Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Inc. Third Quarter 2025 Earnings Call. 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 Third 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. If you've not received a copy of our earnings press release issued last night, 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 forward-looking statements that we've outlined in our earnings press release issued last night and also 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 delivered above expectations for the third quarter, beating our outlook for sales, margins and adjusted EPS. We continue to see solid sequential momentum in the business with a 3% increase in revenue, driven by investments in our commercial engine and innovation. Revenue reached a record $248 million, surpassing guidance, which represents reported revenue growth of plus 1% and organic revenue declines of 4%. New product revenue grew by nearly 60% year-over-year. Customer bookings grew 17% year-over-year and 4% sequentially, reflecting an improving outlook. We also saw significant design win activity, up 50% year-to-date. Adjusted gross margins overdelivered at 46.5% and adjusted EBITDA margin was up above 23%. I'm very proud of our team's ability to successfully execute in a fluid macroeconomic and trade environment. With the strength of our third quarter results and the sequential improvement we're seeing in bookings and revenue across all of our businesses, we're confident that we've turned the corner and will return to positive organic growth and double-digit profit growth in the fourth quarter. And with our strong momentum of our growth platforms, recent customer design wins and new product launches, we believe this sets us up well to deliver mid-single-digit organic growth for the full year of 2026. Our long-term growth strategy remains focused on winning in markets with long-term secular tailwinds, such as AI-driven robotics and automation, advanced minimally invasive and robotic surgery, digital manufacturing and precision medicine. Novanta holds strong technology leadership positions in these areas, which are still early in their adoption. We built trusted long-term collaborative partnerships with the world's leading OEM customers in these applications by solving their most complex needs with our proprietary technology solutions, securing up to 10 years of exclusive and sticky design-in platforms. While our products typically represent no more than 10% of our customers' bill of materials, they enable differentiation and innovation in their systems for their customers, improving clinical outcome, throughput, yield, cost per procedure or part or never before possible performance. Over the past decade, we have extended our proven business model into high-growth health care markets, medical consumables and intelligent subsystems featuring advanced embedded software. Today, medical markets account for 53% of Novanta's year-to-date revenue, intelligent subsystems contribute nearly 30% and medical consumables represent about 15% of sales, the latter growing at a high teens rate. Looking forward, our strategic direction focuses on continuing to expand our business mix and technology leaderships in medical technologies, consumables and embedded software. By strengthening our portfolio in these areas, we're positioning Novanta to deliver sustainable mid- to high single-digit organic revenue growth with less cyclicality, ensuring resilience and consistent performance regardless of market fluctuations. We have prioritized commercial and innovation investments accordingly with a specific focus on our growth platforms of insufflators and pumps, robotic surgery technologies, intelligent physical AI solutions for connected care, warehouse automation, humanoids and precision robotics, and also intelligent subsystems for laser beam steering and precision medicine applications. We've launched 20 new products year-to-date in these areas and believe these growth platforms offer an additional $4 billion end market opportunity for Novanta by 2030. We are also investing in regionalized manufacturing, are deploying the Novanta growth system and a new ERP system while reducing our manufacturing footprint to build a strong foundation for growth and resilience. In parallel to these organic investments, we are advancing our robust acquisition pipeline to expand our portfolio towards these same areas of medical technologies, consumables and embedded software. This will have a compounding effect on the sustainability of our growth and the resilience of our business model. We continue to work on multiple acquisition opportunities while maintaining our discipline on leverage and cash returns. Now let me provide an update on the customer and market dynamics we're seeing. Our sales in minimally invasive robotic surgery markets remain exceptionally strong with high teens double-digit growth in our Advanced Surgery business, driven by new product launches, share gains in surgical robotics, robust patient procedure growth rates and hospital spending. This business supports our strategy by expanding our medical portfolio, boosting intelligent subsystem sales and driving recurring consumables income. Our latest insufflator innovations set industry standards, improve patient safety and efficiently address new smoke evacuation requirements while optimizing surgical workflows. Thanks to our recent product launches in this area, Novanta is on track to achieve $50 million in incremental new product revenue in 2025. In the third quarter, we further extended our market leadership position by securing yet another major new design win with a large OEM for future generation insufflators, reinforcing our position as a trusted partner in this field. This ongoing customer adoption and innovation momentum strengthens our outlook for 2026 and our outlook that the Advanced Surgery business revenue will nearly double to $400 million by 2030. Moving on, our robotics and automation applications continue to see strong demand as evidenced by the sequential revenue growth in the third quarter. Growth in this business is driven by demand for our products that support physical AI applications such as warehouse automation, precision robotics and humanoids. Robots surpass humans in speed and accuracy when analyzing complex data, but they often struggle to effectively navigate the physical world. Novanta has unique capabilities that enable the perception and reaction of precision robotics in this physical world and to do so safely. We are excited about our recent design wins in the warehouse automation space, our momentum in surgical robotics and the ongoing development with multiple humanoid and warehouse automation players. We believe these physical AI applications are an important growth platform for Novanta, representing an incremental $1 billion of addressable market by 2030. Turning to our advanced industrial markets, we saw continued improvement in the quarter as our customers are now back to normalized order patterns. This resulted in sequential growth in our Precision Manufacturing business and another quarter of double-digit growth of customer bookings position us well for further sequential revenue growth in the fourth quarter. In this third quarter, we also saw a sequential increase in sales to China as our Chinese customers have grown confident in the progress of our in-region for-region manufacturing plants. Design wins in the Precision Manufacturing business also continued their strong pace, showing year-to-date growth of over 60%. We're starting to see customer wins in attractive areas such as additive manufacturing, driven by both aerospace investments and reshoring and applications supporting AI investments like advanced packaging and on-device AI compute with our intelligent light engine and scan system. This growth platform represents an incremental $400 million of addressable market opportunity for Novanta by 2030 as customers continue to digitize and automate their manufacturing lines with ever higher demands for throughput and productivity at ever smaller form factors, tighter tolerances and quality levels. Next, in advanced semiconductor applications, which represent roughly 10% of our revenue, we saw some early signs of an up cycle with wafer fab equipment growth expected to achieve mid-single digit next year. Our short-cycle sales remained strong off the back of new construction for data centers and other AI-related infrastructure. Finally, speaking to life science equipment markets, which is mainly served by our Precision Medicine business, we were pleased to see the business show another quarter of sequential revenue growth in the third quarter, while we continue to work our way through consistent yet challenging end market dynamics. We've invested in intelligent RFID solutions through the Keonn acquisition, and we have added advanced machine vision technology offerings to our portfolio through our new commercial partnership. These steps are helping to support the sequential momentum we're seeing and expect to see going forward. We continue to believe in the long-term opportunities in the life science equipment market and are seeing investments in early disease detection as a big driver of productivity in the health care industry. To conclude, I'm proud of our team's third quarter performance. We exceeded our expectations for sales, margin and adjusted EPS. Our solid momentum in our growth platforms, design wins and new product launches position us well for a return to positive organic growth in the fourth quarter of 2025 and for mid-single-digit organic growth in 2026.

Thank you, Matthijs. Our third quarter 2025 non-GAAP adjusted gross profit was $115 million or 46.5% adjusted gross margin compared to $113 million or 46.2% adjusted gross margin in 2024. Adjusted gross margins were up 30 basis points year-over-year and up 40 basis points sequentially, which was better than our expectations, notwithstanding the increased cost of tariffs. As we stand here today, the cost of tariffs in our supply chain and the impact on gross margins has now been fully mitigated. For the third quarter, R&D expenses were $24 million and approximately 10% of sales. SG&A expenses, excluding certain adjustments, were $44 million or 18% of sales. Non-GAAP adjustments included restructuring costs, ERP design costs and legal costs related to the insurance recovery claim. Adjusted EBITDA was $58 million in the third quarter, a 23% adjusted EBITDA margin, demonstrating growth of 2% year-over-year and 11% sequentially. On the tax front, our non-GAAP tax rate for the third quarter was 24% versus 21% in the prior year. Our tax rate increased year-over-year mainly due to changes in jurisdictional mix of pretax income. Our non-GAAP adjusted earnings per share was $0.87 in the quarter, up 2% versus the prior year and up 14% sequentially. Operating cash flows in the third quarter were $8 million compared to $23 million in the prior year. This was below our expectations, but is driven by temporary factors. After successfully settling on a German tax audit, we paid more than $5 million in the prior period cash tax payments in the quarter, and this amount is up to $15 million year-over-year on a year-to-date basis. In addition, we have incurred roughly $15 million of restructuring and acquisition-related costs year-to-date, with a significant portion paying out in the third quarter. And finally, we had higher-than-expected inventory purchases to accelerate the ramp of manufacturing in our regional manufacturing centers. We believe these decisions better position the company in the fourth quarter and the full year 2026 to be more resilient and deliver stronger cash flows, and we expect to recover back to our normal levels of greater than 100% conversion to net income. We ended the third quarter with gross debt of $457 million with a gross leverage ratio of 2.2x and a net debt of $368 million, giving us a net leverage ratio of approximately 1.7x. In the quarter, we purchased $14 million worth of company stock opportunistically and nearly $20 million of shares have been repurchased year-to-date. As we've recently announced, the Board of Directors has authorized an additional $200 million of capacity in our share buyback program. While acquisitions remain our top capital allocation priority, we will repurchase shares whenever the value of the stock gives us a cash return greater than our internal investments or acquisition investments. Now I'll share some additional performance metrics and details of our operating segments. Novanta bookings increased 17% year-over-year and 4% sequentially with a book-to-bill of 1.03, indicating a stronger backlog and positive outlook. New product sales grew nearly 60% year-over-year, raising the Vitality Index to 23%. Design win activity remains strong with company-wide design wins up 20% year-over-year with more than 50% higher on a year-to-date basis. In the third quarter, Automation Enabling Technologies segment revenue declined 3% year-over-year, in line with expectations. The book-to-bill in this segment was 0.96. However, bookings were up 15% year-over-year. Our Precision Manufacturing business, which serves the industrial equipment market, saw a year-over-year revenue decline of 7% in the quarter. However, this business saw sequential growth of 3% and double-digit growth in both bookings and design wins, demonstrating building momentum. In our Robotics and Automation business, revenue was roughly flat year-over-year and grew 3% sequentially. This was also in line with our expectations. We continue to see solid outlook in this business with resiliency in demand for advanced robotic applications and strength in short-cycle semiconductor applications tied to data center investments supporting AI. For the Automation Enabling Technologies segment, adjusted gross margins were above 48%, approximately flat year-over-year, driven by factory productivity and favorable product mix. In addition, we fully offset the cost of tariffs and temporary redundancies and overhead costs as we execute on our regional manufacturing plans. New product revenue for the segment nearly doubled year-over-year and customer design wins grew 30% on the back of both our innovation and stronger commercial execution by our teams. In addition, the Vitality Index was in the high teens percent of sales, up double from where it was last year. Moving to the Medical Solutions segment. Revenue in this segment was up 6% year-over-year. This segment saw a book-to-bill of 1.1 in the third quarter, and bookings were up 19% year-over-year and up 14% sequentially on the back of record new product launches. New product sales in the quarter grew by over 40% year-over-year, and the Vitality Index in this segment was nearly 30% of sales. Our Advanced Surgery business experienced 17% growth year-over-year, driven by both strong patient procedural growth rates in health care on a global basis and from the launch of our second-generation insufflators, which have received overwhelming market acceptance and adoption. These growth dynamics are expected to continue into the fourth quarter and well into 2026 and beyond. In our Precision Medicine business, which serves the life science and multiomics markets, sales declined 4% year-over-year, but grew sequentially by 3%. This business is expected to continue to improve sequentially in subsequent quarters as we work through some of the challenging end market dynamics. In the Medical Solutions segment, the adjusted gross margins were approximately 45% in the quarter, better than expected, which represented margin expansion of 70 basis points year-over-year and 130 basis points sequentially. This solid margin expansion comes from both factory productivity initiatives and from improving scale from our in-house medical consumables manufacturing facility. Finally, our efforts to mitigate the cost of tariffs on our supply chain and the impact on gross margins were successful and are now offsetting any incremental costs. In addition, our regional manufacturing initiative is on track and is being well received by customers. As a reminder, this initiative helps our customers avoid the increased cost of tariffs by manufacturing their demand in the regions in which they sell their products. The 11% sequential revenue growth in China, along with 17% growth in bookings, 60% growth in new product sales, and 20% growth in design wins all demonstrate the progress we have made here, not only for Novanta, but for our customers. Overall, across all regions, we see gradual improvement in investment sentiment in the capital equipment demand as OEMs and end users adjust to trade policy dynamics. Nevertheless, while this market momentum continues to build, we continue to prudently manage the company's profitability, including following through on our cost reduction plans, which we announced earlier this year. These plans are on track, and we are seeing some savings this year with full savings running into 2026. Now turning to guidance. Novanta is committed to delivering sequential revenue and profit growth driven by our innovation pipeline and our strong customer demand in our end markets. We are seeing improving momentum as evident by our revenue and bookings growth by the strong design win activity and our successful new product launches. As such, we now expect fourth quarter 2025 GAAP revenue to be in the range of $253 million to $257 million, which represents year-over-year organic revenue growth of 3% and reported revenue growth of 6% to 8%. This guidance in the fourth quarter is in line with the current Wall Street consensus, and we are confident in this outlook. As a result, for the full year 2025, we now expect GAAP revenue to be approximately $975 million to $979 million, which represents roughly flat organic growth for the full year and 3% reported revenue growth. At the segment level, in the fourth quarter, we expect Automation Enabling Technologies to grow 1% year-over-year and up 3% sequentially. Our Medical Solutions segment is expected to demonstrate up to 15% reported growth in the fourth quarter, which includes up to 11% organic growth year-over-year and sequential growth of 4%. This growth will come from continued strength in Advanced Surgery at growth rates comparable to the third quarter and from a sequentially improving Precision Medicine business. For adjusted gross margins, we expect to achieve approximately 46% in both the fourth quarter and the full year. Excluding the cost of our regional manufacturing initiative, we should be on track to achieving our goal of 100 basis points of gross margin expansion this year. We expect R&D and SG&A expenses in the fourth quarter to be approximately $69 million to $70 million and for the full year to be $276 million to $277 million. This represents roughly 28% of sales. This guidance excludes expected costs associated with the design and planning phase of the standard ERP system, which will be deployed over the next few years and further supports our footprint consolidation and regional manufacturing initiatives. Depreciation expense, which was approximately $4 million in the third quarter, will be similar in the fourth quarter and will be approximately $16 million in the full year. Stock compensation expense, which was below $7 million in the third quarter due to one-time adjustments to certain long-term equity grants will be approximately $11 million in the fourth quarter. And so for the full year would be roughly $33 million. For adjusted EBITDA in the fourth quarter, we expect a range of $62 million to $65 million, which represents 18% to 24% growth year-over-year. For the full year of 2025, we expect EBITDA to be $222 million to $225 million or approximately a 23% EBITDA margin. Interest expense, which was $6 million in the third quarter, will be similar in the fourth quarter and expected to be roughly $24 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% in the fourth quarter and for the full year. Diluted weighted average shares outstanding will be approximately 36 million shares. For the fourth quarter, we expect diluted earnings per share to be in the range of $0.87 to $0.93, growing 14% to 22% year-over-year. For the full year 2025, we expect adjusted diluted earnings per share to be $3.24 and $3.30. Cash flow conversion in the fourth quarter should improve versus the past few quarters as we stabilize our inventory levels as we move beyond some of the large timing-related payments made in the third quarter. For the full year, we expect to achieve a goal of hitting cash conversion of greater than 100% of GAAP net income. Overall, our latest full year guidance is in line with current Wall Street consensus. And looking ahead to 2026, based on our view of the sequentially improving demand environment, we expect to achieve a baseline of mid-single-digit organic growth for the full year. Of course, in early 2026, we will give you another update with additional details. But given the momentum, we wanted to share our initial views now. And finally, with a strong balance sheet and robust pipeline, we are well positioned to accelerate our acquisition strategy. In summary, we remain confident in our long-term strategy and business model. We see growing momentum, which will help us return to organic growth in the fourth quarter and maintain our organic growth trajectory into next year. We are excited about our new customer wins, the success of our new product launches, and we continue to make strong progress in high-growth markets, particularly in medical technology markets and physical AI robotic markets. We remain focused on executing with excellence in our strategy and our top priorities no matter what the market environment brings. This concludes our prepared remarks. We'll now open the call up for questions.

And our first question will come from Lee Jagoda of CJS Securities.

So Matthijs, last quarter, you talked about some exciting contracts with a robotics retail customer. Can you give us any update there in terms of how that's trending and where you see that relationship evolving with that customer over time?

Yes. Thanks, Lee. Last quarter, we discussed several design wins, one of which relates to warehouse automation with a major e-commerce player, specifically the largest in the world. We are very excited about this achievement. Currently, we are in the initial stages, with deployment expected to begin in 2026 and to expand from there, reaching significant growth in 2027 and 2028. The timeline for deployment will depend on our customer, but I am very enthusiastic about it. As I mentioned in the last quarter regarding some of our bookings numbers, we have already seen some bookings from that customer.

Got it. And then a lot of the calls we're getting from investors are really focused around this nascent humanoid opportunity. Can you remind us the products that are most relevant on the humanoid robotics and how we should think about the potential for revenue and the ability to scale over time?

Yes. We said the combined physical AI, which is both robotics for warehouse automation and for humanoids, is about a $1 billion market opportunity for Novanta by 2030. So that's how we sized it. The deployment is still very nascent and is expected to hit a crescendo in '27, '28. But of course, the design win activity is happening right now. What I said in my prepared remarks is that robots need help in reacting to and operating efficiently and effectively in unstructured environments, reacting to their environments like humans can. And for that, you need the perception of humans and you need safety built in in case something goes wrong. Novanta's unique capabilities enable creating a sense of touch, and the combination of touch and reaction is what really Novanta brings, including embedded safety so that a robot, when it malfunctions, can basically collapse safely and not on humans. You can imagine that this is a big factor in terms of deployment and adoption of these types of technologies. We feel we're a leader in enabling that perception and safety, as well as that reaction speed. The products are force/torque sensors, but also include our position sensors that are integrated into intelligent subsystems and servo drives, which intelligently and safely react to all the signals that are there. Yes, you need these competencies in typically all joints of a robot, whether that's in the wrist or the ankles or sometimes in other joints. Warehouse automation is just another form, right? So we all talk about humanoids, but you need the same type of perception and reaction speed in warehouse automation, where you need to surpass the human's ability to pick accurately. That's a pretty high bar, and for that, you need our technology. Hopefully, that provides some more insight.

Yes. That's great. And if I could sneak one more in for Robert, and I'll hop back in the queue. Just in terms of the regional manufacturing footprint, how far along are we? And once we're fully transitioned there, how do you view the potential margin uplift from either current levels or levels prior to the transition for just this item, understanding there's a lot of other moving parts going on at once?

Yes. No, I appreciate that. We're obviously somewhere in the range of around 22 different manufacturing facilities. There is an opportunity over a period of time to build some scale into regional hubs and centralize that scale while reducing our overall footprint and overall cost structure. It's roughly about 100 basis points of incremental margin expansion despite the fact that a traditional regional manufacturing initiative would result in duplication of manufacturing and duplication of cost structure. We have a unique situation where we can actually drive margin expansion by doing that consolidation. And then, of course, once you're done with establishing that duplication of production in those regions, you're now making yourself resistant or resilient from any sort of future dynamics around trade, which helps our customers. Ultimately, they end up paying the tariffs on our products when they import those products into the various regions. By manufacturing them in-region for-region, you're helping them reduce their cost structure, which thereby manifests as higher demand flows for us.

And when do we think that gets completed?

Some of the initiatives we announced back in July will largely be completed by the end of the first quarter. Some have actually already been completed. I would say by the fourth quarter, we feel pretty good that the majority of it will be done. But largely by the end of the first quarter, we feel like the majority of the effort will be completed with the first phase of it. There are additional steps we would take, but I would say the first phase of it, that is the majority of the effort, will be completed by the end of the first quarter.

The next question comes from Rob Mason of Baird.

I wanted to probe the perspective on 2026 around mid-single-digit growth. As you look across your businesses, I think it's probably a safe assumption. Advanced Surgery, curious if it has the most momentum into the year. I'm curious how you're thinking about robotics now from a year-over-year standpoint just for the year and whether it has double-digit growth potential. We should think about Precision Manufacturing and Precision Medicine, just again, if we kind of run out with a gradual sequential, maybe there's flattish or a little bit of growth. I'm just curious how the growth dynamics work among your four main business units?

Yes. I mean, it's fair to say that the two higher growth categories that we'll have in 2026 will be the Advanced Surgery business and then the Robotics and Automation business. Those two businesses are trending in a nice trajectory. I think you'll see Precision Manufacturing continue to sequentially improve. It's gone from a double-digit decline to low single-digit, and they will return to growth next year. The real wildcard is our Precision Medicine business. The dynamics there are positive, particularly as we start to get into 2026, but the volatility in that end market raises some questions, which is why we established that guideline for 2026 as a baseline. If there's one variable piece of our forecast, it's Precision Medicine. I think our forecast encompasses all the potential dynamics that we've been confronted with. So we see that as our baseline growth for next year.

Sure. How should we be thinking about, again, for 2026, the reliance on new product launches that need to happen in 2026 versus those that occurred in 2025 that will continue to scale and gain volume?

Yes. I mean, Rob, the way to think about it is basically current product launches continuing to build momentum. That is the majority of the growth momentum. Of course, we will launch multiple new products next year as well, about the same amount. But typically, the contribution is in year two after launch, so 2027. But yes, continue a very steady pace of new product launches. The majority contribution, of course, is from the big launches of this year that not all of them are full year. They will compound in very nicely. That's why we also feel comfortable with this guide. I would say maybe just if you take a step back and just look further out, we do feel that long-term growth algorithm of mid- to high single-digit organic growth is really building midterm. Based on the strength of the growth platforms we talked about, us gaining share in customers and content with intelligent subsystems, as well as medical consumables continuing to drive double digits for the remainder of this decade. These are kind of key drivers. We believe mid-single-digit next year is a good step towards that. Finally, I would just say that the target growth markets we discussed are still early in their adoption. For instance, about 15% of surgical procedures are performed robotically and approximately 40% minimally invasively. There's further runway for penetration of physical AI and robotics. We just talked about humanoid applications, still very early stages. And precision medicine, while challenged short, mid-term, there's less than 5% of diagnostics that use precision medicine and multiomic techniques today, with less than 1% of the world's population being sequenced. You'll see a longer-term and continued very strong outlook for these markets. I just want to reiterate that.

Sure. Just real quickly, last question. I'll hop back in the queue as well. We talked earlier in the year about, I'll just call it, trap revenue around just tariff dynamics. It was China, but it's really more of a global phenomenon. Maybe it was a $30 million number. Can you just give us an update on where that stands? And have we seen more of that revenue come out in the second half, or how to think about what carries over to '26?

I believe that as we strengthen our manufacturing presence, we will see a recovery in revenue. The dynamics are improving, and some of the organic growth in the fourth quarter can be attributed to our regional initiatives, particularly in China and somewhat in Manchester, U.K. Overall, we've experienced solid year-over-year growth in China, with strong design wins and new product revenue. This progress is broader than we expected and indicates that there's comfort with our regional structure. Similar improvements are occurring in Europe and the U.S., even though the regional structure isn't fully implemented yet. Our customers are becoming more confident in our business and initiatives, reassured that we are managing costs and building a structure that will insulate us from future challenges. This is reflected in our design win progress, bookings increase, and revenue growth in China among other factors.

The next question comes from Brian Drab of William Blair.

I am at a little disadvantage because I had another earnings call at the exact same time, so I'm catching up. But in that outlook that you have for mid-single digits in 2026, what's the expectation for your DNA sequencing business and for the EUV and DUV business? Are those growth businesses in '26?

No, let's start with DNA sequencing. We are not expecting growth in that business at all. In fact, we are reallocating our resources to areas with higher growth potential. So in our guidance, we are not anticipating growth for that, if anything. Regarding EUV lithography, we're closely tied to our customers' adoption. We are very optimistic about the midterm outlook there. The exact timing for next year is too early to determine. It will likely be later in 2026, and then in 2027, we expect to see significant momentum.

In that case, we are not considering individual customers contributing to these numbers. This forecast sets a baseline based on the business's trajectory as we finish the fourth quarter. We are seeing continued progress in Robotics and Automation and advanced Surgery, while Precision Manufacturing is gradually recovering, and we remain cautious about Precision Medicine until we see clearer signs of a stabilizing market. There is nothing included that indicates a couple of large platforms will drive growth. This is the baseline number that we are confident in.

Okay. And then the warehouse automation opportunity that you announced on the second quarter call, the $50 million opportunity over three years. Can you comment at all on how that might be recognized, the pace of that, or cadence of that over the three years? Is that business expected to be at segment level margin?

Yes. So one thing I'll say is that we are seeing bookings now, and we are seeing revenue materializing in 2026, and we will continue to ramp from there. It could be a fairly sizable opportunity for us as we sized before. We feel good overall, and I don't want to get into its margin profile knowing these are public calls. And all that, the individual company knows exactly who it is. I would just clear that. The Robotics and Automation business is a healthy gross margin business; it's got the healthiest gross margin business and the most differentiated technology. It's most differentiated technology is uniquely calibrated to serve these marketplaces. The force/torque sensors, inductive encoders, optical encoders, servo drives are all calibrated and uniquely designed to serve this physical AI space around mobile robotics, warehouse automation, humanoid-based applications. We're making great progress. It's one of the healthiest margin businesses we have. We don't see any reason why that environment or that dynamic would change anytime next year or any time into the future.

Delivering customer value, right, in the process, which is, of course, the most important.

Right. I was just going to ask one more quick question. I think everyone appreciates you reporting the percentage of sales related to consumables. Given the momentum that you have in the insufflator business and the next-gen pump and some of the wins there and getting into robotic surgery with the insufflator, is there any reason to not think that 15% kind of picks up modestly as we move forward into '26 and beyond?

Yes. We see that category growing double digits for the remainder of the decade. It will be a more pronounced piece of our portfolio. What we're excited about is that we've built competence here, right, at close to $150 million. You can see this also in the margin profile. We built scale and competence and engineering capability. On the back of that, we think this is a great platform to grow and jump off into other applications, whether it's organically or inorganically. You can expect us to further expand into other areas organically and inorganically because of this strong beachhead that we've established.

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, 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 the upcoming investor conferences over the coming weeks and early in 2026. Thank you very much. This call is now adjourned.

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