Greetings. Welcome to the Varex Imaging Third Quarter Fiscal Year '24 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 an 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 anticorruption 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 five-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 were in line with their sales trend. Sales in our radiographic modality were above their 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 continue 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 anticorruption 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 pretax 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 pretax income and favorable impacts of tax reform items and tax credits in the U.S. We expect a tax rate of 21% to 23% for the fourth quarter of fiscal 2024. Net earnings were $6 million, or $0.14 per diluted share, down $0.23 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 days 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 12 months adjusted EBITDA was $105 million and our net debt leverage ratio was approximately 2.4x on a trailing 12 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% to 34%; non-GAAP operating expenses in a range of $53 million to $54 million; interest and other expense, net in a range of $7 million to $8 million; tax rate of about 21% to 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.

And our first question today comes from Young Li with Jefferies.

I guess to start, I wanted to get a little bit more color on China. I mean, it's moderately improved sequentially, still down year-over-year, but seemed to be better than last quarter. So kind of bottomed last quarter. Just your comment on not seeing any improvements in the foreseeable future in China? Can you maybe reconcile that a little bit versus it's been a year since the anticorruption 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?

This is Sunny. I'll get started and ask Sam to give a little bit more color. So we did see slight uptick in our orders and sales from China, but 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, as we go into next year, 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 has many undefined aspects. So we are not seeing any direct impact of that yet. However, for us, any investment in health care that impacts purchasing of equipment is beneficial. On balance, we would say that the stimulus program should be good. 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. In terms of competition from Asia-Pacific players, we've talked about the competitive intensity in detectors in the past with Asian players. We're just seeing continued intensity of competition there, particularly in lower-end modalities such as radiographic and dental. In a market where demand is soft and muted, this isn't unusual, and we find more aggressiveness from our competitors in detectors.

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, we are not seeing it as a durable pattern. Also, while stimulus is positive news, we've had reports that the government has extended or expanded the anticorruption campaign from one year to three years. You are correct that we are now one year into the campaign, but with this new understanding that it’s extended gives us some pause. So we don’t expect meaningful improvement in the China business for the foreseeable future.

Okay. Great. Appreciate the color there. I guess for the follow-up, I was wondering if you could provide any early qualitative thoughts for fiscal '25. It seems like on the Medical side there, some of the inventory pressures might be easing. China is still a little bit of a black box, but Industrial seems to be doing well. So any high-level comments on fiscal '25 would be really helpful.

Yes, sure, Young. It's a bit too soon for FY '25 for us, but I would try to say that the China business has now been operating at a low level for almost 12 months. From that perspective, we expect '25 versus '24, 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. As Sunny said in his prepared remarks, we expect that situation to improve by the beginning of 2025. So at this point, we hope for a gradual improvement, and '25 should be slightly better than '24. But the China situation continues, and we are not incorporating that into our predictions for '25 at this point.

Our next question is from the line of Suraj Kalia with Oppenheimer.

This is actually Jacob on Suraj. So just quickly returning to 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 in a positive direction. So just wondering, what, if anything, had changed from Q2 to Q3? And I know you said in the foreseeable future, no improvement, but how does this push out expectations as we look past this fiscal year?

Yes, so as I said, Jacob, 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 orders are continuing to improve. So they are not worsening but have stabilized at low levels. We are obviously hoping for orders and sales to improve on a sustained basis, but that’s not what we are seeing. We want to stress that one quarter's data point is not an indicator for a sustained improvement here. Going into next year, we expect that next year will probably be in line with where FY '24 has been for us regarding China, and we aren't seeing significant improvements. However, we’ll continue to monitor the situation. It’s possible that after six or nine months, conditions improve, but this is our current perspective.

Great. 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 of the percentage of Industrial that is cargo and maybe what indications of stability there you see going forward?

Yes, so the Industrial business grew quite a bit last year, and this year, we expect it to grow compared to last year as well. There is decent traction there. Within Industrial, though there are pockets, particularly in semiconductors and electronics, where we are seeing some softness, predominantly due to capacity being digested as it was shipped. We are seeing some softness in the last quarter and this quarter. However, as we mentioned, the cargo business is strong, and we have reasonable visibility for that strength to continue over the next few quarters. In the fiscal year 2023 numbers for the cargo area, we previously disclosed that the cargo business proportion in our overall fiscal year sales has been increasing. I think you need to give us one more quarter when we complete our full year to disclose those proportions to you. But we did disclose FY '23 previously, and we expect that in FY '24, the cargo business proportion would be much higher than what it was in '23.

Our next question comes from the line of Jim Sidoti with Sidoti & Company.

I think what I hear you saying is the 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 levels, and we need to see very specific and definitive indicators before we can say that it’s going to improve on a sustained basis.

And Jim, our comment about the audit program continuing, that's our understanding is that the current audit is a drastic type of action. However, on an ongoing basis for at least two more years, there will be supervision over the purchasing process. This won't shut it down as it has happened thus far, but it will allow for ongoing purchasing at a much slower level. We haven’t 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?

Yes. That is part of our long-term strategy. We're making very good progress there. Last quarter, we provided some insight regarding what we expect its contribution to our growth in the longer term. That outlook remains strong for us, and we’re excited about it. However, in the near-term, once we get past these destocking levels, we are optimistic about our cost-reduction initiatives with our investments in India. We expect that to help us regain market share in radiographic, dental, and areas where we have lost share. We anticipate making those gains in the mid-term. Overall, all these investments and strategies, both in the near-term, mid-term, and long-term, look promising.

And then last one for Sam. What's the update on refinancing some of that debt?

Yes, sure. A few months ago, we completed the credit financing. We have sufficient flexibility around that. Our revolver and convertible bonds are maturing in June of 2025. So we have some time here. As we make a decision, we will be sure to inform you, but we currently have reasonable flexibility regarding refinancing.

Okay. And do you think you'll make that decision sometime in early 2025?

I cannot say at this time what the timing will be for that decision. Obviously, it will be before June, but you'll have to give us some time before we provide the final decision. Essentially, once a decision is made by the Board of Directors, we have a few days before we inform everyone. As soon as that decision is made, we will be sure to inform you.

At this time, we've reached the end of our question-and-answer session. And 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 supplements of slide presentation will be archived on our website. A replay of the quarterly conference call will be available through August 16 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.