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 Inc.'s First Quarter 2025 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

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; 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.novanta.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 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, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta achieved a successful first quarter of 2025 hitting our expectations for sales and profit, continuing our organic growth path and delivering strong cash flow performance, all while effectively navigating a challenging environment. In the first quarter, we delivered $233 million in revenue, which represents organic growth of 2% and reported growth of 1%. Our orders grew 3% year-over-year. Adjusted gross margins were 46%, in line with expectations, and adjusted EBITDA was $50 million. We generated a robust $32 million of operating cash flows in the quarter, continuing our streak of delivering strong operating cash flow conversion of above 120% of net income for the eighth consecutive quarter. These strong results reflect the strength of Novanta's business, culture and team. I'm especially proud of our team's resilience and disciplined execution in this volatile environment while deeply embedding the Novanta Growth System in our culture. 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. We continue to work on a large pipeline of additional acquisition opportunities, which remains a top priority for Novanta this year. 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 science and advanced industrial markets has consistently demonstrated resilience across various geopolitical and macroeconomic scenarios. Our strategy focused on winning in markets with long-term secular tailwinds such as precision robotics and automation, advanced minimally invasive and robotic surgery and precision medicine. Many applications within these markets are still in the early stages of their adoption cycles, offering significant long-term growth potential. We forge deep and…

Thank you, Matthijs. Our first quarter 2025 non-GAAP adjusted gross profit was $108 million or a 46% adjusted gross margin compared to $107 million or a 46% adjusted gross margin in the first quarter of 2024. Adjusted gross margins were flat year-over-year, in line with our expectations. For the first quarter, R&D expenses were $23 million or approximately 10% of sales. First quarter SG&A expenses were $46 million or roughly 20% of sales. Adjusted EBITDA was $50 million in the first quarter, a 21% adjusted EBITDA margin, demonstrating growth of 1% year-over-year. On the tax front, our 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 jurisdictional mix of pretax income and Pillar 2 implications. Our non-GAAP adjusted earnings per share was $0.74 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 net working capital management. We ended the first quarter with gross debt of $392 million, and with a gross leverage ratio of 1.9x. Our net debt was $286 million, giving us a net leverage ratio of approximately 1.4x. Following the Keonn acquisition, we expect our second quarter gross leverage ratio to be slightly above 2x, and our net debt leverage to remain below 2. This gives us ample capacity for further acquisitions. In the first quarter, we also repurchased approximately $6 million worth of common shares. Novanta's share repurchase strategy is focusing on acquiring the stock when the value of the stock is more attractive to both internal investments 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,…

[Operator Instructions] Our first question today comes from Lee Jagoda with CJS Securities.

So just starting with the acquisition, it looks like the upfront payment is around $75-ish million, including the stock portion. 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, short term to EPS, but how should we think about it from an EBITDA perspective?

We would expect it to be slightly accretive to earnings per share in the first year. So it's a profitable business. The -- it gets a little difficult to predict the actual revenue at this point, largely because of the ramp of project-based business that they currently have. 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 were given as well to incentivize them that have longer-term cliff-vesting associated with them. But I would say that the impact on revenue, we're being a little careful about just because they've never been a public business. They've never closed quarters before, they were located 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 to our 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.

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?

Yes. So I would look at it in a strategic sense in 2 ways. One is they were a customer of ours and so this does solidify the relationship that we have with them, where we were supplying them with 4 key components into their markets. It obviously allows us to displace anybody else who is 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. 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 a similar type of solution into some of our end markets, warehouse automation and health care. Now it takes longer to do that in the health care market. Obviously, it 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.

Got it. One more for me, and I'll just -- I'll hop back in. Just in terms of the $20 million in annual cost savings, can you kind of bucket that cost savings in terms of where things are coming from and how nimble you can be about reinstituting those costs if and when demand picks up. And I'm a little confused whether that was part of the discussion around tariff mitigation or incremental to that tariff mitigation stuff?

It's what gives us -- so what I would say is the $20 million gives us confidence that we will achieve the full year EBITDA numbers that we've already communicated back in February. So those actions allow us to really solidify that. Now you're right in that there are a handful of actions that our deferrals of investments and prioritization around investments that we might add back if the environment materially changes or improves, but there are some actions embedded in there that are really pull forward of what we plan to do in future years. 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. So the $20 million of annual cost savings will be pulled this quarter. We will execute on that, that will allow us to hit the EBITDA. 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.

The next question is from Brian Drab with William Blair.

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. Yes. So we're currently trending at the $240 million number, and I would say that the -- our bottoms-up roll-off is sitting there right now. There's obviously just this morning, an announcement of a possible reciprocal tariff from the EU, depending upon how negotiations unfold. And so just given the environment, we thought to provide a broader range with a little bit more downward bias than we normally would have done on a 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.

Got it. And then can you talk a little bit more about which customers and end markets you're seeing the deferrals and where are you seeing most of those delays either geographically or end market in application?

Well, the -- Brian, it's Matthijs. The most important one is, of course, the deferrals of our U.S.-based production to China, right? That's the most significant element of what Robert in his prepared remarks stated. So that's -- 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. Then secondly, there is uncertainty because nobody knows what to invest where and when because the environment is not cleared up, right? So that in itself creates deferrals of investments. And those are particularly true in life sciences, which you can see in our Precision Medicine segment as well as kind of the broader industrial space. And so that's basically what you're seeing. There's a small automotive component that we have within robotics and automation that of course, is affected. So those are, I would say, widely 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 core visibility right now, particularly in those 2 markets. On the positive side, we do see, again, in the advanced surgery 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 warehouse innovation and related semiconductor automation and other related markets, actually some strong pull. And so we continue to push there. So it really depends on the end markets, but yes, hopefully, that provides some color.

Yes, absolutely. Are you seeing -- you said I think in the press release, and I can't remember exactly said in the prepared remarks, but the new product revenue 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? And can we talk about the $50 million specifically today?

Yes. No, we did, Brian, in our prepared remarks today. I'm more than happy to repeat that. I mean, the majority -- as a reminder, the majority of new product revenues of incremental $50 million are in the medical device end market. So that market is buoyant. It's strong. And what we said is that actually the majority of these products have been introduced by our customers. The reception is very good. The orders are flowing. So we feel very good about these launches and the momentum. And in addition -- and that's a smaller impact, but nevertheless, we're equally excited that in the whole area, whereas automation and precision robotics, including what is still a small piece, humanoids, we have unique proprietary technologies. It's a very active market right now. And so we see buoyant potential there, particularly around the design win side right now. Revenue is starting to kick in a little bit more meaningfully in the second half. But all in all, we feel good about the $50 million in result because they're kind of in markets that have pool independent of today's uncertainty.

Okay. And do you have -- last question is do you have any way of knowing how much of your revenue is directly, indirectly tied to NIH spending?

The way I would think about it is the precision medicine portion of our Medical Solutions has exposure to that end market and -- or has exposure to the sensitivities around NIH funding. It's obviously certain multiomics markets are still in the research phase things like even some of the DNA-based sequencers 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 this time.

Yes. On top of that, of course, related in the genomics market, you have some additional I would say, dynamics in terms of China lack listing of a customer, there was already before the NIH cuts, there was just a general life science capital spending pullback or at least hesitancy. And so yes, there were a multiple dynamics there that are on top of the NIH cuts that makes that a weaker than usual environment.

Right. Okay. Understood. I guess I'm just trying to figure out if this is like 5% of revenue. Is there any way to try to help us with the sizing of it? I understand the markets that have the exposure, and that's helpful. But any more specific sizing of it that you could give us?

Well, without -- you can see the precision -- take it as a percent of the precision medicine business unit revenue. So arguably, it's difficult to get an exact number, but because you're asking us to determine like what do 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 make the precision medicine business unit, some portion of that. But just to attribute the decline right now is largely caused by that. A lot of the -- lot of life science customer revenue goes to either Europe or the United States. And so sure tariffs have an impact, generally speaking, when it comes to capital spending, but the bigger impact would be any sort of cuts in NIH funding or just the general disruptions that causes that industry and the deferrals associated with that.

The next question is from Rob Mason with Baird.

I just wanted to circle back real quick to make sure I'm clear on the -- your discussion around tariffs. So the $20 million in 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?

Yes. 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 will need to take additional actions to offset any of the impact associated with the sourcing. We -- the teams have already mitigated half of the exposure. 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. The restructuring cost actions that we're taking are predominantly geared towards dealing with the lost profitability of revenue deferrals for our shipments from the United States into China. So there's roughly $35 million worth of product going into China from our U.S. factories for the remainder of the year. And there's obviously a profit associated with that. If we're unable to mitigate 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.

Yes, it's important, Rob, that we're of course, accelerating in mitigating the impact in region for region manufacturing that was already a strategy that we had in place that we're accelerating. But of course, it takes a little bit of time to really fully enact that and that timing impact is really what we're mitigating.

Yes. Okay. Actually, that was a follow-up. Just to the extent you can add any more color there, you talked about expanding manufacturing. I thought in China to serve that market. Would that be correct? Or would you be just serving it from outside that Southeast Asia, I guess, that region? And then just if you could speak to the level of investment CapEx around the entire effort, I guess, the entire regionalization.

Yes. Let me speak about the broader strategy, and then Robert can speak about the CapEx piece. I mean, listen, you and I spoke, separately, Rob, that just consolidating our manufacturing base, it is a strategy that we were already pursuing and that was, to some extent, in flight. So since -- in the last few years, we've moved considerable production kind of in China for China. We're more than halfway and we're accelerating the other half as we speak, right? So that's really what you need. So the other $35 million, right is going to go there and/or to Europe and then to China. The second piece is that we had a manufacturing consolidation footprint strategy regardless of pre the tariffs that was already in flight. It so happens that we're just changing the order a little bit so that we're accelerating the in-region, for-region benefits, 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 sites, which, of course, will ultimately improve scalability, resilience but also has the benefit of in-region, for-region. So that's really the plan that was in flight. But of course, yes, it takes a little bit of time to enact all that, and it will not be before early 2026 when we see the benefits of that.

As it relates to CapEx, of course, there will be a little bit of CapEx. We're thankful that most of our production processes are light assembly and tests. And so the vast majority in the CapEx is not related to facilities, but we have facilities that are in place today that we will fill them up with volume. So most of the CapEx investments is 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. And there's a reprioritization that has to go in place around the CapEx 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 shipping into the geographical locations that make sense in order to enable us to do the regionalization.

I see. Okay. Just last question. Matthijs, I thought I heard you make mention of -- within the new product ramps also just around the semiconductor space, EUV in particular. But I just -- could you step back and maybe just comment on that market, in particular, either on the EUV side or at one point, we were starting to see some green shoots in some other areas, but I'm just -- just given all the dynamics in intra-quarter where that stands?

Yes. Yes. 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, and we're on track with kind of the ramp there in the agreements with the customer. So that remains unchanged. And then as it pertains to the rest of the, call it, the wafer fab equipment or advanced semiconductor equipment market. I would say it's still modestly up and positive. Again, we're in next-generation machines, and so there's a little bit of an uptick there. So the green shoots are still there, maybe they're less high and a little bit more cautious, but they're still up. Yes. So we still see a favorable environment 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 stance as we see it today and what we're hearing from our customers. So that's still a positive outlook.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.

Thank you, operator. So to recap, we had a successful first quarter of 2025. We hit expectations for sales and profit and continued our streak of delivering strong operating cash flow conversion. Our new product launches remain on track for 2025. We also completed our first acquisition of the year by closing the Keonn transaction. And we've quickly mobilized a strong response through the tariff and trade disruptions. On the whole, I'm incredibly proud of our team's achievements. Looking ahead, we remain focused on the top 3 priorities for 2025, first, ramp our all our planned new products and achieve our new product sales growth targets; second, deliver strong margin and cash flow using the Novanta Growth System, which now includes executing on our tariff response plan; and finally, acquire additional companies that fit our strategy at attractive returns. Novanta remains very well positioned in the medical and advanced industrial end markets with diversified exposure to long-term growth trends in precision manufacturing, robotics and automation, precision medicine and advanced surgery. 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. In closing, as always, I'd 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 in several months on our second quarter earnings call. Thank you very much. This call is now adjourned.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.