Greetings! Welcome to the Varex Imaging Third Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in listen-only mode. Question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Christopher Belfiore, Director of Investor Relations. Christopher, you may now begin your presentation. Good afternoon, and welcome to Varex Imaging Corporation's earnings conference call for the third quarter of fiscal year 2024. With me today are Sunny Sanyal, our President and CEO, and Sam Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex's website at vareximaging.com. The webcast and supplemental slide presentation will be archived on Varex's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the third quarter of fiscal year 2024. In addition, unless otherwise stated, quarterly comparisons are made year over year from the third quarter of fiscal year 2024 to the third quarter of fiscal year 2023. Finally, all references to the year are to the fiscal year and not the calendar year, unless otherwise stated. Please be advised that during this call, we will be making forward-looking statements, which are predictions or projections about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Item 1A, Risk Factors of our quarterly reports on Form 10-Q and our annual report on Form 10-K. The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward-looking statements in this discussion. On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with, nor are they a substitute for GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website. I will now turn the call over to Sunny. Thanks, Chris. Good afternoon, everyone, and thank you for joining us for our third quarter earnings call. Third quarter revenues came in as expected, with continued strength in our cargo inspection business within our industrial segment. During the quarter, we continued to see customers in our medical segment adjust inventory levels, resulting in reduced demand for some medical products. We believe this is the result of our customers' increasing inventory levels during the supply chain challenges over the past several years. We expect that these inventory adjustments should subside in early calendar 2025. In the quarter, gross margin was lower than anticipated, primarily as a result of unfavorable product sales mix in our industrial segment. The higher proportion of cargo equipment sales compared to service sales pressured gross margins in the quarter. In China, we continued to see softness in the third quarter as a result of the ongoing anti-corruption actions by the Chinese government. While sales are down year-over-year, in the quarter, we saw modest improvement sequentially. We remain optimistic that the medical imaging market will improve in China and that Varex is well positioned to benefit when growth resumes. Particularly, we continue to see a desire by Chinese medical institutions to upgrade from value or 16-slice CTs to performance or 64- and 128-slice CTs. Turning to the third quarter results, revenue in the third quarter was down 10% year-over-year. Revenue in the medical segment decreased 15% year-over-year, while the industrial segment revenue increased 6%. Non-GAAP gross margin in the third quarter was 32%. Adjusted EBITDA in the third quarter was $23 million, and non-GAAP EPS was $0.14, compared to $0.37 last year. We ended the quarter with $192 million of cash, cash equivalents, and marketable securities on the balance sheet, up $40 million compared to the third quarter of fiscal 2023. Let me give you some insights into sales detail by modality in the quarter, compared to a 5-quarter average, which we will refer to as sales trend. Sales in our medical segment were down in the quarter, driven primarily by inventory adjustment actions by our customers and lower sales in China. While sales in China improved slightly sequentially, the overall environment in China remained soft. Global sales of CT tubes improved slightly in the quarter and was in line with its sales trend. Sales in our radiographic modality was above its trend. Sales in our fluoroscopy, oncology, mammography, and dental modalities were all below their respective sales trends. In our industrial segment, sales of cargo inspection products remained solid as our customers benefited from strong demand in the global security screening and cargo inspection markets. We continued to experience softness in other industrial end markets, primarily in semiconductor, electronics, and battery inspection.... The markets we operate in remain challenging, including ongoing softness in China, inventory adjustments by our customers, and continued competition from Asia-based detector manufacturers. We continue to remain focused on our long-term priorities in innovation, particularly on photon counting, as well as cost leadership, as we continue to expand our presence and footprint in India. With that, let me hand over the call to Sam. Thanks, Sunny, and hello, everyone. Our revenues in the third quarter were $209 million, slightly below the midpoint of our guidance, while non-GAAP gross margin was 32% below our guided range. Non-GAAP EPS was $0.14, slightly below the midpoint of our guided range. Third quarter revenues decreased 10% compared to the third quarter of fiscal 2023, driven by a 15% decrease in our medical segment, in part due to continued softness in China. Medical revenues were $149 million, and industrial revenues were $60 million. Medical revenues were 71%, and industrial revenues were 29% of our total revenues in the quarter. Looking at revenues by region, Americas decreased 4% compared to the third quarter of fiscal 2023, while EMEA decreased 8% and APAC decreased 17%. The year-over-year decline in APAC was primarily the result of lower sales in China due to the government's anti-corruption campaign and investigation into its healthcare system. China accounted for 14% of overall revenues in the third quarter, compared to 18% in the third quarter of the prior fiscal year. While sales to China in the third quarter increased sequentially from the second quarter, we do not expect market conditions there to improve in the foreseeable future. Let me now cover our results on a GAAP basis. Third quarter gross margin was 32%, down approximately 100 basis points year over year. Operating expenses were $58 million, up $6 million compared to the third quarter of fiscal 2023, and operating income was $9 million, down $15 million from Q3 of 2023. Net earnings were $1 million, and EPS was $0.03 per share, based on a fully diluted 41 million shares. Now moving on to non-GAAP results for the quarter. Gross margin was 32%, down from 34% in the third quarter of fiscal 2023. The primary driver of the lower gross margin was decreased volume and unfavorable product mix in our industrial segment, as we experienced higher equipment sales and lower service sales. R&D spending was $22 million, up $2 million compared to the third quarter of fiscal 2023. R&D was 11% of revenues. R&D spending is expected to remain around current levels. However, R&D, as a percentage of sales, may fluctuate due to overall sales levels. SG&A expense was approximately $31 million, up $2 million compared to the third quarter of fiscal 2023. SG&A was 15% of revenues. Operating expenses were $53 million or 25% of revenues, at the high end of our expectations for the quarter. Operating income was $15 million, down $14 million compared to the same quarter last year. Operating margin was 7% of revenue, compared to 13% in the third quarter of fiscal 2023. During the third quarter, we saw higher losses associated with our dpiX joint venture and our investment in Micro-X, which resulted in an unusually high expense in the other income expense line. Tax expense was approximately $350,000 or 6% of pre-tax income, compared to $5 million or 21% in the third quarter of the prior year. The lower-than-expected tax rate was primarily the result of decreased global pre-tax income and favorable impacts of tax reform items and tax credits in the US. We expect a tax rate of 21%-23% for the fourth quarter of fiscal 2024. Net earnings were $6 million, or 14 cents per diluted share, down 23 cents year-over-year. Average diluted shares for the quarter were 41 million on a non-GAAP basis. Now turning to the balance sheet. Accounts receivable was flat compared to the second quarter of fiscal 2024, and day sales outstanding improved by 1 day to 66 days. Inventory decreased $4 million sequentially in the third quarter, and days of inventory improved by 5 days to 180 days. Accounts payable increased by $1 million, and days payables remained at 45 days. Now moving to debt and cash flow information. Net cash flow from operations was $8 million. We ended the quarter with cash, cash equivalents, and marketable securities of $192 million, up $40 million compared to the third quarter of the prior year, and up $2 million compared to the second quarter of 2024. Please note that $192 million includes $156 million of cash and cash equivalents, and $35 million of marketable securities. Gross debt outstanding at the end of the quarter was $447 million, and debt, net of $192 million of cash and marketable securities, was $255 million. Adjusted EBITDA for the quarter was $23 million or 11% of sales. Our trailing twelve-month adjusted EBITDA was $105 million, and our net debt leverage ratio was approximately 2.4 times on a trailing twelve-month basis. Now moving on to the outlook for the fourth quarter... We continue to navigate a challenging demand environment due to softness in China, inventory adjustments by certain customers, and continued competition from Asia-based detector manufacturers. In light of this environment, guidance for the fourth quarter is: revenues are expected between $190 million and $210 million, and non-GAAP earnings per diluted share are expected between $0.00 and $0.15. Our expectations are based on non-GAAP gross margin in a range of 33%-34%, non-GAAP operating expenses in a range of $53 million-$54 million, interest and other expense net in a range of $7 million-$8 million, tax rate of about 21%-23% for the fourth quarter, and non-GAAP diluted 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 a question and answer session. If you'd like to ask a question, you may press star one from your telephone keypad, and a confirmation tone to indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Thank you. And our, our first question today comes from the line of Young Li with Jefferies. Please proceed with your question. All right, great, thank you so much for taking our questions. I guess to start, wanted to get a little bit more color on China. I mean, it's, you know, moderately, sequentially improved, still down year-over-year, but seem to be, better than last quarter, so it kind of bottomed last quarter. Just your comment on, you know, not seeing any improvements in the foreseeable future in China. Can you maybe reconcile that a little bit versus, you know, it's been a year since the anti-corruption campaign, eventually it's going to go away. There's talk about stimulus in China as well, although we might not know all the details. And then also your comment on the, competitive, pressures there in APAC. Maybe you can just help us understand the China comment a little bit more? Hey, Young, this is Sunny. I'll get us started and ask Sam to give a little bit more color. So we did see sequential slight uptick sequentially in our orders and sales from China, but that... We don't see that as a trend for the next few quarters. As we've said, the effects of the audits are still continuing. However, look, as we go into next year, you know, we expect that this will start to taper off, but for now, in the foreseeable future, we don't see a significant movement there. The stimulus by itself, you know, it's, there's a lot of things undefined about the stimulus program, so we are not seeing any direct impact of that yet. However, for us, any investment in healthcare that impacts that, that can have a positive impact on buying of equipment is good for us. So overall, on balance, we would say that the stimulus program should be good for us, but we don't have any indication of when that will kick in, in terms of having an effect on orders and sales for us. And then in terms of the competition from Asia Pacific players, this is, you know, it's we've talked about the competitive intensity in detectors in the past with Asian players, and we're just seeing, you know, continued intensity of competition there, particularly in the low end modalities such as radiographic dental. And that's, you know, in a market where demand is soft and muted, you know, this is not unusual that we find the more aggressiveness from our competitors and detectors. Hi, Young, this is Sam. I'd just like to add to what Sunny said. Even though there was a sequential improvement in this last quarter from China, but we are not seeing it as a durable pattern. Plus, while stimulus is positive, there's also been other news that the government there has extended or expanded the anti-corruption campaign from one year to three years. And you are right, that we are now one year done with the campaign, but with this new knowledge that we have for a three-year campaign in a way, so that gives us some sort of a pause. And so we are expecting that the China business. We are not expecting China business to see a meaningful improvement in the foreseeable future. Okay, great. Appreciate the color there. I guess for the follow-up, I was wondering if you can provide any early qualitative thoughts for fiscal 25. It seems like, you know, on the medical side, there some of the inventory pressures might be easing. You know, China is still a little bit of a black box, but industrials seems to be doing well. So any high-level comments on fiscal 25 would be really helpful. Yeah, sure, Young. You know, it's a bit too soon for FY 25 for us, but I would try to provide or I'll try to say that, you know, China has been, China business has now been almost 12 months that it has been operating at a low level. So from that perspective, we expect 25 versus 24. We are not seeing a—we are not expecting a whole lot of meaningful improvement there. However, on the destocking side or the inventory normalization side, as you said, it's supposed to be a temporary phenomenon, and as Sunny said in his prepared remarks, that we are expecting that situation to improve over there from the beginning of 2025. So, at this point, we are expecting that there ought to be a gradual improvement, and 2025 ought to be slightly better than 2024, but the China situation continues, and so we are not baking that in for 2025 at this point. All right. Thank you very much. Thank you, Jim. Our next question is from the line of Suraj Kalia with Oppenheimer. Please proceed with your questions. Hi, Sunny and Sam. This is actually Jacob on for Suraj. Thank you for taking our questions. So just quickly coming back on the topic of China for a little bit of granularity. You've mentioned inbound orders being the biggest indicator on your end of things moving into a positive direction. So just wondering what, if anything, had changed from 2Q to Q3. And I know you said in the foreseeable future, no improvement, but how does this push out your expectations as we look past this fiscal year? Take that, Sam. Yeah. So, as I said, Jacob, that, in terms of order pattern and sales, yes, it did improve a little bit, but, again, we are not seeing a durable pattern here that the orders are continuing to improve. So I think, they are not worsening, but, they have kind of stabilized at the low levels, and we are obviously hoping for order order pattern and sales to improve, on a sustained basis, but that's not what we are seeing. So, we just want to say that, you know, one quarter data point is not an indicator for a sustained improvement here. And going into the next year, at this point, we are expecting that the next year is probably be in line with where FY 2024 has been for us, for China. We are not expecting a significant improvement there. But we'll see. We'll monitor the situation. It is possible after six or nine months, things improve, but this is where we are as of now, and we are just expecting that this current situation in China to continue at these low levels. Great. Thank you. And then just one quick question on the traction you see in industrial. You mentioned that it's driven by cargo, with industrial softness outside of cargo. Could you remind us the percentage of industrial that is cargo, and maybe what indications of stability there you see going forward? Yeah, so industrial business, you know, grew quite a bit last year, and this year also, we expect it to grow over last year, so there is a decent bit of traction there. Within industrial, though, there are pockets, particularly in semiconductors and electronics, where we've been seeing some softness, predominantly because of the capacity digestion that happened, the capacity being digested as it was shipped. So we are seeing some softness there in the last quarter, this quarter. However, as we mentioned, cargo business is strong, and we have a reasonably good visibility for that strength to continue over the next few quarters for sure. So cargo business, you know, we have, we have disclosed full year fiscal 2023 numbers for cargo area, previously, although that, cargo business's proportion in our overall FY 2023 fiscal year sales has been increasing. I think you just need to give us one more quarter when we complete our full year and be able to disclose those proportions to you. But we did disclose FY 2023 previously, and we expect in FY 2024, cargo business proportion would be much higher than what it was in 2023. Great. Thank you. Our next question comes from the line of Jim Sidoti with Sidoti & Company. Please go ahead with your question. Hi, good afternoon. Thanks for taking, thanks for taking the question. I think what I hear you saying is, you know, China business, you don't expect it to improve in the near term, but I think I'm hearing you say you don't expect another step down over the next couple of quarters. Is that right? That's correct, Jim. I think that's what we are saying, yes. It's already running at low level, and we need to see very specific and definitive indicators before we are able to say that it's going to improve on a sustained basis. And, Jim, our comment about... Sorry, Jim, our program—our comment about the program, audit program continuing, that's, from our understanding is that the current audit is a, is a pretty drastic, type of an action, but then on an ongoing basis for another, another two years, at least, that there will be oversight of the purchasing process. Now, that's not going to- ... shut it down like the way it has happened so far, but it's going to allow for ongoing purchasing, but at a much more slower level, and we haven't quite yet seen when that transition will occur. All right. Any update on the new products with the photon counting technology? You've talked about that in the past. On the medical side, are you making any headway there? Yeah. So as you know, that's part of our long-term strategy and making very good progress there. And last quarter, we had given some color in terms of what we expect its contribution to our growth in the longer term, and that is still, that's still looking good for us, and we're very optimistic and excited. I think in the near term, though, as once we get past these destocking levels, the thing that we are continuing to be excited about is the cost out initiatives that we've launched with our investments in India. We expect that to give us ability to regain market share in radiographic, dental, and areas where we have lost share and lost ground. We expect to make those up in the midterm timeframe. All these investments, both in near-term, midterm, and long term, are, you know, looking good, and we're continuing to be optimistic about it. Last one for Sam. You know, what's the update on refinancing some of that debt? Yeah, sure. So, Jim, a few months ago, we completed the credit financing, and so we have sufficient flexibility around that. And, you know, our revolver, our convertible bonds are maturing in June of 2025. So we have some time here, and, you know, as and when we make a decision, we'll be sure to inform you. But we have a reasonably good flexibility at this time when it comes to refinancing. Okay, and you think you'll make that decision sometime in early 2025? Cannot say at this time what would be the time when we will make that decision. Obviously, it'll be before June, but you'll just have to give us some time to hear the final decision from us. You know, Jim, the way it works is when a decision is made by the board of directors, then we have a few days before we inform everybody, and so as the decision is made, we'll be sure to inform you. Okay. All right. Thank you. Our next question is from the line of Young Li with Jefferies. Please proceed with your questions. All right. Thanks for the follow-up. I guess, maybe just following up on the prior question, Jim's question. I guess, what is your capital allocation priorities after the balance sheet becomes stronger from the refinancing? Yeah. So right now, between now, say, next twelve months, our priorities are to continue to fund all of the business needs, operating needs, completely fund all the capital expenditure requirements. We are right now investing CapEx in India and also for automation in our factory in Salt Lake here. So beyond the operating needs, priorities are deleveraging. We expect to deleverage. The quantum of the deleveraging is yet to be decided, but we do want to deleverage in the next twelve months. And beyond that, I think, we would... Once we are at an optimal debt structure, which we have said in the past, you know, anywhere between $300 million-$350 million in total debt, once we are there, then I think we would be looking at growth opportunities in terms of M&A, and also further deleveraging at that time. So those are the two main areas of deployment of cash beyond operating needs, beyond the twelve-month timeframe. Okay, great. That's very helpful. Thank you very much. Thank you. Thank you. At this time, we've reached the end of our question and answer session. I'll turn the floor back to Christopher Belfiore for closing remarks. Thank you all for your questions and for participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived on our website. A replay of the quarterly conference call will be available through August sixteenth and can be accessed at vareximaging.com/investor-relations. Thank you and goodbye. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.