Q4 2021 Varex Imaging Corp Earnings Call
[music].
Greetings and welcome to the <unk> fourth quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being Rick.
I will now turn the conference over to your host Kristen Belfiore director of Investor Relations you may begin.
Good afternoon, and welcome to <unk> Imaging Corporation's earnings conference call for the fourth quarter of fiscal year 2021 with me today are Sunny Sanyal, our president and CEO and Sam Maheshwari our CFO.
Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed on our website.
Website at investors that Barrick imaging dot com.
The webcast and supplemental slide presentation will be archived on <unk> website.
To simplify our discussion unless otherwise stated all references to the quarter or for the fourth quarter of fiscal year 2021 in.
In addition, unless otherwise stated quarterly comparisons are made sequentially from the fourth quarter of fiscal year 2021 to the third quarter of fiscal year 2021, rather than the same quarter of the prior year.
Finally, all references to the year or to the fiscal year and not calendar year, unless otherwise stated.
Please be advised that during this call we will be making forward looking statements, which are predictions and 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.
Risks relating to our business are described in our quarterly earnings release, and our filings with the SEC.
Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including item one a risk factors of our quarterly reports on Form 10-Q, and our 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.
On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures. We provide a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on.
Our web site.
I will now turn the call over to Sunny.
Thank you, Chris and good afternoon, everyone.
Fiscal 2021 was an outstanding year for <unk>, despite what turned out to be a very challenging and dynamic environment.
As we entered the year uncertainty around the ongoing effects of Covid, we're top of mind.
Pent up demand and an increase in focus by many countries around the world on expanding their health care delivery capabilities has increased the demand for diagnostic imaging systems.
As the year progressed. This increased demand was met with supply chain constraints that challenge, both our output levels and our profitability.
That said, we continue to execute on our strategic initiatives improving.
Improving gross margin, reducing operating expenses and inventory and introducing new products and technology to drive future growth and profitability.
Turning to the fourth quarter I am excited to report a strong finish to the year.
Broad based strength globally, especially in our medical segment drove record quarterly revenues up $226 million in the fourth quarter.
Profitability improved in the quarter, driven by strong growth and stable operating expenses.
Improved earnings and working capital management helped drive robust cash generation.
Cash flow from operations was $51 million in the quarter and the cash balance at the end of the year was $145 million.
Global demand for <unk> remains strong in the quarter as did demand for detectors in both medical and industrial applications.
While the third quarter marked a return to pre COVID-19 levels or better for many medical modalities I'm pleased to say that the fourth quarter. So all modalities above pre COVID-19 levels.
Our revenues in the fourth quarter increased 7% sequentially and 33% year over year with both medical and industrial segments showing strong growth.
Non-GAAP gross margins in the quarter were 34% as strong volumes were partially offset by supply chain challenges.
Non-GAAP operating margin was 14% of revenues and non-GAAP EPS of <unk> 45 exceeded the top end of our guidance range.
Let me give you some high level insight into how our different modalities and applications trended during the quarter.
Medical segment revenues increased 8% sequentially and 33% year over year.
We continue to see robust demand globally for our Cte tubes in the fourth quarter.
In our other medical modalities oncology radiographic dental and mammography posted sequential growth and we're above pre COVID-19 levels.
Florida was somewhat flat in the quarter due to timing of shipments.
Revenues in our industrial segment increased 4% sequentially and 34% year over year.
During the quarter demand for digital detectors for non destructive inspection remained strong in several of our industrial verticals, including battery inspection and oil and gas.
Demand for imaging products for security screening at ports and borders as well as baggage screening at airports continued to be soft, but both remain headed in a more positive direction.
As we have done in the past I would like to highlight the outstanding work, we're doing in one of our businesses.
At <unk>, our mission is to make the invisible visible in our AI aided software is strategic to that mission.
This software will be on display at our survey in a few weeks along with other products such as photon counting detectors nanotubes Z platform detectors, and our new aluminum detectors.
Our software business represented over $30 million in revenue in fiscal year 2021.
As imaging becomes more accessible globally and efficient workflow becomes more critical we're excited about the growth potential that AI aided software represents.
They actually I aided software leverages, our more than a decade of field based experience with software for image analysis and computer aided detection that is installed on thousands of diagnostic workstations globally.
We haven't been able to apply these competencies for developing AI aided software for breast lung neuro and liver imaging and we expect to continue this development across various other imaging modalities.
With an increasing focus on connectivity and integration, we're happy to be able to offer the software via the cloud.
Our AI aided lung screening software called reality is setting new standards in the industry as a trusted diagnostic platform for high throughput environments.
With an increased focus on lung screening globally. We think we already has the potential to become a significant contributor to our software growth.
We have been participating in tenders globally and recently, we won a tender to provide lung screening software for nine hospitals in the province of British Columbia and Canada.
We expect this win and other projects one in Europe, and the United Kingdom to help drive broader adoption of reality over time.
In the U S alone there are over 200000 lung cancer cases, and over 60000 deaths from lung cancer each year are.
The high mortality rate of about 19% is mainly due to late diagnosis of lung cancer catching the disease at a point, where it is often too late to treat effectively.
However over the last few years global and National recommendations have encouraged early lung cancer screening using low dose <unk> I'm on more high risk groups.
In the U S. This could potentially increase the number of persons eligible for screening from about 6 million to nearly $15 million.
With other regions like Europe, Canada, and Asia. Following suit, we expect this expansion of lung cancer screening to continue to grow.
This expansion will require productivity enhancing software that supports effective high volume screening.
This is a key capability and our strength of reality.
<unk> software can enhance radiologist productivity by enabling them to perform Cte lung screening quickly and with AI oversight for added diagnostic confidence.
This software offers automated workflow with historical comparisons and three D volume measurement capabilities that tracks the progress of a tumor over time and can help with early detection of cancer.
Over the last five years <unk> has licensed over 570 instances a reality across the Americas, Europe and Asia.
The global lung cancer screening market is expected to grow at 20% CAGR from a base of approximately $20 million in calendar 2021, and we expect to benefit from this market growth.
We are excited about the possibilities that software can bring to the imaging world I'm proud that <unk> is an innovator in this space.
As we expand our AI added software capabilities into other applications. We expect this business to become a larger contributor to <unk> in the future.
Before I hand over the call to Sam I'd like to take a minute to reflect on the past year.
As noted earlier, our fiscal 2021 was a record year for <unk> across the board as broad based demand drove our business to new levels.
Looking back to a strong period before Covid revenue was up 5% from fiscal 2000 $19 million to $818 million in 2021.
While adjusted EBITDA was up 15% to $133 million.
This translates to nearly 50% incremental margin.
An outstanding accomplishment from a period, we considered to be very strong at a time.
This increase includes the results from the first quarter of fiscal 2021, which was still significantly impacted by the effects of COVID-19.
As we all know the strong results exiting fiscal 19 were met with the significant headwinds from Covid, but the actions that we took to bolster our financial position helped us recover to an even stronger position.
Robust demand drove revenue growth of over 30% from the low point in the fourth quarter of 2000 $20 million to $226 million in the fourth quarter of 2021, while adjusted EBITDA grew tenex to $40 million.
This strong sequential quarterly improvement culminated in record revenue of $818 million in fiscal 2021.
This revenue along with continued expense management led to gross margins of 34, 7% in fiscal 2021, while adjusted EBITDA improved to $133 million and EPS finished the year at $1 31.
During this period global TT volumes increased double digits.
In fiscal 2021, we generated record operating cash flow of $93 million and our cash balance ended the year at $145 million, even after paying down $30 million of our debt in July.
I'd like to take a moment to recognize all our employees customers and suppliers globally for continuing to weather, a very difficult environment and meeting elevated demand levels through significant supply chain challenges.
Fiscal 2021 set a strong foundation for us to build upon as we move into 2022 <unk>.
Demand remains strong.
Fly chain is dynamic and we're confident in our ability to deliver quality products to our customers.
While we expect Covid and supply chain issues to remain part of our business environment. During fiscal 2022, we are steadfastly, maintaining our focus on <unk> and the long term.
The focus of that journey is centered around expanding our leadership position through innovation and continued focus on improving profitability.
Our fiscal 2022 expenses include fully funding several R&D initiatives that we will expect to drive future growth.
Okay.
As we have discussed earlier, we are developing several exciting new products, such as photon counting detector for Cte.
Our family of next generation radiographic detectors on flexible substrate.
Several advanced two models for <unk> and cardiovascular.
Fuller applications.
<unk> software and new connect and control components as well.
We expect to have customer prototypes of Cte photon counting detector modules available in the second quarter of our fiscal 2022.
We expect that these and other innovation initiatives will expand our addressable markets and increased our position as a preferred partner for innovative technology with current and potential customers.
While our local for local platform in China continues to be highly successful in <unk>. We are now engaged with local Oems on our innovation and X ray tubes detectors for applications, such as cardiovascular oncology.
And surgery.
Our joint venture VC is making steady progress with magnitude of technologies and we are at a stage in our development process, where we are shipping prototypes to industrial Oems.
Our continued focus on improving profitability and cash generation are driven by investments in our factory ongoing improvements in productivity and yield and reducing product costs through lower cost designs vertical integration and supply chain actions.
We have weathered the uncertainties created by Covid, so far and have come out stronger.
In the same way, we expect to continue to navigate the current supply uncertainties and emerge with a more resilient supply chain globally.
With that let.
Let me handover the call to Sam.
Thanks, Sunny and Hello, everyone. As a reminder, unless otherwise indicated I will provide sequential comparison of our results for the fourth quarter of fiscal year 2021, with Doosan for third quarter of fiscal year 2021.
<unk> continued to deliver strong results in the quarter with solid demand across all modalities revenue and non-GAAP EPS were higher than our guided range.
Fourth quarter revenues were $226 million, an increase of 7% from the third quarter.
Medical revenues were $181 million and industrial revenues were $46 million.
For both the Rx in total and the medical segment. This is the highest quarterly revenue level you have posted.
These revenue levels translated to 80% medical and 20% industrial sales.
Sequentially medical sales grew 8% in industrial sales grew 4%.
Revenue levels in all three regions remained strong in the quarter EMEA declined 2% sequentially Americas grew 7% and APAC grew 18%.
<unk> revenue was $112 million in fiscal year 2021.
Let me now cover our results on a GAAP basis fourth quarter gross margin was 33% down 200 basis points from the previous quarter.
Operating income of $27 million was $1 million higher than the third quarter.
Net earnings declined $9 million compared to the previous quarter, primarily on a higher tax provision of $6 million compared.
Compared to $3 million in the prior quarter.
Earnings per diluted share were <unk> 20, compared to 2009 in the third quarter.
Moving on to non-GAAP results for the quarter gross margin was 34% down 200 basis points from the third quarter as higher volumes were partially offset by ongoing supply chain challenges.
At the beginning of fiscal 2021, we aim to expand gross margins through cost reduction initiatives as well as improve efficiencies in our manufacturing and servicing activities. As noted earlier in 2021, we grew our gross margins 470 basis points to 34, 7% for the full year.
We are very pleased with the gross margin improvement we saw in 2021 and believe it sets a solid foundation for 2022 and beyond.
As we have noted in the past we continue to expect gross margins to be 35% plus or minus 100 basis points.
Despite the robust demand environment during the quarter supply chain and freight expenses impacted gross margin more than originally anticipated.
Great impacted gross margin by about 30 basis points sequentially.
In addition, during the quarter, we qualified various alternate suppliers and as a result, R&D resources were devoted towards solving supply chain issues for.
For this reason approximately $1 million of R&D was charged to cost of goods sold as compared to the third quarter of fiscal 2021.
This impacted gross margin sequentially by about 50 basis points.
As we have highlighted since the second quarter supply chain constraints, largely around freight and logistics have been a persistent headwind.
These challenges became more pronounced in the fourth quarter and impacted the availability and cost of some materials used to make our products, especially semiconductors.
We continue to work through these challenges with current and alternate suppliers to mitigate impact, but this has been and continues to be a dynamic environment.
In the backdrop of such a rising input cost environment, we are working to mitigate the impact of increasing costs through expense management and price increases.
In late October we rolled out a broad based price increase of mid single digit percentage are higher since many customers are on annual price contracts, we expect pricing adjustments to kick in gradually throughout fiscal 2022.
R&D spending in the fourth quarter was $18 million or 8% of revenues within our 8% to 10% target range.
Call that R&D was lower by $1 million as it was redirected to cost of goods sold.
SG&A was approximately $27 million in Q4, roughly in line with the prior quarter.
Operating expenses were $45 million down $1 million from the prior quarter as explained above.
Lower operating expenses helped drive an 8% increase in operating earnings from the previous quarter to $33 million. Despite lower gross margin our operating margin held steady at 14% of revenue.
Tax expense in the fourth quarter was $6 million similar to the previous quarter.
Net earnings increased to $19 million or <unk> 45 per diluted share compared to $16 million or <unk> 40 per diluted share in Q3.
Average diluted shares in the quarter were $41 million compared to $39 8 million in the prior quarter.
Please note that due to our convertible notes related bond hedge and the associated trading range of four shares. There is a difference between diluted shares for GAAP and non-GAAP purposes, GAAP share count in those the bond hedge while non-GAAP share count includes the economic benefit from the hedge we have provided.
A reconciliation between the two at the end of our earnings press release. The appendix four slides provides a table showing the effect of the convertible notes related bond hedge on the diluted share count for GAAP and non-GAAP purposes.
Now turning to the balance sheet accounts receivables increased by $7 million, mainly due to higher sales in the quarter.
So improved by two days to 62 days.
Inventory declined $18 million and days of inventory improved 236 states.
<unk> payables decreased by $7 million and days payable was <unk> thousand 60 <unk>.
Now moving on to debt and cash flow information.
Cash flow from operations improved to a record $51 million driven by improved profitability.
And working capital we ended the quarter with cash of $145 million on the balance sheet, an increase of $17 million in the quarter after being down $30 million of debt.
Gross debt outstanding at the end of the fourth quarter was $481 million.
And debt net of cash declined to $336 million.
Afflicting have a priority to continue to delever on a net debt basis.
Adjusted EBITDA was $40 million in the fourth quarter up $1 million from the prior quarter.
Adjusted EBITDA margin was 18% in the quarter.
Combination of improved profitability and robust cash generation has helped lower our net debt leverage ratio to two five times at fiscal year end recall of our goal was to bring our net debt leverage ratio of below three times.
Fiscal 2021 present challenges seemingly at every turn from higher than anticipated demand levels.
To a severely constrained supply chain, but we remain focused on our strategy to improve both the capital leverage and operating leverage to that and I would like to think of erotica colleagues worldwide for their tremendous efforts in staying on course and achieving these excellent results.
Before providing guidance I wanted to take a step back and discuss our revenue results for Q4 in the context of our expectations for Q1.
Our Q4 results came in higher than expected in part because towards the end of Q4, we received some raw material earlier than planned and consequently, we're able to meet additional customer demand.
The supply chain environment remained significantly unpredictable and lumpy.
While Q1 demand remains strong and higher than Q4 due to supply chain constraints, we may not be able to ship all the demand in Q1 and have taken this into account when establishing our guidance.
With that as a backdrop here is our guidance for Q1 revenues are expected between $200 million to $120 million.
And non-GAAP earnings per diluted share unexpected between 20 and 40.
Our expectations are based on the following non-GAAP gross margin in a range of 34% to 35%.
Please note going forward, we expect gross margin to be an ongoing and a dynamic balance between price increases and rising costs.
Non-GAAP operating expenses in a range of $45 million to $46 million.
Tax rate of about 23% for full fiscal year 2022.
Non-GAAP diluted share count of about 41 million shares for Q1.
And a slightly higher capex of about $25 million to our full fiscal 2022 to expand capacity for our tubes factory as well as complete the buildout of our new cable factory in the Philippines.
With that we will now open the call for your questions.
At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question is from Anthony Petrone with Jefferies. Please proceed with your question.
Hi, guys. This is frankly now on for Anthony I guess first of all congratulations on a very nice quarter again.
First question I guess.
We're seeing a lot of companies touch on our supply chain impacts and you sort of touched on it with.
With labor and pricing increases.
Wondering what youre seeing as you were exiting the quarter and how you're sort of thinking about <unk>.
<unk>, maybe if you can touch on.
China, maybe port congestion, that's impacting you and perhaps.
How long do you expect these impacts are persistent.
Go into mid 2022.
To the back half beyond thank.
Thank you.
Okay.
Well this.
Sunny I'll I'll touch on I'll open it up.
It's a pretty broad question and I'll, let Sam jump in and give the financial implications.
You know the port congestion for US that is was a problem at a point in time, but we've moved away from ocean freight to airfreight for all our inbound so from a freight perspective.
Outbound costs freight those are handled by our customers who pick up from our doorstep the inbound that we buy from.
Our input materials that we buy those come through airfreight. So we've been able to avoid the delays and congestion set.
Seaports are supply chain issues continue to hover around the fact that.
Material supply from our suppliers have become very lumpy. They are unpredictable. They're lumpy now this is not new it's been going on for a good solid 12 plus months now and we are just.
Managing towards becoming difficult because more and more of these suppliers are falling behind but we're just managing through it and increasingly as Sam pointed out we've been.
We've been qualifying alternate suppliers and this has been an ongoing dynamic situation.
Qualifying alternate suppliers and figuring out how to fill in the gaps and that that is continuing.
And Frank this is Sam here.
What I can add here.
More and more for instead of Ocean freight, we're going air freight and that is much more expensive.
Yes.
So sequentially, we were 30 basis points higher on freight, but as I look at our long run average freight is running 60 basis points higher so it is expensive and.
And then he said.
Remain lumpy and unpredictable sometimes stuff comes in a bit sooner in sometimes.
The last moment, we would be told that it's going to be a week later or two weekly to three weeks three weeks late and that causes a lot of inefficiencies in terms of factory scheduling and providing our shipping the product on time. So all those issues are going through and we are managing through it but we are.
We are actively managing through it but it is definitely a dream.
On the performance.
Great. Thank you for that.
I guess the next question if you will.
If you could touch on our underlying demand in China.
<unk>.
Backlog that would be great and I have one follow up question after that is possible.
The demand for <unk> in China is continuing.
It's been the one thing thats been steady and increasing and it's driven by as you know continue.
Continued expansion of healthcare services.
In China, and the Chinese government has not let up on that secondly are our participation. There is pretty strong because of our because we've got several Chinese Oems a Chinese Oems that are designing in our products that are that started this journey, a while ago and they are continuing to release more systems. So that continues to remain strong.
The demand there is strong and into the foreseeable future as well we see this continuing.
Yeah, and Frank to a question on backlog I can add that typically we have not provided backlog number every quarter, but it is in our 10-Q. Our 10-K documents we are planning to file our 10-K in a week or so here.
<unk> been working on it so our backlog did increase for Q4 significantly from Q3, but I just want to remind you that backlog is not necessarily a very strong predictor of our revenue performance. Nonetheless.
Backlog.
We're significantly ahead of $300 million it was closer to 320 million $327 million for us at the end of Q4.
Around 250, 260, previously, but again I want to caution you backlog is not necessarily.
Predictable predict turned off.
Future revenues for us because things can change.
Great. Thank you for that Sony and Sam just one last one here I was just wondering if you can provide.
Any sort of color updates on on your Nano-tech X Ray technology I think.
Most people are generally excited to hear about that.
Yeah.
It's a novel technology and as you know in our in our business. It takes time for.
Introducing novel technologies in adulthood, and since we go through our BTB OEM channels.
When we after we have the technology, then we feel it's ready for customer.
Consumption, then our customers start the consultative process I'm trying to understand what to do with this technology and how they start conceiving of applications, but.
I'll summarize by saying that we're we also continue to be excited about this technology, we have been steadily continuously validating the technology itself and assessing the the the parameters for.
For this technology the performance parameters are characteristics. So that we can have intelligent consultative customer conversations with our customers about what kinds of applications would be suitable for so we're at that stage now where I mentioned that we are we are.
We're now including in our customers into our into that piece of the work and we are shipping prototypes to two prospects who will want to evaluate this technology. So that's where we are.
Great. Thank you so much congrats on a great quarter again.
Thank you.
Our next question is from Larry Solow with CJS Securities. Please proceed with your question.
Hey, good afternoon, thanks for taking the questions.
I guess first question is just sort of a general question. It sounds like demand is pretty strong across both segments and most modalities.
Other than fluoroscopic frozen coffee is there anything that's sort of been a laggard in.
You did mention I know on the industrial side. The cargo is a little bit there's been a little bit slower, but thats improving anything else. That's you know sort of hasn't.
Come back from Covid, but is sort of languishing in.
Maybe a little more.
Inside on the industrial side I know you said NTT is doing well and the other things are doing well there.
So.
As we've said all modalities did well in the fourth quarter and.
The Florida.
Fluoro, that's that's timing as you know in our business, sometimes one quarter I might find one modality was slightly down next quarter someone else's slightly down. So there is no pattern there.
And in a couple of other modality. So <unk> has been strong strong throughout as you know surgery has held the ground throughout cardiovascular after the initial slowdowns during COVID-19 starting to come back up as procedure volumes came back up and then mammography was slightly slow coming back up but now we're seeing strength there as well.
And it is returning to.
Good health, so to say, so theres nothing thats.
That I can call out.
In the medical side that Hasnt recovered or Hasnt shown some strength, even dental right you know it.
There was some there was some up we had a hard time identifying patterns because you would move around the globe are different and different patterns depending on.
As COVID-19 moved around but even within dental were starting to see that.
And that recovery.
Growth type of mode.
On the industrial side cargo in security in general cargo and airport security, although they're they're they're on the right trajectory.
As you look at our customers major Oems in that space. They are also reporting.
Orders confirming orders that they have received and sooner or later, we expect those too.
Translate into into shipments for us as well so that is a positive sign and it's as we said the moving in the right direction industrial NTT.
It's.
Areas that were strong previously.
We mentioned in our earlier calls like electronics inspection battery inspection.
Detectors are doing very well in that space and then broad based NTT is seems like business as usual.
Okay.
Very good color there and then just second question just on.
On guidance I know, you're no longer giving annual guidance, just kind of give the quarterly guidance.
A bunch of moving parts, maybe you can just help us better frame the year.
I don't know if there's any seasonality or is that even comes into play anymore Q1 used to be slower but.
But maybe with supply chain stuff and still Covid made that skewed a little bit but it sounds like you have a couple of pluses going forward pricing move roll in and you'll get more of a benefit as the year goes on.
Let's call it seasonality a wash for now supply chain that did you expect that to get better worse. So you should should you make up or expect to make up these loss revenue and I guess, so it sounds like R&D might be a little bit higher so just trying to.
You know just as Q1 is that a good representation of the year should we expect things to get better or get worse marketable either on either side of that it maybe you can just help give us a little more.
Respective from a high level.
Thank you Larry.
A lot of questions and a lot of fun.
Lot of good ones, Larry So yes, absolutely. So yes, you are right that in general Q1 is a slow quarter for us but that is when the world is in a demand constrained environment as you know right Ben.
Normally there is seasonality because of demand and all of that type of stuff. So that concept applied there.
But right now as we indicated quite clearly that we are operating in a supply constrained environment. So seasonality goes out the window and essentially if the supply chain bottlenecks, whether not there then we would be shipping more than what we are guiding here, but we are clearly operating in that constrained.
And so I would say that.
Not to focus too much on seasonality, but maybe perhaps by the following year in 2023 seasonality comes back.
Back in all of the supply chain constraints are removed who knows.
That's the perspective on seasonality then.
In terms of the year as it develops et cetera. The way we are thinking about this situation is that.
That's how we are planning we are planning to invest in R&D resources, we are planning to invest additional capex and increasing the capacity for the tubes factory.
And a number of other things. So we are expecting FY 2022 our fiscal 'twenty to be a growth year. However in terms of guidance and any such thing for the entire year, we really do not have that much of visibility and what I mean by that is visibility into the supply chain. It is a very.
<unk>.
Uncertain unpredictable type of an environment. So we are staying away from providing an annual guidance. So all I can say at this time is that we are expecting fiscal 'twenty two to be a growth year.
If the.
If supply chain constraints get retired early.
And then we can do better and if they continue to remain constrained and we will operate in a constrained environment and that's that's where really the what we can see at this time Larry.
Start up and so that's a growth year on an EPS basis, you're saying.
Is that right.
Yeah.
That's fine just appreciate that clarification last question just longer term.
Supply chain issues.
Are there further levers on the gross margin side or is that just a mix and overhead absorption thing and then similarly on the operating side is that it sounds like R&D could wait for a little bit up and down but maybe remain at 8% to 10% range is the operating income or margin more of a just an operating leverage on a go forward basis.
Yeah, so from an operating leverage basis.
Thanks, Larry Yeah on an operating leverage basis definitely the P&L has significant operating leverage and both Ids border force.
Growing segments.
So outside of supply chain and whatever headwinds there are outside of that we should see a nice development of operating leverage on the P&L.
Definitely incremental sales should drive incremental.
Hmm.
Operating income.
So from a longer term perspective, thinking that way and modeling that we would be fine.
Excellent I appreciate all the color. Thanks, a lot guys.
Thank you Larry.
Our next question is from Jim Sidoti with Sidoti <unk> Company. Please proceed with your question.
Good afternoon, and thanks for taking the question.
I wanted to ask you about inventory because it's down I think almost $40 million from.
Fiscal 2020, and it's even down about $20 million from fiscal 2021.
I mean fiscal 19.
What.
Why is that and is.
Is that trend continuing or do you think you'll have to.
To invest in inventory going forward.
Yeah.
Sure Jim Let me take that question. So yes, as you know we rolled out an initiative to reduce inventory at the beginning of fiscal 'twenty, one and we had provided you some color and some guidance on that and I am pleased to say that we were able to achieve achieve or over achieve those targets. So we did well over there.
However, as you rightly pointed out you know right now in this type of a supply chain environment.
I would rather have a bit more inventory than less so my thinking is and how we are planning is that.
More likely than not that inventory would go up in the remaining in the in the coming quarters.
Not all the way back to the levels, where it was when we started the year, but perhaps a little bit of buildup in the inventory and as I said, we are expecting fiscal 'twenty two to be a growth year. So I think that would provide a nice support to our growth.
Objective here on the top line and then also provide a little bit more streamlined and efficient operations whenever factory.
So we are not necessarily targeting a further reduction in inventory for the upcoming fiscal year now it can move around a bump around here or there from quarter to quarter, but we do not have.
Another initiative for fiscal 'twenty, two that we had for 'twenty one.
But even even if you don't get that boost to cash flow from the inventory.
It seems like.
Even if it's not mid $92 million.
The operating cash you had in fiscal 2021, there is going to be cigna.
Significant operating cash generated in fiscal 2022, and with capital expanding around $25 million, you're still going to have.
Quite a bit of free cash.
What are the uses of that going forward.
Yeah.
You're right we expect.
To generate positive cash flow coming fiscal year for sure Yeah. That's what we are planning at this time.
Again as I have said that our goal is to fully fund all the operating needs new technologies as well as capex that I laid out the.
The details that I laid out for capex beyond that for the excess cash flow you know.
We are allowed to pay down some amount of debt and re calendar year. So that is one opportunity.
And if any such decision is made we will be we would go ahead and share that with you as and when such a decision is made so that opportunity is there, but broadly I would say our focus is to delever, whether it is on a net debt basis, where the cash is on our balance sheet are we.
We are able to retire the debt either which way I think the strategies to keep on Delevering.
Alright, thank you.
Sure.
Thank you Jim.
As a reminder, if you'd like to ask a question or a follow up question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
Our next question is from Suraj Kalia with Oppenheimer <unk> co. Please proceed with your question.
Good afternoon, Sunny Sun can you hear me all right.
Yes, Hi, Suraj how are you.
Gentlemen, congrats on a great quarter and excellent progress.
Sunny a bunch of questions for you wouldn't.
And a couple of samples so let me throw out my questions to you first sunny specifically.
Specifically U.
The first call that I remember in a long time, you're spending so much time on AI.
And how it could be a significant component of the overall business, maybe you could walk us through how you view <unk>.
What is the competitive advantage for.
For example in lung versus other systems other AI systems.
That's one question for you Sunny if I could just.
Tack on a couple more to you.
The cold cancelled what all.
Validation is still needed.
And would you venture to first Trialed it out on the industrial or the medical side, and finally, I'd love to get a little more color on the flexible substrate digital detector.
Don't want to get too bogged down on the engineering side, but it's a fascinating concept and would love any color you could provide.
Okay. So I'll take it in that sequence first of all on AI.
Suraj, we have been in this.
In this technology area for quite some time, so the company that as you know the Memphis The company that we acquired in Germany that go beyond 73% of they've been in the computer aided detection space for a very long time. So we've got a lot of field experience in a lot of in house experience with with.
AI technology, so there we have.
We.
We have developed lung screening workstation. So the difference in our lung screening workstation or what we do versus someone elses and I can't speak for our competitor relatively what we do very well is it's a full workflow solution.
Algorithm, it's one thing to build AI algorithms and sell those to Oems as they come and get it versus what we have the full workflow solution designed at.
Being able to being able to enable radiologist do lung screening with high velocity. It's the same type of workflow and efficiency solution that you see in mammography screening, where you need to read at very high speed because.
There are.
We anticipate that as the volumes of lung screening increase that.
That organizations would have to deal with it with that.
With the with limited radiologists and very efficiently and so that's that's the main thats. The main main thing and then the day the radiology group wants they want to go through they want to see efficiency in their productivity and their department secondly on the clinical side. We believe we've got a very very robust clinical solution where.
The combination of the way, we the way we present the images for diagnosis the way we the things that we do to help the radiologist such as being able to <unk>.
Track progression of tumors over our historical them and be able to provide information with automated calculations. We can do volumetric measuring these are the kinds of things that make it clinically very user friendly and the radiologist experience is really really great and by the way. This has come from decades of working on these.
Types of workflow solutions. So that's basically what we're doing now we're also in this particular case, we are we are taking.
We're taking steps to help the industry with adoption and Thats why.
We are positioning these technologies in in tenders and as you know outside of the U S. Most of these kinds of programs are are initiated by different government health initiatives. So in the U K in <unk>.
In Canada and other parts of the World, we have been participating in tenders and largely to get ourselves out there and provide.
Provide the momentum for adoption of AI technologies. So that's and then we've continued on with that work with other.
Oregon system, Cedar like liver dental and the intention here is broad based wanted to be able to market. These independently separately, but also to be able to incorporate these technologies into our broader solutions. So.
Sure.
We do offer software analysis packages image processing packages that are included as part of our detectors. So so image.
These images can be pre process before they even get to a radiologist and so if I were to fast forward and say, we would continue to stay down on that path and bring more of those capabilities into a broader applications.
Okay.
So that was that was.
Yes.
On the AI secondly.
Cold Castle. So then our multimeter mono tube related X Ray sources.
Sure.
We continue to push the edges of that technology to make sure that we understand what it's capable of and that's what we've been doing.
I don't want to share I had given you everyone a color as to what that meant and we I'll just say as we've continued to make that journey down the path and we are not disappointed but we are learning about.
About.
How one how to make these tubes and do more and more complex deals with a lot more <unk> and <unk>.
And make them in a way that satisfies R. R.
Needs to ascertain stability performance life longevity yield all those kinds of things and we are in that lifecycle of our product development lifecycle, where this is a good time for us to engage with Oems and Thats, what were doing now industrial versus medical.
We the conversations.
We are having with customers are simultaneously, but its always convenient for us to put something in an industrial setting where there are fewer regulatory constraints. There. So it's easier for us to try something out in the field.
<unk>.
And the experience there helps because.
That's real life real life use in real life.
Integration activity. So that's what we're doing.
<unk>.
Standard part of our process and journey that we're doing and we have not been disappointed so far.
And then lastly, the flex substrate.
Alright Yep.
Go ahead please.
Yes, flex substrate, so the flex substrate is it.
You should think about it in terms of what we talked about Z platform Z platform used a new material called <unk>, but the difference between just dropping in Nigeria sensor, we didn't do that but we did was we took advantage of the the performance that you get from that type of sensor with that material and redesigned a whole new platform.
For dynamic detectors with the ZIP platform, it's a whole new simulator homely electronics, all new everything to take full advantage of that platform the same way with flexible substrate flat.
<unk> by itself doesn't do much I mean, our detectors.
The breakage rate glass breakage rate is very nominal weight savings will be okay. It will be up order a few hundred grams, but that wasn't a big deal what we've done with the with the new generation of detectors that we are planning to introduce half customer.
Shippable versions available in the middle it by May or June of this upcoming year is to redesign that radio graphic platform with high capabilities. These would be premium capabilities that would bring down into into the radiographic detectors and with lower cost design lower cost supply chain and the intention here is to attack that.
<unk> aggressively so these will be very high high quality <unk>.
Detectors and and while we're at it we decided a Microsoft move away from glass onto a flexible substrate and you get the added benefit of robustness.
In the mechanical design.
Interesting.
One question for you and I'll hop back in queue, and maybe you already referenced this so please forgive me I didn't catch this.
One of the things when you joined and you had clearly articulated efforts to improve cross margin and optimize the P&L.
Inventory was one component I believe $25 million or so.
That you had articulated and please correct me if I got the numbers wrong, but.
Inventory was one target area.
In this environment of supply chain issues.
Are you shifting any LIFO FIFO base, because the raw materials sold so the prices increasing and if you could help us understand this 5% ESP increase how.
<unk> do you think is this pass through in terms of price.
This increase gentlemen, congrats again, thank you for taking my questions.
Okay. Thanks Rod Yeah.
That's right that the inventory reduction was one off or initiative for fiscal 'twenty, one that we signed up for and.
And as the results show that we were able to definitely achieved dose.
Our current situation and our accounting method the LIFO FIFO, we're not discussing that so we're not looking at changing the accounting method or the inventory standard cost method or inventory relieving method. So we plan to continue to follow the same practice.
Is that we have followed before.
So that's on the LIFO versus FIFO in the inventory.
And in terms of the price reduction versus the cost increases our goal with price increase has been.
And was when we rolled out the price increase was to pass on the cost increases over to over to our customers. It's not our initiative to improve gross margin.
For gross margin improvement, we continue to work towards improving factory efficiencies.
Reeling relaying out the factory to move reducing warranty costs, reducing scrap and improving yield and all of those initiatives, which are all pretty much determined by us.
In terms of price increases.
One is to maintain the gross margin guidance that we provided you.
Should not use the word guidance, but gross margin expectations on a longer term basis, 35% plus minus one.
Plus plus minus 100 basis points that should continue and what we are doing here is to maintain that gross margin expectation and pass on the increase in.
Raw materials cost or to customers and that's how we're looking at pricing.
And we are expecting these to remain sustainable. These are not transitory as you know some of the costs do not go down for example wage inflation.
Is also something that we are dealing with and that's not expected to go down so from our vantage point prices that we are rolling out are not transitory they are.
They are permanent.
And then subject to.
Other market factors that may come in future, we will deal with them, but from our perspective the increase in prices.
It's permanent.
Thank you.
Thanks Suraj.
We have reached the end of the question and answer session I will now turn the call over to Chris Belfiore for closing remarks.
Thank you for your questions and participating in our earnings conference call for the fourth quarter of fiscal year 2021, the webcast and supplemental slide presentation will be archived on <unk> website. A replay of this quarterly conference call will be available through November 30th and can be accessed at the company's website or by calling 877 six.
606 to 853 from anywhere in the U S or 200, 161 to 741, 5% from non U S locations. The replay conference call access code is 137 to 4162.
Thank you and goodbye.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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