Varex Imaging Corporation

Greetings and welcome to the VARIC's fourth quarter and fiscal year 2023 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce Christopher Belfiore, Director of Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Varix Imaging Corporation's earnings conference call for the fourth quarter of fiscal year 2023. 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 Varix's website at variximaging.com forward slash news. The webcast and supplemental slide presentation will be archived on Varix's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the fourth quarter of fiscal year 2023. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the fourth quarter of fiscal year 2023 to the third quarter of fiscal year 2023, 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 risk 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 fourth quarter earnings call. I'm pleased to announce another solid quarter for Verix. Revenue of $227 million in the quarter was a result of strong performance in our industrial segment, offset by lower revenue in China in our medical segment. Non-GAAP gross margin of 36% and non-GAAP earnings per share of 45 cents exceeded our expectations. Revenue in the fourth quarter decreased 2%, both sequentially and year over year. Revenue in the medical segment decreased 7% sequentially and 10% year-over-year, while industrial segment revenue increased 12% sequentially and 27% year-over-year. Non-GAAP gross margin of 36% was solid in the fourth quarter and above the high end of our expectations. This was primarily due to a beneficial segment and product mix led by higher proportion of industrial sales, as well as further realization of results of our pricing initiatives. Adjusted EBITDA in the fourth quarter was $38 million, and non-GAAP EPS was $0.45. We ended the fourth quarter of the fiscal year with $195 million of cash, cash equivalents, and marketable securities on the balance sheet, which was $42 million higher sequentially and $82 million from the fiscal 2022 year end. The increase was primarily due to higher profitability and a reduction of inventory in the quarter and year. Let me give you some insights into sales detail by modality in the quarter compared to a five-quarter average, which we refer to as the sales trend. In our medical segment, global sales of CT tubes remain flat compared to the trend in the quarter, as the lower sales in China was offset by strength in the rest of the world. Mammography remains strong with sales above the trend in the quarter. Oncology improved in the quarter and was above its sales trend. Fluoroscopy remained flat while radiographic sales were below the trend in the quarter. Dental remained soft and was also below the sales trend in the quarter. We saw strong performance in our industrial segment with record revenue of $64 million in the quarter. Non-destructive inspection, specifically cargo screening, was a bright spot for the industrial segment Similar to last quarter, we also continue to see increased adoption of photon counting detectors across various industrial verticals, including food, battery, and electronics inspection. Our medical segment finished the fiscal year at $673 million in revenue, which was flat year over year, and represented approximately 75% of total Barrick's revenues for the year. The global CT market continues to be a significant driver of overall sales, accounting for nearly 40% of medical sales in fiscal 2023. We expect CT to continue to be a key driver of our medical sales as developing countries expand their healthcare services. In addition to the new installations and upgrades, we expect replacement tubes sold into our extensive and growing installed base to provide solid baseline for future CT tube sales. Our photon counting technologies continues to gain OEM interest and we are working with several of our customers on a range of potential medical applications for photon counting, particularly where speed and high contrast imaging can make a difference. We expect photon counting technologies to once again be a main focal point at RSNA's show in a couple of weeks, and we believe our position at the table is very strong. While there are many potential medical applications for photon counting technology, Use of photon counting detectors in CT is a significant focus for our customers, and we are actively engaged in their design discussions. We look forward to meeting with our customers and colleagues in Chicago at RSNA to discuss how we can enable their innovation and imaging. Moving to our software business, I'm happy to say that our majority-owned subsidiary, Mevis Medical Solutions, recently received US FDA 510K clearance for an innovative new software product named MEVIS Liver Suite. This is an AI-based software application which enables physicians and radiologists to create detailed visualizations and volumetric quantification for evaluation of liver surgery strategies, treatment planning, and post-procedure follow-up assessment. The innovative AI-based software technology and 3D medical visualization-driven approach is applicable to both CT and MR imaging, and can help daily workflow for liver surgery and post-procedure evaluation. Let me turn now to our industrial segment. In the recent quarters, the strength of our industrial segment has been a highlight for Verix. In fiscal 2023, our industrial segment grew to $220 million in revenue, up 19% year over year, and accounted for approximately 25% of total Verix revenue. This growth has been due to broad-based strength in various non-destructive inspection verticals, driven by our investment in X-ray tubes, linear accelerators, as well as photon counting detectors. In the past, we expressed intention to provide more integrated solutions, including full systems, to our customers across various industrial verticals. One of the verticals we highlighted was irradiation of consumer-facing goods like packaged foods, or plant products. Today I'm excited to announce a new industrial irradiation system that we will offer directly to end customers that is a novel application of our X-ray technology. We expect system solutions to potentially add nearly a billion dollars to our addressable market within five years. This new irradiation system, XR-Pure, offered by one of our subsidiaries can be used to reduce microbial loads in agricultural and other products. One of the applications of this system is for decontaminating cannabis, which is becoming a significant market in the U.S. Across the United States, where cannabis is legal, state regulators have established limits on various types of microbial contamination in the interest of public health and safety. Cannabis growers are therefore required to submit a sample from each batch grown to be tested for microbial load before the product can be sold. This process is critical to growers as a failing cannabis lot can potentially lead to financial and reputational issues, as well as patients' health and safety concerns. There are many benefits of using X-ray irradiation to decontaminate an organic product. Traditional decontamination methods may use chemical or heat-based technologies, which can degrade the end product. In contrast, X-ray irradiation decontaminates the product by killing the microbes and pathogens without compromising the efficacy of the product. Cannabis cultivation for both medical and legal recreational uses has grown significantly in the United States over the last several years. With an estimated 13,000 growers nationwide, we believe the addressable market for cannabis irradiation using X-ray technology is approximately $225 million per year and growing at double digits. With a subscription model for XR-Pure, we expect to be able to reach a run rate of $25 to $50 million in annual revenues in the next five years. We believe our advanced X-ray technology can make XR-Pure a significant player in this space. In the coming weeks, our team will commercially launch the XR-Pure product at the 12th annual MJ BizCon show, which is the largest cannabis conference and expo in the world. We are very excited at the potential of this new system and believe this is just one of the many applications where x-ray irradiation can be utilized. If you'd like to learn more about XR-Pure, please visit the website at www.xrpure.com. In fiscal 2023, we made solid progress with innovation, strengthened our financial position, and generated solid cash flow. As we look to fiscal 2024 and the future of Verix, we remain focused on executing on our existing and new initiatives to drive profitable growth and continued free cash flow generation. We are expanding investment in our industrial segment where new technology tends to be adopted at a much more rapid pace. Much like what we have done with our photon counting technologies, we believe we can leverage the more rapid adoption and feedback from industrial customers to accelerate development of new products in medical. As we highlighted earlier, there are many applications of our X-ray technologies across the industrial landscape, from non-destructive inspection to decontamination of organic products. Our intention is to invest in full systems in select industrial verticals that can create differentiated workflow solutions. In due course, we will share more with you as we continue to make progress on this initiative. We intend to continue to invest in photon counting technology, which is gaining solid traction across our non-destructive inspection applications in our industrial segment, and expand its use in medical applications. Photon counting CT detectors is an example of an application that can become a potentially meaningful growth driver for us in the future. Similarly, we're taking a page from our playbook in China and investing in our future in India. We intend to leverage the local for local approach to engage emerging local OEMs and build our footprint in India. We're making progress with our efforts and expect to manufacture tubes and detectors in India in the next 18 months. India is a very large end-user market for diagnostic imaging where modality penetration per million of population is very low. The Indian government has made a public commitment to expand healthcare services and gain independence in medical device technologies. We see new OEMs emerging in India, making it an attractive market for us to invest in a local presence to seek out new OEMs and to grow with them. We improved our gross margins in fiscal 2023 with our pricing initiatives. We expect to continue to see gross margins improve for the full fiscal 2024 as select pricing actions are implemented. Our freight-related expenses as well as efficiencies across our manufacturing platform continue to be a tailwind to overall gross margins. We are pleased with our inventory reduction efforts in fiscal 2023, and we remain focused on further reducing inventory levels in fiscal 2024. Ultimately, our goal is to maintain efficient inventory levels associated with demand and new product introductions. Finally, fiscal 2023 was a record year for Verix in terms of cash generation. With initiatives around margin expansion and inventory management, we expect to see continued cash generation going forward into fiscal 2024. While there are some challenges to growth in China in fiscal 2024, which we will touch on in a bit, we are well positioned to navigate these uncertainties while continuing to support our customers. With that, Let me hand over the call to our CFO, Sam.