Morning, and welcome to the Sidoti Company June Virtual Investor Conference. The next company presenting is Varex Imaging Corporation, its ticker VREX. This presentation will be a fireside chat. We have with us the CFO, Sam Maheshwari, and the Director of Investor Relations, Chris Belfiore. And why don't we just get started, Sam? So, you know, can you give us, for the new investors, a brief description of your business, so that they're familiar—people who aren't familiar with the Varex story now? Thank you, Jim, and good morning to you. Welcome everybody to this webinar. Yes, so Varex, you know, we are the largest maker of X-ray components in the world. We have been in business for more than 30 years, and previously we were part of Varian. But last 6, 7 years, we've been a standalone public company. As you look at our business, about 25% of our revenues come from the industrial segment, and 30%, and the remaining 75% come from the medical segment. In the X-ray area, there are about, say, 150 OEMs in the world, and almost all of them, barring a couple of few of them, they are our customers. And we have had very long-standing relationships with our customers. Many of our customers have been our customers for last 30, 40 years. So that is overall Varex. We are headquartered out of Salt Lake City, about 2,300 employees worldwide. We have major operations in U.S., Germany, Netherlands, China, Philippines, and now also increasing our operations in India. And then there are a few other countries as well. All right. Great, great. And, I failed to mention, you know, I have a list of questions to run through, but if there are any questions from the audience, they can type them into the Q&A tab at the bottom of the screen. But, why don't we start out with China? That's been a topic the last couple earnings calls. I know there's been an anti-corruption campaign going on there, and the economy has been fairly weak, so that's been a headwind. Are you seeing any of those headwinds start to subside at this point, or do you think they'll be continuing through fiscal 2025? Sure. So, on the anti-corruption campaign, we believe it started around July timeframe last year, so we are coming up closer to almost a year on that campaign, and that has impacted our business over the last few quarters. Generally, based on a little bit of experience in this area, maybe 10 or 12 years ago, we expect these type of campaigns to last, you know, 12-18 months. That has been what we are currently thinking. Obviously, I'll be remiss to say that we know exactly when these type of campaigns will stop or start. That has just been our, a little bit of our experience in the past. So we are expecting that hopefully, this anti-graft campaign is completed or significantly completed towards the end of this calendar year. So we are optimistic and hopeful about business improving from China from the start of the next year. So that's on the anti-corruption campaign. But at the same time, it is true that the overall macro situation is somewhat weak, but we do derive confidence from the fact that China government has been really focused on improving the healthcare infrastructure and the overall healthcare facility in China, and that would mean a lot of investment for the longer term. So when it comes to China, we remain quite optimistic over the long-term growth of that country in terms of healthcare facilities and our business. So, you know, they, China announced the Made in China 2025 program several years ago. Do you think that they're still intending to complete that program? I don't know that much about in terms of completing that program, but that has definitely been an area of focus for for China, to be a little bit more, locally self-sufficient or have more production, or more, product being, products being made inside China. So, you know, Jim, we have, our own, manufacturing operations in China, and our products, largely, that we sell in China, are registered in China. So this has been our approach in terms of China 2025 so far. The government has talked about a stimulus package. I know details aren't complete yet, but, you know, do you think that could have any impact on Varex in fiscal 2025? Yeah, we are optimistic about it. I believe they announced that a few months ago. However, the details of that program have not been announced, whether it is a cash subsidy or a discounted loan, or what would be the way that will be benefiting the purchaser of equipment, or whether it'll be for equipment or for operating expenses, we don't know quite as yet. However, we are hopeful that over the next few months, say, two, three months, the details are provided by different provinces, and we are hoping that that would drive some sort of a purchasing cycle a few months after the details are brought about. So that also sets up a nice backdrop for towards the year-end, a pickup in the China demand. All right. And then, outside of China, you know, one of the other headwinds that you've been dealing with is the supply chain issues. You were actually, I think, a little bit ahead of the curve there. You were able to deliver, where some of your, some of the other companies weren't, and so your OEM companies, your OEM customers wound up with more inventory of your product than some of the other components. Do you think that this has started to abate? Do you think that the supply chain issues are starting, or supplier inventories are starting to come back to normal levels yet at some of the big OEMs? Yeah. So Jim, as you said, during the supply chain crisis, a number of our customers ended up stocking quite a bit of our product, and that is. And since the supply chain crisis are now, has now largely abated, I would not say it is 100% over, but most of that is over at this time. So our customers are bringing their inventory levels back to normal, normal levels. And so this renormalization of inventory for us in our customers' warehouses is happening right now. We believe, and it varies customer by customer, we believe that is a 6- to 9-month type of a process, and we also believe that it started 3 or 4 months ago. So I think we are in the middle of it, and there are a few more months left in it. But we hope that a lot of that is over, again, towards the Q4 of this year, or towards the end of this year in terms of the calendar year perspective. You know, a lot of a significant percentage of your business comes from the shipment of X-ray tubes, which wear out over time. You know, can you just remind investors about what percent of revenue is that, what I would consider recurring revenue from the X-ray tubes? Yeah. So, in our business, we sell X-ray tubes, particularly on the medical side, and also largely on the industrial side as well. We sell our product to our OEM customers, and then they divert that product from their warehouses into forward production or for field service purposes. So we never are able to figure out an exact percentage. However, when it comes to tubes, which is currently running about 50%, or sources, X-ray sources, are running about 50% of our overall revenues. So that is the largest business unit that we have. And for X-ray sources, we believe about two-thirds of that revenue is for service and replacement purposes. So as you do the math, it'll come down to about 30%-33% of our overall revenues being recurring or service-driven. Okay, and, can you talk now about, you know, some of the new detectors that you developed? I know photon counting technologies has been becoming more popular, and you invested in that about 4 or 5 years ago. How are those products going, and how are the launches for both the medical and the industrial businesses? Yeah, sure. So photon counting has been a great technology, and the industry is talking quite a bit about it. It was discussed quite actively in the RSNA conference last year as well. So photon counting, just for everybody to know, it enables a significant reduction in dosage through the body, so up to 60%-70% less dosage through the body. It provides a much better image because it allows material discrimination. And then lastly, it is a very fast technology in the sense we can create a much higher frames per second leveraging photon counting detection technology. So on the medical side, it is finding its way in the CT modality, and we are planning, and our plan is to enter CT detector market. You would know, Jim, that as of now, we do not sell into the CT detector market through our traditional detectors, but we are planning to penetrate that market with our photon counting-based detectors. Couple of months ago, we announced that we have signed an agreement with a large OEM, and we, our R&D teams are working with their R&D teams to get our detector design into their system. So as that product is designed in and our customer releases their system, and then as it gets into volume production, then we should see photon counting-based revenues in the medical segment for CT in, say, about 2-3 years from now. So that is on the CT side. Then coming on to the industrial side, we've been seeing a lot of interest, and on the industrial side, the interest has been varied, and there is a lot of demand for prototypes and a request by customers to work with us to get our product designed in. So just to give you an example, photon counting detectors are being used for. We got EU grant to develop two products, to help develop two products. One is in the postal sorting area, and the other one is for battery detection and waste batteries, so to say. So that is two areas. But then because photon counting is also a very fast technology, it is also finding its way in terms of end-of-line production. For example, you can imagine cereal boxes going down a conveyor belt. They're all tagged, but it can be used, it can be viewed using photon counting technology, whether there's a plastic part or a metal part in it, and those boxes can be separated from the forward shipment. So that is another area. This technology is also finding its use through oil and gas inspection, other food inspection areas. So there are a number of areas we are finding a lot of interest in photon counting. Today, we do about $20 million in photon counting revenues. Majority of that is for industrial. And we expect industrial applications or industrial side of photon counting to grow. We expect it to grow from this base double digits. But then on the medical side, as the systems are released by our customer, then we should see a step change in revenues. You know, for photon counting and for some of your other components, you know, once you're designed into a system, how sticky is that? How difficult is it for a competitor to come in and replace you? Yeah, it's a proprietary technology. It is a more difficult technology, so it is definitely difficult. It definitely has a lot more switching cost, whether it is on the R&D side of the customer, whether it is software integration, data read, working on the data read side, as well as on the imaging side. So there are multiple areas where customer would have to work through the change, so it'll be more difficult. Is it impossible? Definitely not. Is it very difficult? Yes. If it's a medical product, would they have to go back for FDA approval? They would have to register the product again. I don't know whether it would require an FDA approval, but they'll have to re-register the product. But then they may also have to go ahead and change how their system hardware and software is working with the detector, so that would be difficult in terms of the software, the user interface. Not only user interface, but also software imaging and data acquisition, and various other aspects. Okay. All right. Can you talk a little bit about pricing? I know you did start to implement some price increases when costs started going up. Have you been able to hold those price increases? Do you anticipate additional price increases going forward? So, yes, we have been able to hold price increases. We've been increasing prices for the last few years, two, three years for sure, and we've been able to hold them. I would say that our price increase strategy is largely to offset the increases in raw material costs as opposed to a gross margin improvement strategy, and we've been successful at that. Okay. All right, one of the other areas where you've invested recently is nanotubes. I know you have a relationship with Micro-X on that. I think you're also gonna start manufacturing some of those for another OEM. You know, can you just tell us how that's going and where you are in the development cycle for those products? Yeah, that's, there's a lot of work going on in that area. That is in our sources area, it's in the tubes and the sources area. So we've been working on a few nanotube technology using different emitter types. You mentioned our joint venture partner, VEC, and then also Micro-X, and a couple others. So we've been working on that. We've been making continuous progress on that. I would say that is a little bit, that wave of technology, adoption, and revenue generation is a few years out. So I would say photon counting is ahead of nanotube in terms of how we think about revenue generation, as well as this technology. So currently, we are building prototypes. As we speak, we're building prototypes, and we are working on improving the performance of these tubes, as well as lifetime testing. So, that's what we've been working on as we speak. We've also signed an agreement with Nano-X to develop tubes for them, and that is, that we've talked about in the past, so we've been working on that as well. Right. And then, one of the other big areas or other areas with a lot of potential is artificial intelligence. I know we had, RadNet present yesterday. They have a system that's using, artificial intelligence to detect, breast cancer and, and lung cancer as well. Have you been able to, capitalize on this trend? Do you have any development going on with AI right now? Yes. So you know, Jim, we have our business unit in Germany, MeVis. They are the software business for us. They deploy a lot of AI, and definitely we've been implementing AI and benefiting from it. From a revenue perspective, it is coming through the software business unit, and AI is embedded in it, and the products there that we sell are in the breast imaging as well as lung cancer screening, and we are definitely implementing AI or pieces of AI in that product. So for example, in lung screening, a radiologist can see how it has progressed for a patient for a number of years after repeat scans. Or so multiple scans can be concocted together, so to say, and then AI can help determine where there have been changes. So it definitely helps improve the productivity of radiologists, and also helps improve completeness of diagnosis, so to say. So at the end of the day, it is a radiologist productivity improvement technology at this time, and this is the way we are approaching it. And then the other area where we are implementing AI is in our production. We are using AI or machine learning for various production methods, you know, in terms of predicting the quality of the product or predicting or assessing the image that is coming out of a pre-shipment image that is coming out of a detector, and leveraging AI to make sure that the product will do what it is expected to do. So we are leveraging AI in various areas in our manufacturing. All right. All right, I wanna switch over to the balance sheet. You know, and I think, Sam, you've been there about four years now, and I know when you got there, you know, there was concerns about violating debt covenants and overall debt levels, and I think things have improved quite a bit. Yeah, so what are your plans at this point regarding debt pay down and you know, renewing the convertible bond that will come due in 2025? Yeah. So, our convertible bonds, $200 million notional, that is due in June of 2025, so say about a year from now or slightly less than a year from now. We have excess cash on the balance sheet as of now. Last quarter, we reported about $190 million in cash. For operating purposes, we only need about $100 million, so that means we have $90 million of excess cash on the balance sheet. And recently, we secured credit line of financing for $175 million. So we have. And it remains undrawn as of now, so we have plenty of liquidity. So as of now, we are maintaining our optionality. Optionality in the sense we might be able to retire the entire convertible with the help of our balance sheet cash, as well as drawing from the line of credit. Or we may be able to bring the convertible, notional convertible down, say reduce it from $200 million to $100 million, depending upon how the next 9-11 months play out. That is how we are thinking about it. One way or another, it is our goal to deleverage the balance sheet, bring down the overall levels of gross debt on the balance sheet, and through this step, in the next 12 months, we ought to be able to do that. What is the quantum of that? Time will tell. Right. All right, we do have a couple questions from the audience, so I just wanna run through them. First, you know, how do you protect your IP in China? So we do have a few patents that are registered in China. At the end of the day, the IP to be protected in China is largely through protecting the know-how. So it is not through a patent regime, but it is mostly through know-how or the dark secrets, so to say. Right. Right. We do have manufacturing, as I mentioned, in China. But that manufacturing is more towards, back end of the line in terms of the manufacturing processes. Okay. All right, and who are the, w ho would you consider your biggest competitors? Are they, other companies or are they, the, the actual OEMs themselves? Actually, both. So when it comes to sources, we compete with a few companies other than some of the large OEMs who have their own internal departments. So the large three or four OEMs, say GE, Siemens, Philips, Canon, they have their own internal departments for tubes and sources. We are the largest merchant provider of sources in the market, so outside of the, outside of the captive, so to say. But then there are other companies and sources, for example, IAE, they compete with us. On the industrial side, we compete with company, which is a public company, which is Comet, a Swiss company. So we compete with them on the industrial side in certain areas. So that's on the sources side. On detectors, we compete on the dynamic detectors. We compete largely with a company called Trixell. That's a French company. It's a privately held company. And then on the static side, we compete with a few Asia-based companies. One is Vieworks, out of Korea, the one is iRay, out of China, and there might be one, CareRay out of China as well, a smaller company than iRay. So that is the competition on the detector side. Have you seen any significant shifts in share in the last 12-18 months from in these markets? Yeah, yes, so I would say that in sources, we've been gaining in market share broadly. There has not been any major shift in competitive landscape over there. In detectors, overall, I would say we have seen some erosion in our market share, particularly on the static detector side. That shares, I would say, based on limited knowledge, I would say that because there is nobody who's who's published market shares, but I would say that we've lost market share on the static detector side in the last 2-3 years, largely to the Asia-based competitors. Is that a more price-sensitive market? It is a more price-sensitive market and less differentiation-oriented market. Got it. Got it. All right, so we only have a couple minutes left. So, just, you know, looking out into 2025, you know, what do you think are the biggest opportunities, and what do you think are the biggest risks that you're facing? So looking forward to 2025, I think we are most excited about, you know, getting past the headwinds in our medical business. One is the China-driven headwinds, and hopefully we are getting closer to the end in that area. The other one is getting past the renormalization of inventory situation that we talked about, Jim. So those are the two things that I'm more excited about in 2025 from a top-line perspective. I would say the real exciting piece is the photon count piece, and we look forward to making a lot more progress with the customers that we've signed up, and then adding on to new customers. So that will be really exciting for us, because that would pave the way for the next many years for the company. So that is the most exciting piece. You brought it up and we discussed it, you know, from a balance sheet perspective, also getting to a decision point and concluding one way or another on the convertible bonds, the quantum of it, and the decision surrounding that. That would also be something that we would be completing in 2025. So those are some of the things, top line, technology-wise and the balance sheet-wise. Then it comes to what are the things I'd be worried about for 2025. You know, one thing that comes to my mind is the upcoming election in the United States, and based on which side of the administration and what their trade policies are with China, that would be something that is uncertain and something that we need to monitor carefully. But that would be something that we'll be continuously thinking about. The fact that you actually manufacture in China, does that help you with regard to some of these, you know, risks regarding tariffs? Yes, I think it definitely does, and we are better situated than in the past. It definitely buffets us, but at the same time, you never know. I cannot say that we are 100% insulated from all of the trade policies or trade regime changes in trade situations. We are definitely better positioned, but not 100% insulated from it. Okay. All right, great, great. All right, well, thank you very much, Sam, Chris. I appreciate your time today. I know you have a very full schedule of investors you're meeting with, so we appreciate the fact that you're taking the time to do that as well. I guess we'll probably be talking in about maybe two months from now, maybe a little less, on the next quarterly earnings report. Same here. Thank you, Jim, and thanks, everybody, for joining us, and look forward to more conversations in a. Okay Couple months. All right. Thank you. Thank you. Take care. Bye. Bye-bye.