bit of time to to enact all that and it will not be before early 2026 when we see the benefits of that
Rob Mason: As it relates to catbecks, of course, there will be a little bit of catbecks. We're thankful that most of our production processes are light assembly and tests, and so the vast majority of the catbecks is not related to facilities, but we have facilities that are in place today that we will just fill them up with volume.
Rob Mason: So, most of the CAPEX investments associated with test stations and bench tops and things of that nature. So, I don't believe it's going to be a large material item just because in general we're a light assembly and test.
Rob Mason: And there's a reprioritization that has to go in place around the catbacks that we've already had planned so I would say that it's in the envelope that we've already budgeted for the year. It's just shifting into the geographical locations that makes sense.
in order to enable us to do the regionalization.
Matthijs Glastra: I see. Okay. It's just last question. Matthijs, I thought I heard you make mention of...
Matthijs Glastra: with in the due product ramps also just around the semiconductor space EUV in particular but I just you could just step back and maybe just comment on that market in particular either on the EUV side or
Speaker Change: At one point, we were starting to see some green shoots and some other areas, but I'm just just giving all the dynamics in intra-cortrum where that stands.
Speaker Change: Yeah, so that's a multifaceted question. Let me start with the EUV side of things. Again, we're solving a major issue for our customer there. So it's a little bit independent of the exact market dynamics there, which long term is super favorable. All right.
Speaker Change: And we're on track with with Drab there any agreements with a customer. So that remains unchanged.
Speaker Change: and then as it pertains to the rest of the waiver-fab equipment or advanced semiconductor equipment market, I would say it's still modestly up and positive. Again, we're in next generation.
Speaker Change: Machines, and so there's a little bit of an uptake there, so the grain shoots are still there, maybe they're less high and they're a bit more cautious, but they're still up. Yeah, so we still see a favorable environment.
Speaker Change: there, and we're leaning into that. Of course, that can change based on announcements that seem to change by the day, but that's the current, the current as we see you today and what we're hearing from our customers.
So that's still a positive outlook.
Very good. All right, thank you.
All right. Thanks, Rob.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.
Matthijs Glastra: Thank you operator. So to recap, we had a successful first quarter of 2025. We hit expectations for sales and profit and continued to our streak of delivering strong operating gas local version.
Matthijs Glastra: Our new product launch is remain on track for 2025. We also completed our first acquisition of the year by closing the key on transaction and we've quickly mobilized a strong response to the dare of and trade disruptions.
Matthijs Glastra: Looking ahead, we remain focused on the top three priorities for 2025. First, remember all our planned new products.
Matthijs Glastra: to achieve our new product sales growth targets. Second, deliver strong margin and cash flow using the Novanta gross system, which now includes executing on our tariff response plan. And finally, acquire additional companies that fit or strategy at attractive returns.
Matthijs Glastra: Novanta remains very well positioned in the medical advanced industrial landmarks with diversified exposure to long-term growth trends and precision manufacturing, robotic and automation, precision medicine, and advanced surgery.
Matthijs Glastra: We feel that our winning growth strategy and our deployment of the Novanta Growth System continuously improves our company operations is what drives our performance no matter the environment.
Matthijs Glastra: In closing, as always, I'd like to thank our customers, our shareholders, and especially our dedicated employees for their own support.
Matthijs Glastra: We appreciate your interest in the company and your participation in today's call. I look forward to joining all of you in several months on our second quarter earnings call. Thank you very much. This call is now adjourned.
Matthijs Glastra: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.