Novanta Inc. Common Stock 2026 Q2 Earnings Call

Thank you, Marcy. Good morning, everybody, and thanks for joining our call. Novanta delivered an outstanding second quarter. We delivered strong results, 9% organic sales growth, 10% on a reported basis, 16% adjusted EBITDA growth, 47% adjusted gross margin, which was 100 basis point improvement year-over-year, adjusted EPS growth of 17%, and operating cash flow that year to date exceeds the operating cash flow we generated in all of 2025. All of our business units grew organically in the quarter. The combination of these strong results give us a terrific foundation to close our largest acquisition in history. With the close of Riverpoint Medical at the end of July, we are also raising our full year 2026 outlook, positioning Novanta to deliver more than 15% reported revenue growth year-over-year for the full year.

Very proud of performance and our accomplishments, putting us on a solid growth trajectory and a path to exceeding our strategic goals. For 2026, we remain focused and are executing well on our top three priorities. First, organic growth. Our innovation engine is now a very strong contributor. New product revenue grew by more than 50% in the quarter and is up over 60% year to date, lifting our vitality index to approximately 29% of sales from 21% a year ago. Bookings are up 18% year to date and backlog is up 11%. While some timing of custom orders impacted our advanced surgery business in the first and second quarters, our year-to-date book-to-bill was well over 1.0. Organic growth is now accelerating with all four business units delivering on solid organic growth in the quarter.

As we look out to the remainder of the year, we expect to see many of these trends to continue with strong new product revenue, design wins, and continued strength in precision robotics, physical AI, semiconductors, and minimally invasive and robotic surgery. Second, acquisitions. In June, we announced and just recently closed the acquisition of Riverpoint Medical, a milestone transformative acquisition, our largest to date, and an extremely strong strategic and financial fit for Novanta. Riverpoint accelerates our shift into minimally invasive surgery markets with long-term secular growth dynamics. It roughly doubles our recurring medical consumable business to approximately $300 million, from about 15% of revenue to roughly 25% annualized, and expands our medical end market exposure to 60% of revenue. It is expected to be immediately accretive to revenue growth, gross margins, EBITDA margins, and earnings per share, as well as long-term organic growth rates.

Integration is underway under leadership of John Lesica. The more time we spend with the Riverpoint team, the more impressed we are by the depth of their customer relationships, their innovation mindset, and their commitment to quality. We are excited to welcome them to Novanta. Our third priority for 2026 is about completing our manufacturing foundation. In the second quarter, we completed the manufacturing moves and closure of two of our factories. The establishment of our regional lighthouse manufacturing centers of excellence is well underway, supported by two new MRP system implementations, the Novanta Growth System, and world-class manufacturing teams.

Given the strong progress and momentum being made to regionalize our manufacturing, reduce the company's complexity and asset intensity, and establish a lower cost structure, we decided to accelerate our strategy by announcing 2 additional factory closures by the end of the first quarter of 2027 as part of our current restructuring program. These manufacturing moves are also underway now on a solid track to ensure Novanta achieves better scale, stronger systems, deeper talent, and a full in-region for region capability, which ultimately deepens our preferred supplier position with leading OEMs, dramatically reduces or eliminates our sensitivity to trade disruptions while sustainably expanding gross margin, profit margins, and cash flows. Stepping back, the first half performance validates our strategy. We win in end markets with durable secular tailwinds, where our growth platforms represent a nearly $10 billion addressable market opportunity by 2030.

We win in them by solving our OEMs customers' hardest problems with proprietary technology, which designs us in for the better part of a decade. We deploy capital to compound that position, which this quarter meant Riverpoint. The macro remains complex, and we're watching it closely. Complexity and opportunity travel together, and what is in front of us is accelerating demand, record new product momentum, the strongest team Novanta has ever had, and the balance sheet to keep acting. Chuck Ravetto and John Lesica are both with us today. They will walk you through their segments' new product launches, design wins, and customer momentum behind these results, and more on the Riverpoint integration. John, over to you. Thanks, Matthijs.

In the second quarter, revenue in the Medical Solutions segment grew 8.6% year-over-year, better than we expected. This segment saw a book to bill of 0.79 in the second quarter, and year to date had bookings growth of greater than 10% year-over-year. New product sales grew by nearly 50% year-over-year, and the vitality index in this segment was above 30% of sales. Our advanced surgery business experienced 12% growth year-over-year, driven by both strong patient procedural growth rates and from our new product launches of our second-generation insufflators. Our second-generation insufflators have set the industry standard for patient safety, smoke evacuation, and surgical workflow optimization. In addition to our next-generation insufflators, we now have two customers with first-generation arthroscopic fluid management platforms.

These first-generation systems will help us better identify the right combination of pump modalities to deliver to our customers and surgeons a tool that reduces the complexity of surgeries, enhances workflows to improve safety and productivity at a reduced cost to own and serve in a manner similar to what we achieved with our insufflator platform. The advanced surgery business remains on track for a strong full-year growth, supported by year to date bookings growth of greater than 8%, new product revenue growth of greater than 70% in the second quarter, and a vitality index near 30%. We continue to have strong momentum in insufflation, expansion of our fluid management solutions in arthroscopy, and a scaling medical consumables business. In our precision medicine business, sales grew by 5% year-over-year.

The year-over-year growth in this business was driven by continued strong momentum from our Kion acquisition, as well as our core growth from our medical customers. Customer demand in sectors outside of life sciences are beginning to show momentum. Our life sciences exposure is still expected to be less than 10% of the company's overall revenue in 2026. While this business is not expected to return to sustained growth in 2026, we do see a path to growth materializing in 2027 based on how the market is recovering and the narrative from our customers. In addition, we've continued to invest in bringing Kion's leading technology and AI-based software solutions to the healthcare market. Earlier this year, we established a strategic partnership with a direct-to-hospital provider to start prototyping solutions for that environment.

While this is a multi-year investment initiative, the progress and momentum we're seeing with Kion's core business is a testament of the value proposition we believe we can offer. Overall, Medical Solutions segment adjusted gross margins were approximately 41%, which is down 290 basis points year-over-year and down 230 basis points sequentially, primarily due to a higher mix of precision medicine products with lower margins and temporary cost increases incurred as part of our operational transformation as we accelerate site rationalization across the segment. Some of these costs were temporarily higher in the second quarter, and we expect gross margins to sequentially expand materially in the third quarter. Finally, I'm also pleased to share that we closed the acquisition of Riverpoint Medical, a milestone we're genuinely excited about.