Q4 2023 Varex Imaging Corp Earnings Call
Greetings and welcome to the <unk> fourth quarter and fiscal year 2023 earnings call.
At this time all participants are in a listen only mode.
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.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce Christopher Belfiore director of Investor Relations. Thank you you may begin.
Good afternoon, and welcome to Barracks imaging Corporation's earnings conference call for the fourth quarter of fiscal year 2023 with me today are Sunny Sanyal, our president and CEO and Sam Maheshwari our CFO.
Note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at <unk> website at barrick's imaging dotcom forward Slash news.
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 2023.
In addition, unless otherwise stated quarterly comparisons are made sequentially from the fourth quarter of fiscal year 2023 to the third quarter.
Full year 2023, rather than to the same quarter of the prior year.
Finally, all references to the year or to this 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 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've provided 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 website.
I will now turn the call over to Sunny.
Thanks, Chris Good afternoon, everyone and thank you for joining us for our fourth quarter earnings call.
I am pleased to announce another solid quarter for barrick's.
Revenue up $227 million in the quarter was a result of strong performance in our industrial segment.
Offset by lower revenue in China in our medical segment.
non-GAAP gross margin of 36% and non-GAAP earnings per share of <unk> 45 exceeded our expectations.
Okay.
Revenue in the fourth quarter decreased 2%, both sequentially and year over year.
Revenue in the medical segment decreased 7% sequentially and 10% year over year, while industrial segment revenue increased 12% sequentially and 27% year over year.
non-GAAP gross margin of 36% was solid in the fourth quarter and above the high end of our expectations. This.
This was primarily due to a beneficial segment and product mix led by higher proportion of industrial sales.
As well as further realization of results of our pricing initiatives.
Adjusted EBITDA in the fourth quarter was 38 million and non-GAAP EPS was <unk> 45.
We ended the fourth quarter and the fiscal year with $195 million of cash cash equivalence and marketable securities on the balance sheet, which was $42 million higher sequentially and $82 million from the fiscal 2022 year end.
Yeah.
The increase was primarily due to higher profitability in the reduction of inventory in the quarter and the year.
Let me give you some insights into sales detailed by modality in the quarter compared to a five quarter average, which we referred to as the sales trend.
In our medical segment global sales of C. T tubes remained flat compared to the trend in the quarter as the lower sales in China was offset by strength in the rest of the world.
Mammography remained strong with sales above the trend in the quarter.
Oncology improved in the quarter was and was above its sales trend.
Fluoroscopy remained flat while radio graphic sales were below the trend in the quarter.
<unk> remained soft and was also below the sales trend in the quarter.
We saw strong performance in our industrial segment with record revenue of $64 million in the quarter.
Non destructive inspection specifically cargo screening was a bright spot for the industrial segment.
Similar to last quarter. We also continued to see increased adoption of photon counting detectors across various industrial verticals, including food battery and electronics inspection.
Our medical segment finished the fiscal year at $673 million in revenue, which was flat year over year and represented approximately 75% of total <unk> revenues for the year.
The global <unk> market continues to be a significant driver of overall sales accounting for nearly 40% of medical sales in fiscal 2023.
We expect <unk> to continue to be a key driver of our medical sales as developing countries expand their health care services.
In addition to the new installations and upgrades, we expect replacement tubes sold into our extensive and growing installed base to provide solid baseline for future C tube sales.
Our photon counting technologies continues to gain OEM interest and we are working with several of our customers on a range of potential medical applications for photon counting, particularly where speed and high contrast imaging can make a difference.
We expect photon counting technologies to once again be a main focal point that arsenic show in a couple of weeks and we believe our position at the table is very strong.
While there are many potential medical applications for photon counting technology use of photon counting detectors in C. T is a significant focus for our customers and we are actively engaged in their design discussions.
We look forward to meeting with our customers and colleagues in Chicago at <unk> to discuss how we can enable their innovation in imaging.
Yeah.
Moving to our software business I'm happy to say that our majority owned subsidiary <unk> Medical solutions recently received U S. FDA five 10-K clearance for an innovative new software product named Memphis liver suite.
This is an AI based software application, which enables physicians and radiologists to create detailed visualizations and volumetric quantification for evaluation of liver surgery strategies treatment planning and post procedure follow up assessment.
The innovative AI based software technology, and three D. Medical visualization driven approach is applicable to both C T and MRI imaging and can help daily workflow for liver surgery and post procedure evaluation.
Let me turn now to our industrial segment.
In the recent quarters the strength of our industrial segment has been a highlight for very <unk>.
In fiscal 2023, our industrial segment grew to $220 million in revenue up 19% year over year and accounted for approximately 25% of total <unk> revenue.
This growth has been due to broad based strength in various non destructive inspection verticals driven by our investment in X ray tubes, linear accelerators as well as photon counting detectors.
In the past, we expressed intention to provide more integrated solutions, including full systems to our customers across various industrial verticals.
One of the verticals, we highlighted was irradiation of consumer base facing goods like packaged foods or plant products.
Today I'm excited to announce a new industrial irradiation system that we will offer directly to end customers that is a novel application of our X Ray technology.
Yeah.
We expect system solutions to potentially add nearly $1 billion to our addressable market within five years.
This new irradiation system XR pure offered by one of our subsidiaries can be used to reduce microbial loads in agricultural and other products.
One of the applications of this system is for Decontaminating cannabis, which is becoming a significant market in the U S.
Across the United States, where cannabis is legal state regulators have established limits on various types of microbial contamination in the interest of public health and safety.
Cannabis growers are therefore required to submit a sample from each batch grown to be tested for microbial load before the product can be sold.
This process is critical to growers as a failing cannabis lot can potentially lead to financial and reputational issues as well as patient health and safety concerns.
There are many benefits of using X ray radiation to decontaminate, an organic product.
Traditional decontamination methods may use chemical our heat based technologies, which can be great than product.
In contrast X ray radiation decontaminate, the product by killing the microbes and pathogens without compromising the efficacy of the product.
Cannabis cultivation for both medical and legal recreational users has grown significantly in the United States over the last several years.
With an estimated 13000 growers nationwide, we believe the addressable market for cannabis a radiation using X Ray technology is approximately $225 million per year and growing at double digits.
With our subscription model for XR pure we expect to be able to reach a run rate of $25 million to $50 million in annual revenues in the next five years.
We believe our advanced X Ray technology can make XR pure a significant player in this space.
In the coming weeks, our team will commercially launched XR pure product at the 12 month annual MJ Biz Con show, which is the largest cannabis conference and Expo in the world.
We are very excited at the potential of this new system and believe this is just one of the many applications where X ray radiation can be utilized.
If you'd like to learn more about XR pure please visit the website at www Dot XR pure dot com.
In fiscal 2023, we've made solid progress with innovation strengthened our financial position and generated solid cash flow.
As we look to fiscal 2024, and the future of <unk>, we remain focused on executing on our existing and new initiatives to drive profitable growth and continued free cash flow generation.
We are expanding investment in our industrial segment, where new technology tends to be adopted at a much more rapid pace.
Much like what we have done with our photon counting technologies. We believe we can leverage the more rapid adoption and feedback from industrial customers to accelerate development of new products in medical.
As we highlighted earlier there are many applications of our X ray technologies across the industrial landscape from non destructive inspection to decontamination of organic products.
Our intention is to invest in full systems in select industrial verticals that can create differentiated workflow solutions.
In due course, we will share more with you as we continue to make progress on this initiative.
We intend to continue to invest in photon counting technology, which is gaining solid traction across our non destructive and stock inspection applications in our industrial segment.
And expand its used in medical applications.
Photon counting detectors as an example of an application that can become a potentially meaningful growth driver for us in the future.
Similarly, we're taking a page from our playbook in China.
And investing in our future in India.
We intend to leverage the local for local approach to engage emerging local Oems and build our footprint in India.
We're making progress with our efforts and expect to manufacture tubes and detectors in India in the next 18 months.
India is a very large end user market for diagnostic imaging were modality penetration per million of population is very low.
The Indian government has made a public commitment to expand health care services and gain independence and medical device technologies.
We see new Oems emerging in India, making it an attractive market for us to invest in our local presence to seek out and the Oems and to grow with them.
We improved our gross margins in fiscal 2023 with our pricing initiatives. We expect to continue to see gross margins improve for the full fiscal 2024 as select pricing actions are implemented.
Our freight related expenses as well as efficiencies across our manufacturing platform continue to be a tailwind to overall gross margins.
We are pleased with our inventory reduction efforts in fiscal 2023, and we remain focused on further reducing inventory inventory levels in fiscal 2024.
Ultimately our goal is to maintain efficient inventory levels associated with demand and new product introductions.
Finally, this call 2023 was a record year for <unk> in terms of cash generation.
With initiatives around margin expansion and inventory management, we expect to see continued cash generation going forward into fiscal 2024.
Well there are some challenges to growth in China in fiscal 2020 for which we will touch on in a bit.
We are well positioned to navigate these uncertainties, while continuing to support our customers.
With that let me handover the call to our CFO Sam.
Thanks, Sunny and Hello, everyone. As a reminder, unless otherwise indicated I'll provide sequential comparison of our results for the fourth quarter of fiscal year 2023, with those of the third quarter of fiscal 2023.
The fourth quarter was another solid quarter for us while revenue was below the guidance midpoint gross margin and non-GAAP EPS above the high end of our guidance.
Continued strength in our industrial segment was the primary driver of strength in the quarter. As a result, we reported sales of $227 million non-GAAP gross margin of 36% and non-GAAP EPS of <unk> 45.
Which was also helped by an unusually low tax rate in the quarter.
Cash generation remains strong with $47 million of operating cash flow in the quarter.
Fourth quarter revenues decreased 2% compared to the third quarter.
Medical revenues were $164 million and industrial revenues were $64 million sequentially medical sales decreased 7% and industrial sales increased 12% medical revenues were 72% and industrial revenues were 28% of total revenues for the quarter.
Looking at revenue by region Americas increased 1% sequentially, while EMEA increased 1% and APAC declined 8% the.
The decline in APAC was primarily the result of lower sales in our China business due to the anti corruption campaign there.
China sales were 13% of fourth quarter revenues.
For full fiscal year, 2023 sales to China totaled $147 million, which is up 5% year over year and represented 16% of total <unk> sales.
Given the anti corruption campaign, we expect China sales to be down in fiscal 2024 compared to fiscal 2023.
Visibility to the magnitude and duration of the impact from this campaign is unclear, but we expect this to be temporary and currently believe the market may improve in the second half of our fiscal year 2024.
We remain focused on executing our long term strategy in China and support its efforts to improve the overall health care infrastructure.
Let me now cover all of our results on a GAAP basis.
Fourth quarter gross margin was 34% up 100 basis points from the previous quarter operating expenses increased $2 million sequentially to $54 million.
And operating income was $24 million flat sequentially.
Net earnings were $32 million and GAAP EPS was <unk> 66 based on fully diluted 51 million shares.
Moving on to non-GAAP results for the quarter. We are pleased with our gross margin of 36% in the quarter. This was up 200 basis points from the previous quarter and above the high end of our guidance the.
The higher gross margin was primarily due to beneficial mix led by the higher proportion of industrial sales as well as further realization of our pricing initiatives.
Our quarterly gross margin can fluctuate depending upon the segment mix product mix customer concentration and factory productivity.
For fiscal 2023 of our gross margin was 33% slightly down compared to fiscal 2022.
R&D spending in the fourth quarter was $22 million up $2 million compared to the prior quarter and represented 10% of revenues.
The higher R&D expense was due to higher spending on R&D materials, and industrial systems as well as for the supplier diversification efforts.
SG&A was $30 million up approximately $1 million compared to the prior quarter and represented 13% of revenue.
As a result operating expenses were $51 million up $2 million from the prior quarter and represented 23% of revenue.
For fiscal 2023 operating expenses were $199 million up 11% compared to fiscal 2022 and represented 22% of revenues.
Operating income was $30 million and operating margin was 13% of revenue similar to the previous quarter.
Full year operating income was $99 million and operating margin was 11% of revenue.
Tax expense in the fourth quarter was low at $1 million or 6% of pretax income compared to $5 million or 21% in the previous quarter.
The lower tax rate in the fourth quarter was primarily a result of favorable credits related to R&D and foreign taxes.
And so we will book to tax differences as a result of the tax Reform Act.
For fiscal 2023, the tax expense of $12 million was 17% of pretax income.
Net earnings were $21 million or <unk> 45 per diluted share up <unk> <unk> from the third quarter.
Average diluted shares for the quarter on a non-GAAP basis were $51 million.
Now turning to the balance sheet accounts receivable increased $1 million and days sales outstanding increased by one day to 65 days in the quarter inventory decreased by $20 million in the fourth quarter and days of inventory decreased by five days to 169 days.
We are happy with the result of our inventory reduction efforts in fiscal 2023 and expect to remain focused on maintaining efficient inventory management.
Accounts payable decreased by $10 million and days payable decreased by five days to 39 days due to reduced incoming inventory receipts.
Now moving to debt and cash flow information.
Net cash flow from operations was a robust $47 million in the fourth quarter, due primarily to profitability and a $20 million reduction in inventory.
We ended the quarter with cash cash equivalents in marketable securities of $195 million, an increase of $42 million from the prior quarter and $82 million from fiscal year end 2022.
Please note the $195 million includes the $153 million.
Cash and cash equivalents shown on the balance sheet.
$41 million of marketable securities and $1 million of certificates of deposit.
Gross debt outstanding at the end of the quarter was $448 million and debt net of $195 million of cash and securities was $253 million.
Adjusted EBITDA for the quarter was $38 million and adjusted EBITDA margin was 17% of.
Our fiscal 2023, adjusted EBITDA was $132 million and our net debt leverage ratio was one nine times on a trailing 12 months basis.
Now moving on to outlook for the first quarter of fiscal year 2024, and the full fiscal year.
Under the backdrop of the anti corruption campaign in China, We expect the following first revenues for the first quarter of fiscal 2020 for Rx unexpected to be down approximately 8% at the midpoint compared to the first quarter of fiscal 2023.
This is largely the result of lower sales in our China Medical business. We expect the second half of fiscal 2024 to improve over the first half of fiscal 2024 with full fiscal year revenues down approximately 3% to 5% compared to full fiscal 2023. This.
Expectations assumes business in China improved in the second half of fiscal 2024.
Second we made significant progress on improving our gross margin in fiscal 2023, and we expect this to continue in fiscal 2024.
We expect to see gross margin improve in fiscal 2024, and we are targeting 35% in the second half of fiscal 2024.
Third we expect a tax rate of approximately 21% to 23% for full fiscal year.
Lastly, we expect to continue to generate cash flow, while investing in our future.
For fiscal 2024, we expect capex of $25 million to $30 million and free cash flow generation above 90% of non-GAAP net income.
Now moving onto guidance for the first quarter of fiscal 2024 as a reminder, in addition to lower sales in our China medical business. The first fiscal quarter is generally a seasonally low quarter for shipments for us with that in mind our guidance for first quarter is as follows revenues are expected between <unk>.
<unk> 80, and $200 million and non-GAAP earnings per diluted share is expected between zero cents and <unk>.
Our expectations are based on non-GAAP gross margin in the range of 33% to 34% non-GAAP operating expenses in the range of $49 million to $50 million tax rate of about 22% for the first quarter.
non-GAAP diluted share count of about 41 million shares.
With that we'll now open the call for your questions.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad.
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Our first question comes from the line of James Sidoti with Sidoti <unk> Company. Please proceed with your question.
Hi, Good afternoon can you hear me.
Yes, Hello, Jim Hi, Jim Hi, Thanks for taking the question well.
Yeah.
Well, let's start out with China, because I think that's something people that are focused on most.
It sounds like.
Revenue at 16% of sales it was around $36 million in the quarter, sorry, If you said it but what was it a year ago.
The revenue a year ago in China was.
Just give me one second here Oh, Jim.
It was.
A year ago it was <unk>.
Q4, 'twenty two it was about $37 million and in Q4, 23 lakh 36 $31 million.
31, Okay, yeah yeah.
Yeah.
Was the decline.
Primarily related to the anti corruption or.
Can you break that out.
Two what we see Jim it is mostly related to anti corruption measure, but at the same time, we know the economy in China is also soft, but it is very difficult for us to parse out.
The two issues they might be connected.
So, but but mostly we would say it is anti corruption.
Measures based on what we are hearing through our sales channel who have been talking to customers over there.
And in the past when China has implemented these anti corruption initiatives and sales have declined.
Have you seen a rebound.
Relatively quickly you know in two or three quarters or how long do you think it takes for the sales to come back.
So a lot of inquiries.
I think last time, we saw this was somewhere around 2014 timeframe.
As we look at our revenues from 14 to 15.
Seemed to bounce back felt fairly fairly quickly back but at that time. We also had a very small amount of business in China, but nothing like what we have today.
Okay, Alright, and then if we move on to the AI.
It sounds like you got them.
So the application approved.
For.
Liver surgery.
What about applications for things like breast.
Breast cancer detection in prostate cancer detection, how far are you from some of those.
Some of those projects.
So our software business has two channels, one where we go through Oems. So our breast prostate. Those are those are sold to Oems are lung screening workstation as a standalone workstation full workflow solution that we go direct and that continues on and we're bidding on tenders as we've described previously.
And this is a this is also another new standalone solution for to support liver surgery transplants et cetera.
So it's a direct market channel.
And that's why we went for the full 500 10-K for this.
Okay. So so for the other the other applications.
The Oems will.
Do the corrections.
Correct, we also sell lung screening modules and applications through the OEM channel, but we also we have a full standalone workstation. So our software business in summary has two parts, there's acquisition and diagnostics and the acquisition is our what we call is our Nexus platform. It's a combination of tubes detectors integration regenerated.
It's a full blown acquisition system.
We sell also through the OEM channel those are mostly used for through systems integrators.
And then the pure AI software.
Historically was sold through the Oems over the last few years, we've started going directly to that.
Breathing directly on tenders and hospital selling directly to hospitals.
Alright, and then the industrial business I mean, another very strong quarter.
Whats driving that and what it means.
Both rate sustainable.
So we had an exceptionally strong fourth quarter for industrial which was more than actually what we had forecasted that the strength was broad based we saw it in many of the non destructive inspection of articles as well as cargo.
As we said it was a bright spot this quarter.
We expect for the year, we expect industrial to still grow so we're going to have a growth year for industrial but the first quarter is will be down and it will be down because of of actually we a lot of strength in the fourth quarter. So there tends to be monthly puts and takes and we had some customers.
We're up against some deadlines and pushed us very hard to shift some additional products, which is what we did in the fourth quarter and.
So we're gonna have a we're going to see a softer first quarter, but overall for the full fiscal year, we're expecting our growth out of industrial year over year growth.
Alright.
So it seems like big picture.
The margins are getting better in your industrial business continues to.
To grow and you have a short term hiccup in China.
But long term you still think China is going to be.
Growing market for you.
Correct, Yeah, absolutely we believe the Chinese government continues to.
Their commitment to expansion of health care, we're very well positioned there our installed base is large and keeps growing we are making a lot of advances with products.
Our Chinese OEM customers.
Cardiovascular and some of the.
Additional modalities like dental et cetera, So China continues to be a good market for us we're well positioned for 2025.
Just need to get past this current malaise and so we're anticipating in the second half of next year is when.
That's what we're hearing where the recovery will begin.
And then last question for me on the balance sheet I know you have.
Some some debt pay downs coming up but you know what.
What's your plan for capital allocation, so you're going to continue to build up.
The cash balance you can pay down some of that debt.
Do you think there'll be more active on the acquisition front.
The next four or five quarters.
Yes, Jim So yes, we are.
All of the cash balance at the end of Q4 was $195 million and I just want to remind that looking at the balance sheet, you may not be able to get to that because its distributed amongst a couple of lines, but the total cash was $195 million and we clearly are in an excess cash.
Situation.
As you rightly said we are essentially.
Preparing for upcoming refinancing because of the debt is supposed supposed to mature in June of 'twenty five.
It would go current in June of 2024, so essentially we are building up the cash balance to approach refinancing with strength and at the same time take care of some of the excess cash situation.
At this time, our priority is to.
From a capital deployment perspective, the priority is to fully fund the operations.
And then followed by deleveraging and and lastly.
And then beyond that would be any inorganic growth.
Okay, Alright, well. Thank you. Thank you for taking the questions.
Thank you.
Our next question comes from the line of Larry Solow with CJS. Please proceed with your question.
Oh, great. Thank you Hey, good evening guys I guess first question just on the on the medical.
Weakness on revenue is it is it sounds like you guys feel like it's mostly China, whether it's.
Our economy economic related or mostly.
Just the increased scrutiny and the ample crops and environment, but anything on just on the on the U S side of it.
And a lot of hospital based companies.
Hum.
Having issues with hospital spending budget.
Being a little bit tight.
Obviously hospitals aren't doing well the high interest rate environment, either I know you guys 23, I think we started out. Good then we got a little bit more you know a little more conservative and then less in Q3 things were a lot better so.
But it feels like you haven't spoken too much about negatives there, but I'm just trying to connect those dots.
Let me make a comment my last time to chime in so.
<unk>.
There are many puts and takes Larry first of all first quarter is a seasonally.
Seasonally lower quarter.
And secondly.
The situation in China, but it puts additional burden on the medical side, so that that is what's driving.
The.
Pressure on the medical in the first quarter.
And of course, then compounding the fact that industrial had a strong fourth quarter and we're just.
Seeing a month to month kind of.
Issue there.
In terms of the U S. In the hospital market, our general perception and what we're hearing and seeing is that the hospitals health of the hospital is improving so they're reporting better operating expenses controls. So we think that there they are in a better position going forward and by next year.
There are two for capital deployment, so no real.
No real concerns there when we bought them.
We're trying to get our head around is how and when the Chinese situation will turnaround.
Larry I would add that if you look at our Q4 results revenues in the Americas improved sequentially over the quarter and then EMEA also improved a little bit.
Third quarter, the place where you typically would want to see a growth, but a decline in fourth quarter was APAC and we talked about you and I drive right.
So America than EMEA. They both grew in the impact was through China reflected in APAC.
And from Q4 into Q1, there's a seasonality that is coming in and we then expect to.
<unk> resumed the growth from there in Americas, EMEA, and et cetera, and then the China as we've already talked about it as somewhat situation dependent.
As and when this anti corruption campaign gets them, where we hope to begin to grow from there in that region.
And specifically, China, and I know you're not guiding.
As you look out to 'twenty five but.
It feels like the next few quarters, it's hard to time exactly when the shakes out but.
Any concern.
All of that window as we get back the normalization that we're at a lower level. It feels like I know you know the.
And there has been any change in sort of that mid to longer term outlook for the build out of <unk> in China.
Anything there of significance.
Okay.
Larry Nothing particular first of all.
If you.
If based on the based on the.
Anecdotal and customer feedback.
We think what's been happening over the last several months is a significant reduction in new system placements. So that means the volume of business that we're getting from China has been primarily through.
China for us is mostly tubes, and mostly <unk> so the.
The business that the volume of business that we've been seeing has been replacement tubes.
To keep the keep their hospitals and health care systems running right. So that's.
Good baseline for us so from here on as business comes back there there is going to be some some amount of pent up demand which will.
Adjusted levels back up and then we expect it to grow back from there now we've grown China, China business has grown at 20% plus per year, we don't and we've said before that that is not sustainable we expect growth to come to what would be kind of a secular levels for China, which is in the 8% to 10% type of a range. So that's what we.
It will happen it will bounce back and there'll be a little bit of pent up demand, which will raise the baseline and then go back to the.
A little bit more traditional growth rates.
Right, Okay, and I know Youre writing.
Yeah, I'm here, yes, sorry.
No go ahead, Larry Good. Please no I was just going to say I, just I know youre not guiding it's hard to tell but I know you're not guiding on the on the revenue line, specifically, but just from a high level.
If you if you declined 4% at the midpoint right.
The rest of your business is flat in China down, 25% you'd be yield declined 4%.
Just the way the math works out like almost to a tee.
So again.
Again, it sounds like the rest of your business might actually be up so it feels like China could actually be down more than 25.
In front of and bigger in the beginning of the year.
Thinking about that kind of right.
Larry we are not guiding by geography or anything but in some ways. You are thinking are thinking in the right way, we are expecting China full year to be a down year for 'twenty in terms of percentages et cetera, we're not guiding.
But broadly you're thinking about it right yeah, okay, Okay, and I interrupted you don't know what you're trying to fit something before that I'm sorry about that.
I was trying to say something Larry but now I forgot what's your question.
Okay, all right I'll move on I'll, let someone else get into the queue. Thank you got it sure yes.
Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.
Alright.
Sam Sunny can you hear me all right.
Yes, Hello Suraj.
Good afternoon gentlemen.
Tony did.
Did I hear you correctly that the expectation of the anti corruption waves to abate is roughly around two quarters or did I get that wrong.
We're expecting that we will start to see things pick up again in our beginning of our third quarter.
So that's again the situation is.
Whose fluid we will know better in the upcoming months, but the current expectation is that mark.
In Q3, beginning of Q3 onwards, we would start to see it pick back up.
Got it.
I know there are a lot of moving parts I appreciate that.
But to the extent the China contribution of soft.
It does look necessarily now should we just start looking at.
Gross margin there should be a there should be an uptick.
Yes, so that's right Suraj, China lack of China revenues are less proportion of China revenues is actually a tailwind for the gross margin.
But we also need to keep in mind, the volume effect of it. So the two aspects intersect, but part of the reason Q4 gross margins were much higher than our expectation is because.
China mix went lower than what we were expecting at the beginning of the quarter. So your intuition is right there that less China revenue does help gross margin, but only to the extent that.
The volume is not.
It's not lack of volume is not becoming the driving factor.
Got it.
Bobby in terms of tubes and detectors manufacturing in India.
<unk> local for local or local for international.
India is going to be first local for global and then later also local for local so the India strategy as an extent is.
Is slightly different from that of China in in this case, we're setting India up as a as a full full capability.
Operating center Shaw from full manufacturing.
For a further four extending our capacity from Salt Lake to India, and then also business functions R&D et cetera, So India is going to become a full blown hub for us for South Asia.
Got it got it.
Our final question and I'll hop.
Back in Q2.
Since the time that I've picked up their act it takes almost three years ago to now.
Ball parking it okay.
<unk> has gone from almost 20% contribution to let's say around 30% contribution to overall sales obviously with their respective growth rates in these two buckets.
As we look forward over let's say the next or eight quarters.
The trajectory.
Sure.
Continue to expect.
E.
Increasing contribution of industrials and that's really how we should start thinking about the overall business or do you think like two two steel honeys words that some temporary malaise, but then it should revert back to the 80 20 gentlemen, thank you for taking my questions.
Yeah. So really its very good question in general industrial business growth rate for us is higher than the medical business growth rate. So I expect the overall contribution of industrial segment to our revenues to continue to climb and the next.
Three to five years, it might cross 30%.
That is the right way to think about it.
There are just a lot of applications that we are seeing that X ray technology can be very successfully applied in.
For the industrial business. So right now we are thinking that eventually industrial could go 30% or somewhat even higher than that.
In terms of the overall revenue proportion.
Thank you.
Thanks Rich.
Our next question comes from the line of Anthony Petrone with Mizuho. Please proceed with your question.
Thanks, and good afternoon, maybe just to segue back to China.
Sunny you mentioned.
It's tubes are still.
Trending well here, but it's been a slow down on the capital front, but I just want to confirm.
We've heard actually both headwinds.
Throughout the quarter due to anti corruption, meaning that procedures were down.
Through the third quarter, but also the capital purchases slowed down so.
I know you mentioned <unk>, where we're still trending well has there been any slowdown in tubes.
And do you expect actually tubes can also see a catch up once things normalize into next year and I'll have one follow up.
Let me clarify tubes has been down so that's what's led China too.
The decline in sales for us however, when we ask our customers to know where are these going.
We are not the same thing.
Strong placement of new systems. So our understanding is this is mostly going into replacement and wherever they might be.
Smaller percentage of those that normal for new systems.
So hard for us to tease those apart, but the general sense is that new business or new systems placements is down and replacements have continued but tubes overall have been down as a result.
That's helpful. And then maybe just when you think about the global manufacturing footprint to you.
New disclosure Tonight on India, how does that play with Wuxi is wuxi only going to exclusively supply to China, well, India supply to India, what happens to salt Lake over time.
Or well, India, and Wuxi become just larger global hubs.
Again, Joe.
So China in Wuxi.
Our footprint in Wuxi was set up for China. So we optimized it for the specific products that are where needed in China and to the extent, particularly for detectors. The injectors that we make in China. We have also been shipping to other places, where we needed lower cost detectors, so from that perspective.
Wuxi has.
Mainly for China.
India.
The capacity that we're adding to India actually moves out some capacity from Salt Lake frees up Salt Lake for some other products Salt Lake is running the tubes.
Production at Salt Lake is running at very high capacity levels. So this frees up space here and then the production in India is initially intended phase one is intended for global sales and these will be at a lower cost with lower cost supply chain over the last three years during the Covid phase and since then we have been.
Diversifying our supplier base and one of the things we did was.
Qualified a lot of suppliers in India. So this is this gives us access to lower cost supply chain and lower manufacturing costs and makes us more competitive that's their intention and then for many of the newer tubes.
Innovation and some of the high end tubes, we will use up the capacity freed up in salt Lake for that.
Thanks again.
Thanks Anthony.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Great. Thank you for your questions Sunny you have any final comments.
Short comment thanks.
Thanks, Chris So in closing, we're really pleased with the results we achieved in fiscal 2023, and as always I'd really like to thank our employees all over the world for their efforts. During this during the year, everyone worked really hard to contribute to our results and thank you for thank you for taking the time to join US today and for your continued interest.
<unk>.
Thank you Sydney and thank you all for participating on our earnings conference call for the fourth quarter of fiscal year 2023, the webcast and supplemental slide presentation will be archived on our website. A replay of this quarterly conference call will be available through November 28th and can be accessed at our barracks imaging Dot com forward class Investor Relations. Thank you and have a great evening.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.