Q2 2025 Varex Imaging Corp Earnings Call
Greetings and welcome to the barracks Q2 fiscal year 2025 call.
At this time all participants are in a listen only mode.
Speaker Change: The 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 you to your host Chris Bayle fourth director of Investor Relations. Thank you Chris you may begin.
Speaker Change: Good afternoon, and welcome to Barrick's Imaging Corporation's earnings conference call for the second quarter of fiscal year 2025.
Speaker Change: With me today are Sandy said, Yao, our president and CEO and Sam Maheshwari our CFO.
Speaker Change: That can be accessed at Berks website at Berksimaging.com. The webcast and supplemental slide presentation will be archived on Berks website.
Speaker Change: To simplify our discussion, unless otherwise stated, all references to the quarter are for the second quarter of fiscal year 2025. In addition, unless otherwise stated, quarterly comparisons are made year over year from the second quarter of fiscal year 2025 to the second quarter of fiscal year 2024.
Speaker Change: Finally, all references to the year or to the fiscal year and not the calendar year unless otherwise stated.
Speaker Change: Please be advised that during this call, we will be making forward-looking statements, which are predictions and projections about future events. These statements are based on current information, expectations and assumptions that are subject to risk and uncertainties that could cause actual results to differ materially from those anticipated.
Speaker Change: Wrist 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 1A, risk factors of reportedly reports on form 10Q and our annual report on form 10K.
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. 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.
Sunny: With that, I will now turn the call over to Sanyal.
Sunny: Thank you, Chris. Good afternoon everyone, and thank you for joining us for our second quarter earnings call.
Sunny: We continue to see strong demand in the second quarter, which resulted in revenue near the high end of our expectations.
Sunny: Both, the medical and industrial segment delivered year-over-year revenue growth as we continue to see solid order coverage during the quarter.
Sunny: Gross Margin of 36% in the quarter was higher than anticipated.
Sunny: This is primarily the result of improved volume, favorable product sales mix and productivity
Sunny: Cash generation was strong with cash from operations of $17 million in the quarter.
Sunny: This was driven by improved profitability and continued solid working capital management.
Sunny: Turning to the second quarter results, total revenue and both medical and industrial segments were up 3% year-over-year respectively.
Sunny: non-GAAP Grow margin was 36% up from 33% in the same quarter last year.
Sunny: Adjusted EBITDA and non-GAPIPS in the second quarter, where $34 million and 26 cents compared to $25 million and 16 cents last year respectively.
Sunny: We ended the second quarter with $226 million worth of cash, cash equivalents and marketable securities on the balance sheet.
Sunny: Up $13 million, compared to fiscal 2024 year end, and up $36 million year over year.
Sunny: In addition, we also have $125 million of restricted cash raised from our senior secured debt offering in December .
Sunny: As noted in our press release earlier today, we plan to use this restricted cash and other cash on hand to repay the outstanding principle of our convertible notes upon maturity in June .
Sunny: Let me give you some highlights of sales detail by modality in the quarter compared to five-quarter average which we will refer to as the sales trend.
Sunny: Across both medical tubes and detectors, we continue to see strong demand in the quarter with improved mix which drove increased profitability.
Sunny: Sales in our medical segment were up in the quarter led by solid global sales of CT tubes which were in line with their sales trend.
Sunny: Sales in Floroscopy, oncology, mammography and dental modalities were all above their respective self-trends in the quarter.
Radiography was below its self-trend in the quarter.
Our industrial segment continued to see strong demand.
Sunny: Strength and global security screening drove the sales of cargo inspection components as well as security inspection systems.
Sunny: We continue to see increased demand for check baggage inspection and cargo screening at airports as well as non-destructive inspection in vertical, such as aerospace and automotive.
Sunny: This demand drove growth in our industrial X-ray tube components product line, which continued to grow.
Sunny: Now, let me switch gears to talk about how the current tariff environment is impacting
Sunny: Let me also remind you that it is a very dynamic environment and our discussion today relates to the current terrafraids.
Sunny: The most pronounced impact of the tariffs for Varex as of today is due to the bilateral tariffs between the US and China.
Sunny: First, on the failed front, we currently expect that the 125% tariff imposed by China on the US products could negatively impact sales by about $20 million in the third quarter.
Sunny: This is primarily due to a pause in purchases by some of our China-based customers.
Sunny: Our customers typically maintain some level of inventory of our components and some customers appear to be pushing back deliveries to buy some time to see if there could be an improvement in the tear of rates, or if exemptions might become available to them.
Sunny: Separately, we are actively working on implementing a number of options that could reduce the impact for our customers in the near term, including pursuing commonly utilized mitigation practices and localizing more manufacturing activity in the region.
Sunny: Second, on the cost side, raw materials and component source from global suppliers can include tariffs ranging from 10% to 145%.
Sunny: and roughly 17% of cost of goods sold is imported from the rest of the world.
Sunny: Our mitigation actions include passing the tariff charges to our customers, redirecting material purchases to suppliers in lower tariff countries, shifting manufacturing closer to the region of consumption and localizing supply chain where possible.
Sunny: We expect the impact on our gross margins, net of the mitigation efforts to be in the 150 to 200 basis point range on a go forward basis.
Sunny: Separately, you may have seen reports that the China Ministry of Commerce recently initiated two investigations of medical products imported into China.
Sunny: One investigation relates to the impact of imports of x-ray tubes on the domestic industry and its competitive mess.
Sunny: And the other investigation relates to alleged sales in China of medical CTX rate tubes and tube inserts made in the US and India at prices that are less than what they are sold for in the home countries.
Sunny: We produce x-ray tubes for CTs in the United States, but not in India.
We intend to cooperate with the investigation.
Saurabh Prasad, Saurabh Prasad,
Moving to some product highlights.
Sunny: In medical, I'm happy to note that our largest customer, Canon Medical Systems, introduced in Japan last month, had the International Technical Exhibition of Medical Imaging Trade Show in Yokohama, a very innovative new CT system called Aquilian Rise.
which uses a CT tube made by Varex
Sunny: Aquiline Rye is the whole body CT scanner and the first of its kind to be able to image a patient in multiple positions, from lying down to sitting to standing vertically, enabling detection of lesions that may not be visible in a lying down position.
Sunny: This type of operation requires immense mechanical sophistication, and Varex's tubes have demonstrated the ability to perform under high G forces while rotating at different angles.
Sunny: We are proud of our partnership with Canon and our continued collaboration on new products.
Shubham Maheshwari
Speaker Change: In photon counting, as mentioned previously, we continue to be actively engaged with large imaging OEMs to integrate our photon counting detector technology in their X-generation
Sunny: We have two OEMs who are active in their R&D process and others in our pipelines who are evaluating our technology.
Sunny: With Photon County, we have moved past the technology invention part of our development process and now we are in our typical new platform introduction process with our OEMs, who in turn are in different stages of their new systems development.
Sunny: This week at the Control Trade Show in Stuttgart, Germany, which is one of the largest industrial non-destructive inspection technology conferences in the world, we are prominently showcasing our photon counting technologies for industrial imaging.
Sunny: A key offering is a product called Thor, which is a linear array detector for high speed 3D imaging and inspection of the speed of production.
This product is also suitable for certain medical imaging applications.
Sunny: Im happy to say that we are continuing to make forward progress with driving adoption of photon counting and expected to be a future growth driver for Varex.
Sunny: In our industrial segment where cargo systems is a key focus, today we announced a new order worth 25 million dollars to provide cargo inspection systems.
Sunny: This order is from an international customer for portal systems that will be used to secure
Sunny: This order is in addition to the $14 million of orders that we announced last quarter from other international customers.
Sunny: As is typical for these orders, they are expected to be installed over the next 12 to 18 months.
Sunny: Due to three years after installing these systems, we expect to see an ongoing service revenue stream from these customers.
Sunny: We are seeing good traction with our offerings and continue to engage with many customers and prospects regarding new systems opportunities.
Sunny: In summary, we're pleased with our solid first half performance and with the exception of China, encouraged by the demand trends across our business.
Sunny: While there are headwinds from the current tariff situation, we are partnering with our suppliers and customers to find ways to mitigate the impacts.
Sunny: Considering the mitigation efforts that we have in flight at this point, particularly in China, we're not planning any restructuring in our China business.
Sunny: Also, our customers have not canceled any orders in our $316 million backlog at quarter
Sunny: In addition, we remain committed to paying down our convertible debt next month.
Sunny: We will stay closely evolving geopolitical situation and adjust our mitigation plans as necessary.
Sunny: We intend to continue to execute on our long-range growth strategies that are based on innovation and cost leadership and in parallel continue to invest in our regional manufacturing operations and supply chain capabilities.
Sunny: I'd like to thank all our employees globally for their hard work and commitment in working through this challenging environment. Thank you very much. Thank you.
With that, let me hand over the call to Sam.
Thanks, Sonny, and hello everyone.
Turning to the results for the quarter.
Sunny: Our revenues in the second quarter were 213 million dollars above the midpoint of our guidance. non-GAAP gross margin was 36% and non-GAAP EPS was 26 cents, both above our expectations.
Sunny: Comparing the second quarter to the same period in fiscal 24, revenues increased 3%. This increase was driven by a 3% increase in both our medical and industrial segments.
Sunny: Medical revenues were $154 million and industrial revenues were $59 million.
Sunny: Medical revenues constituted 72% of total and industrial revenues were 28% off of a total revenue for the quarter.
Sunny: Analyzing revenues by region, America saw an increase of 2% compared to the second quarter of fiscal 24.
Sunny: Emia revenues were flat while APEC increased 8% due primarily to increased sales in China.
Sunny: During the quarter, China sales were 15% of total sales. China sales increased 25% year over year and declined 11% compared to the prior quarter.
Speaker Change: Let me now cover our results on a gap basis. Second quarter gross margin was 36% up approximately 400 basis points zero over year.
Speaker Change: Operating expenses were $55 million, a decrease of $3 million, compared to the second quarter of fiscal 24. Operating income was $22 million, an increase of $14 million from Q2 of fiscal
Speaker Change: Net earnings was $7 million and gap EPS was cents per share based on fully diluted 51 million shares
Speaker Change: Now moving on to the non-GAAP results for the quarter. Gross margin was 36% and increased of 350 basis points year over year, primarily due to increased volume, favorable product sales mix and productivity gains in both the segments.
Speaker Change: This was particularly the case in our medical segment which posted a record gross margin in the quarter.
Speaker Change: R&D spending in the second quarter was $22 million, a decrease of approximately $1 million compared to the second quarter of fiscal 24 and representing 10% of revenues.
Speaker Change: Of note, R&D in the second quarter of fiscal 24 included a $1 million milestone payment for the transfer of technology from Micro X.
Speaker Change: As GNA expense was $29 million, a decrease of $3 million compared to the second quarter of fiscal 24 and representing 14% of revenues.
Speaker Change: The decrease in SGNA was primarily due to a decrease in expenses associated with one of our joint ventures.
Speaker Change: Consequently, operating expenses totaled $51 million, a decrease of $3 million, and representing 24% of revenues.
Speaker Change: Operating income was $26 million, an increase of $13 million compared to the previous year, an operating margin was 12% of revenue up from 6% in the second quarter of fiscal 24.
Speaker Change: Tax expense in the second quarter was $3 million or 21% of pre-tax income compared to $2 million or 19% in the second quarter of fiscal 24.
Speaker Change: Net earnings were 12 million dollars or 26 cents per diluted share compared to 16 cents in the year ago quarter. Average diluted shares for the quarter on a non-GAAP basis were 51 million.
Now turning to the balance sheet.
Speaker Change: Accounts Receivable increased by $8 million and day sales outstanding declined by 6 days to 62 days in the quarter. The increase in accounts receivables was largely related to the higher sales in the quarter.
Speaker Change: Inventory increased by 5 million dollars in the second quarter and days of inventory decreased by 19 days to 190 days.
Speaker Change: The increase in inventory was primarily due to a buildup prior to the tariffs. Accounts payable increased by 5 million dollars and days payable decreased by two days to 47 days.
Speaker Change: Up $36 million compared to the second quarter of the prior year and up $7 million compared to the first quarter of 2025.
Speaker Change: The $226 million includes $205 million of cash and cash equivalents and $21 million of marketable
Speaker Change: In addition to $26 million of cash, we also have $125 million of restricted cash raised through our senior secured add-on debt offering which is currently held in a restricted account earmarked for paying down our convertible notes.
Speaker Change: At mentioned previously, we plan to repay the outstanding principle of $200 million of for convertible notes upon maturity in June .
Speaker Change: We are pleased to be able to pay off the convertible notes which will reduce our overall debt burden and simplify our capital structure.
Speaker Change: Gross debt outstanding at the end of the quarter was $570 million and debt net of $226 million of cash and marketable securities and $125 million of restricted cash was $219 million.
Speaker Change: Adjusted EBITDA for the quarter was $34 million or 16% of sales. Our trailing 12 months adjusted EBITDA was $103 million and our net debt leverage ratio was approximately 2.1 times adjusted EBITDA on a trailing 12 months basis.
Speaker Change: Now moving on to outlook for the third quarter. Under the current tariff environment, we see sales impact of roughly $20 million in China and gross margin impact of 150 to 200 basis points driven by increase in cost of goods sold, net of price increases to customers.
Speaker Change: In total, the lower sales and gross margin impact could result in an approximately 15-20 cents reduction of EPS in the third quarter.
Speaker Change: With that as the backdrop, our guidance for the third quarter is as follows, revenues are expected between $180 and $200 million, and we are assuming that sales in China are approximately $10 million for the third quarter.
Speaker Change: non-GAAP Earnings per diluted shear are expected between a five-cent loss and ten-cent of profit.
Speaker Change: Our expectations are based on a non-GAAP cross margin of 32 to 33 percent and these figures include 150 basis points impact from tariff-related costs.
Speaker Change: Tax rate of about 25% for the third quarter and non-GAAP deluded share count of about 41 million shares.
With that, we'll now open the call for your questions.
Thank you. We'll now be conducting Q&A session as
Speaker Change: Pat, a confirmation tool will indicate your line is in the question queue.
Speaker Change: Thank you. First question comes from the line of Young Li with Jeffries. Please proceed.
Young Lee: Alright, great. Thanks so much for taking the questions. I guess I'll start first on China.
Still, um, place in waters.
Young Lee: I was wondering if you can talk a little bit about...
the types of orders that are still coming in.
Young Lee: and then for the ones that pause purchases, have they given any indication for what they'll need to see before resuming purchasing?
Young Lee: and then zoom in out any updates on potential stimulus in China as well as the medical
Young Lee: Hey young, this is Sunny. Thanks for the question. This is the first one regarding orders in China. You know it's...
There is an-
Young Lee: The mix of orders that we've seen are continued to be similar to what we've seen in other quarters. The key difference is that for some of the more expensive tubes, particularly the ones that are shipped directly from the U.S.
Audit.
Young Lee: It was over and it would start, you know, the buying would begin again and then we had also said that destocking was over. Those things pretty much panned out the way we had laid out.
Young Lee: So we started in the first two quarters, we saw upticks in order and the order intake rate was good.
Young Lee: And so the pause that I talked about is mainly when a customer, I've just given the illustrative example of a customer place in order for 300 tubes.
Young Lee: They say, look, here's an order, it's with the FarmPO, but in terms of delivery dates, give me the first 100.
Young Lee: Hold off on the next 200 until I figure out what's going on. So that's sort of the drift of what we made by the pause. They need those tubes, the X-ray tubes are used for new systems as well as for replacement so they need them.
So that's the backdrop here.
Now we make certain, we make certain products in-
Young Lee: In China as well, some of our tubes are made in China and some of our detectors are also made in China.
Young Lee: and then we also sell industrial extra tubes and detectors in China. So we continue to see sort of the same profile of orders for the deliveries and were lower and some of the industrial order volume was slightly lower.
It's continuing as it is.
Young Lee: But the business from US into China, as Sanyi mentioned, is on pause.
Young Lee: and the customers are trying to see, you know, they are trying to buy some time here and exhausting their inventory right now because they are hoping maybe there is a trade deal or maybe some other situation changes that makes it a little bit more affordable for them.
And at the same time, we are also pursuing
Young Lee: Operational practices like a bonded warehouse, or a free trade zone, or stuff like that.
Young Lee: So that is not completed but we are very hopeful that we are able to complete it by the end of Q3.
So, right now...
Young Lee: External environment change on the tariff and trade situation or through our own individual strategies, we may be able to mitigate the impact of tariff for our customers in China.
Young Lee: And so that is also causing a little bit of a pause for the time being and we are hopeful of that.
Young Lee: and besides that, we are pursuing a few other strategies and we can talk about it but that's specifically what's going on.
Young Lee: in China and related to the pause of buying of our product by our customers in China. Now back to you, Sunny. Yeah, and your second question, young, was about, have we seen anything?
More with stimulus, any more demand being driven by stimulus.
Young Lee: We haven't, we haven't, and at this point, given everything else that's going on, it's very difficult to tease apart what is impacting what.
Young Lee: I frankly cannot give you any insight into whether stimulus is working or not. Anything beyond what we've said before which is we haven't seen any direct correlation.
Young Lee: Okay, understood and really appreciate the detailed thoughts, understandings of very dynamic environment.
Young Lee: In fact, terrorists might be changing next week on China, so who knows?
The $25 million cargo inspection order.
You know, it's a pretty big number and...
You know, last quarter I think you had 14 million.
Young Lee: I think last quarter you said the 14 million takes around a year to turn to revenue. The
Young Lee: So I wanted to get a little bit of understanding about your capacity to deliver, especially if you expect to get more of these type of deals in subsequent quarters.
Young Lee: And then, you know, just one of the hearer's thoughts about the trajectory of these types of orders to call it forward.
Saurabh Prasad, Saurabh Prasad, Saurabh Prasad,
Yeah, so...
and Shubham Maheshwari. Thank you.
Speaker Change: At this point, so first of all, we're really excited that we've been, we're getting good traction.
Speaker Change: We have been bidding on, since we launched these offerings, we've been actively bidding on tenders and as these start to get into the sales process, we've been, we're happy to see that we're able to be successful in these deals. In terms of what it takes to deliver.
Speaker Change: We have our lead time, so what we need to do to build a product and for us those lead times are typical, you know, 120 days to 180 days.
Speaker Change: However, these systems typically involve civil works construction, the local site, depending on the product.
Speaker Change: If it's a portal, if it's a gantry, then there's construction involved, it's a mobile, then there's really no construction, but invariably when someone sets up this type of scanning, they have to make some changes to roadways and redirect traffic and those kinds of things. So a large part of the...
Speaker Change: Lee Time is due to civil works and construction works, so that's the point.
Depending on the profile of the projects.
Speaker Change: If there's less construction and we're adding more portals, then you know, it can go in sooner versus sometimes it can take a little longer. So that's why our general statement about 12 to 18 months. If it's mobile systems, then it's only our lead times and it's the lead times where it takes to order the trucks and equipment.
Speaker Change: So you should expect that the delivery times will be in that range.
Speaker Change: The first order that we received last quarter, we've begun shipping against those and those are we've got products built, we ship some, we're waiting for
Speaker Change: Export Licenses for the others, they're all packed ready to go. So from our side at this point with the volume of orders we've taken
Speaker Change: Manufacturing is not a rate limiting factor. It's mostly everything else around us from exporting, getting the export license lined up, getting the construction completed, and then injecting ourselves in that process.
Saurabh Prasad, Saurabh Prasad,
Speaker Change: By the way, we don't do the construction work. We have local partners that handle all of the civil works.
Okay, understood. Thank you so much.
Thank you, Jan.
Speaker Change: Thank you. Our next question comes from the line of Larry Solow with CGS Security.
Please proceed.
Larry Solo: Great, good afternoon. I joined the call a little late, so I just want to do a little clarity on that so the tariffs...
Larry Solo: The 20 million in revenue, and just to clarify, isn't the predominant revenue driver in China is tubes? I know there is a little bit of, I guess, a little remaining detectors and some industrial detectors, but I thought when we had the last round of tariffs...
Larry Solo: You got out of most of the, or not, yeah, I thought you got out of the most of the excluding the tubes.
is that directionally correct? [inaudible]
Speaker Change: So a majority of our revenue in China is from tubes and that is really CT tubes.
Speaker Change: Don't have it, at least in the short term, don't really have a choice. And maybe they don't. And they're just not, like they're not always doesn't find the ordering from enough from a competitor, but
Speaker Change: They're just a laying for the inevitable or they, you know, hoping, right, something will be resolved before they have to buy again, but if there's no resolution to that, you know, the tariffs, let's say in six months from now or would have you and nothing has changed.
Speaker Change: They need replacement tools, never mind growth and new machines, which I thought you would get that too. But on the replacement side, don't they have to come to you, right? Or is there an opportunity to, or can you actually lose share?
Larry Solo: So on the high-end CT tubes, Larry, that is correct. There's no, they'll have to come to us, at least in the foreseeable future and the near term. What's happening currently is, I don't
Larry Solo: The customers are, even though they've placed orders, they've put a pause waiting because they're trying different things on their end as well. First of all, most of our customers carry a certain amount of inventory. They carry anywhere between 16 and 90 days worth of inventory.
Larry Solo: So they can't release that down for some time while they're biting time to see if they're also lobbying their local governments for exemptions, they're also trying to figure out working with us to figure out
how alternate ways of getting products that might work.
Larry Solo: We, as you know, we make, we're able to make certain tubes in China and get made in China a designation for them. And those, you know,
When we do that, we ship parts.
Larry Solo: And those parts have lower value, and they come into the country with, even though the tariff rate is the same, the tariff exposure is lower. So some of the tubes that we don't make there, we're now also accelerating the process of making there.
Larry Solo: So our customers have many choices, they know that we've given them road maps and they know some of these are coming.
Larry Solo: Then on top of that, as they look at the trade discussions that are all the buzz around what might be happening or it could be happening, they're all waiting to see if...
Sanyal, Shubham Maheshwari, Christopher Belfiore
Larry Solo: If they've depleted their inventory, field inventory then they need to replenish that that's what they're doing but if they have inventory they're just holding off.
Larry Solo: Now, we haven't stopped producing since we have frame orders from them, we haven't stopped producing, so we will make those and when they ask for give us shipment dates, we will resume shipments.
Larry Solo: So it doesn't sound like, so the China revenue is basically essentially going from approximately 15 to about 5%
Larry Solo: If everything else was all as we go, plus or minus. But it doesn't feel like that whole that reduction of two-thirds of kind of revenue.
Sounds like...
Somerville, you know, there's a... It's...
Larry Solo: You would think it's temporary or a lot of it will come back because of several different things, reasons, whether it be customers are just delaying for eventually have to come to you or some of these mitigation efforts on your behalf, I guess, right?
Larry Solo: Did that correct Larry in the sense that the Q3 impact we are viewing it as?
Temporary, and it's clearly temporary.
Larry Solo: Laws of Revenue in China is temporary and I believe hopefully by the time Q4 begins around
Larry Solo: We are able to recover this. So clearly modeling Q3 as the basis for next four quarters would we would we would I would think that that would be a mistake at this point
Larry Solo: Sure. But, I mean, is there an opportunity without trade resolution that you, you know, a year from now that this will be an impact, but maybe not. It's certainly not as significant, but do you think it could still be, you know, do you think you could actually mitigate most the majority of it?
More local supply chain as well as local manufacturing.
Larry Solo: And then on top of that, we are also working on, you know, bonded warehouse or free trade zone type of a situation and so we are working on all of these and our focus is to essentially
Larry Solo: Mirigate a lot of this for our China customers and other than that if there is no issue, China was recovering very well for us
Larry Solo: very well for us, so the demand was there, is there, it's just that different customers are trying different things to just kind of get away from this, what we are calling a temporary burden.
Larry Solo: Mostly based on our own efforts and with the help of our customers working with us.
Speaker Change: Hasn't doesn't seem to have had any impact, or can you comment on that at all?
Speaker Change: Industry. That's one part of the investigation. By the way, this investigation is going to continue somewhere between 12 and 18 months. Initially they announced 12 months, but it can't take 18 months.
Sanyal, Shubham Maheshwari, Christopher Belfiore
Thank you.
Speaker Change: and we make CT tubes in the U.S. but, you know...
Fast majority of our CTOM customers are outside the U.S.
Speaker Change: So anyway, we are named in it so we're collaborating and we will, I mean, we're definitely, we will comply.
Okay, now that doesn't make sense. Okay.
Speaker Change: Last question, I guess, I know a lot has been made on China, but of course it's only like 15% of your business.
Speaker Change: But I guess I'm going to go down this dramatically, but how is just overall trends outside of China, OEM trends? I know we're improving. I don't know if you touched on that, come in on the game call that I missed, but unfortunately it looks like it's at least in the short term going to get over shadow but
Speaker Change: Did the thing has continued to sort of improve outside of China? Is there any other tariff impact you expect of than this that you talked about?
No, in this phase where there's a pause, you know,
What we saw in Q2 was that...
Speaker Change: There was broad-based strength, both in medical and industrial, and then we saw many modalities which had been either down or flatish previously oncology, floraoscopy, they were recovering.
Effect, and so that was driven by demand.
Speaker Change: We don't, while the backlog has grown, as you know, it's not necessarily an indicator of strength for us. We look at the order intake rates throughout Q1 and Q2. We saw order intake rates going up. Industrial remains strong. It was continued to be strong and we saw a lot of new orders.
So really, at this point comes down to
It's really China for us at this point.
Thanks for being a soundtrack to YouTube or our positive stories.
Speaker Change: Aright, I'll leave it at that, I appreciate it, thanks.
Thank you Larry
Speaker Change: Thank you. Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed.
Hi, Sunny and Sam, this is James on for Suraj.
Congrats on drawing a quarter.
Thank you, you're welcome.
Speaker Change: Thanks. I guess to start obviously all the focuses on trying to mitigate supply chains and whatnot, but any updates you can give on the India plant, and I guess is there any chance that you guys could accelerate some spend to kind of get that up and running sooner and kind of utilize that pathway to mitigate some of these tariff impacts?
Yes, yes so, our India.
Speaker Change: Activities and projects, they are proceeding as per our plan and you are absolutely right, James, that we are looking at that or that flex operational flexibility and the factories that we are bringing up there.
that we can accelerate some of that.
to help mitigate some of these tariff-related situations.
Speaker Change: We are also accelerating qualifying suppliers from India so that that can also help us in terms of reducing our costs of procurement.
Speaker Change: as well as localizing more over there. So definitely a tool in the toolkit, so to say here, and puts us in a better place from regionalization and tariff mitigation perspective.
Thank you.
Got it, appreciate that.
Speaker Change: Kind of piggybacking previous question. Can you speak to the current environment you are seeing? The trend you are starting to see in the so on April and obviously the beginning of May. I guess putting some things together, you guys noticed 150-200.
Speaker Change: basis point impact to your gross margin because of tariffs. Are you guys passing on costs to customers due to the increased cost of goods sold? Are you seeing any?
Speaker Change: customer weariness because of that, you know, are they accepting prices? It just anything you can talk to there would be much appreciated. Thank you for taking our question.
Speaker Change: Week or so. So essentially, that is our strategy is to pass standard out of dollars to our customers.
Speaker Change: One thing I would say is that our plan is to not do markups on the tariff, we are basically looking at tariff dollars and then charge it to our customers and so charge the customers what we pay in terms of tariff.
Speaker Change: So, we are working with our customers, with some of our large customers, we are having a back-and-forth type of a discussion as we speak, but that is our strategy in terms of passing the tariffs to our customers.
Thank you. Thank you.
Thank you.
Thank you.
Thank you.
Our next question comes from D.
Sidoti, or Sidoti in company, just to see.
Speaker Change: Well, thank you guys. This is Alex on Trigin. Thanks for taking questions.
Yes, I don't have Jim in the 5, but yes.
Speaker Change: I know we've covered China and the tires fairly well. I just had one quick follow-up.
Speaker Change: on the industrials business. You know, is there an impact to tires that you're anticipating? I know it's, you know, smaller than the medical business in China.
Speaker Change: Yes, there is definitely an impact of tariffs on industrial business also, you know, in industrial business we sell industrial detectors, industrial tubes, linear accelerators and of course we talked about cargo systems.
Speaker Change: at all a major area of discussion for us, but on the core side, product coming in from Germany, Austria, UK, it's a truck coming into the US, it's definitely...
Speaker Change: There and it increases our costs and there also our plan is to pass.
that cost related to these tariffs to our customers.
[inaudible]
Speaker Change: Great, thank you for the context. And are you hearing anything? You've mentioned some of the local lobbying efforts. Do you think that's more likely to result in exemptions on the medical side or no sort of preferences on either side yet?
No, it's to be determined that our customers in China
Speaker Change: Don't have an indication whether they will get exemptions or not. There have been exemptions given to several different industries and categories of products, unlike in the US, where it's openly announced. I think these are kind of.
Speaker Change: More subtle but are at this point in time the X-ray CT products are not in that list yet but our customers you know they they've received exemptions in the past and they're certainly going to try.
and they are doing that.
Speaker Change: Understood. One more from us. I know you spoke about using cash towards those convertible notes. Could you talk a little bit about how you anticipate annual net interest expense falling out after paying down those notes?
Speaker Change: on a go-forward annualized basis, interest expense. Our debt would be close to 370 million once we pay down the convertible notes.
Great. Thank you again for taking questions. Thanks Alex.
Saurabh Prasad, Saurabh Prasad,
Speaker Change: Thank you. Our next question comes to the line of Anderson Shukh with the Riley Securities. Please proceed.
Speaker Change: Hi, this is Brendan Carnion for Anderson. Thanks for taking our questions. I just wanted to know, you know, if we're getting your term relief on the terrace, would you expect that to have an immediate impact on your China outlook or would that take some time to ramp back up?
Speaker Change: I think we should see if it's near-term as it gives us enough time in the quarter to get product back to customers, we could see some pretty immediate pull-in, so to say, but...
Speaker Change: And that's why I made a comment earlier. We haven't stopped production, productions moving on, we're making sure that we are preparing ourselves to be able to pivot. Now if that happens the last two weeks of the quarter then...
Speaker Change: We'll be out of luck. But if it happens, let's see in the next two weeks and that still gives us all of June , we'll be able to pull some in. But we've lost a month, so that's hard to recover from.
Right.
Speaker Change: Okay, and then it sounds to me like just given the assumption that the current levels stay where the mitigations kind of come into play in the next few quarters and you expect to ramp up, anyway, off of that $10 million number.
Speaker Change: I'm wondering how the cadence on that is going to be more towards the back half of the fiscal year, or is it going to be more evenly spaced to the recovery day?
Larry Solo: So, Brandon, there are two ways to answer your question. One is based on our own efforts in which we are making some operational strategies so that the tariff burden on the customer in China is minimized.
If we are successful in terms of
Larry Solo: Executing as per our plan, then we are expecting that to be completed by the end of Q3.
Looking into the future here, but there can be some
Larry Solo: Plus Minus in terms of a few weeks on that window but that's what we are working on so if such a thing happens and provided there is no other impact on the macro side in China or anywhere else then we should see recovery starting from Q4.
Larry Solo: So that's one way to look at it. The other way to look at it is, you know,
Larry Solo: that we are not successful, and then we are trying some other strategies, we have a plan A and a plan B. In our plan B, it might take into the following quarter, so that strategy may play out in that regard. And while we are talking all...
Larry Solo: All of the strategies that we are pursuing, the broader world keeps on moving, right, in terms of the macro situation, etc. So it's hard to pinpoint, but hopefully this color gives you an idea about how we are going about it.
Nare, that's very helpful, thanks.
Larry Solo: And then maybe just turning it into the inspection business, great to see the $25 million order is quarter.
Larry Solo: I think you mentioned in the past that you expect that business to be margin-accretive once it gets to 10 to $15 million per quarter. With the $14 million last quarter and the $25 million this quarter, do you have any update on timelines and when you expect to reach that?
$10 million to $15 million level.
Larry Solo: related to a number of machines or number of units and these units are going to ship at some sort of a cadence, call it one unit a quarter, two units a quarter and there is also a lead time before we begin to ship them.
Larry Solo: So, there is still some time in the sense we may begin to see...
Larry Solo: Say in the coming quarter a million dollars of revenue from it and in the following quarter two or three million dollars of revenue from it even though the backlog would say 25 and 14 million or so says close to 40 million in backlog
Larry Solo: 18 months or so so that they go from warranty into what we call service contract or billable service or time and material service.
Larry Solo: So, we are still quite some time away from that side of the business becoming margin accretive. I would say we are at least two years away.
Gotcha, thanks. That's helpful. Yeah, thanks for taking our question.
Thank you, Brandon. Thank you.
Speaker Change: Thank you. Our next question comes from a line of the Ruth Prasad with Marshall Ways. Please
Saurabh Prasad,
Hey, guys. Thank you for taking my question. Um, so...
Speaker Change: 3 questions I have. So the 150 to 250 basis points gross margin impact that you talked about. How much of that is from countries excluding China and how much is China? I'm just trying to figure out if China tariffs go down to 50 percent next week or something like that and other countries over time go up to 20 percent. Does your gross margin impact go up or down?
Speaker Change: Sure, so I don't have that math right away, but you can get to that math. We said that 17% of our cost of goods sold comes from vendors outside of US, X China.
Speaker Change: and 3% of cost of goods comes from vendors in China into the US so you can see you can do that map.
Speaker Change: in terms of import duties that we pay to the government here to pass it on to the customer.
Speaker Change: from our suppliers or from our importation basis over to our customers.
Speaker Change: So because there is no markup, there is an impact on gross margin but I know I'm giving you some math, not the 100% math but this is what we are able to share at this point.
Speaker Change: Habs, and then the orders that obviously are paused at this moment.
and on the retaliatory tariffs.
Thank you. Bye.
You know, let's just say 50% is from 25% [inaudible]
Speaker Change: How will that be shared between your Chinese customer and you?
Are, will you be-
Speaker Change: Should we be thinking about a similar sort of absorption on your end as you are?
Thinking on on the U.S. side.
Speaker Change: to the best of our ability and right now we are targeting to pass near all of the tariffs to our customers.
Thank you very much. Thank you.
So, in your question, there will be...
Speaker Change: There will be a point at which it would not make sense for our customers to pay that type of tariff and buy our product so in that situation sales.
Significantly, significantly reduced the tariff burden that all our customers
Speaker Change: so that they can pay the staff of dollars to us so that we are unimpacted and the impact on our customers is minuscule or small or something that they can absorb quite easily.
Got it. Okay. And that's what was caught by at least at this time.
Thank you.
Got it.
Speaker Change: and my last question. You disclose in the 10Q that the extra tube sails into China roughly.
Speaker Change: 10% of your sales, obviously there's that off-com investigation, is that 10% all of that coming from US, is that right?
Shubham Maheshwari
Thank you.
Shubham Maheshwari, Christopher Belfiore
Speaker Change: Tubes are not all tubes and reselled detectors and tubes and a few other industrial products into China.
Shubham Maheshwari, Christopher Belfiore
Roughly what we sell from U.S.
Speaker Change: Other countries in the world into China is 50-50, so US into China is 50% of our overall China sales.
Speaker Change: I would say roughly 40% is made in China and 10% is from.
You know, Europe or Philippines or whatnot into China?
Got it. Okay.
Okay, this is very helpful. Thank you very much.
Thank you.
Thank you.
Speaker Change: There are no further questions out this time. I'd like to pass the call back over to Chris for any closing remarks.
[inaudible]
Speaker Change: Thank you for your questions in participating in our earnings conference call today. The webcast and supplemental slide presentation will be our question on our website. Our weekly play of the quarterly conference call will be available through May 22nd and can be accessed at VarexImaging.com, forward slash investor relations. Thank you and goodbye.
I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Speaker Change: This concludes today's cell conference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Okay.