Q2 2023 Varex Imaging Corporation Earnings Call
Speaker 1: I.
Speaker 2: But this time, all participants are in a listen only mode. A brief question and answer session will follow formal presentation. If anyone should require operators to send during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is not my pleasure to introduce your host, Chris Belfiore, Director of Investor Relations. Thank you, Chris. You may begin.
Speaker 2: Good afternoon and welcome to Berk Imaging's Corporations earnings conference call for the second quarter of fiscal year 2023. With me today are Sunny Saniel, President and CEO and Sam Maheshwari, RCFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Berks' website at BerksImaging.com. The website and supplemental slide presentation will be archived on Berks' website.
Speaker 2: To simplify our discussion, unless otherwise stated, all references to the quarter are for the second quarter of fiscal year 2023. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the second quarter of fiscal year 2023 to the first quarter of fiscal year 2023.
Speaker 2: Finally, all references to the year are 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 or projections about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
Speaker 2: that could cause actual results to differ materially from those anticipated. We're just relating to our business, our describes, and 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 1A, risk factors of our quarterly reports on form 10Q, and our annual report on form 10K. The information in this discussion speaks as of today's date .
Speaker 2: 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 assessed to for GAAP financial measures. We've provided a reconciliation of each non- GAAP financial measure to the most directly comparable...
Speaker 2: driven by better than expected results in our industrial segment, while the medical segment performed in line with our expectations.
Speaker 2: We are encouraged by the demand levels we are seeing and we anticipate our growth through a main solid in the second half of fiscal 2023.
Speaker 2: Revenue in the second quarter was up 11% sequentially and 6% year over year. Revenue in the medical segment increased 9% sequentially and 2% year over year. While industrial segment revenue increased 19% sequentially and 22% year over year.
Speaker 2: non-GAAP gross margin in the second quarter was 33%, which was better than our expectations, primarily due to a higher proportion of industrial sales.
Speaker 2: Adjusted even done the second quarter was $30 million dollars and non-GAP EPS was 26 cents.
Speaker 2: We ended the second quarter with $122 million of cash, cash of prevalence, and marketable securities on the balance sheet, up 14 million from the $108 million in the prior quarter.
Speaker 2: This was primarily due to a $9 million reduction in inventory in the quarter.
Speaker 2: Medical segment revenues increased 2% year over year and 9% sequentially. Demand for CT tubes was solid in the quarter, primarily due to the strength with our Asia Pacific customers. Fluoroscopy and oncology were down in the quarter. Dental, which can be lumpy from quarter to quarter, was down in Q2, and mammography was flat in the second quarter while radiography was up. Revenues in our industrial segment increased 22% year over year and 19% sequentially. Demand for industrial products was robust in the quarter and solidly ahead of our expectations.
Speaker 2: The strength in the quarter was primarily in our non-destructive inspection products across various end markets and service.
Speaker 2: We also continue to see improvement in security market primarily in cargo inspection. As we highlighted last quarter, the technological capabilities of photon counting detectors continues to be a focus for many of our customers.
Speaker 2: It was a significant topic of our conversations with customers at R.A.C. in November , as well as at the European Congress of Radiology in March.
Speaker 2: We are excited to announce that we have entered into several projects across our medical and industrial businesses to further demonstrate the capabilities of what uncounting detectors.
Speaker 2: In the medical segment, we continue to make progress with our CT customers for potential integration of photon counting detectors into their systems.
Speaker 2: In order to accelerate and support these efforts, we have also entered into a publicly funded project led by Munich Institute of Biomedical Engineering of the Technical University of Munich.
Speaker 2: The focus of the project is to develop a technology demonstrator of a photon counting CT system.
Speaker 2: This project, which will utilize several VARIX components in addition to photon counting detectors, will allow VARIX to showcase the capabilities enabled by our photon counting detector technology in CT applications, including the use of AI for enhanced imaging.
Speaker 2: We expect this project will democratize cutting-edge CT technology to potentially accelerate the adoption of put on-counting detectors in the next generation CT systems.
Speaker 2: In our industrial segment, Barracks is involved in two collaborative photon counting projects named Parsec and Grinner.
Speaker 2: These projects are sponsored under the Horizon Europe program, the EU's key funding program for research and innovation. The first project, Parsec, is aimed at addressing the abuse of postal and express career services by criminals and terrorists.
Speaker 2: Varics' role in this project is to help carsec enhance detection of threats and illicit goods in the postal and express career flows and achieve higher levels of detection performance.
Speaker 2: BEREX will deploy its photon counting technology to assist users in achieving these objectives.
Speaker 2: demand trends that we are seeing across both segments and expect the solid performance to continue in the second half of fiscal 2023. We believe the supply chain situation for our customers is improving and as a result we expect revenue in fiscal 2023 to grow 3-5% over fiscal 2022.
Speaker 2: With that, let me hand over the call to Sam.
Speaker 2: Thanks, Sonny, and hello, everyone. As a reminder, unless otherwise indicated, I'll provide sequential comparisons of our results for the second quarter of fiscal 2023 with those of our first quarter of fiscal 2023. I'm pleased to report solid results for the second quarter compared to our guidance.
Speaker 2: We exceeded our guidance for revenue, gross margin, and non-GAAP EPS and generated $27 million of operating cash flow in the quarter.
Speaker 2: A primary driver of the strong performance was excellent execution in our industrial segment which was significantly above recent run rates. As a result, we reported sales of $228 million and non-gap cross margin of 33%. The high-gross margin is primarily the result of the larger portion of industrial sales.
Speaker 2: Revenue increased 6% compared to second quarter of fiscal 2022. Medical revenues were $174 million and industrial revenues were $54 million. Medical revenues were 76% and industrial revenues were 24% of our total revenues for the quarter. Industrial revenues have typically contributed between 2022 % of total VARX revenues in the recent past. Looking at revenue by region, America has increased 2% sequentially while AMIA increased 7% and A-BAC increased 23%.
Speaker 2: The increase in APEC sales were primarily driven by strength in CT. Please note there was a minor reallocation of revenue from America to APEC in Q1 of fiscal 2023.
Speaker 2: Let me now cover our results on a GAAP basis. Second quarter gross margin was 32%, 100 basis points higher sequentially. Operating expenses were $57 million, up $7 million compared to the first quarter of fiscal 2023. And operating income was $16 million, up $3 million. Net earnings were $4 million, and GAAP EPS was 10 cents based on fully diluted 41 million shares. Moving on to non-GAAP results for the quarter. Gross margin of 33% was up 100 basis points sequentially, driven primarily by the larger proportion of sales in our higher margin industrial segment, as well as reduced freight.
Speaker 2: expenses. R&D spending in the second quarter was $23 million up $3 million compared to the first quarter due to spending on R&D material and micro-X related payment. Recall from the guidance we provided last quarter, R&D expense included a $2 million payment.
Speaker 2: for successful completion of micro-X related technology transfer milestones. Overall, R&D was 10% of revenues at the high end of our targeted 8-10% range. As GNA was approximately $29 million, up $1 million compared to the prior quarter. As GNA was 13% of revenues.
Speaker 2: As a note, compared to the second quarter of fiscal 2022, SG&A was up $6 million. The lower SG&A in Q2 of fiscal 2022 was related to a credit associated with our incentive plan.
Speaker 2: Operating expenses were $52 million or 23% of revenue.
Speaker 2: Overall, our operating expenses were higher than our expectations due to higher R&D material spend and SGNA. Operating income was $23 million up $5 million sequentially. Operating margin was 10% of revenue compared to 9% in the first quarter of fiscal 2020.
Speaker 2: 5% tax rate for full fiscal year 2023.
Speaker 2: Net earnings were $11 million or 26 cents per diluted share, up 5 cents sequentially. Average diluted shares for the quarter on a non-gap basis were 41 million. Now turning to the balance sheet. Despite a significant increase in sales, accounts receivable increased by $2 million from the prior quarter and DSO decreased 6 days to 64 days.
Speaker 2: Inventory decrease $9 million in the second quarter and days of inventory decreased 21 days to 182 days. We are very pleased with our progress reducing inventory and expect this trend to continue in the second half of fiscal 2023.
Speaker 2: Accounts payable decreased by $12 million and days payable was 43 days. Now moving to debt and cash flow information. Cash flow from operations was $27 million in the second quarter due primarily to a reduction in inventory. We ended the quarter with cash, cash equivalents and marketable securities of $25 million.
Speaker 2: securities was $327 million.
Speaker 2: Adjusted EBITDA for the quarter was $30 million and adjusted EBITDA margin was 13% of sales. Our net debt leverage ratio was 2.6 times trailing 12 months EBITDA at the quarter end.
Speaker 2: Now moving on to guidance. Due to an improving supply chain situation for our customers, we are now expecting fiscal 2023 sales to be stronger than we anticipated in the last earnings call. We now expect revenue for fiscal 2023 to be up.
Speaker 2: 3 to 5% compared to fiscal 2022. Our expectations for the third quarter of fiscal 2023 are revenues are expected between $220 and $240 million and non-GAAP earnings per diluted share is expected between $0.20 and $0.40.
Speaker 2: Our expectations are based on non-gap cross margin in a range of 32 to 33%. Non-gap operating expenses in a range of $47 to $48 million tax rate of about 25% for the third quarter as well as the rest of fiscal 2023 and non-gap diluted share count of about 50 million shares.
Speaker 3: With that, we will now open the call for your questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad.
Speaker 3: A confirmation tone will indicate your line is in the question queue. You may press star 2 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.
Speaker 3: Thank you. Our first question is from Larry Solo with CJS Securities. Please proceed with your question.
Speaker 3: Great, good afternoon to us. The first question I go from a high level, from last quarter, I think you singled out that the demand environment was softening a little bit. And it sounds like demand remained pretty strong. I know there has always been sort of this...
Speaker 2: of our customers were having supply chain issues and that they had with moving to the having trouble moving to the factory. So that gave us the reason for some caution saying okay, when will this clear up and what should we expect then in the subsequent quarters?
Speaker 4: What we saw in the quarter was our customers started to make progress and they as they made progress are the orders that then they placed with us started to grow so that increased our confidence in the second half of the year.
Speaker 4: And secondly, for industrial, we continue to see strength ongoing strength, and that has continued on. In terms of the capital environment and that situation, there's still capital prioritization going on. But what we're sensing is that the hospitals are...
Speaker 4: have been working hard to improve their financial situation, their profitability. And so to the extent that that continues, even though they'll still continue on with their partization, it should improve the capital partization situation. So...
Speaker 3: We're feeling better than we were, let's say, in the December , January timeframe. Okay, and I think you kind of called out sort of low single digit, flat to low single digit volume growth this year, I think you said last quarter. Do you still, are you sort of, I know you don't really guide the full year, but is that, I mean, it feels like you're at least at the higher end of that, maybe not flat, but maybe more, you know, low single could be, you know, two, three percent, sort of semantics there, but I'm just trying to.
Speaker 3: Is that the case that your demand, maybe not so much in Q2, but going forward, is, feels a little bit better? Maybe that's more industrial driven than medical.
Speaker 2: Hey Larry, this is Sam. So yeah, in our prepared remarks, we did call out that for the full year, we are now expecting sales growth in FI23 over the prior year in a range of 3 to 5%. Previously we had flat to up.
Speaker 2: And that's really coming from what Sunny said, that previously customers were indicating some softness in certain pockets, and as the last few months have progressed, we are seeing less of that, and so we are being more constructive here, and kind of raising the full year sales number. Okay, and then just putting.
Speaker 3: Switching gears real fast, just on the cost side, the little bit of higher expense this quarter, it feels like it seems somewhat temporary as your guidance for Q3 is kind of back to even below where you originally had guided for this quarter, I think probably like a million dollars. So was that sort of R&D material spend?
Speaker 2: Yeah, sure Larry, a few things to unpack there. If you would remember, we had guided that in Q2 where we just reported results, there is a one-time $2 million payment related to milestones and successful completion of that for MicroEx. If you would remember, we had guided that in Q2 where we just reported results, there is a one-time $2 million payment related to milestones and successful completion of that
Speaker 2: So that clearly is one time that goes away in Q3. So there is that benefit. And then in Q2, we also had, like you were saying, we also had R&D material. Whenever you are doing more R&D, there is a little bit more R&D material. So there was
Speaker 2: a bit higher than expected R&D material spending. So that also we expect to kind of trend down in this coming quarter, meaning Q3. So that's why OPEX is kind of going back into a run rate where I think that is sustainable. I would say that Q2 actually was on the OPEX.
Speaker 2: are not the effects that I'm expecting going forward. It was just a one quarter high expenses that we had. Now, coming back to your comment on S-GNA, you know, travel has come back in this last quarter. We had full quarter of...
Speaker 2: travel as well as meeting with the customers. The normal things are getting resumed. A few countries opened up for external visitors as well. So I think as GNA in my mind would continue as it is, but R&D should come. Got it, great. I appreciate all the call. Thanks, Sam.
Speaker 3: Thank you. Our next question is from Young Lee with Jeffries. Please press the video question.
Speaker 3: All right, great. Thanks so much for taking our questions and congrats on a strong quarter. Maybe to start out on the China business. I was wondering if you can survive a little bit more detail on it. It looks like it's growing 20 plus percent in the first half of the fiscal year.
Speaker 5: around 17% of revs. I was wondering if you can comment maybe on the growth outlook for China as well. Is it reasonable to assume that China can grow 20 plus percent for the year?
Speaker 4: So first of all China has been on the tear due to first adoption of these systems and that's why you've seen in the past 22-30% growth rates for us. And then we expect the growth rates to settle into the more market.
Speaker 4: The adoption has continued and our install base has grown. So for the long haul, we expect a 10% type of growth. You can kind of plot it along that trajectory.
Speaker 5: All right, great, very helpful. Maybe one on gross margins. I was just wondering, so some of the macro supply chain issues are improving, either using some of the higher cost inventory, the industrials business.
Speaker 5: doing better and it's the higher margin. Should we expect, I guess, the fiscal one cues gross margin to be the low water mark for fiscal 23 and maybe fiscal 24 as well? Hi, I'm here.
Speaker 2: Yeah, I think in terms of gross margin, you know, a few tailwinds we mentioned in the industrial, which is a higher margin business being a higher proportion of sales, so that contributes, you know, 30, 40, 50 basis points to the overall gross margin number.
Speaker 2: But then we also benefited from freight. Freight rates have come down, both on the ocean as well as air freight. We still need some work to do to move more of the freight from air to ocean. So that should help. So I think freight related
Speaker 2: There is more to do there, a little bit more. So that was that. Foreign exchange, you know, dollar, we can see a little bit here in this last quarter compared to some of the other major currencies that we do business in.
Speaker 2: Overall, that was a very small effect. So between all these two or three items, Gross margins benefited in Q2.
Speaker 2: are expected to be the low point. And going forward, I'm expecting gross margins to improve further as some of the price-cost drag that the P&L has that we work to balance that. So that should provide some help on gross margin. I'm expecting that freight environment would continue to remain favorable. And as that happens, that should provide some more benefit to us.
Speaker 4: and building those here successfully by ourselves. So those were completed and we're satisfied with how that went and so that's one. We are now in the middle of building out, doing what we do next, which is to build up tubes with them characterizing and doing the necessary performance benchmarking and testing. So once we have that, Jim, then we go down the path of starting to ship prototypes to our customers. So those are sort of the breadcrumb trails on how we get to commercialization.
Speaker 4: It will take us the rest of the year to finish up the building of the tubes, testing them and coming up with the spec sheets and the data sheets that would be used to engage the OEMs. And then in China, some of the other device companies that were reported indicated.
Speaker 4: as much by the COVID shutdowns because our customers
Speaker 4: very flexible ways of accommodating our workforce and that helped out. So we were fine with that. We didn't...
Speaker 4: We intend to do anything on that front.
Speaker 2: I would just add that during the shutdowns we were not that much impacted in China. And so as a result when things opened up, it's not that we saw a step up or anything like that. China has been strong.
Speaker 2: Continuously, over a number of quarters here for us and continued that way. So we really didn't see much of a difference between January versus March, as well as China's concern.
Speaker 6: Okay. And then, you know, the other trend that I've heard on some of the calls for the quarters that I would like to procedure, I'd seem to be, you know, very strong above 2019 levels. Do you think that's what's maybe driving some of the improvement on the...
Speaker 4: or backup. The sense we're getting from our customers is the demand environment continues to be strong for them.
Speaker 4: they were jammed up with their ability to deliver. And so when we shipped products to them, and they've also said, as I mentioned in the previous quarter, we were not the reasons for their jam up. So when we shipped product for them and they're stuck because they're missing another bolt, then our components were stuck in there in their whip. So as that freed up, they were using up our products and hence we saw an R demand.
Speaker 4: strengthen. So overall, we have only heard
Speaker 6: Positive news from our customers about the demand environment. All right. And then the last one on cash. I think you said you have 122 million. Uh, you only have.
Speaker 6: show 104 million on the balance sheet. Is the average 20 million or so, and is that me pre-paid another current asset fund?
Speaker 2: No, Jim. So on that one, the difference between the cash that we said and the cash reported on balance sheet, you rightly picked up about 20 million dollars or so. They are invested in treasuries and other such securities. And as per GAP,
Speaker 2: It is called marketable securities or other such securities. So they are elsewhere in the balance sheet, but for all practical purposes.
Speaker 2: It is cash and it is very low risk cash investments to pick up some yield on the interest income. All right, thank you.
Speaker 2: and it is very low risk cash investments to pick up some yield on the interest income. Okay, all right, thank you. Thanks, Jim.
Speaker 5: Thank you. Our next question is from Saraj Kalia with Oppenheimer. Please proceed with your question. I thought it was Sam. It's Sam. The Slack, I'm I at risk, not-school-life, actually.
Speaker 5: Thank you. Our next question is from Siraj Kalea with Oppenheimer. Please proceed with your question. Siraj Kalea with Oppenheimer. Siraj Kalea with Oppenheimer. Siraj Kalea with Oppenheimer.
Speaker 5: No worries. Thanks for taking our questions and congrats on a strong quarter. So kind of you know given that other players also have photon counting detectors how do you ensure the attached rates of varix tubes to varix detectors? Is there a mechanism or is it a kind of free-for-all mix and match?
Speaker 4: so
Speaker 4: For time counting, I think the two are disconnected in terms of how they...
Speaker 4: How they may be bought how they may be purchased so let me let me talk about photon counting first and I'll come back to your Your the guts of your question so photon counting our detectors are going into industrial applications And they're you know those they're fairly
Speaker 4: broadly dispersed across food inspection, across electronics, battery inspection, a variety of different industrial verticals. There in some cases our industrial tubes are used, in some of the cases our tubes may not be used. There's really no direct connection right now between.
Speaker 4: the performance of the detector and the performance of the tube. So on the medical side, our photon counting detectors go into some medical applications that have those designed in, and in some of those cases, our tubes are in there. So a lot depends on how we approach the customer.
Speaker 2: inventory costs kind of in there, so to speak, from higher component pricing. So I guess any gross margin boosts as you kind of worked through that over the year, and if you could quantify that. Sure, so overall, Shane, in terms of our overall inventory balances, we are targeting inventory to take down further during the rest of the fiscal year. So we are planning and working towards bringing inventory amounts down, so that should be positive from a cash flow generation perspective.
Speaker 2: And then in our inventory there is high-priced components and they are rolling through the P&L. And as some of those high-cost components roll through the P&L we should see a gross margin pickup.
Speaker 2: But as of now my estimate is that that would be much more towards the end of this calendar year. So beginning from January of next year, we should see some growth margin pick up when those components have kind of moved their way.
Speaker 2: But now my estimate is that that would be much more towards the end of this calendar year. So beginning from January of next year, we should see some gross margin pickup when those components have kind of moved their way across the P&L.
Speaker 5: Okay. Thank you. And I just left one from our end. You know, kind of what's the current status of the OEM evaluation of cold cathode?
Speaker 4: So, those are, we've continued to make progress on the technologies and we're continuing to ship the prototypes, the design prototypes, engineering prototypes to our customers. So that's moving forward with our joint venture and we are continuing to support them. And at the same time, the technology progress with our micro-X technology is also moving forward.
Speaker 4: Thank you. Thank you. There are no further questions at this time. I would like to turn the floor back over to Chris Belfiore for any closing comments. Great. Thank you for your questions.
Speaker 4: Do you have any final comments? Sure. Okay. Folks in closing, we're very pleased with the second quarter results. And we're encouraged by the demand levels that we're seeing and our growth prospects for the remainder of fiscal 2023. And as always, I'm very proud of the effort of our global employees that they make on a daily basis. Thank you for taking the time to join us today and thank you for your continued interest in various.
Speaker 7: Thank you.
Speaker 4: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.