Q2 2025 Novanta Inc Earnings Call
Too.
Please note this event is being recorded.
I would now like to turn the conference over to Ray Nash Corporate Finance leader for Novant. Please go ahead.
Thank you very much. Good morning and welcome to novantas second 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 Matias claustra and our Chief Financial Officer. Robert Buckley 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.nova.com please note, this call is being webcast live and will be archived on our website shortly after the call.
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 issued 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 these involve inherent assumptions with known and and unknown risks and other factors that could cause our future results to differ materially from our current expectations, any forward-looking statements made today represent our views only, as of this time, we disclaim any obligation to update forward-looking statements in the future, even if our estimates change, so you should not rely on any of these forward-looking statements as representing our views as of any time. After this call during this call, we will be referring to certain non-gaap Financial measures 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.
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 reconciliations 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, Matias claustra.
Thank you, Ray, good morning, everybody. And thanks for joining our call noventa Delivered, solid second quarter, results meeting or exceeding, expectations for sales, margins and profits.
Revenue reached 241 million which represents reported Revenue growth of 2% and organic Revenue declines of 2% surpassing guidance.
New product Revenue grew by over 50% year-over-year, customer orders grew, 10% year-over-year, and 20% sequentially reflecting a Outlook.
We also saw significant design in activity, growing more than 150% year-over-year.
It's just a gross margins held at 46% and adjusted ibida. Margin was 22% both in line with expectations.
These results reflect the strength of November business model team and culture and the power of using the noventa growth system to optimize company performance in a very fluid, microeconomic and trade environment.
And I'm proud of the team: strong execution of our tariff response strategy.
Our long-term growth strategy remains focused on winning and markets with long-term secular Tailwinds, such as precision and ai-driven Robotics and automation advancement of the invasive and robotic surgery and precision medicine.
We built trusted long-term collaborative partnerships with the world's leading OEM customers by solving their most challenging needs with our proprietary technology solutions, securing up to 10 years of exclusive and sticky designing platforms.
While our products typically represent no more than 10% of our customers. Bit of material, they enable differentiation and innovation in their systems for their customers in terms of clinical outcome outcome.
Throughput yield cost per procedure or part or never before possible performance.
In the last decade our portfolio has evolved significantly. We've expanded into Healthcare growth markets which are now approximately 55% of our business.
We have increased our recurring, consumables Revenue to approximately 15% of sales.
We have increased our revenue from intelligent subsystems with embedded software to approximately 30% of sales, which is margin-accretive for an event.
We intend to continue to expand our portfolio into these areas.
Now, let me provide an update on the customer demand and market dynamics that we're seeing.
Our social medical device. Markets, remain exceptionally strong with patient procedure, growth rates, uh, Hospital spending and our share gains driving sustained double digit growth in our Advanced Surgery business in the second quarter and year to date.
Our new product launches in surgical robotics and minimally invasive surgery applications are ramping very successfully. These products are designed to significantly enhance patient safety, improve surgical throughput, and help meet new regulatory requirements as U.S. states and countries around the world pass legislation regarding surgical smoke evacuation.
Ventes on tractor reached fifty million dollars of incremental, new product revenue for 2025 mainly due to the strong outlook for the Next Generation medical devices.
Rapid adoption of these products supports our confidence. That the Advanced Surgery business Revenue will nearly double by 2030 up from $200 million in 20 2024.
Medical consumables. A strategic, Focus for noventa are expected to account for approximately 15% of sales in 2025 with ongoing double digit growth rates
Our success stems from long-term Innovation investment and strong customer relationships and we believe we now have the expertise and scale to expand into adjacent, recurring medical consumable segments.
We're also very excited to announce 2, major design wins in the second quarter in the minimally invasive surgery Market. First, we want a new product program with 1 of the largest medical, OEM customers to develop a third generation insulating, insulated device, and consumables.
Which will be launched in the next few years.
This design in Jones are strong long-term partnership with winning oems and our ability to provide Leading Edge Innovations over multiple generations of our products.
Seconds with a separate. Medical OEM customer. We want to contract to develop a Next Generation pump for their upcoming endoscopy Tower.
Our product will provide multi-functional pump capabilities along with proprietary sensing and seamless integration with other devices on the customer's Tower.
This represents our second major win of Next Generation pumps, with more in progress.
Moving on our Robotics and automation applications continue to see strong demand, despite the global trade disruptions as evidenced by the strong, double digit Revenue growth in the second quarter.
Growth in this business is driven by demand for our product that support physical AI applications such as Warehouse automation Precision, Robotics and humanoids.
We expect sales into these applications to double in 2026 versus 2025, and then to double again in 2027.
We believe these physical AI applications represent. An incremental 1 billion dollars. Addressable market for an noventa by 2030.
To that point, we're excited to announce a significant contract signed in July with a leading e-commerce and Warehouse robotics uh company. This represents a fifty million dollar Revenue opportunity over the next 3 years.
Because of the timing this time and will be included in our third, quarter metrics and revenue, will start in 26.
Taking a step back the warehouse automation space is booming because of AI labor shortages and latest advancements in fiscal AI sensor Technologies.
As a result leading, OEM players are aggressively deploying, High conviction use cases.
Event is proprietary technology, offers precise, touch and safe movement for robots. Enabling smarter faster and more efficient Goods handling, critical capabilities, for more modern Warehouse operations.
I'm also pleased to share progress in humanoid robotics this emerging field is in early development.
And we're collaborating with over 10, leading humanoid players across North America and Europe.
We're working with these players on multiple slots with significant content. We hope to announce specific designs in the future as this Market matures and these players finalize their product architectures.
The same unique novata sensing and server. Drive capabilities that are used in Warehouse Automation, and surgical Robotics are also relevant in the humanoids. So we have a competitive Advantage with platform Technologies relevant from multiple physical AI robotics applications
Disadvantage has been built up over years with our growth, Playbook consistent investment in Innovation, combined with in-depth application, know-how targeted, Acquisitions and customer intimacy.
Turning to other markets sales to Industrial Capital Equipment saw declined year-over-year. This Market is mainly served by a Precision manufacturing business, which was affected by the impact of trade disruptions and customer demand, particularly in China.
However Revenue has now stabilized at this. Lower level and bookings are rising at Double Digit, Pace both year-over-year and sequentially as customer. Inventories are mostly depleted and visibility improves
Coupled with the new design when it's more than doubling year-over-year for the second consecutive quarter. This positions us well, for sequential Revenue, growth through the second half of 2025 and Beyond.
An application. Supporting AI Investments, like Advanced, packaging and home device. AI computing.
Which demand extreme precision throughput and miniaturization.
Uh, areas where November scan had subsystems excel.
Also, as Supply chains regionalized, we see growth opportunities in New Markets, such as India, where we are, expanding our commercial presence and have had recent success, waiting new customers.
Next in advanced semiconductor applications in a new term. This Market continues to show mixed signals, but appears to be in the early phases of an upcycled albeit at a slow pace.
Our short cycle sales are still strong on the back of capacity to build out for new data centers and other AI related infrastructure. As for our new content in deep UV and euv applications, we're shipping small amounts of early units, and we will be ramping up as our customer ramps in the marketplace.
We're designed in on Max crus of basis with this new content and we expect significant sales growth over the next few years.
Finally speaking to a life science equipment markets which is mainly served by our position medicine business. This area saw a year-over-year decline caused by weak and market dynamics, including further disruptions at the US NIH and FDA
Meet biotech funding cutbacks in Pharma kex.
And trade disruptions.
Due to these Market disruptions, we're starting to see customers accelerate a replacement cycle away from barcoding and older older instruments as they focus their new product development or more Advanced Technologies such as RFID and Machine Vision.
Over the last 2 years, we've been aggressively shifting, our product offering into these new technologies for RFID. We feel that with the key on acquisition, we've successfully uh, positioned ourselves at the Leading Edge of new, RFID Solutions offerings.
And as for Machine Vision, we're happy to announce that in the second quarter, we entered into a new commercial partnership with a global leader in Machine Vision Technologies, to sell their embedded Machine Vision to OEM customers in the Life Sciences sectors.
This partnership leverages our partners' leading machine vision technology, combined with Novanta's deep domain and application knowledge of medical and life science applications.
Including our ability to provide tailored support to our OEM customers.
And so, while the recent decline in Revenue has been more than expected, we were encouraged to see our position medicine business, grow double digits, sequentially in the second quarter largely because of our accelerated transition to these more Advanced Technologies.
Based on this, we believe uh the revenue will stabilize over the next several quarters and expect it to grow sequentially. The remainder of this year,
We continue to believe in the long-term secular opportunities in the life science. Equipment Market, early detection of root cause of disease will continue to be a big driver of productivity in the healthcare industry and we will continue to execute our long-term growth playbook in this market, albeit that in the near term, we're managing the prophet flow through of this business.
And shifting our Capital, uh, allocation plans.
Now, I'll provide an update on our acquisition activities. The key on integration is on track and the business performance is already beating our initial expectations. Our short, time with this team has proven their leading expertise in software development at RFID Technology Solutions, and they also have succeeded at winning a large new customer which we believe will offer excellent near-term growth for the business.
Helping the second half sales Outlook of 2025 with content, double digit growth in 2026.
looking Beyond key on Acquisitions remain a top priority for our team uh to continue to evolve our portfolio towards high growth medical more recurring consumable based and more embedded software and intelligent subsystems
We continue to have a large and exciting pipeline of targets valuation levels are more attractive. When we believe that the near-term microeconomic environment is an added Catalyst to increase actionability.
our balance sheet is well positioned for additional transactions while maintaining our historical discipline of both cash returns and financial leverage
You should expect us to lean in hard to pursue additional transactions in the second half of 2025.
So to conclude, I'm very pleased with the second quarter performance. We met our exceeded, our expectations for sales margins and profit.
Uh, driven by double digit growth in our Advanced Surgery and Robotics automation businesses.
Underscoring. Our strategic focus on high growth markets and the diversity of our portfolio.
Still new product sales.
We also have 10% year-over-year growth in bookings, which, combined with the new product ramps, sets us up for steadily increasing sequential growth in 2025.
We also anticipate growth in 2026, based on multiple significant new design wins and high growth in markets such as minimally invasive surgery and also physical AI applications like warehouse robotics.
And finally, the key on acquisition is off to a great start and we have an additional large pipeline of exciting actionable. Acquisition targets.
We remain focused on our top 3 priorities for the event in 2025. First ramp all our plan new products and achieve the 50 million growth from new products this year.
Second delivers, strong profit margin and cash flow performance by driving NGS deep into our culture and operations and successfully execute on our tariff response. Playbook
And third acquire additional companies that fit our strategy at attractive returns and in a matter that evolved our portfolio to secular growing and resilient markets and business models.
So with that, I will turn the call over to Robert to provide more details on our operations and financial performance. Robert.
Thank you for ties. Our second quarter of 2025 non-gaap adjusted. Gross profit was 111 million or a 46.1% adjusted. Gross margin compared to 110 million or 46.6%, adjusted gross margin in the second quarter of 2024.
Adjusted. Gross margins were down year-over-year, but flat sequentially. And in line with our expectations, despite the increased cost of tariffs,
For the second quarter R&D expenses were 25 million or approximately 10% of sales. Second quarter, sgna expenses, excluding Erp design costs for 45 million or approximately 19% in sales.
The ERP design costs of the quarter were approximately $1 million. Adjusted EBITDA was $52 million in the second quarter, or a 22% adjusted EBITDA margin, demonstrating growth of 2% year-over-year.
On the tax front are non-gaap tax rate for the second quarter of 2025 was 21% versus 20%. In the prior year, our tax rate increased year-over-year mainly due to changes in jurisdictional mix of pre-tax income.
Our non-gaap adjusted earnings per share with 76 cents in the second quarter of 4% versus the prior year.
Operating cash flow for the second quarter, 2025 was 15 million compared to 41 million in the second quarter of 2024, the year of your decrease in operating cash flow was primarily driven. By the time you have tax payments, an increase in inventory purchases to mitigate the global trade Dynamics, which were at their peak in the second quarter.
And from the acquisition of Keon, we expect cash flow, conversion, rates to return closer to historical averages in the third quarter.
We ended the second quarter with gross debt of 465, million with a gross leverage, ratio of 2.2 times. And our net debt was 355 million. Giving us a net leverage ratio of approximately 1.7 times.
In the quarter, we acquired Keon Technologies for approximately 75 million.
As a reminder, Keon combines proprietary RFID Hardware, with AI enhanced cloud-based software to offer real-time inventory and asset management. Filling a crucial software, integration gap for better penetration into the medical markets, including hospitals.
We also amended our credit facility in the final week of June increasing its size to approximately 1 billion dollars and adding a 350 million accordion feature, giving us nearly 1.4 million of borrowing capacity over the next 5 years.
This new prorata bank facility gives us borrowing capacity to pursue our acquisition strategy while maintaining the debt. Leverage disciplined. We have practiced over the last decade.
Now, I'll serve some additional performance metrics and some details on our operating segments.
For the second quarter novanta had a 10% growth year-over-year in bookings and 20% growth sequentially and a book to Bill ratio of 1.02 reflecting strengthening backlog and a strengthening Outlook.
We saw a continued strong pace of bookings in both our segments, demonstrating not only stabilization of demand but also increased demand, the outlook for 2026, and the continued strong momentum of new product launches.
In the second quarter, medical market, sales represented 54% of total in Nevada sales and advanced industrial markets represented 46% of total sales.
20 to 21% of total sales.
We are seeing growth in new product sales, across all businesses, but especially the Medical Solutions segment.
Through the first half of the year, we launched over a dozen. New products mainly focus on high growth and markets in Advanced Surgery, and Robotics and automation.
Also in the quarter. As we mentioned, we saw excellent design win activity, with the companywide design wins growing over 150% year-over-year.
In the enabling technology segment, revenue grew by 4% year-over-year, beating expectations and driven by continued strength in the Robotics and Automation business unit, which was up nearly 16% year-over-year.
To book. The bill in this segment was 1.05. And bookings were up 8% year-over-year and 17% sequentially. Giving us improving customer visibility
Adjusted gross margin in this segment where approximately 49% of 40 basis points year-over-year driven by favorable mix but partially offset by the increase in tariff costs.
Both new product revenue and customer design wins doubled year-over-year on the back of both our innovation and stronger commercial execution by our teams.
In addition, Vitality index was in the High Teens percent of sales of significantly versus the prior year.
Moving on to Medical Solutions Revenue in this segment was roughly flat year-over-year.
In the second quarter and bookings. Were up 13% year-over-year but up, 26% sequentially on the back of record, new product launches.
New product sales in this segment grew by over 30% year-over-year, and the Vitality Index in this segment was over 25% of sales in the second quarter.
Our Advanced Surgery business experience, 17% growth year-over-year driven by both strong, patient, procedural growth rates in healthcare on a global basis. And from the launch of our second generation smoke evacuating insulators, which have received overwhelming Market, acceptance and adoption.
These growth Dynamics are expected to continue for the remainder of the year and well into 2026.
conversely, our Precision medicine business, which serves the life science and multiomics markets, experienced a 13% decline in sales year-over-year
Growth, 10% and is expected to continue to improve sequentially in subsequent quarters.
Adjusted gross margins. In this segment were approximately 44% in the quarter flat sequentially and in line with their expectations but slightly higher tariff costs, which we expect the mitigate
Further in the third quarter.
Finally moving to guidance, let me give you an update on our tariff response plan.
Speaking first.
The impact of tariffs on our supply chain. Our cost mitigations are largely on track and we continue to work on efforts to accelerate our plans with some of the recently announced trade deals that higher than expected permanent tariff rates. We are seeing a approximately a $4 million net impact from tariffs year to date.
On our cost of sales. However, we continue to make, strong progress with both tariff mitigation strategies and cost mitigation strategies to further reduce the impact in the second half.
Next, to address the matter of impacts on tariffs between the United States and China. While tariffs have remained paused between the two countries, there is optimism that a trade agreement will be reached quickly. Our customers in China continue to be cautious about placing committed purchase orders on goods from our U.S. factories. As such, we are working with them on accelerating our plans to ship production to non-tariff regions and are exploring further short-term mitigation strategies to minimize their risk of ordering products from us.
While Chinese customers ordering product from our us Factory has been muted design when activities with our Chinese customers have accelerated.
Which we believe signals to us. That our Chinese customers have confidence that we have the right tariff, mitigation strategies, to reduce their costs and risks.
And that they are excited about our new product Innovation and what it can do for them in their markets.
In addition demand for our products manufactured in China, which is our in China, for China strategy, accelerated in the quarter, which drove our total China. Sails up 15% year-over-year in the quarter.
Land market demand at the end of June. We launched our cost reduction plans that we had previously announced including changes that support the regional manufacturing strategy.
Over the long run. We expect these actions to structurally improve our cost by simplifying. Our operating model allowing further expansion of our growth margins while permanently minimizing the disruptions from tariffs on our products and for our customers.
The total restructuring charges related to. This program are expected to be in the 20 to 25 billion dollar range with the bulk of the savings run rating, and the fourth quarter of 2025 and into 2026.
Novant is committed to deliver sequential revenue and profit growth driven by our Innovation pipeline. Robust, customer demand is secular growth markets and operational discipline, including our cost reduction efforts and the regional manufacturing strategy.
Despite the rapid changes in tariffs and trade agreements. We believe we have navigated this well, and a quickly adopted to the environment. After several years of investing heavily in R&D to deliver, breakthrough Innovations to our customers. The results of those efforts are materializing in our financials, in our design wins and in our new product Revenue.
And with a stabilizing demand environment as evidenced by our bookings growth, we believe we are well, positioned to accelerate our organic growth initiatives further when the macroeconomic Tailwind improve.
While trade Dynamics could further disrupt our Outlook increased visibility from our customers is giving us confidence to reissue full year guidance, albeit with some caution.
As such we now expect, full year, 2025, gaap Revenue to be approximately 970 million to 90085 million which represents overall Revenue growth of 2 to 4%.
For adjusted gross margins. We expect to achieve approximately 46% this Outlook concludes, the cumulative impact of expected tariff costs and the associated, temporary redundancy in costs from our regional. Manufacturing strategy, excluding those extra costs, we would be on track to achieving our goal of 100 basis points of gross margin expansion this year.
This resilient margin performance is thanks to the noventa growth system. The business system that is allowing us to maintain our financial commitments, despite the cost headwinds
We expect R&D and sgna expenses. For the full year to be approximately, 28% of sales or between 274 million and 278 million. This guide includes expected costs associated with the design and planning phase of a standard Erp system, which is scheduled for a phase deployment, starting in 2026 and
Taking place over multiple years.
Further supporting our footprint, consolidation and our regional manufacturing strategy.
Besides improved scalability and resiliency benefits, this also supports our gross margin expansion plans and operating expense reduction plans.
Depreciation expense should be approximately $16 million for the full year. Stock compensation expense should be approximately $37 million for the full year, which includes the change in the incentive compensation plans that we made.
For all our incentive based employees.
Aligning them tightly with our strategy, driving strong employment, engagement and aggressively driving shareholder value. While also reducing ner near-term cash needs
For adjusted ibida. And for the full year of 2025, we expect to be 225 million to 230 million or approximately a 23% ibid down margin. This represents year-over-year growth of 7% to 10%.
Interest expense is expected to be roughly $23 million for the full year of 2025, excluding any material changes in debt balances. We expect our non-GAAP tax rate to be around 22% for the full year.
We are still analyzing the effects of the new corporate tax law changes. And as such of non Incorporated these changes fully into our full year rate
Polluted weighted average shares outstanding will be between 36 million and 37 million shares.
For the full year 2025.
We now expect adjusted diluted earnings per share to be approximately $3.22 and $3.00, representing growth of 5% to 9%.
Finally, we expect strong cash flow for the full year from both lower cash taxes in the second half, as well as better Inventory management and stronger profit.
Which represents a year-over-year change? A reported Revenue, growth of flat to up 1% and sequential growth of 1% to 2%.
At the segment level in the third quarter, we expect automation enabling technology segment to reduce flat to low single digit, decline year-over-year cost largely by lower exports, from us, factories to Chinese customers. Something we expect to better mitigate in the fourth quarter.
We expected to grow sequentially. 1% to 2%.
Our Medical Solutions segment is expected to demonstrate mid single digit growth year-over-year and up sequentially. Approximately 3% from continued strength and Advanced Surgery at growth rates comparable to those demonstrated in the second quarter and from a sequentially, improving Precision medicine business.
Moving on to adjusted gross margin for the third quarter. We expect to be at nearly 46%. This Outlook includes the cumulative impact of expected announced tariffs as well as some near-term redundancy and costs from our regional manufacturing strategy, which we expect to overcome in the fourth quarter.
We expect R&D and sgna expenses in the third quarter to be approximately 68 million to 69 million. Similar to our full year guidance. We have excluded expected costs associated with design and planning phase of our standard Erp system.
Depreciation expense, which is approximately 4 million in the second quarter will be similar into the third quarter stock compensation expense.
Was 7.5 million in the second quarter will be nearly 11 million in the third quarter. This increase in quarterly, stock compensation expense is driven by both the retention and incentive Equity Awards associated with the Keon transaction, as well as The Enquirer impact of the change of incentive compensation plans, which we discussed earlier.
For adjusted, evida for the third quarter. We expect a range of 57 million to 60 million interest expense, which was 6 million in the second quarter would be similar in the third quarter and we expect our non-gaap tax rate to be around 22%.
For adjusted earnings per share. We expect the range of 78 cents to 85 cents for the third quarter.
finally we expect third quarter cash flows to rebound versus the second quarter and return to a cash conversion rate closer to the historical averages we have demonstrated
This updated Outlook considers, our latest view of the end markets, the continued successes of our new product launches foreign exchange rates based on the second quarter. And the signed tariff. Agreements trade agreements between the US and its trading partners as of July month end.
However, in this environment, the Dynamics of both trade and foreign exchange as well as Government sponsored funding and Regulatory disruptions as ever evolving and therefore subject to change, but we continue to have confidence in our ability to navigate these Dynamics and adapt quickly.
And finally, with improvements to both our Core Business and long-term visibility to customer demand, along with a strong, balance sheet and strong credit facility. We are well positioned to accelerate our acquisition Pipeline with more meaningful and impactful acquisitions.
Giving our current acquisition pipeline, we feel confident in executing a transaction by year end.
In summary, we are confident in the fundamentals of our business, the long term strategy, and our business model remains intact.
We are excited about our new customer wins and the success of new product launches.
We continue to make strong progress in high growth markets, particularly in medical markets and physical, AI robotic markets,
As a company 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.
This concludes our prepared remarks. We'll now open the call up for questions.
We will now begin the question and answer session.
to ask a question, you may press star then 1 on your touchtone phone,
If you are using a speaker-phone, please pick up your handset before pressing the keys.
To withdraw your question. Please. Press star. Then 2
And our first question will come from Lee Jagoda of CJs Security. Please go ahead.
Hey, good morning guys. Morning latte.
Um, I guess Robert just to start, can you, um, break down your Revenue guidance and and you can use the midpoint, uh, I guess. Um, in terms of growth from Keon, the impact of FX and then the true organic growth underlying
uh,
For the second half of the for the full year, full year is full full year or second, half either either 1 or both.
Okay, um well for the full year, you know you the reported on a organic basis, it would likely be down. 1% up 1% somewhere in that range.
And then the what and what's the FX?
Implied impact.
Or benefit the same effects impact that we have in the second quarter so we just carry that forward for the full year.
Got it. So the Delta is really the key on that position.
Gotcha, which, to be fair, has done significantly better than expected.
Got it.
And then um I it was the hearing all the color around the new products over the next several years was really uh good and interesting earlier. Um,
Given you kind of have pretty good visibility about your product roadmap. What do you think are the biggest drivers of
Uh, organic growth in 2026, in terms of the new products, independent of whatever the Market's going to do.
Yeah. Hi, there. This is this Matias. So, um, basically a continuation of the Advanced Surgery, uh, product ramps, right? Because we are, um, basically having the first year of Rams this year and that will, that will continue to to expand. So that's 1. Secondly, the physical AI. So basically the AI enabled robotics market. So, Warehouse automation, you heard us comment about a, uh, fifty million dollar. Uh, contract what we've won there, where we see, um, yeah, rapid deployment, um, of Robotics, in advance Warehouse automation applications.
And, um, these robots need a sense of touch and, um, a sense of fast and safe movement, and we have unique capabilities to help in that application.
And um, and and and third, we see um, let's say related applications, uh, humanoids still will be small, but we what we commented on is that the overarching industrial, physical AI applications will double and 26 versus 25 and then again double again be it from a small base but the kind of tells you that we're growing and then finally um we we are seeing um let's say a very very strong.
Strong design wins and that will start to ramp. Yeah. So for at the company level 150% year-over-year. Now they they won't all ramp in 26 fully but they will start to ramp and that's a visibility. We have again a right right, variety of applications.
Um I commented on um let's say additive manufacturing driven by Aerospace and and medical. What you see is that of course with
The whole terrorists and trade environment, people want to produce locally and actually additive manufacturing is a very uh, good way to do that. And so we're seeing some, some significant traction there and we've won some business um some significant business there. But also um, what I would call Advanced material processing um applications that are actually supporting some of the on-device AI investments in advanced packaging related to and events AI or related related markets. So those are a few areas that we see uh we're excited about that we commented on and that we see uh growing um, you know, despite whatever, whatever the environment will bring, and it shows you that we're staying, the laser focused on the secular growth markets and no matter the environment. And then with the Innovation and customer intimacy. We're we're we're we're very encouraged by
Buy everything that is happening there.
And then um within Life Sciences 1 thing I'd add there. Yeah sorry yeah go ahead. All right Lee go ahead.
Is in business that that'll give you a pretty good indicator of what 2026 is going to look like.
Well, and that and that's sort of where I was going to go next. So an industrial and Precision, Precision medicine. It, it sounds like you're seeing certainly some signs of improvement in the industrial and, and maybe, you know, at a minimum bouncing along the bottom in life sciences. So I guess, have we seen the low point for the year in your mind, in those 2 areas and sitting here today? Um, are we looking at sort of a flattish 2026 for those end markets or, um, could they still decline further?
Well, basically what we see today and again, um, you know, you never know with, of course, the the the trade changes. But based on what we see today based on the bookings and the customer Outlook
Um, which is actually improving, right? Customer inventories on the industrial side have been depleted. And so we see the 2026 backlog actually building on the industrial side, and we see the business sequentially improving in the second half of the year. So based on that, yeah, we see that business has reached bottom and then sequentially improving from here. Um, the precision medicine also, we commented that but that's more of a technology shift in addition to market dynamics. So the market dynamics, we don't necessarily see improving in the near term, but we do see.
Technology shifts based on the the Machine Vision as well as the RFID. Uh, transitions that we're making, we see that having a sequential uh improving effect on the business and therefore we see that business, sequentially improving, as well.
So yes and then, um, the outlook for, uh, life sciences a little bit, uh, unclear. But but what we what we do is we just focus on what we can control, which is those new technologies, as well as we're aggressively managing profit, flow through, as well as capital allocation, of course to these areas that have really strong Tailwind like, physical AI, Advanced Surgery,
Perfect. Well, how about can you? Thanks?
Thanks Lee.
The next question comes from Brian drab of William Blair.
Please go ahead.
Hi, thanks. Uh, first Robert you touch on China and tariffs, did you say specifically um status of of, did you talk about in the same context about the 35 million?
That was held up, and um, is that still 35 at risk for the year?
Yeah, that's the 35 million is factored into our guidance right now. So we have an assumed that we're going to recover that yet. Um, so I I would take that's where we issue the guidance that I made a comment around with some caution. Um, so we're not seeing the order Behavior yet from our customers, uh, in the second quarter. Um, and as we enter the month of August, uh, you know, the same holds true. Um, and that's largely just because the uncertainty with how those tariffs would unfold. So when you're ordering products, from a US factory with a 90-day lead time, you know, they can get themselves stuck in a position on a non-cancellable purchase order where they'll be importing at an unowned uh expense to them because they don't know what the Tariff cost is going to be. Yeah.
Um, now that being said, what I, what I see is an offset is the local, uh, first and foremost, we're growing in China for China. So that's strategy which represents 50% of our our sales into overall exposure of China sails um is growing. And as a consequence, we saw total China sails up 15% year-over-year. So despite missing the we got some, we still got some depressive growth happening. Um, and then second, the design went activities with our Chinese. Customers did accelerate. So we are seeing signals from them to design our, our technology into new products. Uh, which effectively you would not do if you thought the situation was going to be permanent.
Um, so effectively, our strategy of how we're going to mitigate tariffs is being well received by our customers, and they're being as patient as they can, uh, until we get those fully implemented. So now, could we get that turned around by the fourth quarter? Yes, it's possible. Not third quarter, but definitely by the fourth quarter. Um, it's possible to get that get that rectified and start clawing back some of that Revenue. But we haven't factored that in at this time until uh, we have better visibility around the execution of that plan.
That's why the design means our continuing.
Um, and of course, the actual transfers are starting to happen in the fourth quarter, which is really the mitigation, right? So then it really depends on how quickly can you rectify and ramp from there? Yeah, but structurally we're addressing it. It's really a timing issue that we're working through.
Understood. Are those design ones in China, uh, medical industrial robotic surgery? Um,
Did you say, "But mostly industrial, mostly industrial, and robotics?"
So, our Robotics and Automation business, of course, Matias. When it is some details around that, there's a lot of new products launched around that. But we're also seeing nice design win activities in our Precision Manufacturing business.
Okay, can you say if any of those humanoids?
All we’ve mentioned are 10 human vendors or customers that we have. Those are, uh, we were very specific in the language saying that there was us and European exposure. So I would say the bulk of our humanoid exposure today is in the U.S. and European markets.
Would be reluctant to to say that, you know, there's anything in China at this point injection. Yeah. And, you know, some, but, but not not a lot, I would just say. And then, um, and we're not banking on that, but there are other Precision robotics markets, both surgical as well as kind of adjacent to Warehouse automation that that are getting traction and where we, where we feel we got, you know, a very good offering. So
Okay, thanks. And then just 1, 1 more for now, I guess, uh, can you can you talk a little bit more about the, the maybe the specific use case within the warehouse, uh, for the warehouse robotics win? And
What, what, what type of, uh, technology are? Are you winning with, like, is it Force, torque, or Servo drives that have tick? And then I've got 1 more piece to this question. Could this be much bigger, uh, than 50 million down the road?
Yeah, so uh let me, yeah, thanks Brian. Let me kind of try to pour that out. Um and so first and foremost um,
what you see is that um Vision alone is not um will will not do the trick in these really Advanced Warehouse over uh uh automation markets where you going to almost
A process Goods faster than humans. And so you got to mimic humans in terms of touch. And so it's proven by 1 of the leader players that the touch is actually essential and then the fast and safe reaction to what you're sensing. And then that turning that into motion and doing that safely is actually very complicated. If you do that in a small form factor at the edge, meaning at the end of Factory at where the, the action happens. And so an event that has unique capabilities to do this, in a small form factor.
Um, very precisely and reliably to the extent that the, the the tremendous demands on this applications where you basically Cannot drop a package for. Yeah, maybe you can drop a package like once in 24 hours, which means extreme accuracy. That's what we bring to the table. And that then, um, provides that high conviction of, um, these browser automation players to start deploying this because now it's actually possible.
To replace humans. So that is, that is what that is, of course there is a massive amount of
Um, Capital that is being deployed, that's all public. So, what we like about it is, of course, the the the use cases there. It's proven in the warehouses. Um, the capital is there and so it will be a multi-year, uh, deployment cycle. Um, we've commented on and, you know, as we're kind of conservative, we only will will quote things that we have won and, uh, and that we've contract signs. So, that's the 50 million. Um, I do believe, and we do believe that down the line. If you combine, all these physical AI applications and you look at the served available market for US based on conservative estimates, that's about a billion dollar market in 2030.
And, you know, we will, we're aiming, of course to get a decent chunk of that. So, that's so, we think it's a sizeable opportunity down the line we're allocating and deploying resources aggressively.
Feel uh, you know, are leaning in the industry. So and yeah, so that is forced or sensing that a surfer drives but it's also including um, encoders, let's say, or in a subsystem package that works in the different use cases for these uh for these OEM players and you know whether it's whereas automation or humanoids or related uh applications, right? The these robots don't necessarily have to stand on 2 feet. That's maybe that the last the last thing I will say you see a lot of applications specific related applications that you know you see robots on wheels or you see them fixing the location. We're doing very similar smart tasks.
Yeah, so hopefully that answers the question.
Yeah, that was really interesting, and congrats on the warehouse win and all the other ones you announced this quarter. Thanks.
Thanks s.
The next question comes from Rob, Nathan of beard. Please go ahead.
Good morning. Um maybe just to follow on um your last response Matias. The um you know when you were talking about the entire package of you know, your your offering and into this market for torque and Servo drives and encoders was that the case for this particular Warehouse automation contractor, or was that just forced torque because you mainly were referencing sensing
Well, the it's the sensing in their reaction so it's actually it has the both the servo drives as well as the sensing capabilities. And again, we're commenting on this this 1 player but we've won multiple Warehouse automation designs that are that are a bit smaller than this, where we use basically the whole gamut of the different capabilities and it depends a little bit on the player. Um, how much of 1 versus the other is being used but I would say holistically. It's true that both in browser Automation and humanoids. As well as surgical robotics actually, these capabilities are getting more important going forward.
Yeah, so the sense of haptic feedback in surgical robotics is a key capability. It's basically the same capability that gives the robot in the warehouses a sense of touch, as well as the humanoid, right? But in all these applications, the low latency, meaning fast response, is also crucial.
Safely. So humans can work side by side with these robots safely. Embedded safely is not um it's not trivial and we do that embedded into our server drives uh which is unique at a very small form factor, uh super precise, very high, power density, which means that small from firm Factory. Yes, very powerful.
So it's all these things combined that make us uniquely qualified for these applications. So the short answer is that both capabilities are included in these applications.
I see, I see. And just, you know, as you've talked about kind of the ramp in these products in 2026 and 2027, are you needing to add additional capacity? Do you have current capacity to serve this?
Yeah, no. We do, on the other hand. This is an, I'm glad you asked this question. It's a unique example of how to invent a growth system that can really help to increase capacity very efficiently. So, we just completed a Kaizen.
With, uh, over 20 people and um, just cutting a lead times down by a factor of 3 um, increasing capacity by a factor of 4 to 5 without adding major capacity and that down the line. We see this, this ramp grown beyond that beyond that. And there. Yes, we will have to automate and, you know, either own dog food so to speak, right? Put Automation in our lines to kind of get to these really high volumes. So the answer is yes. And we're using the no rent, the gross system to do this efficiently. Um and and reliably
I see, um, maybe just last question, you know, 1 of the in marches you touched on, you said was mixed was around the semiconductor Electronics area. I, I'm just curious, I mean, we have seen um, you know, really over the past year, I guess, you know, some pushes to the right in that industry.
Yeah, I would say that you know, any sort of risk associated with that. Those applications has been factored into our so I can have guidance um as well as the before mentioned uh China situation where we are not anticipating that Revenue in our guidance to come back. Although you know that's looking more more possible as you know as we get particular as we start to look at Q4. Um we are shipping units uh into those applications in the fourth quarter. So there are some units going out. They're not at the volumes that we're uh, hoping for before, but we are we feel very good because we're still designed in on a sole source basis into those applications. We've doubled the content that we've had in, in, from a, from a per unit basis. Then we've had in Prior periods, um, and then we have some backward compatibility with some of our technology. So we feel very good that we have the right technology and the right application position to
those whole Source bases that's positioned for growth. Um, we're just waiting anticipating as as that market Works through some Dynamics to allow those shipments to really ramp up to the volumes that we're hoping for and that have been communicated
I see very good.
Thank you.
Yep, thanks Rob.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Matias gastro, for any closing remarks
Thank you, operator. And thank you, everyone, for your questions in closing. As always, I would like to thank our customers, our shareholders, and especially our dedicated employees for their ongoing support.
We appreciate your interest in the company and your participation in today's call. I look forward to joining all of you soon at our third quarter 2025 earnings call. Thank you very much. This call is now concluded.
The conference is now concluded. Thank you for attending today's presentation and you may now disconnect