Varex Imaging Corporation

Greetings. Welcome to the Verix second quarter fiscal year 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Chris Belfiore, Director of Investor Relations. You may begin.

Good afternoon, and welcome to Verix Imaging Corporation's earnings conference call for the second quarter of fiscal year 2022. 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 Verix's website at veriximaging.com forward slash news. The webcast and supplemental slide presentation will be archived on Verix's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the second quarter of fiscal year 2022. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the second quarter of fiscal year 2022 to the first quarter of fiscal year 2022, rather than to the same quarter of the prior year. Finally, all references to the year are to the fiscal year and not calendar year, unless otherwise stated. Please be advised that during this call we will be making forward-looking statements, which are predictions or projections about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Item 1A, risk factors of our quarterly reports on Form 10Q and our annual report on Form 10K. 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.

Thank you, Chris, and good afternoon, everyone. We continue to see robust demand for our products in the second quarter of fiscal 2022 and achieved sales of $215 million despite ongoing supply chain constraints. The current operating environment remains challenging with persistent supply constraints, inflationary cost pressure, and continued COVID-related shutdowns outside the U.S. While we continue to work to mitigate these headwinds, They impacted our performance in the second quarter, and we expect this to continue in the third quarter. Despite these headwinds, we remain focused on delivering on our backlog while investing in innovation and being the partner of choice for our customers. Turning to the results, revenue in the second quarter increased 8% sequentially and 6% year-over-year. Revenue in both medical and industrial segment increased sequentially. Non-GAAP gross margin in the quarter was 34%, in line with our expectations as price actions helped offset some of the cost increases. Adjusted EBITDA was $38 million and non-GAAP EPS was $0.37. Our cash position remained strong at $115 million at the end of the quarter. Balance was down $43 million sequentially, driven by redemption of $27 million of our senior secured notes, as well as working capital investments. Now, based on a qualitative assessment, let me provide some high-level insights into the demand environment for our different modalities and applications during the quarter. Medical segment revenues increased 10% sequentially and 9% year over year. We continue to see robust demand globally for CT tubes. Demand was also strong in our other medical modalities, including fluoroscopy, oncology, radiography, dental, and mammography. In addition, all modalities posted improved revenues compared to the prior quarter and a year ago. Revenues in our industrial segment increased 3% sequentially and decreased 6% year-over-year compared to a very strong quarter in industrial last year. We continue to see strong demand for products for non-destructive inspection across several of our industrial verticals, including electronics inspection and aerospace applications. Similar to last quarter, we are experiencing improved demand for high energy sources and tubes for security screening. In previous quarters, we had mentioned that we had expected to see future demand as tender activity picked up. In the second quarter, we were pleased to see some of this activity translate into orders for us. In addition, we believe strong backlog at our customers bodes well for future growth in the security business. Last quarter, we provided details on some of our new products in the medical segment. We continue to see good traction with our customers and their response to our new products. In our tubes business, our high-performance x-ray tubes for cardiovascular applications continue to see good initial customer interest. One customer is getting close to a system launch, several others are evaluating integration and design options, and we continue to get positive reactions from additional OEMs. Our joint venture in Germany continues to make steady progress with nanotube technologies. As we noted in the first quarter, we signed a prototype development agreement with a medical customer and we shipped the first multimeter prototype to an industrial customer. We continue to work closely with this industrial customer as they work on integrating the prototype into their system and also shipped additional prototypes to the customer during the quarter. In detectors, our photon counting technology continues to make progress and is currently being utilized or evaluated in a number of medical modalities, including dental, radiography, and mammography. Due to its high frame rate imaging ability, we continue to see photon counting adoption in inline industrial inspection systems with automated detection. We are seeing increased orders from customers in Japan, Europe, and the U.S., for food inspection systems focused on foreign particle detection, as well as analysis of food content. Towards the end of this year, we expect to see additional customers launch new systems utilizing our photon counting detectors in food inspection and in battery inspection. We have had multiple design wins with our Z platform dynamic detectors, now called Azure, in mobile CRM and dental applications. We expect production of these systems and our product shipments to start ramping up in the second half of 2022. In addition, more customers are evaluating our prototypes with positive feedback. Separately, we're seeing good progress with the launch of our Lumen series RAD detectors. We are excited to see that the Lumen series is performing well and that several of our existing customers are migrating to this product. We expect to see more competitive wins with the Lumen series. As we have talked about for several quarters, we continue to see robust demand across the business. Strong order momentum continues, adding to an already solid backlog. Our customers' confidence in our ability to work through the current backlog through their issuance of new orders supports our expectations for a continued strong demand environment. Despite current COVID-related shutdowns in China, demand in China remains strong, especially for our CT tubes. Our investment in manufacturing capacity in Wuxi has enabled us to meet our Chinese OEMs' needs for local service and supply, which gives them a competitive advantage. We recently attended a medical imaging exhibition that is part of Japan Radiology Congress. We were happy to see that the conference was well attended by medical imaging OEMs, and we were able to connect live with many of our customers. Japan is the hub for many global medical and industrial imaging OEMs, and our discussion with them confirmed our perspective on the continued strength in CT and imaging systems for surgery. We also saw signs of demand recovery in the high-end cardiovascular systems, which had slowed down during the past two years due to COVID. There was also a growing interest and acknowledgement of the potential for photon counting technologies in medical imaging, confirming that our investments in technology are on the right path. As you're all aware, supply chain challenges continue to be a pressure point for Varix and many other companies globally. We continue to operate in a hand-to-mouth environment for certain components, like semiconductors and related electronics. This situation is further exacerbated by erratic vendor performance across the supply chain, which we expect will continue into the near future. Let me outline the measures that we are taking to respond to these challenges. First, We have increased inventory levels of key parts and materials. Second, we are redirecting our R&D efforts to redesign certain products and qualify new suppliers. Third, we are sourcing semiconductors from the spot market by paying higher prices. Fourth, we're prepaying certain vendors to improve the likelihood that we receive the material when we need it. Lastly, we moved shipments from ocean to air freight and are using expedited shipping. These measures helped mitigate some of the supply chain constraints in the second quarter, but at the expense of profitability. In summary, as we look forward towards the second half of the fiscal year, we expect supply chain volatility to continue. We're pleased to see robust demand for our products. Pending successful completion of supply chain diversification efforts, which are already underway, we expect fiscal 2022 to be another growth year for Verix. With that, let me hand over the call to Sam.