Q4 2024 Varex Imaging Corp Earnings Call
Yes.
Speaker Change: Greetings and welcome to the <unk> fourth quarter fiscal year 2024 earnings 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. Please press star zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Christopher definitely Reed director of Investor Relations. Thank you you may begin.
Speaker Change: Good afternoon, and welcome to Barrick imaging earnings conference call for the fourth quarter of fiscal year 2024.
Speaker Change: With me today are sunny Sanyal, our president and CEO and Sam Maheshwari our CFO.
Speaker Change: Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at <unk> website at vertex imaging dot com forward Slash news the webcast and supplemental slide presentation will be archived on <unk> website.
Speaker Change: To simplify our discussion unless otherwise stated all references to the quarter or for the fourth quarter of fiscal year 2024.
Speaker Change: In addition, unless otherwise stated quarterly comparisons are made year over year from the fourth quarter of fiscal year 2024 to the fourth quarter of fiscal year 2023.
Speaker Change: Finally, all references to the year or to this fiscal year and not calendar year, unless otherwise stated.
Speaker Change: 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.
Speaker Change: Risks relating to our business are described in our quarterly earnings release, and our filings with the SEC.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: On today's call, we will discuss certain non-GAAP financial measures.
Speaker Change: These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures.
Speaker Change: We 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.
Speaker Change: I will now turn the call over to study.
Speaker Change: Thank you Chris.
Speaker Change: Good afternoon, everyone and thank you for joining us for our fourth quarter earnings call.
Speaker Change: Fourth quarter revenues were at the high end of our guidance range driven mainly by continued strength in our industrial segment.
Speaker Change: During the quarter, we experienced the continued effect of Destocking actions by our customers in the medical segment outside of China.
Speaker Change: However, we believe customer inventory adjustment actions are beginning to stabilize and expect the effect of destocking to subside in the second quarter of fiscal 2025.
Speaker Change: Yeah.
Speaker Change: Gross margin in the fourth quarter was at the low end of our guidance range as unfavorable sales mix in our industrial segment due to a high proportion of equipment sales continued in the quarter.
Speaker Change: We expect the strong growth of equipment sales to drive higher margin services in the future.
Speaker Change: Revenue in our China business remains stable for the quarter, although that business overall is running at a lower levels than in fiscal 2023.
Speaker Change: We are optimistic that medical imaging demand will improve in China, and <unk> is well positioned to benefit when growth resumes.
Speaker Change: While we have not yet seen a measurable uptick in our incoming order rate.
We are encouraged by the potential of stimulus funds, making their way into the health care system.
Speaker Change: Turning to fourth quarter results.
Speaker Change: Revenue in the quarter decreased 10% year over year.
Speaker Change: Revenue in the medical segment decreased 12% year over year, while industrial segment revenue decreased 4% year over year.
Speaker Change: non-GAAP gross margin in the fourth quarter was 33% adjust.
Speaker Change: Adjusted EBITDA in the fourth quarter was 23 million and non-GAAP EPS was <unk> 19.
Speaker Change: We ended the fourth quarter and fiscal year with $213 million of cash cash equivalents and marketable securities on balance sheet up $18 million compared to.
Speaker Change: Prior fiscal year end.
Speaker Change: Let me give you some insights into sales detail by modality in the quarter compared to a five quarter average, which we refer to as sales trends.
Speaker Change: Sales in our medical segment were down in the quarter, primarily due to continued inventory management by our customers.
Speaker Change: Global sales in <unk> oncology modalities in the quarter were flat compared to trend while sales in radio graphic modality continued to be above trend.
Speaker Change: Sales in fluoroscopy, dental and mammography modality in the quarter were all below their respective sales trends.
Speaker Change: In our industrial segment, our customers continue to benefit from strong demand in security screening driving sales of our cargo inspection products in the quarter.
Speaker Change: Other industrial end markets, primarily semiconductor electronics and battery inspection continue to remain soft in the quarter.
Speaker Change: Yeah.
Speaker Change: Switching gears to fiscal 2025, we are excited about several initiatives that will drive growth in future years.
Speaker Change: A significant portion of our business each year comes from repeat product purchases from existing customers.
Speaker Change: This is what we refer to as our core business.
Speaker Change: To grow the core we need to continue to innovate and refresh our current product portfolio to get designed in into subsequent system models that our customers plan to release.
To accomplish this we work closely with our customers as they develop our update their imaging systems, primarily in areas of C. T dynamic detector applications and in industrial imaging applications.
Speaker Change: In our existing CTG business, we're investing in in the Premier tier to include capabilities to support high resolution higher speed and cardiovascular applications.
We believe that premium tier is growing at a higher rate with higher margins compared to the rest of the market.
Speaker Change: Since the tubes are the largest revenue contributing modality within our medical segment and require replacement at a higher frequency.
Speaker Change: Staying in step with our customers' R&D plans is important for profitable growth for us.
Speaker Change: We are very happy with the performance of our <unk> Z O based as your detect our platform, which we launched last year with great success.
Speaker Change: This platform enables high quality imaging cost effectively as compared to Cmos based detectors.
In fiscal 2025, we are going to continue to expand our portfolio of as your dynamic detectors to include additional products for our premium applications, such as surgery oncology and cardiology.
Speaker Change: We are continuing to migrate customers from legacy amorphous silicon products to that as your platform and pursuing design wins in premium applications.
Speaker Change: In our industrial segment radiographic inspection applications for castings pipelines and additive manufacturing continue to evolve from using film to digital detectors. These.
Speaker Change: These applications demand versatile detectors with high resolution that are bendable to address complex use cases.
Speaker Change: We believe we are well positioned to address both these needs along with differentiated software and image processing to accelerate analog to digital conversion and the growing non destructive inspection space.
Speaker Change: In addition, we're investing in digital detectors for automotive and aerospace verticals, where we see a growing need for large area imaging with high energy X-ray sources.
Speaker Change: Investment in platforms like C T as your and Bendable industrial detectors in growing application areas enable us to expand our leadership position with margin accretive revenue contribution.
Speaker Change: We expect fiscal 2025 to be a year, where we take meaningful steps with a number of novel technologies.
Speaker Change: We have been laser focused on developing our photon counting technologies, which we believe can be a key enabler for fast high resolution and low radiation dose spectral imaging.
Speaker Change: We expect adoption of photon counting technology, especially in next generation <unk> to be a new and significant revenue growth driver for <unk>.
Speaker Change: <unk> is a leading merchant manufacturer and supplier of photon counting technologies.
Speaker Change: We are actively engaged with large imaging Oems to integrate our photon counting detectors technology in their next generation <unk> system designs.
We are excited about the prospects of working with these Oems as well as other medical imaging Oems to drive further adoption of photon counting technologies.
Speaker Change: In our industrial segment, where we are currently generate the majority of photon counting revenues.
Speaker Change: Our expanding applications and our customer base.
Speaker Change: Specifically, we're seeing continued interest in adoption by new Oems in both food and recycling inspection applications.
Speaker Change: We're excited about these verticals as well as growing opportunities in battery oil and gas security and aerospace inspection.
Speaker Change: We believe that the industry is at an inflection point in both our medical and industrial segments with photon counting and we expect to see increased adoption in fiscal 2025.
Speaker Change: Given the potential size of photon counting market and our position as a leading merchant supplier. We anticipate an increase in revenue contribution from products using this technology in the near future.
Speaker Change: As we highlighted earlier this year, we target photon counting technologies to contribute approximately $150 million in annual revenue by fiscal 2029.
In our industrial segment, we are excited to bring our portfolio of cargo inspection systems that include our portal a gantry, a mobile scanner and a car scanner to the security inspection market.
Speaker Change: In fiscal 'twenty five we plan to launch these solutions utilizing our years of experience integrating our high energy linear accelerators into third party scanning systems.
These applications very well as we have provided the core imaging components, such as linear accelerators detectors software and services for these types of systems for many years and we believe we can provide differentiated value directly to end customers.
Speaker Change: I'm happy to say that we have successfully completed a few cargo inspection systems installations and have additional installations underway.
Speaker Change: We are working actively to established distribution channels and participate in tenders worldwide.
Speaker Change: This end market is tender driven and can be very lumpy, but we see a long term potential for our revenue and margin contribution from equipment and services with these solutions.
Speaker Change: Our India expansion plans continue to make progress and we remain on track to begin production of components in India. During the third quarter of fiscal 2025.
Speaker Change: Our initial objective for India is established low cost manufacturing for a radiographic components in a very competitive market.
Speaker Change: We have outstanding product knowledge and with an improved cost structure. We're confident that we can grow our sales of radiographic components.
In the past, we have talked about our investments and nanotube, our cold cathode technology.
Speaker Change: We recently completed a full technology transfer with micro X.
Speaker Change: We're pleased to announce that we will begin shipping evaluation kits, consisting of 92 based X-ray tubes and to control electronics to several customers.
Speaker Change: In addition, our R&D teams are engaged with OEM customers, who are in early stages of commercializing. This novel technology, and we look forward to working with them to bring innovative systems to market.
Speaker Change: As we look forward to fiscal 2025, we believe we are taking the necessary steps to expand our leadership and drive future growth.
Speaker Change: As noted earlier in terms of market dynamics, we expect the impact of Destocking by medical Oems to subside in the second quarter of fiscal 2025.
Speaker Change: In China, while we have not seen a measurable uptick in our incoming order rate. We are encouraged by the potential of stimulus funds, making their way into the health care system.
Speaker Change: Before handing the call to Sam I'd like to briefly touch on the effect of potential changes to tariffs on our business.
Speaker Change: The fact is currently unknown, but we will continue to monitor developments in this area and adjust our operations where possible.
Sam Maheshwari: Meanwhile, we continue to advance our local for local manufacturing as well as supplier diversification strategies.
Sam Maheshwari: Our initiative to manufacturer in India, our global consumption May also help mitigate some of the impact of potential changes in tariff policies.
With that let.
Sam Maheshwari: Let me handover the call to Sam.
Sam Maheshwari: Thanks, Sunny and Hello, everyone. Our revenues in the fourth quarter were $206 million.
Sam Maheshwari: Towards the high end of our guidance range, although over non-GAAP gross margin was 33% at the low end of the projected range with non-GAAP EPS was <unk> 19 exceeding the high end of our guidance.
Sam Maheshwari: Comparing the fourth quarter to the same period in fiscal 2023 revenues decreased 10%. This decline was primarily due to a 12% reduction in our medical segment attributed to ongoing inventory adjustments by our customers. Despite the strong performance, our industrial segment experienced a 4% decline year over year.
Sam Maheshwari: Largely due to the challenging comparison against our record revenues achieved in Q4 of fiscal 'twenty three.
Sam Maheshwari: By segment medical revenues amounted to $144 million and industrial revenues were $61 million.
Medical revenues constituted 70% of her total and industrial revenues were 30% or the fiscal 'twenty. Four these proportions were 72% for medical revenues and 28% for industrial revenues.
Sam Maheshwari: Analyzing revenue by region.
Sam Maheshwari: Erica saw 11% decline compared to the fourth quarter of fiscal 'twenty, three EMEA revenues decreased 8% and APAC revenues declined 9% for fiscal 'twenty for our sales to China reached $118 million, reflecting a 20% decline compared to the previous year and represented 15%.
Sam Maheshwari: <unk> sales.
Sam Maheshwari: We are cautiously optimistic about the sequential quarterly increase in sales to China.
Sam Maheshwari: Although we observed early signs of the anti corruption campaign easing and stimulus funds gradually making progress major capital equipment investment is still pending.
Sam Maheshwari: Let me now cover our results on a GAAP basis.
Sam Maheshwari: Gross margin for the fourth quarter was 33% a decrease of 170 basis points year over year.
Sam Maheshwari: Operating expenses were $56 million, an increase of $2 million compared to the fourth quarter of fiscal 'twenty three.
Sam Maheshwari: Operating income was $11 million or <unk>.
Sam Maheshwari: Decline of $13 million from Q4 of fiscal 2003.
Sam Maheshwari: Net loss was $50 million.
Sam Maheshwari: Primarily due to a valuation allowance related noncash tax charge of $52 million.
Sam Maheshwari: GAAP EPS represented a loss of $1.22 based on fully diluted 41 million shares.
Sam Maheshwari: For the quarter non-GAAP gross margin was 33% down 270 basis points year over year.
Sam Maheshwari: Mainly due to lower volume and an unfavorable sales mix in our industrial segment higher equipment sales and lower service sales contributed to the unfavorable mix.
For full fiscal 'twenty four gross margin was 32% down 110 basis points compared to full fiscal 'twenty three.
Sam Maheshwari: Due to the same reasons of lower volume and unfavorable industrial sales mix.
Sam Maheshwari: R&D spending in the fourth quarter was $22 million similar to the fourth quarter of fiscal 2003, representing 11% of revenues.
Sam Maheshwari: SG&A was $31 million, an increase of approximately $2 million.
Sam Maheshwari: Compared to the fourth quarter of fiscal 'twenty, three representing 15% of revenues.
Consequently, operating expenses totaled $53 million, an increase of $2 million year over year, representing 26% of revenues.
Sam Maheshwari: For fiscal 2024 operating expenses were $210 million, an increase of 5% compared to fiscal 2023, representing 26% of revenues.
Sam Maheshwari: Operating income was $14 million, a decrease of $15 million compared to the previous year and operating margin was 7% of revenue down from 13% in the fourth quarter of fiscal 'twenty three for the full year operating income was $52 million with an operating margin of 6% of revenue.
Sam Maheshwari: <unk> expense in the fourth quarter was a benefit of $2 million on.
Sam Maheshwari: Our negative 30% of pretax income compared to $1 million.
Sam Maheshwari: Our 6% in the fourth quarter of fiscal 2003.
Sam Maheshwari: The tax benefit in the fourth quarter was due primarily to reflect favorable adjustments in the U S and Germany on full year tax returns.
Sam Maheshwari: Due to this for our full fiscal 'twenty for the tax expense of $1 million or 3%.
Sam Maheshwari: Percent of pre tax income was unusually low.
Sam Maheshwari: Net earnings were $8 million or <unk> 19 per diluted share compared to 45 in the year ago quarter.
Sam Maheshwari: Diluted shares for the quarter on a non-GAAP basis were $41 million for fiscal 2024, net earnings were $22 million or.
Sam Maheshwari: Our <unk> 55 based on average diluted shares of $41 million for the year.
Sam Maheshwari: Now turning to the balance sheet accounts receivable increased by $6 million and days sales outstanding increased by four days to 70 days in the quarter.
Sam Maheshwari: Inventory decreased by $17 million in the fourth quarter and days of inventory improved by six days to 174 days. We are pleased with our inventory reduction efforts in fiscal 'twenty four and while some of this was the result of lower sales, we remain focused on maintaining efficient in this inventory level.
Sam Maheshwari: <unk> moving forward.
Sam Maheshwari: Accounts payable decreased by $11 million and days payable decreased by six days to 39 days.
Sam Maheshwari: Now moving to debt and cash flow information net.
Sam Maheshwari: Net cash flow from operations was a solid $26 million in the quarter due primarily to the $17 million reduction in inventory.
Sam Maheshwari: We ended the quarter with cash cash equivalents and marketable securities of $213 million an increase.
Sam Maheshwari: <unk> of $21 million from Q3 of 24 and $18 million from fiscal year end 'twenty three.
Sam Maheshwari: Yeah.
Sam Maheshwari: Please note the $213 million includes $169 million of cash and cash equivalents shown on the balance sheet $41 million of marketable securities and $3 million of certificates of deposit recorded in prepaid expenses and other current assets.
Sam Maheshwari: Gross debt outstanding at the end of the quarter was $447 million in debt.
Net of $213 million of cash and securities was $234 million.
Sam Maheshwari: Adjusted EBITDA for the quarter was $23 million and adjusted EBITDA margin was 11% of sales.
Sam Maheshwari: Our fiscal 'twenty, four adjusted EBITDA was $89 million and 11% of sales.
Sam Maheshwari: Our net debt leverage ratio was two six times adjusted EBITDA on a trailing 12 months basis.
Sam Maheshwari: Now moving to the outlook for the first quarter of fiscal year 2025.
Sam Maheshwari: In terms of market dynamics, we expect sales to China to remain stable at current levels.
We are encouraged by the potential China stimulus funds, making their way into provinces, but we have yet to see a follow through impact on our incoming orders.
Sam Maheshwari: Elsewhere, we expect destocking by our medical customers to subside in the second quarter of fiscal 2025.
Before I provide guidance details. Please note that Q1 of 2005 will include 14 weeks of operating results.
Sam Maheshwari: It is important to keep this in mind when evaluating seasonal trend for the subsequent quarter.
Sam Maheshwari: The additional week is expected to contribute approximately $15 million in revenue in Q1.
Sam Maheshwari: Revenues for the first quarter are expected between $195 million and $215 million.
Sam Maheshwari: And non-GAAP EPS is expected between a loss of five.
Sam Maheshwari: And a profit of <unk> 10 per share.
Sam Maheshwari: Our expectations are based on non-GAAP gross margin of approximately 31% non-GAAP operating expenses of approximately 50 $53 million.
Sam Maheshwari: Including $1 million for the final micro X related milestone payment.
Sam Maheshwari: And the extra operating week.
Sam Maheshwari: Interest and other expense net in a range of $7 million to $8 million.
Sam Maheshwari: Tax rate of about 22% for the quarter and non-GAAP diluted share count of about 41 million shares.
Sam Maheshwari: Yeah.
Speaker Change: With that we will now open the call for your questions.
Speaker Change: Thank you.
Speaker Change: 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, a confirmation tone will indicate your line is in the question queue. You May press star two to remove yourself from the queue.
Speaker Change: Participants using speaker equipment, it may be necessary to pick up the handset before pressing needs darcie.
Speaker Change: One moment please poll for questions.
Speaker Change: Yeah.
Our first question comes from the line of.
Speaker Change: Kelly with Oppenheimer and company.
Speaker Change: Please proceed with your question.
Speaker Change: Okay.
Speaker Change: Tony Some hope you're well congrats on a nice quarter.
Speaker Change: Thank you. Thank you.
Speaker Change: <unk>.
Speaker Change: Tony a couple of questions for you and one for Sam.
Speaker Change: Tony Obviously, China stimulus right. It has been part of your prepared remarks.
Speaker Change: How.
Speaker Change: How youre thinking about the level of China stimulus and part of the reason I ask is.
Speaker Change: Our field checks are suggesting that China's stimulus the level of or the amount of stimulus may not necessarily jibe with original expectations I'd love to get your color on that and how.
Speaker Change: How you all are adapting to the level of the stimulus.
Speaker Change: So serge.
Serge: As we indicated that we have seen an uptick in our orders in China, but we are not yet attributing that to the stimulus it hasnt been large enough for us to.
Serge: We are able to say that the stimulus program has made its way through the whole system to the provinces to the health care systems, and then buying Oems and to US. So we haven't felt perfect yet so that's why we.
Serge: It's muted for us right now and and were.
Serge: Watching it now any stimulus is good and we appreciate that but we have not seen the effect and so that's why we've been careful about.
Serge: Our projections for China growth.
So FY 'twenty fives, not necessarily predicated on a certain level of stimulus flowing through is that the right way to think about it.
Speaker Change: That is correct in the way we're seeing it at this time, we have not made any baked any significant assumptions based on any stimulus.
Speaker Change: So rod.
Speaker Change: Just one other element I wanted to add is that.
Speaker Change: I think we would agree with you that you know only a portion of the overall package is going towards health, Canada, and perhaps you would have been we would have been more pleased if that quantum for healthcare was a little bit more.
Speaker Change: Fair enough.
Speaker Change: Sonny photon counting right.
Speaker Change: I think that the benefits of full cost accounting are pretty obvious.
Speaker Change: At least theoretically there are pretty obvious right.
Speaker Change: What's funny is your rollout and this is us.
Speaker Change: On an apples to apples basis that does a smaller markets currently.
Speaker Change: How do you think about differential market share gains as the velocity of photon counting picks up adoption picks up.
Speaker Change: <unk> has their own photon counting Philips has their own you guys, providing two Oems have their own what differentiates necessarily one from the other.
Speaker Change: To cause market share gains for you all.
Yeah. So great question Suraj, so photon counting first of all as you said.
Speaker Change: The benefits of the technology is now understood it and that's why we feel good about the fact that we think it has reached a tipping point, where this is where adoption starts to increase as many Oems start to experiment with applications. The way photon counting for us falls into a few different categories all of which we.
Speaker Change: I think Ken we can differentiate on those.
It's a combination of there is the hardware and then there's the software on the hardware side.
Speaker Change: There is the speed.
Speaker Change: The speed of the detector and its ability to process, a very large number of photon counts.
Speaker Change: Her permanently.
Speaker Change: Per millimeter square per second is important to be able to do.
Speaker Change: Two things first of all the type of application that it supports and secondly, it's a ability to.
Speaker Change: Create many different energy Vince so that's one of the main.
Speaker Change: The attraction of photon counting that the energy separation can be large enough that you can do.
Speaker Change: You can do things with more precise material discrimination you'd be able to get to the higher tier of clinic potentially clinical benefits of being able to perhaps.
Speaker Change: Prove the workflow by reducing the need for our contrast media contrast agents once you get to that type of benefits that the application can take advantage of then you start to see.
Speaker Change: The separation of the crowd of the technologies. So we're focused on those things resolution speed sensitivity of the detector and ability to process with multiple energy. Vince. This is mostly on the hardware side on the software side, we bring our years of experience with digital detectors to the same.
Speaker Change: Due to due to do image processing in a way that further enhances what comes out out of these detectors. So.
Those are the.
Speaker Change: The simple way that that's how I see our ability to position ourselves.
Speaker Change: And our leadership role.
Speaker Change: And the.
Speaker Change: The price elasticity of demand.
Speaker Change: Photon counting.
Speaker Change: At this time.
Speaker Change: Most of the applications are focused on the higher tiers, the premium tiers of the <unk> systems.
Speaker Change: We have customers who are working with us that are looking at.
Both the high tiers, but also looking at Democrats sizing.
Speaker Change: The technology, so that it can be more broadly available in the mid upper type of tiers and then we also have customers that are looking at other applications various forms of tomography <unk> tomo synthesis type of applications. So it's.
Speaker Change: It's early the technology than it is in its early phases. So the costs are higher and once we start to scale up we will see that we will see the industry itself will move towards.
Speaker Change: Towards.
Speaker Change: Perhaps better pricing better cost structures that will allow the technology adoption to accelerate we went through this exact same cycle with digital detectors, so I'm not exactly sure what.
Speaker Change: What do you mean by price elasticity I think at this point the Oems are focused mainly on getting the right applications out of the door knowing that it's early stage in the technologies and it's it's costly.
Speaker Change: Now that said one of our advantages is that we since we serve both the medical and industrial segments were able to do two things, we aggregate scale across Oems and across.
Speaker Change: Two different.
Speaker Change: Our market areas, so that gives us the ability to do.
Speaker Change: Take the benefits of scale.
Speaker Change: The most expensive thing photon sorry, the most expensive part of this technology is the material itself cadmium telluride.
Speaker Change: Got it.
Sam Maheshwari: Sam I promise last question I'll hop back in queue.
Speaker Change: <unk> gross margins right.
Speaker Change: You all had a road map you'll have a roadmap in terms of cross margin expansion at this stage of the game how much would you say gross margin incremental cross margins.
Speaker Change: Our more macro event specific driven.
Speaker Change: How much is company specific.
Speaker Change: Energies.
Speaker Change: Is that can be implemented to squeeze out marginal gross margins from this point on gentlemen, congrats again and thank you for taking my questions.
Speaker Change: Yes, so thanks Suraj.
Speaker Change: You know.
Speaker Change: There are company level energies and efforts and initiatives that we've been taking to improve our gross margin.
Speaker Change: If you look at our medical segment and as you know, we disclose gross margins by medical and industrial segments on.
Speaker Change: On the medical segment gross margins have improved steadily over the last few quarters and.
Speaker Change: We are benefiting from <unk>.
Speaker Change: Freight cost reduction supplier diversification efforts.
Speaker Change: Vertical integration.
Speaker Change: Also currently in medical gross margin benefits because the mix is a little bit less from China and then also at this time, we are benefiting from the pricing related efforts that we executed on previously so on the medical segment, we have improved the gross margin, but when it comes to the industrial.
Speaker Change: <unk> segment, and our industrial segment has been growing faster than our medical segment.
Speaker Change: And that is also a segment where generally we have higher gross margins. So what is happening with industrial segment, even though sales are increasing our gross margins have steadily come down. So so generally if industrial proportion of sales is increasing we would have seen our gross margins pick up but that is not.
Being the case and that is because we are shipping unusually high volume of <unk>.
Speaker Change: <unk> linear accelerators into the cargo inspection market and these limits are at low margins much lower than corporate gross margin and as their volume has picked up that has brought the overall gross margin for the industrial segment down. So overall corporate gross margins have been weighed down by the industrial segments.
Speaker Change: Gross margin.
Speaker Change: We hope.
Speaker Change: And some of this is our energies, but then at the same time. Some of this is also market driven we hope to swap this volume with higher margin.
Speaker Change: Industrial tubes industrial detectors.
Speaker Change: All cargo systems, so as industrial segment picks up along with the medical segment gross margin improvements that we've made I think.
Speaker Change: We remain.
Speaker Change: We remain on point to to continue to work towards mid <unk> type gross margin, but those are the those are the things.
Speaker Change: I would also say that the overall.
Speaker Change: Volume needs to pick up, particularly destocking needs to subside.
Speaker Change: We are seeing tailwind of that so that should be helpful.
Speaker Change: Also when China comes back although from a mixed perspective, it would be margin dilutive, but overall volume perspective, it might help us. So those are some of the market driven dynamics and I also talked about some of the energy that we've.
Speaker Change: That we've been working on in this area.
Speaker Change: Thank you.
Yes.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Cai Boston <unk> Securities. Please proceed with your question.
Hi, everyone, great quarter, and thanks for taking my questions.
Speaker Change: Maybe I'll start and oncology segment looks like it's stabilized compared to last quarter.
Five quarter average can you talk about any dynamics that caused this or is there anything to call out here.
Speaker Change: Hi, Kyle this funny no no particular dynamic that I can pinpoint to other than perhaps the destocking phenomenon.
Speaker Change: <unk> started to subside there as well.
Speaker Change:
Speaker Change: It's been it's been more or less the same type of St products, and I think no nothing unusual.
Speaker Change: Got it and maybe I'll stick on the Destocking situation. So glad to hear you expect it to kind of stabilize by the second fiscal quarter.
Speaker Change: And you talked about it and are already seeing that pattern in oncology. Simon can you talk a bit more about what youre seeing here to give you confidence in the ordering patterns of our discussions with clients that give you confidence here any color would be great.
Yeah.
Speaker Change: I'll get us started and maybe Sam can chime in and provide his color as well a few quarters ago. When we started pointing this out.
Speaker Change: The for us the lead and the leading indicator for US is our inbound order intake rate.
Sam Maheshwari: We have fairly fast moving.
Order order to shipment process and the inbound order intake rate as we see ups and downs in there that gives us early indicators into what's going on in the market and if you can generally look at something that's 90 days out.
Sam Maheshwari: And there we saw this phenomenon and as we looked at.
Sam Maheshwari: Right the downward slope on the order intake rate, we started working with customers and then we saw it start to stabilize and now we've begun seeing early indications of upticks, particularly in China. So that's what's giving us and plus that's the data plus the conversations we're having with our customers, giving us an indication.
That they're there and sort of the tail end of their clean up process. So to say plus this is also a year end.
Sam Maheshwari: December is here and for far most of our customers. So you will also see the traditional year end clean up so that's what's giving us.
Early indications that this might be behind us and starting in <unk>.
Sam Maheshwari: First calendar quarter, we expect this will be behind us.
Sam Maheshwari: Yes.
Sam Maheshwari: Yeah.
Sam Maheshwari: Okay.
Speaker Change: Great I appreciate that color and then lastly, if I may maybe regarding capital expenditures, how should we think about this line item to trend given the company's kind of current initiatives and growth strategy should we anticipate similar kind of quarterly cadence of $5 $9.
Sam Maheshwari: Yes, Kyle this is Sam let me take that question. So in terms of our capital expenditure plan.
Sam Maheshwari: A majority of our investment in fiscal 'twenty four we just completed and also into this coming year is targeted towards <unk>.
Sam Maheshwari: Building up the infrastructure and the manufacturing capability out of India. So 24 was a little bit higher than our five year average on capital expenditure and 25 would also stay somewhat elevated I would expect it to be in the $25 million to $30 million range.
Sam Maheshwari: Flat to FY, 'twenty, four or somewhere around that and beyond that it should come down but that's what we are expecting as of now for the capital expenditure for this coming fiscal year.
Speaker Change: Okay excellent well, thanks for taking my questions.
Sam Maheshwari: Thank you Kyle.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jim Sidoti with Sidoti <unk> Company. Please proceed with your question.
Speaker Change: Hi, good afternoon. Thanks for taking the questions can you get a little more specific with China, you said stable there I know you did.
Speaker Change: About $29 million of revenue in the third quarter can you break out exactly what was in the fourth quarter than what it was a year ago.
Speaker Change: Yes, sure so China in the quarter, just completed Jim was $31 million and it was $31 million in the year ago quarter. So it is stable. Although it is stable at lower levels. So the way I would characterize China is that it.
Speaker Change: It is stabilized at lower levels, we are not seeing.
Speaker Change: Any worsening.
And.
Speaker Change: This last quarter was $31 million, but in Q3, it was $29 million. So one might think that it has picked up but I would say that is just quarter to quarter variation.
Speaker Change: We need to see a little bit more in terms of.
Speaker Change: Orders from China before we begin to see that it is.
Speaker Change: Going to pick up the timing of that pickup is still uncertain in our mind, but it is definitely not worsening and thats, what we mean by seeing the China has stabilized.
Speaker Change: Okay, Alright, and with regards to inventory management, you said you expect.
Speaker Change: The destocking to subside by the second quarter.
Speaker Change: Are you seeing end user demand your customer demand continued to grow is that what gives you confidence to say that.
Speaker Change: I would say that on that aspect. It is mostly qualitative and it is mostly based upon our conversations with our customers, although we would get little bit more.
Speaker Change: Rich conversation so to say, although we have we have active dialogues with customers all the time, but once they complete their fiscal year in December and then it comes to January February timeframe.
Speaker Change: They begin to get us much more concrete with us in terms of what their expectations for the coming year or with us. So so so the conversations have been happening and.
Based on I would say order rate as well as these qualitative discussions.
Speaker Change: It leads us to believe that the Destocking has begun to taper down although it will take all the way until January or something like that to fully be done January February is when we are currently expecting that we would be.
Speaker Change: We would be able to see that destocking is behind us.
Speaker Change: Okay, and then last one from me as a balance sheet question.
Plenty of property and equipment, it's up too.
Speaker Change: About $5 million from the June quarter, it's up about $10 million from a year ago.
Speaker Change: Is that India.
Speaker Change: What else is contributing to that.
Speaker Change: Sorry, Jim.
Speaker Change: The first part of your question it got cut out I could not hear it could you repeat yourself.
Speaker Change: Yeah, Yeah sure yeah.
Speaker Change: PPD is.
Speaker Change: About $5 million from the June it's up about $10 million from a year ago.
Speaker Change: Is that India.
Speaker Change: Coming up or why is that increasing.
Speaker Change: Increasing.
Speaker Change: Yes, so <unk> is really a proxy for capital expenditure and that you are right. It is mostly India.
Speaker Change: And if you look at full year that <unk> should be around for the fiscal just and it should be $26 $7 million or in.
Speaker Change: That neighborhood and coming year, we expect it to kind of remain at those levels.
Speaker Change: Okay. So.
Speaker Change: 25% to 30, yes.
Speaker Change: So should we assume from that that the.
Speaker Change: And to your plant is nearly complete and that should start contributing.
Speaker Change: Yes.
Speaker Change: We are working on two factories in India, Jim One factory, we are expecting to begin to produce product in the second half of fiscal 'twenty. Five. So we have made pretty good progress there and then the second factory is a little bit behind.
Speaker Change: The first one and that would be probably nine months behind the first one so the second one we expect it to go into production in first part of FY 'twenty six but.
Speaker Change: A big quantum of capital expenditure our PP&E.
Speaker Change: Would be behind us by the time fiscal 'twenty, five and but there will be still some equipment related spending in the first half of FY 'twenty six but the rate of PP&E or invest at the rate of investment would come down as we enter FY 'twenty five.
Speaker Change: And should we assume the products made at those plants that are primarily.
Speaker Change: India and other parts of Asia.
Speaker Change: No not necessarily our strategy in India is focused around production in India for global consumption.
Speaker Change: Our initial strategy.
As to produce somewhat more competitive.
Competitive products in India. So that we have somewhat of a cost advantage out of production from India.
Speaker Change: So.
Speaker Change: <unk>.
Speaker Change: So essentially it is a global consumption on the competitive products.
Speaker Change: RF, India and that is the strategy here.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Larry Solow with.
Speaker Change: CJS Securities. Please proceed with your question.
Speaker Change: Great. Thanks, and Mark just good late afternoon to you guys.
Speaker Change: I guess first question I know you don't Hi, I know you don't like normally don't give annual guidance, but I think in years past you've given us.
Speaker Change: Some some high level.
Speaker Change: Revenue volatile trends it looks like for Q1, if we exclude.
Speaker Change: Exclude the extra week, our adjusted extra week, you're about flat year over year, I think 190 midpoint you did 190 last year right. So but could you is that.
Speaker Change: Is that what youre expecting for the full year, obviously qualitatively I think you've spoken about improvement or a waning of inventory destocking.
So maybe you can just give us some high level.
Thoughts on where you think that will go going beyond the seasonally slower Q1.
Speaker Change: Yes, so I think.
Speaker Change: Larry China is running at low levels, but it has stabilized.
Speaker Change: However, the timing timing for the growth of China is unknown at this time and also on the Destocking side.
Speaker Change:
Speaker Change: Yes.
Speaker Change: We are getting more and more constructive or feeling better about destocking trends to kind of get completed by January February timeframe. As we said previously so all of that is good those two tailwind.
Speaker Change: Might be coming up our way as we get into Q2 and beyond however, we need to be cautious at this time due to the incoming administration and potential changes to the tariff regime.
So we feel like that we're not in a position to to guide full year at this time in any way as we generally do not guide full year, we go quarter by quarter and so when you take all of these perspectives in mind, we are just providing one quarter at a time.
Speaker Change: Okay.
Speaker Change: Specifically I thought you guys did reduce most of your exposure to that already so how would the tariffs actually higher tariffs impact you specifically.
Speaker Change: If you can just.
Speaker Change: Not quantity quantify it but just qualitatively.
Speaker Change: So.
Speaker Change: Sorry, if it's sunny tariffs for us.
Speaker Change: The impact comes two ways, one for input cost stuff that we import into the U S and those those are if they're coming from China there'll be at a higher rate of there somewhere else in the world with a 20% rate. So that's input costs and we have we have you know in the past we've been able to get exemptions, we've been able to get duty drawbacks for what would be.
Speaker Change: Export out so some of that can well mitigated that.
That's number one right.
Speaker Change: The more I would say the.
Speaker Change: More difficult part of dealing with tariffs is what happens when we ship completed products out of the U S where we to the extent that there are retaliatory tariffs and that impacts sales can impact gross margins that part is unpredictable right now.
Speaker Change: We don't know we don't know what the retaliatory actions will be so anyway. That's the framework for how we're looking at tariffs now.
Speaker Change: To your point.
When this happened in 2018, we were in a different place. Since then we have more local for local presence. So we can manufacture of certain products in China for China. We also if you look at our detector products. The last time this happened we.
Speaker Change: He didn't have detector manufacturing in China that that could allow us to.
Speaker Change: Hold on to that business. However, now we can make the detectors that we make in the U S and many of those in Germany and in China. So, yes, our resiliency level has increased that should help us.
Speaker Change: And that when this whole scenario also we have been the whole purpose behind making these investments in India is also to have another another redundancy in our ability to supply the world from another location. So long longer term rate, that's going to give us additional advantage.
Gotcha.
Speaker Change: The gross margin outlook for 31% again, I know you don't want a guide to future quarters, but I assume that margin is also artificially depressed because of seasonality right you're slower volumes and the extra week, but you also have that strength of costs right. So.
Speaker Change: Bob.
Speaker Change: So I feel like again.
Speaker Change: Don't know what could happen with tariffs.
Speaker Change: I feel like it doesn't it can't impacted that path anyhow, I would say, but as we look out over the next couple of quarters I would feel like gross margin, probably you should come up a little bit right I mean.
The quarter over quarter drop is that.
Speaker Change: Based on lower sales over the.
Speaker Change: Extra one week or what's that what's that drop I guess for starters.
Speaker Change: Industrial also.
Speaker Change: Yeah. So Larry couple of teams in there when you compare this Q1 guidance of gross margin and stripping out the extra week, we are at $190 million a year ago quarter was $190 million also and at that time gross margin was also 31%.
Speaker Change: So that is one year over year compare for you. So we're kind of holding steady there.
Speaker Change: So business at $190 million is definitely I would say below scale and so there is a scale of volume effect on gross margin.
Speaker Change: You were to look at Q1, there was a 13 week quarter. So clearly scale is there.
Speaker Change: So we hope to pick up on.
Speaker Change: On a 13 week to 13 week basis, we hope to pick up volume during the year that should help gross margin.
Speaker Change: Alright.
Speaker Change: So that's definitely there and.
Speaker Change: And as the quarters come up about in the.
Speaker Change: Beyond Q1, we do hope to expand gross margin just like we did in FY2023.
Speaker Change: Got it okay. If I could just ask one just one last question just on the.
Speaker Change: On the sort of increased security.
Speaker Change: Scanning solutions.
Speaker Change: The first question.
Speaker Change: I know the players out there probably the largest of those.
Speaker Change: A couple of larger players right would you be competing against them using your customers I guess right.
Speaker Change: Suddenly linear accelerators to is that a is that a challenge to compete with your customers I guess that's question one and then.
B R. Two to that question is are you are you going after the same.
Speaker Change: Most of the sales today are always the ones that I'm focused on I've been sales to government bodies, whether it's in the U S Mexico or other international places are you targeting the same customers.
Speaker Change: Your equipment I've looked at it a little bit on the website some of the picture together.
Speaker Change: So you have some drop through stuff and it looks like some for a cargo vehicles and maybe some for passenger vehicles.
Speaker Change: First off targeting the same customers or is it smaller maybe more project customers any any feel for that would be great too. Thanks.
Speaker Change: Yeah.
Speaker Change: We believe we can we can play in this space, both as a supplier of components to.
Speaker Change: To the other players in this space and also with full systems now even historically historically, we have sold sub systems, which consists of our linear accelerator detectors are software packages a variety of things that then someone else a systems integrator would take and go to market.
Speaker Change: So we believe we can do a good job of doing both and we've we've spoken with our customers about this they know what we're doing they understand it and we have differentiated products that makes it worthwhile to buy those from us.
Speaker Change: The space is big it's large it's growing and we believe that the types of applications are continuing to grow as well it used to be only ports and borders now.
Speaker Change: Smaller footprint in mobile applications, it's expanding to other sites youre seeing them at venues Youre in future, you're going to see them in garages and other places. So we think theres plenty of opportunity in this market for different differentiated applications.
Speaker Change: Gotcha, So you will be targeting more some smaller smaller one off type places or.
Speaker Change: Maybe not one off but maybe ill garages, maybe you got a string of 10 garages that is owned by an operator, but it feels like Youre also going to be targeting some more smaller locations than a lease but the bigger guys have been speaking to.
Speaker Change: Is that fair to say.
Speaker Change: We will participate.
Speaker Change: Based on what we have in terms of products and capabilities. I think you were referring to cars car scanners. An example of a product that we have where we can go into a niche and do well would be a car scanner.
Speaker Change: So yes, there are other players you know like the ones who are established in this space have the scale and potential.
Speaker Change: In footprint.
Speaker Change: Look we're starting out we're starting from a small number by the way many of our.
Speaker Change: Many people may not be aware, but there are several of our systems that are installed and continues to be in service in <unk>.
Speaker Change: U S Mexico border.
Speaker Change: Through customs and border patrol Theres, probably 20 of these that are already installed they have been there we have been in this space. So we do have a good bit of experience, but initially we're going to look for deals where we believe we have a differentiated opportunity.
I appreciate that I appreciate the color thanks, guys.
Thank you Larry.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: <unk> reached the end of our question and answer session I'll now turn the call back over to Christopher.
Christopher: <unk> for closing remarks.
Speaker Change: Sure.
Speaker Change: Thank you. Thank you all for participating in our earnings conference call for the fourth quarter of fiscal year 2020 for the webcast and supplemental slide presentation will be archived on our website a replay of the quarterly conference call will be available through December 3rd and can be accessed at barrick's imaging Dot com forward Slash Investor relations. Thank you and have a great evening.
Speaker Change: And this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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