Q2 2020 Earnings Call
Welcome to VERYX leveraging corporation second quarter fiscal year 2020 earnings conference call.
[music] Colleen.
A question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Howard Goldman Director Investor Relations. Thank you you may begin.
Good afternoon, and welcome to VERYX imaging corporations earnings conference call for the second quarter fiscal year 2020.
With me today are sunny Sanyal, our president and CEO and clarity there <unk> our CFO.
To simplify our discussion unless otherwise stated all references to the quarter or comparisons for the second quarter fiscal year 2020 versus the second quarter fiscal year 2019.
On today's call will discuss certain non-GAAP financial measures.
These adjusted measures are not presented in accordance with nor are they a substitute for GAAP financial measures.
Provided a reconciliation of each adjusted financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website.
Please be advised during this call will be making forward looking statements.
Which our predictions or projections about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
That could cause actual results to differ materially from those anticipated.
Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our FCC filings, including one day risk factors of our quarterly reports on form 10-Q, <unk> annual report on form 10-K.
The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward looking statements in this discussion.
And now I'll turn the call over just sunny.
Thank you Howard good afternoon and welcome.
Since our last earnings call in February the World around this has changed dramatically due to their cobot 19 pandemic.
Before discussing our results for the second quarter.
Behalf of everyone at Verisk, some effect all of the selfless professionals and volunteers on the front to frontlines around the world fighting against the global pandemic I would also like to say our customers our suppliers for working closely with us to manage the impact of cobot 19.
Those are grateful that all of our 2000 plus employees around the world are safe and well and that all our factories and service centers, our operational and stuff by our central personnel.
We have implemented strong social distancing and good hygiene practices.
And with many Nonproduction employees working from home, we're using our video conferencing systems effectively for internal and external meetings.
In addition to health and safety actions, we took some extraordinary measures in our operations in the Philippines, where we manufacture some high volume products. The strong lockdown initiated by the local government disrupted public transportation and commuting they can't virtually impossible for many of our workers to get to our production site.
I'm glad to say that we were able to make arrangements for many of the impact of workers, we sheltered in our premises.
Arrangement allowed us to not only maintain business continuity, but also to ensure on time delivery for our customers.
The cobot 19 pandemic began to impact our business in a second quarter, although our revenues increased over the prior year quarter, we experienced a substantial shift in mix between our business segments and within each segment that lowered our overall margins.
Revenues for the second quarter increased $297 million from hundred $96 million in the prior year quarter.
Medical segment revenues increased 4% $255 million, while industrial segment revenues decreased 11% to $42 million.
In our medical segment, a significant increase in sales of C.D. tubes, and higher demand for certain other actually imaging products that assist with the fights can scope at 19 drove revenue growth.
We increased production and met much of the incremental demand for seeking tubes, radiographic tubes, and detectors and high voltage connectors.
This growth was partially offset by a decline in sales of other medical products as our OEM customers manage their inventory levels in response to the uncertainty around spending for X Ray imaging systems.
She is one of the most versatile of diagnostic imaging modalities and growth that we're seeing a new cities system installations demonstrates this.
The fight against <unk> 19 has shown us disbursal versatility as practitioners have been using C.D. systems to assist in diagnosing complications from covered 90.
Demand for Cts continued to be healthy and we anticipate demand to remain solid over the coming quarters.
Our success in CTG is driven by several factors.
First we forged longstanding relationships with our global OEM customers, it's not uncommon for us to have customer relationships that exceed 25 plus years.
These customers, particularly our largest customer who drove the vast majority of our growth in CTG themselves during the quarter. All continue to win in the market, but systems that include our advanced and cost effective technologies.
Second our leadership and innovation drives new technology adoption and our global OEM customers continue to rely on barrick's for their future product needs.
Despite disruption operations front, a pandemic most of our OEM customers continued to move forward with their C.D. system introduction plants.
Third the scalability of our operations is an advantage that our customers value.
As I previously mentioned some of our customer saw an uptick in demand and for their systems that was driven by covert 19.
And we were able to fulfill most of this demand during the quarter.
Well, the dental mammography and oncology markets appear to have slowed down globally due to the pandemic. We firmly believe that this is a temporary situation for us.
These are markets, where we are well known as an innovation leader I know he amps have responded very favorably to our recent product introductions.
Despite the pandemic there has not been any notable slowdowns in the rollout of our new detector technologies, such as our high performance and cost effective the platform for dental surgical cardiovascular another dynamic applications.
Customer projects in these areas are moving forward.
At the same time, we have continued to make solid progress with our plans for introducing locally made radiographic in dental detector products in China and have begun shipping these products in increasing quantities.
Our new portable wireless detector is hardly while the lightest in the most robust detectors and the world with best in class specifications, and we're very encouraged by the traction that it has received from Oems developing mobile X Ray systems.
In summary, we feel very confident that our medical detector and two technologies are hitting the mark and we expect to come out of this temporary pause competitively stronger than before.
In our industrial segment, a decline in world oil prices led to significantly lower seltzer products for cargo screening at ports on borders.
Most projects of this type are typically tender driven and funded by governments many of which are located in oil producing regions of the world.
Similarly, and then de T. market.
Product sales to our customers in the oil and gas vertical decreased substantially as spending contracted sharply.
Product sales for other entity applications also declined considerably due to the global economic impact of covered 19 on many companies that manufacture commercial and consumer products.
In the second quarter product sales for airport security market increased however, given the precipitous drop in global Air travel due to covert 19, we anticipate a decline in product sales for this application in second half of this fiscal year.
Despite temporary headwinds we can do you believe that the industrial segment remains an attractive part of our business with long term growth potential.
Overall, the corporate 19 pandemic and its impact on the global economy has created a disruption to VERYX as business, which includes significant uncertainty in demand for certain products for our medical and industrial applications as well as variability in our supply chain and manufacturing productivity.
We expect this uncertainty to continue for at least the remainder of the current fiscal year.
As a result, where withdrawing our previously issued guidance for fiscal year Twentytwenty.
To help improve our financial condition and better enable our business to weather the extraordinary challenges associated with cobot 19.
The second quarter, we initiated a series of cost reduction and cried cash preservation measures that will continue to into the second half of our fiscal year.
For example, we have pulled in the closure date of our Santa Clara facility by full quarter into the fourth quarter of the current fiscal year.
And the United States, where reducing labor cost through furloughs and targeted reductions in personnel.
In addition for the remainder of this fiscal year through a combination of two weeks of leave without pay and temporary salary reductions, we will be reducing cash compensation for our nonproduction employees by approximately 10% to 30% depending on the job level.
My salary will effectively be reduced by 30%.
And the other members of our board of directors have agreed to 30% reduction in their annual cash retainer for the second half of this fiscal year.
Internationally, we are exploring and implementing salary reductions and reduced work schedules each in line with local guidelines.
Were temporarily suspending the company's for on K match, along with cash components of employee recognition programs, we have reduced and we'll continue to reduce other discretionary expenses and we're taking actions on low margin products in our portfolio to either increase prices or discontinue the products.
In aggregate, we expect these actions to reduce cost by approximately $15 million to $20 million over the remainder of this fiscal year.
There are other long term actions under evaluation as well, we're targeting additional cost reductions across our entire business as we look closely at the broad portfolio of our product lines, I said 10 facilities as well as our overhead cost structure.
We expect to begin implementing these changes in the second half of Twentytwenty. The leadership team and I are committed to delivering on this and we will provide additional details over the next few quarters.
With that let me handover the call to Clarence to talk about our financial performance in greater detail.
Thanks, Tony and Hello, everyone.
Before I go into the detailed in the second quarter performance I wanted to discuss liquidity.
Cost actions that Sunny just reviewed our for two purposes. They will help to improve the p. an outperformance and they are critical for cash preservation. We have recently taken other actions to manage our cash as well.
Several months ago, we put a hold on all capital equipment spending other than that what was needed to increase production for high demand products.
We continue to target reducing inventory levels, while managing our manufacturing build schedule due to the frequently changing customer demands.
We're closely monitoring our customer payment patterns and negotiating with our suppliers on payment terms.
You're taking additional steps to strengthen our balance sheet at the end of March we modified the covenants of our credit facility to increase the allowable leverage ratio to 4.25 times adjusted EBITDA.
In April we borrowed the remaining balance of our credit facility that provided us with an additional $65 million a cash.
We are in the process are pursuing other sources of capital, including the U.S. Government main street lending program.
Now turning to the quarter, we had good revenue performance, while both gross and operating margins were weighed down by segment and product mix and some onetime events.
For the second quarter revenues were $197 million compared to $196 million in the prior year quarter.
Medical revenues for the quarter increased $6 million to $155 million and industrial revenues decreased $5 million to $42 million.
Well the second quarter, our gross margin was 29% compared to 33% in the prior year quarter.
Medical segment gross margin declined by about three points.
During the quarter, we incurred onetime costs of approximately $2 million related to a customs audit in Europe, and approximately $1 million of accelerated depreciation related to the closure of the Santa Clara facility.
Industrial segment gross margin decreased by about four points deep versus the prior year due to an unfavorable mix of lower margin products.
Overall, our adjusted gross margin was 32% compared to 34% in the prior year quarter, primarily due to the lower volume and performance in the industrial segment.
R&D expenses were $21 million, just the second quarter, an increase of $2 million from the prior year quarter, primarily due to the inclusion of direct conversion.
As a percent of revenues R&D expense was about 11% for the quarter.
Second quarter SGN, a expenses were $35 million and included approximately $4 million on expenses related to acquisition integration restructuring and other non operational costs.
SGN expenses also increased approximately $3 million versus the prior year due to audit and consulting fees associated with the implementation remediation of new accounting standards.
SGN a expense for the prior year quarter, where we're $30 million included approximately $6 million of expenses related to restructuring and other non operating costs.
Depreciation and amortization totaled $11 million for the second quarter compared to $8 million in the prior year as mentioned previously the second quarter included $1 million, an accelerated depreciation related to the closure of the Santa Clara facility.
Our operating earnings for the second quarter were $1 million compared to $14 million in the year ago quarter. Our adjusted operating earnings for the second quarter were $11 million compared to $23 million in the year ago quarter.
Interest expense in the second quarter was $5 million, which was comparable to the year ago quarter.
In April we completed the payment of deferred consideration for the acquisition of direct conversion, which was based on a six amount of their shares due to the reduction of the Barrick share price in the second quarter, we revalued the amount of the deferred consideration and recorded a one time 3 million dollar gain in other income.
This gain is excluded from our adjusted net earnings.
Act expense for the second quarter was less than $1 billion compared to tax expense of $2 million in the prior year quarter.
We recorded a net loss of $2 million or five cents per diluted share in the second quarter compared net earnings of $6 million or 15 cents per diluted share in the prior year quarter.
Adjusted net earnings for this quarter were $5 million or 12 cents per diluted share compared to $13 million.34 per diluted share in the prior year quarter.
Diluted shares outstanding were 39.1 million shares versus 38.5 million shares in the prior year quarter.
Looking at our working capital accounts receivable increased by $4 million during the quarter day sales outstanding was 59 days compared to 57 days in the prior year quarter.
Inventory increased $13 million into second quarter to $282 million, primarily due to additional inventory in preparation for the transfer of detector production from Santa Clara to Salt Lake City.
We ended the second quarter with cash cash equivalents of $24 million during the quarter. We d., we increased debt by $2 million ended the quarter with total debt outstanding of $383 million.
Due to the uncertainty associated with the Cobot 19 pandemic, we have withdrawn guidance for the fiscal year 2020 that said Directionally, we anticipate that the decline in revenues in the industrial segment will continue through at least the ended the fiscal year.
Now I'll turn it back over to Sunny for some closing comments.
Thank you clearance.
Before we get to questions questions I'd like to emphasize that despite the significant near term headwinds our business fundamentals remain strong.
We will continue to support our customers. We will continue to innovate and we will continue to take actions to ensure that very VERYX is well positioned into the future.
VERYX is unique.
We have been a leader in extra imaging industry for more than 70 years and we continue on.
Do you plan to continue that leadership on for the next 70 years and beyond.
We're a leader in both innovation and quality and our customers recognize that.
We have many multi decade long relationships with customers, who rely on VERYX further imaging system needs.
We believe there will be continued long term demand not only for extra tubes, and detectors, but far barrick's as actuate you've done detectors.
We supply approximately 25% of all electric tubes into digital detectors globally and are the only independent manufacturer of both these products in the United States.
Thank you for your support this isn't unusual time, and we will not only get through this but emerged competitively stronger.
We'll now open up the called for your questions.
Thank you, ladies and gentlemen, and we will now be conducting a question and answer session.
If he'd like to ask a question you May press star one on your telephone keypad.
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Our first question comes on the line of Anthony Petrone with Jefferies. Please proceed with your question.
Oh, Hi, Gray then a good afternoon hope everyone's doing well and staying healthy and other things. So I believe it or how are you selling just.
One quick housekeeping question, just on the 2.1 million add back to <unk> to gross margin just a little bit of color there.
On that in particular and then.
In terms of.
Orders, specifically from the China backlog anything you can provide and way of.
He to demand this quarter and how that will trend in to the back half and then I'll have two quick follow thank you.
All right, let's say the first while it was like.
Anthony I'll answer the what's going on with the add back there. So this is related to the customs audit that's going underway in in Germany in particular, and so it's one of those things where we booked a some estimated amounts for the prior year customs payments and so.
Shade without we are contesting it in the courts, because there's been a ruling done by the customs authorities about which classification for our for our detectors or for any detectors for that matter that are being imported into Germany, and they've chosen a classic.
Patient code that has a higher tariff rates a than what we've historically used and and so it's there's going to be a bit of a process that will take some time to get resolved I would say, it's going to go through the courts process, but oh and I expect that we will probably end up booking a little bit more around that.
In the coming quarters as we.
Get further clarity from the auditor in terms of the more recent time periods and all locations that we have in Germany.
Okay. So it didn't would you expect you know two point around that 2 million.
So what adding back to be repeated possibly next quarter, and then trail off into the back half.
Yeah, well, it's sort of fluctuate from there.
It's it's.
Im going to just take a an estimate that says that yes. That's a yeah, we would expect to see.
Another number whether it's in the next quarter or the next two quarters or something like that a similar sized kind the number to that's a hard to define exactly because the auditors still has to finish their work around it. So it's all about identified numbers versus a kind of rough estimates and at the time, we only book the.
Amount that's clearly identified.
Got Ya.
And then Anthony of almost yes. Thank you Susan.
Second second part of your question no China orders, how things are going there, hey, so C.T. and China have been the bright spots this quarter and.
I'm very happy to say that yeah, you know things in China about rebounded back fairly quickly. They were down first six seven weeks and when they came back things return to normal fairly rapidly and then the CP our safety performance in China came right back to where inline with the trajectory that we were on so we're very satisfied and happy with with whats going.
And in China, and C.T. in General was a good performer for US. It was a combination of two things one our normal run rate for C.T. continued on and things progressed as we had anticipated and in addition to that we had a additional demand during the quarter tied to cover.
19 related purchases that we we anticipate that that was a that was used for geismar assisting in diagnosis of Cowen 19. So we had a nice bubble of C.T. During during this quarter that we were able to deliver against the foundational demand there was inline with our expectations.
Okay, and then two quick follow ups Sunny you mentioned, obviously headwinds in dental in particular, and we've heard obviously an hour and lots of checks on the decrease in procedures in physician office closures and then you also.
No reference the oil market.
Headwinds in the medical imaging stays but also industrial.
You know how did those to play out.
When you think about.
Orders into the second half, but also backlog is there risk that that that the backlog gets impaired tubes and these headwinds.
I'll start with the demand side as as we as I mentioned for the second half of that we are a year, we expect a strengthened CTP to be as any other year as normal TT just seems to have its own.
Demand, Pat and as a it's a very versatile modality and when people have the choice of buying multiple modalities and they have to pick one it's usually see t. and so we're benefiting from that.
And that said the other modalities dental mammography you you know as you've seen in a in the market those came to a grinding halt but its vision physician offices top performing procedures and ER.
They stopped coming into the office, so we've seen that stoppage, but our our where we're seeing we're seeing external find dense dentist's offices opening up that those haven't translated into straight demand for us yet, but we believe that as soon as.
The these outpatient clinics opened up that we should start getting back to those kinds of volumes timing. It's been uncertainty that next quarter is the two quarters from now.
That's where the uncertainty is we're listing.
We're talking to our customers dental customers mammography customers weekly daily and looking for signals since we're on the front end of the supply chain. In this we expect that we will get earlier signals. Then you know burden you know were three to usually three months ahead of their production shipments. So we hope that we won't be the first wants to know as demand comes right back there.
We've seen dental demand in China come back, which has said if the other markets. Following that similar pattern, we would expect that physician off because once they open up and these outpatient related system purchases will begin resumed.
And then after these sorry for the last part of your question regarding.
I didn't get there.
The question certainly like oil and Oh, Yeah, just you've mentioned oil in terms of that security detection.
ER business that segment of that portfolio within industrial just.
How that's playing out just in terms of demand for security detection.
Linear accelerators and even more so it's a backlog of.
Of that business is not risk.
Yeah in general we don't carry much of a backlog a you know as you know we are we.
We usually it takes our lead times for delivering products are anywhere between 90 220 days. So there's no real significant impact to any backlog or impairment any backlog what had happened in that in that segment of our market is that two factors played in one because of covered 19.
Many of the security projects. So just came to a stop because people can show up there didn't do that installations and.
So that's why there that was number one pause for the slowdown.
Again, we are on the front end of this so we felt probably a part of it and then our customers who deliver those systems and installed those systems felt the actual impact of the delay but the delay also caused then other projects to ship move out. So that's why we saw slow down in cargo related shipments during the quarter.
The second part of this is oil oil prices oil prices, usually have a slowing down effect on on tenders that come outside of this business is largely tender driven and projects, where we were expecting tenders come out for our customers, where they all moved to the right. So that's that's a number two reason and related to that relate to.
The oil prices, we haven't we have a very good solid presence in the oil and gas vertical in our industrial business.
And there as oil prices came down the willingness to spend money also shrank.
So we think that that.
Oil and gas for industrial or tubes detectors, and software will will be tied more to those oil prices then covert 19.
Okay I'll get back in queue. Thank you.
Thank you.
Our next question comes on line of Larry solo with CJS Securities. Please proceed with your question.
Great. Thanks, good afternoon.
Just one is doing and Irene.
Just a few questions couple of follow up just on the clearly your coated impacts obviously started in China and whatnot, but probably for most of the quarter you didnt feel much of it until.
The latter probably 234 weeks just trying to I know you that you're not giving guidance, but just trying to get.
From a high level trends in April you know they.
Terms of sales and felt that.
Just.
For the bad in some areas and others have been like you can see to remain kind of constant.
Trying to get some kind of feel or maybe even tell us what happened in the first quarter <unk> or the front half versus back half.
Well, Larry I'll start out with a little bit <unk> first of all I'm going to give you. The reminder, yes, we don't give a specific guidance anymore and I can probably give too much color around this.
Right I think we see point, though is that around the ER. The industrial side is a business or the slowdown that we saw.
And it started you know probably mid way through the second quarter not necessarily just the last few weeks of it has got to remember where more on the front end of the cycle.
But as thought it was just mentioning so and that slowdown in industrial all indications are that that's continuing on and our expectation is the second half is going to see more of that.
Supposing gotten worse right I'll read the last week and right I mean Uh huh.
I'm not going to get very specific but yes, I would say that to you know that because if you're thinking about it as.
We had a slowdown in the second half of what that means we still had an okay first half and so just recognize that you get a whole quarters worth of impact on this now rather than just a month or a month and a half of it.
And then within the medical space, Yeah, I mean, I think 70 is already touched on a little bit about a C.G. demand continues on the.
Radiographic detectors, and a and a kind of the products that are used for doing some basic chest that great X ray kinds of imaging that demand is still there. So I mean, I think twice a day and it's more about the you know the additional capital equipment purchases for higher Rand application.
That data that we've seen a bit of a slowdown in in.
In the latter part of March and and going into the next quarter.
Right and then just in terms of just.
Not to look back too much but in terms of the Q2 performance because it's probably were under only to set up increasingly more challenging world, but in terms of the margin the impact on mix was that mostly just the drop.
I mentioned, the industrial side, because I think that the medical side at least some of these kids machines I know you have.
Pretty good margin on right.
I'm in the two right. So yeah, I mean, so yeah, yeah, Yeah, Larry I'm glad you asked that because I I looked at it is as kind of in a I'm a little bit more maybe a little bit more macro in terms of we ended up at 32% as our gross margin we've been target for the year to be 35.
5%, which was comparable with a year ago or the prior year and so three points of a loss margin is a pretty significant movement for us and I'd break it down roughly a third a third third into three categories.
The first first of it is is overall mix, whether it's between segments or even the mix of the products that we are selling were just selling less of the high end product in the a in the second quarter than we historically have the second 10, we haven't really touched on this yet but.
We still have particularly when you're comparing with prior year, we still have the overlap costs associated with the Santa Clara transfer. So we have some stranded overhead in Santa Clara and we are ramping up production and support costs in Salt Lake City in preparation for the transfer so that's no rock.
The point of Oh impact as well and then let's not lose sight of that cobot by itself.
Caused some impact on us in terms of higher freight costs, and just kind of less good productivity in the factors were just not as efficient as we were before and so oh. So we saw a roughly a point of impact associated with that as well you know freight by the way it is.
Certainly a challenge and I would you say that you see this with other companies as well is is the freight costs have gone up as there's no restrictions on the number of ships that are available or airplanes that are available in freight costs have gone have increased.
Ask your that how much that impacted your gross margin and also maybe on the operating side on your question they side yesterday's Tim.
A little higher than I thought it would be I know you called out the threemillion of increase consulting fees.
Couple of questions. There is that a few accounting standards that more of a onetime or just this quarter is I cannot leak into next quarter and even if I take that out costs were still I think close to 15% of a decent revenue number even though the mix was down the revenue number itself. What you know that's the basis was okay. So trying to figure out decipher there was.
Anything else in there, maybe some kobin related stuff.
Let me I'll, let me kind of run through kind of the different elements of that and I would put it first of all as far as the.
Added consulting costs to do a new.
Accounting standard that most of that was associated with accounting standard that was.
Implemented in a combination of Q1 and that bled over a little bit into Q2. So so we had that that's a you know probably Oh I talk about 3 million and that's a probably at least 2 million others is associated with that we also if you remember we said the Sox remediation.
Cost, we used to non-GAAP that out and we have now started to include that in our and our adjusted earnings our adjusted financials. So there's a you know some additional cost associated with that that historically has been.
Adjusted out from a non-GAAP adjustments perspective, and then you're right I think that in general just a little bit of Oh.
Hmm less oh, good performance in terms of the or the overall business because it koby, but I I have a hard time, putting a lot of that into the asked you in a bucket. So I didn't incur a whole lot of extra costs associated with with with Kobin. It is more that we just haven't.
Ben operating as efficiently as we would normally like too so.
Okay.
I I missed one other point, which is the M, particularly when we're doing a comparison with prior year. We have the addition of direct conversion, which adds mostly on the R&D line, but then it does add some costs on on SDMA as well.
And we're not direct generating the revenues yet with the direct conversion. So there's a bit of the let's call. It investment in that business going on right now that are still impacts us from a SGN as a percentage revenue perspective.
Our selling cycle again, [laughter] Oh, just last question I guess, it and I'm, probably kind of touched on you know hopefully a lot of this stuff is temporary or you know even comes back next year. Hopefully couple of years. We're you know it's pretty much under control I guess my question.
It is a lot of your stuff on the medical side a lot of your purchases are.
A lot of is driven by high and you know t. machines himself and if these hospitals, even if it like the surgery as you know they'll come back, but maybe not quite to the the part that you know where they were and are in the meantime can get the it'd be maybe come due hospitals. Their funding is a lot lower so is there a possibility where you know the economic impact into maybe in.
You know direct impact on slow down elective surgeries leads to slower equipment sales for I want you know extended period that would then you know impact your OEM live on you guys.
I'll, let me give out on an initial response and then I want sunny to answer that more because I think he has a better finger on the pulse of that I would say that you know the question was a little bit about you know what will happen with hospital economics and <unk>.
I think that's an interesting question because I you know from what I'm reading and kind of what I'm hearing a little bit is is that there's a lot of more interest in making sure that hospitals are viable in Moscow fills out our properly funded and the like to ensure that they are functioning well so I I'm not sure I agree with your premise that.
You that you think that they will all have ER that they'll be struggling more in the future I think that there's a commitment by governments to make sure that hospitals function well.
Sunny no fault of promise I just wanted to here I'm, just trying to play Devil's advocate and that it took nearly got they will be struggling but.
I appreciate your thoughts there.
Yeah, Hi, Larry I think that your theory, I think translates into a timing uncertainty and that's why.
No we're not because we can't put your finger on the specific timing of recovery, we're throwing guidance, but fundamentally.
If you think about it.
Let's take on oncology as an example.
Demand for cancer treatment I, we don't we just don't see that diminishing. So uncalled, you know things like oncology mammography dental procedures. These these are going to come back because the basic demographic drivers that are but that are that it will continue to be there.
The question is will we see a faster a return on that military or versus the hospitals. We just don't know those secondly, a pretty significant portion of our revenues on the tube side, our replacement tubes show up you know there as hospitals come back online as Cts systems continue to function.
Note that that demand comes back there was some of that demand that slowed down as well and just you know things surgeries stopped getting done so.
So we're we're more.
We're bullish that the fundamental market drivers will then bring the systems you know this the demand side back online and the timing is what were not placing a bet on.
Appreciate the color like pockets.
Our next question comes from the line of Surajit Calia with Oppenheimer. Please proceed with your question.
Good afternoon, everyone Sunny Clarence powered hope, everyone, a safe and healthy.
Hi, good were to be able to.
Can you give me a right.
Yep.
Okay. So.
I mean, Clarence looking just kind of dancer on between some questions Sunny one of things that most of the companies in our universe, albeit these are.
Correlated to procedures in hospitals and the hospitals shutdown, obviously has a collateral impact.
Most of the companies that.
We know of have beans, Telegraphing look April volumes were down anywhere from 50% to 85%.
No. Obviously you guys. This business is a little different.
Not only from medical in any industry perspective, but just sort of the the visibility you haven't demand ordering patterns as.
I'm not sure I heard any specific numbers on how we go saw April may be already made people.
But you will give us some color that you know this is where or maybe even oil and gas. This was whether it was down.
This March in a you know relative to what you normally see pretty cold it.
[laughter].
Well Serasa I think I talked a little bit with with Anthony about this switches and I'm just I would say that the industrial side of the business or is we saw the.
Slowdown that start in the second or the middle part of the second quarter and now we expect to see a full quarters worth of that decline. So you can little bit do the math around that in terms of Ah Ah extrapolating, what a half the quarters.
Locked declines versus a full quarters decline.
I I don't get it probably give very specific numbers somewhat because yeah. We we still do our business pretty much a with or without a lot of backlog and so it's a lot of Ah orders as they come in and that and and then we ship and deliver on to that to the to that demand.
Got it okay.
So many in terms of you know again <unk>, how should we think about contractual minimums if any.
You know what offsets are there.
You guys are going to get impacted right everyone is getting it back then but how should we think about any contractual minimums during over the next let's say three quarters to tight this calendar year.
Got it that could give us some perspective of okay, you hit as the counterbalancing effect.
Despite some some slow downs, let's say in oil and gas.
To summarize a I think we've said this before that our agreements with our customers are pricing agreements and the prices our volume driven so there are really know a with a few exceptions, where we were me where we may have done special projects and you know, but generally speaking there are no real hard and fast contractual minimum.
These are mostly if the volumes are down then next year, when we sit down to talk about prices and or sit down with their customers will have a discussion around pricing, but largely speaking customers don't take more than what they need and if they take more than what they need the next quarter. We have a you know.
They take less than so so you're not going to see an impact of that.
From us we won't have any significant adjustments because of.
Because of <unk>.
No actually and I and I first of all just want to say kudos to the team because there is a ton of work going on right now in terms of ramping up the capabilities to do that manufacturing of those detectors in Salt Lake City building a the initial production of those having those.
Go to our customers, having them validate that they they perform well and and that we're right in the midst of that right now we will start to see the the the slow down the.
<unk> down of the Santa Clara operations at the end of this quarter and going into the fourth quarter. So when you start to see some financial benefit in the fourth quarter of this fiscal year. So we have moved that in about a quarter from what we originally talked about so instead of talking about.
End of the calendar year most of the the production will have been stopped by the end of the fiscal year. So we pulled it in about three months from there. So it means that we fundamentally we'll get the full benefit of of reducing those costs for for all of a fiscal year 21 and.
So.
Too much on track and and I would say you know what I mean, there's a lot of work to be done there's always a few hiccups and learnings along the way, but I would say all and all that they are on schedule.
Fair enough and find a questionable hop back into Sunny forgive me have just been jumping in between two calls Suez map out the remaining quarters would it'd be fair to say that the relative impact of the the the structural drop in demand oil and gas and and the cap x. spend their off.
Is going to impact you guys from more.
Than than on the medical tight or the called a a covert related specifically more you know I'm just trying to visualize how the medical line item, but what a map out on the performer models versus industrials is it safe to say industry is we should pretty much factor in all the stepped down.
Predominantly in the in the industrial second thank you for taking that question then be safe everyone.
Yeah, Hey, that's that's actually pretty difficult question to answer, but let me see if I can frame. It for you the behavior in the industrial segment is is different by vertical. So as you know we play in security as a vertical within security, we've got an airport and you've got cargo what's.
<unk> and I'll go through examples of few vertical so you can get your.
Sort of a framework around this if you look at the security vertical airport security related issues are are are tied do tend to both you know volume for us it's tied to volume of a passengers going through airports us more passengers go through airports lower systems are used on more demand for tubes right that's number.
<unk>.
That's covered related now our other customers in in security that are in cargo related <unk> security there, yes, they've had some delays with the projects getting delayed but they're the they're the demand you know comes from being able to pay for these I mean, if these are in well produced.
Thing countries oil based economies then the projects move out so it's a combination <unk> security, but it's mostly.
Kobe related stuff is temporary and and oil related stuff will will will continue to do we've seen this happened in the past when oil prices go down projects get delayed hopefully the projects. So the project funding will come back when oil prices <unk> stabilize.
In other verticals. If you look at let's say verticals that are more broad based manufacturing and consumer facing so the food food inspection vertical or electronics inspection vertical. These are tied to covet and these are tied and recovery there will be tied to consumer spending and when these.
Factories open up and production start right then you've got you've got verticals that are in the government's actors like aerospace. There you know we we we think we are optimistic that the government will continue to spend money. According to their budget. So there the that that's what the recoveries on a totally different track, it's based on government funding in government budgets.
So every and oil and gas, where we were selling software detectors tubes that that vertical it again tied to <unk> oil prices. So there isn't one single reason for the recovery. We think will be in industrial will be staged you know something's will come on earlier as manufacturing general manufacturing.
Comes on line and other verticals will start do.
Resumed there as they resumed their operations will lose the recovery. So full recovery time frame is hard to put a finger on.
Oh next question comes from a line of Mark Strauss with J.P. Morgan. Please proceed with your question.
Yeah, Yeah. Good evening, Thank you very much for taken of questions.
Just wanted to to get a bit more color on the the cost savings you know when you when you talk about 15 to 20 million.
Thanks during the second half.
Is that versus prior plan is a year over year number or just any color. There and then also you know how much of that would be in cogs versus topics.
I'll take a shot at that so it's it's a mark it's it would be against our current run rate. So the first half run rate you would say these are reductions that are happening against that that current runrate. So that's probably the easiest way for you to model it.
And you know a good.
Portion of that is people related kinds of expenses. So we kind of walk through you know sunny walk through some of the different actions in terms of furloughs and salary reductions et cetera. So those are going to be spread.
More in the R. and D.N.S.G.N.A. lines, because we are not impacting the direct labor production, so you're going to see a heavier weighting of those people related costs in the operating expenses than you would into gross margin at the same time, we're looking at some of our let's call. It.
Variable expenses inside of the the manufacturing overhead in reducing some of those as well. So that's where we do see some benefit with that and you know subset of that is with the the pulling out the Santa Clara closure that we see that benefit mostly in the gross margin line a little bit anyway.
And D. line, so so a bit of a mixed bag I would say.
Probably in the order of magnitude of two thirds operating expense one third gross margin very roughly speaking.
Okay. My telephone Clarence. Thank you and then I I wanted to go back to your your long term gross margin targets, you've talked about expectations for the market to eventually recover but are there any structural changes that you think come out of this.
That might impact that that that long term target.
I, well I I'm going to give you a little bit of the color from the finance Guy and then I think sunny can give a little color kind of the broader picture kinds of things, but you know as we learn through this process about how can we function with reduced cost structure like the things that we just talked about here just.
Second ago, there's there's opportunities there that say these could be things that could continue on maybe not so much the furloughs and and the salary reductions, but more about some of the other you know or operational costs and.
Variable expenditures et cetera. So that's that's a fundamental starting point and then yeah, we're going to take a hard look at just our overall cost structure as we kind of look at our overhead expenses. Some of the you know sounds are are lower performing product lines and say should we what can we do too.
Either discontinue those or get some some level of price increase those are the things that make a difference from a gross margin perspective at the same time. Yeah. We are we continue to invest on the right things in our in D.
With the you know we'd talk about the news the platform for detectors, that's a big deal for US I mean that is one of those that we'll end up actually you know, it's a improving the performance of the product and and has a good cost structure associated with it. So it does a it does lead to some better performance in the <unk>.
<unk> side of the business with things like that.
Okay very helpful. Thank you.
Sure.
Our next question comes from the line of Tim Cydonia would sit Odiaun company pleased to see what's your question.
Good afternoon, it's good to hear you guys I hope everybody six agenda Hello, Jim.
So just a couple of quick follow ups I'm. So make sure we said in China or those manufacturing facilities up and running and is that there's this back back to where it was before covert.
Yeah, it's gym to Sunny Oh, Oh, because I'll start us so.
China, China has recovered fairly quickly from at least from from the Kobe related shut down that they had over a period.
They they came right back fairly rapidly on on track and so R.C.T. projects are.
Factory project the production work the starting up a of our production and all of those has remained on track we're producing detectors in China, we're shipping them in increasing quantities, who are making graduated graphic detectors dental detectors <unk> Oh, that's our plans for China remain on tracks. So that's that's a that's.
You know the we're very happy about that.
And then they shouldn't we had we had begun to move you remember we had talked about moving.
Some of our some portions of our supply chain and qualifying suppliers in China. Those are also on track and we're using those suppliers in our manufacturing activity that's going on in China right now.
Okay and then in in your other facilities worldwide have you cut back on ships.
You tell us you know.
<unk> on how much you've cut back.
No. We didn't we we didn't weed there was no cutting back on ships et cetera, you know, they're the only place where we had challenges was in the Philippines and blue as a period of time when production staffing went down <unk> because of the transportation issues. We we created dorms for employees in the facilities, we how's them.
And we production we balanced production between geography is and look we talked about this earlier and earlier quarters, where we said we're we're distributing our production globally. So that we can be more resilient and that paid off you know despite.
Pretty significant impact at a point in time in the Philippines are on time delivery of those products high volume product remained a greater than 99%. So we were able to balance between the Philippines and the Netherlands added more ships in the Netherlands on the Moon docking added more ships in the Philippines ruined <unk> balancing labor and shifts and we have been.
We have not faltered their same thing in Salt Lake City, we've been running at which we were here running out.
Historical capacity levels, and we were able to <unk> deliver major portions of the increased demand within the quarter.
How about in the month of April have you have you would do system and the motor vehicle.
So plenty of saying I think where where Jim has gone is is a little bit about yes, yes. There is a slow down and industrial where we slowed down a little bit of that though production and that would be a little bit in you know the linear accelerator production. For example is probably the the example of that.
That's that's correct and then our two production even you know the into the the <unk>. It's those industrial tubes, the linear accelerator somebody in a different that's a different product, but the regular x. ray tubes industrial tubes medical tubes are made in the same facilities and they're the labor. There's fungible resources there are fungible the production process.
As our share so that's the advantage of having both those together we get the economies of scale.
Okay, alright, so so even with the slow down and industrial you haven't had to make dress to drastic changes to to to your production I mean, you're still operating the same ships you were.
Three months ago.
Okay.
And <unk>.
Talked about the the the game reported because of the [noise] final payment too too funny acquisition the change in a share price.
<unk> make sure I missed it <unk> have those shares already been issued or what should we think of for share account for for the rest of the year.
They got issued in April.
And I'm going to go a little bit from memory here I believe it's something like 300000 shares something in that order of magnitude.
Okay, so you'll still be around that 39, and a half yeah. So years, you'll get a little bit of dilution here. So that's yeah. I think we were at 39.1. So next quarter will be 39.4, or five something like that got it okay. Alright. Thank you.
Yep.
I think a gym or next question as a follow up question from Anthony patrolling please busy with your question.
Oh. Thanks appreciate that just just one on.
The balance sheet.
Cash outlook in in the news that you called out cost reductions in the second half.
You do have 30 million do in short term debt and you took at 65 million and from credit revolver. So you know just as you think of the cash outlook, specifically I guess looking in the fiscal three q.
It appears that there should be some level of a cash burn.
So is there any color there and and you know she had sort of look into the to the the fiscal four q. and early next year.
Well the business be cash flow positive. Thanks.
Yeah, it's a it's a topic that I spend a lot of time on these days and and I'm watching it very closely maybe just a little bit of color in terms of our our debt is is that we have a minimum payment that we make on the on the term loan that seven and a half million a quarter. So that's the a a minimum amount that we have to pay.
As far as debt payments Ah in two three and cute for the good news about our business is is that we're dealing with repeat customers that are substantial in there financial strength and in that we're dealing with large entities that.
Make their their payments very timely so we've.
We've not seen any changes in the customer payment patterns at this point in time, which is a big deal. Okay. Because as we continue to monitor that they are they continue to pay very closely to there to their turns level. The key for US is all about as we see the shift in the mix of what customers.
Ordering from US we have to adjust our manufacturing schedules and we need to reduce inventory for the items that we've seen slowdown in and so that's a that's been the keep focused for me is is about making sure that we are are not having to make payments outflows as such for for a product that's just.
I can sit in inventories and there's a lot of adjusting going on in terms of our our builds schedules and the corresponding purchases from suppliers. That's a that's the main focus that we have I would say that the there's the obvious benefit that happens with reducing some of the the expenses.
Which is what we talked about the $15 million to $20 million and then also the reduction of the cap expending is the other item that helps us keep cash flow positive for the second half, it's gonna be tight I'm going to tell you that it's gonna be tight, but but I feel like we're in okay spot.
There are no further questions in Q. <unk> been for closing remarks.
Thank you for your questions and participating in our earnings conference call for the second quarter of fiscal year 2020.
Replay of this quarterly conference call will be available through me 26.
Can be accessed out the company's website or by calling 877 660.
<unk> five three from anywhere in the U.S.
Or two's or a 161 to seven for one five from non U.S. location.
The replay conference call access code is 137.
Zero to four to one.
<unk>.
But isn't gentleman. This doesn't include today's teleconference. Thank you for your participation you mean, just connect to lines at this time and have a wonderful day.
Thank you or.