Varex Imaging Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 9 speakers on the call.

Operator

Welcome to the Verix Third Quarter Full 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. Please note this conference is being recorded. I will now turn the conference over to your host, Christopher Belfry, you may begin.

Speaker 1

Good afternoon, and welcome to Barrick Imaging Corporation's Earnings Conference Call for the Q3 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 atverixwebsite@veriximaging.com. 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 Q3 of fiscal year 2023.

Speaker 1

In addition, unless otherwise stated, quarterly comparisons are made sequentially from the Q3 of fiscal year 2023 to the Q2 of fiscal year 2023. 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 and 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.

Speaker 1

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 ks. 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.

Speaker 2

On today's call, we will

Speaker 1

discuss certain non GAAP financial measures. These non GAAP measures are not presented in accordance with, nor are they a substitute for, of GAAP Financial Measures. We provided a reconciliation of each non GAAP financial measure to the most directly comparable GAAP financial measures in our earnings press release, which is posted on our website. I will now turn the call over to Sunny.

Speaker 3

Thank you, Chris, and good afternoon, everyone. I'm pleased to report another solid quarter for Varex. Revenue of $232,000,000 in the Q3 of fiscal 2023 is a new quarterly record for us. Non GAAP gross margin of 34% exceeded our expectations And non GAAP earnings per share of $0.37 was at the high end of our guidance. These results were helped by continued strength in our Industrial business.

Speaker 3

In addition, we increased cash by $30,000,000 in the quarter, primarily driven by diligent inventory management and increased profitability. Revenue in the 3rd quarter was up 2% sequentially and 8% year over year. Revenue in the Medical segment increased 1 and 5% year over year, while industrial revenue increased 5% sequentially and 20% year over year. Non GAAP gross margin in the 3rd quarter was 34%, which was better than our expectations and up 100 basis points compared to the 2nd quarter. Was $38,000,000 and non GAAP EPS was $0.37 We ended the 3rd quarter with $152,000,000 of cash, cash equivalents and marketable securities on the balance sheet, up $30,000,000 from $122,000,000 in the prior quarter.

Speaker 3

This was primarily due to higher profitability and $13,000,000 reduction in inventory in the quarter. 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. In our Medical segment, global sales of CT tubes was solid in the quarter and remains above its sales trend. Our fluoroscopy and oncology modalities improved in the quarter, but were flat compared to their respective sales trends. Mammography was solid in the quarter and above its sales trend.

Speaker 3

Dental, which can be lumpy from quarter to quarter, remained down in the 3rd quarter, but it's trending in a more positive direction and Radiographic continues to grow above its sales trend. Global sales of our industrial products were robust for the 2nd straight quarter and order intake remained solid. The continued strength was primarily in our non destructive business across various applications, including cargo screening and oil and gas. We also saw increased adoption of our photon counting technology with growth in food, battery and electronics inspection in the quarter. Taking a step back from the quarter, I'd like to provide a brief update on some of our products we introduced over the last year.

Speaker 3

Our dynamic detector platform, Azure, continues to make solid progress with our customers who are integrating these detectors into various systems, including those for cardiovascular and surgery applications. The Azure platform is a cost effective, high performance dynamic detector technology aimed at enabling us to secure design wins for dynamic applications. These detectors are targeted at expanding our applications footprint in our new and existing customers. It offers high resolution and high performance at lower x-ray dose than its amorphous silicon equivalent and is a cost effective alternative to CMOS detectors, which become expensive at larger sizes. We expect to see continued adoption of Azure and expect that many new system launches by our customers in the coming years We'll design in our Azure detectors.

Speaker 3

Since its launch in 2022, we have seen strong interest in this platform and we are happy with how At the same time, we are seeing continued uptake of our lumen detectors. We now have a full portfolio of Lumen detectors used across various modalities, including dental and fluoroscopy. We recently also introduced Lumen detector models made in our factory in China for sales in global markets where there are no political or economic barriers to sales of products made in China. We expect to see shipments of Lumin detectors made in our factory in China starting in October of this year. Lumin platform offers a U.

Speaker 3

S. Designed detector for radiographic applications at a globally competitive price and is targeted at expanding our coverage of these applications. Our Industrial business has seen solid growth this year, partly due to strength in our non destructive inspection applications, which utilize our linear accelerator products, also referred to as LINAKs. These are high power x-ray sources that are used in inspection of large objects such as cargo containers, automotive parts, jet engines, and rocket motors. We're excited to say that this technology was used in the manufacturing of India's Chandrayaan-three Rocket, which is carrying a rover to the moon.

Speaker 3

Barrick's linacs were used to inspect the integrity of the rocket motors, propellant tanks and detecting voids, cracks and other abnormalities. Varex is the world leader in high energy linear accelerators for industrial applications. We worked with various rocket manufacturers in the U. S, Europe and Japan, and now we're proud to support India's growing space program. In summary, we're very happy with our performance in the Q3.

Speaker 3

And now I will turn over the call to Sam to go over details of our financial results.

Speaker 2

Thanks, Sunny, and hello, everyone. As a reminder, unless otherwise indicated, I'll provide sequential comparisons of our results for the Q3 of fiscal 2023 with those of our Q2 of fiscal 2023. I'm pleased to report another strong quarter. We exceeded the midpoint of guidance for revenue. Gross margin was above the guided range and non GAAP EPS was towards the high end of guidance.

Speaker 2

The primary driver of the strong performance was the continued execution in our Industrial segment. As a result, we reported sales of $232,000,000 and non GAAP gross margin of 34%. Non GAAP EPS was $0.37 Further, we generated $38,000,000 of operating cash flow in the quarter, our 2nd highest cash generating quarter as a public company. 3rd quarter revenues increased 2% compared to the Q2 of fiscal 2023. Revenues increased 8% compared to Q3 of fiscal 2022.

Speaker 2

Medical revenues were $175,000,000 and industrial revenues were $7,000,000 Due to the ongoing strength of the Industrial segment, Industrial revenues climbed to 24% of our total revenues for the quarter. Medical revenues were 76%. Looking at revenue by region, Americas increased 8% sequentially, While EMEA increased 10% and APAC decreased 10%. China was 18% of the overall revenue for the quarter. Let me now cover our results on a GAAP basis.

Speaker 2

3rd quarter gross margin was 33%, 100 basis points higher sequentially. Operating expenses were $52,000,000 down $5,000,000 compared to the Q2 of fiscal 2023 And operating income was $24,000,000 up $8,000,000 Net earnings was $9,000,000 and GAAP EPS was $0.21 based on fully diluted 50,000,000 shares. Please note that GAAP and non GAAP EPS for the 3rd quarter reflect the adoption of ASU 2020-six. This involves an add back of $1,400,000 of after tax interest expense for us to our net earnings and adds approximately 10,000,000 shares to the diluted share count. Moving on to the non GAAP results for the quarter.

Speaker 2

Gross margin of 34% was up 100 basis points sequentially, driven primarily by higher pricing, Higher proportion of sales in higher margin industrial segment and a favorable experience in freight expenses. R and D spending in the 3rd quarter was $20,000,000 down $3,000,000 compared to the 2nd quarter. This was due primarily to $2,000,000 of payments related to technology milestones made to MicroX in the Q2 of fiscal 2023. Overall, R and D was 9% of revenues within our targeted SG and A was approximately $29,000,000 flat compared to the Q2. SG and A was 12% of revenues.

Speaker 2

Operating expenses were $49,000,000 or 21 percent of revenue. Overall, our operating expenses were slightly above our expectations. Operating income was $29,000,000 up $6,000,000 sequentially. Operating margin was 13% of revenue compared to 10% in in the Q3 of fiscal 2023. Tax expense in the Q3 was $5,000,000 or 21 percent of Pretax income compared to $4,000,000 or 28% in the Q2 of fiscal 'twenty three.

Speaker 2

Net earnings were $17,000,000 or $0.37 per diluted share, up $0.11 sequentially. Non GAAP EPS of $0.37 is calculated by adding after tax interest expense of $1,400,000 to net earnings of $17,000,000 and the result is then divided by 50,000,000 shares. Now turning to the balance sheet. Accounts receivable increased by $3,000,000 from the prior quarter and DSO held steady at 64 days. Inventory decreased $13,000,000 in the Q3 and days of inventory decreased 8 days to 174 days.

Speaker 2

We are pleased with the progress in reducing inventory and Expect this to continue in the Q4 of fiscal 'twenty three. Accounts payable increased by $1,000,000 and days payable stood at 44 days. Now moving to debt and cash flow information. Net cash flow from operations was $38,000,000 in the 3rd quarter due primarily to profitability and $13,000,000 reduction in inventory. We ended the quarter with cash, cash equivalents and marketable securities of $152,000,000 an increase of $30,000,000 from the Q2 of fiscal 'twenty 3.

Speaker 2

Gross debt outstanding at the end of the quarter was $449,000,000 And debt net of $152,000,000 of cash and marketable securities was $297,000,000 Adjusted EBITDA for the quarter was $38,000,000 or 16 percent of sales. Our net debt leverage ratio was 2.3 times, Trailing 12 months of adjusted EBITDA at the quarter end. Now moving on to guidance. At the beginning of the second half of fiscal 'twenty three, we provided guidance for sales growth for the year of 3% to 5%, and we expect to be in that range. Here is the guidance for the Q4.

Speaker 2

Revenues are expected between $220,000,000 $240,000,000 And non GAAP earnings per diluted share is expected between $0.20 $0.40 Our expectations are based on non GAAP gross margin in a range of 33% to 34%, non GAAP operating expenses in a range of $49,000,000 to $50,000,000 Tax rate of about 25% for the 4th quarter, non GAAP diluted share count of about 50,000,000 shares per ASU 20 20-six. With that, we'll now open the call for your questions.

Operator

Thank you. At this time, we will be conducting a question and answer session. Our first question comes from the line of Suraj Kalia with Oppenheimer and Company. Please proceed with your question.

Speaker 4

Hi, Sunny, Sam, can you hear me all right? Yes, we can, Suraj. How are you? Doing well. Gentlemen, congrats on a really nice quarter.

Speaker 4

So Sunny or Sam, either one. Specifically on medical, Sunny, one of the things that I know you have talked in the past numerous times And I know, for example, GE is also talking about photon counting detectors as a key thing Being viewed. Sunny, if you could, I'd love to understand how should we adjudicate photon counting adoption And competitive dynamics and maybe if you could give us some aerial snapshot Where worldwide photon counting sales are if Varex fits in that pie?

Speaker 3

Sure, Suraj. So photon counting is an emerging technology, and it's in the process Gaining reputation in the market and it's only the last, let's say, 18 months or so that in the medical field, it has been publicized quite a bit for CT type of applications. So from our Perspective, where we we're excited about it because we went into photon counting in anticipation of Solid capabilities that would bring value in Medical CT and now we're seeing the industry also starting to move in that direction. We are present with Photon Counting in 2 markets, industrial and medical. The adoption cycle in industrial is has been faster than in medical so far.

Speaker 3

And so part of our strength in industrial this quarter was also driven by use of photon counting detectors in a few applications like food processing, battery inspection, etcetera. So we're excited to see Photon County get traction. It's getting traction in industrial faster. We have some OEMs who are engaged in the use of photon counting in medical OEM medical applications. And more recently, we've started gaining fairly good interest from the market with the use of CT.

Speaker 3

So that said, this is a novel platform, and we've said that our expected contribution

Speaker 2

to their to growth in

Speaker 3

the medical side is still several years away, while the market absorbs these technologies into their newer designs. So that's where we stand. We're excited about the technology. It's moving forward, and we're glad to see some of the major OEMs also lining up behind it because that's what then makes the adoption increase.

Speaker 2

Yes. And then Suraj, I'll add that as of now, our photon counting and charge integration combined, That business is right now generating about $20,000,000 of sales annualized, and we are seeing growth there. So just wanted to give you that perspective of where we are with this technology as of now revenue wise. Perfect.

Speaker 3

Yes, that is really helpful.

Speaker 4

Sunny, one more question for you and one for Sam. Sunny, if you could, status on coal cathode And also MIC China 2025, what are the dynamics there currently to the extent that you can share? And Sam, any updates and forgive me if I missed this, we have multiple calls going on. Just in terms of inventory And your gross margin, your pace of growth of GAAP gross margins, how should we think about it as we exit this year And going into, let's say, first half of twenty twenty four. Gentlemen, thank you for taking my questions and congrats again.

Speaker 3

Okay. So Suraj, with respect to cold cathodes, just like I said, with photon counting, new technology takes time to adopt. An adoption curve there is further along than with cold cathode Nanotube Technologies. Nanotubes are much newer and The industry is trying to figure out what kinds of applications would be applied to it. So again, From our perspective, from a revenue contribution perspective, that's further out than photon counting.

Speaker 3

Where we are with that technology is, We're continuing to make progress on the product development and developing making tubes with that technology. Our technology transfer from MicroX has gone very well. We are continuing to do with that work, and we're continuing to evolve that technology. We have continued to make prototypes with our joint venture partner and now we're working through some commercial aspects of our relationship. In short, from our perspective, we're making good progress with the technology.

Speaker 3

We're happy with the technology. And we're seeing now Customers starting to get engaged to get their head around how they might think about applications for this technology.

Speaker 2

Okay. And then coming back To your question, Suraj, on inventory and gross margin. So in terms of inventories, as you know, we've been trying to bring inventories down, and we are very pleased with the progress that we made in this last quarter. We brought inventories down by $13,000,000 and our focus on that continues. We are expecting inventories to come down further.

Speaker 2

We are working in that direction. So in the next 3 months 6 months, we should be bringing inventory further down. We are not guiding by how much the amount we are not guiding the amount that we are targeting to bring down, but I think we have some room to bring it down further. And then in terms of gross margin, we've made good progress in this last quarter. I would say That gross margin has benefited through various initiatives of ours.

Speaker 2

Manufacturing efficiencies have come back in. Freight environment has generally been favorable in the last quarter. And as I talked about, price Cost drag has been minimized, but there are still we are still suffering through some Continued price cost drag onto the P and L, and we have some high cost components in our inventory, and we are expecting them to Fully work their way through the system by December, January time frame. So at that point, I'm thinking of a further pickup of, say, around 100 basis points in gross margin further. So that is how gross margin picture is shaping up, and we remain committed to our target of Getting to a non GAAP gross margin somewhere between 34% 35%.

Speaker 3

Suraj, you also asked about China 2025, I didn't understand the first word that you said with it, MIC. I wasn't sure what that what you meant by that. But As far as China 2025 is concerned, we began our journey to address the needs requirements for China 2025 a few years ago. And what we're taking 2 different oh, I see, Made in China. In terms of our Approach to it, we started with our facility in Wuxi to make products local for local in China, and That has been we started with tubes.

Speaker 3

We've expanded to detectors, and now we're making Very large number of tubes and detectors in China. We are so the couple of things are happening. Our strategy for China 2025 is to get our products registered with and Such that we can get the Made in China labeling, which is where we are currently. And we're continuing to expand the portfolio of products that Two products that we sell in China to be made that way and have carried that kind of a label. In addition, we've been Expanding our local commercial relationships in China so that we contract locally with our Wuxi office, our Wuxi facility to handle both shipment of new products, but then also warranty, service, support and all the things that you would expect out of a supplier that's based in China for the Chinese manufacturers.

Speaker 3

And so our expectation is by 2025, vast majority of the products that we sell in China Will be may will be can be supplied from China. That's the approach we're taking. We have validated this approach with our global OEMs and with the local OEMs to see their level of comfort in what we're doing. We seem to be in alignment with what they're expecting from us for China in 2025.

Speaker 5

Thank you.

Speaker 6

Our next question comes

Operator

from the line of Larry Solow with CJS. Please proceed with your question.

Speaker 6

Great. Thanks. A couple of follow ups to Suraj's questions and a couple of New ones as well. Just on the sorry, you mentioned or I think Sam might have mentioned, on the full time counting, it's about $20,000,000 in sales Today, so that's about 2% of sales. Just trying to get a little my hands is around like, you have like Figure of sort of new products or products introduced in the last 3 years and how much they represent of your total sales today.

Speaker 6

I imagine it's still under 5%. Is that fair to say?

Speaker 2

Larry, this is Sam. In terms of the revenue related to new products and new products which is over the last 3 years from that perspective.

Speaker 6

Or whatever stat you might have. Yes. Whatever that. Yes. And I don't know how you guys look at that, but I'm just trying to get a sense Products introduced over some newer period, whether that's 1 year, 3 years, 5 years and sort of how much Revenue that's contributing today and maybe what that could be in 5 years?

Speaker 2

Yes. So Larry, I do not have that number off the top of my head here right now. But I do want to qualitatively say that in our business, once we release the product, it goes through a pretty reasonable Fairly long adoption cycle in the sense the product has been released and that customers are trying to make it into their product and then they release their product. And when that customer's product picks up volume, that is when we see volume. So it is quite normal and natural in our business that for Quite some time and that quite some time could easily be 2 years, 1 to 2 years easily, where the product has been released and it It's not generating a significantly high amount of revenues.

Speaker 2

So from that perspective, for the 1st 3 years of product release, we may not be seeing a whole lot of revenues and so we do not track it that way, but we can figure that out for some other conversation In future, I think in our business, it will make more sense in terms of thinking more from a 5 year horizon perspective.

Speaker 3

We can talk about it

Speaker 2

at some other later call.

Speaker 3

Larry, I

Speaker 2

don't have that right. Okay.

Speaker 3

So Larry, I can give Yes. Let me give you one frame of reference.

Speaker 6

Yes. Go ahead, please. Sorry.

Speaker 3

One frame of reference. You may recall, When we spun off, at that time, there were we had a lot of discussions about China and CT tubes in China and the contribution of Revenues from those, it's been now 6 years. And at that time, those tubes were designed. And we recall, we said our OEMs We're implementing them, designing them in. We are now 5, 6 years into that journey and now you see what our China revenues are.

Speaker 3

That's sort of a you can have as a frame of reference.

Speaker 2

What happens when we launch products? How long does

Speaker 3

it take? And once we do, what kind of volume sort of to expect in an active market?

Speaker 6

Yes. No, I appreciate that color. And Sunny, yes, no, I appreciate that. And while I got you on that, so the 18% that you referenced Sam referenced as coming from China. Is the vast majority of that today in CT tubes?

Speaker 3

It's in tubes, yes. And majority of tubes is CT tubes for us there. Right.

Speaker 7

Okay. Right. Okay. Dan, did

Speaker 6

I cut you off there? Maybe you were going to say something else. No, that's it. Okay. And then just to follow-up on the margin question.

Speaker 6

I guess early in the year, I think you guys sort of cited price to cost lag, Inflation or I guess price to cost lag maybe tied with inflation because you're trying to catch up with price raising, but also some supply chain I think you sort of said you were you felt there was like a 400 to 500 basis points Tailwind on EBIT, adjusted EBIT margin. We how far along are we? You kind of mentioned you have like another 100 bps on gross margin. And if I just look at what you did this quarter versus what you did in Q1, you're sort of 400 bps higher. So Does that kind of capture that 400 to 500 bps that you spoke about in Q1?

Speaker 6

Can we get more as we look out? How should we view that?

Speaker 2

Yes, Larry. So, 6, 9 months ago when we talked about it, there were a number of things that For headwinds and slowly, we have been working on it, including freight and manufacturing efficiencies and supply chain driven issues, etcetera. A lot of them are now back to the pre crisis or pre COVID crisis type of levels. So I would say at this point, there is still 100 to 200 basis points of improvement possible from where we are here. But I would say more closer to 100, 150 basis points.

Speaker 2

You might see some noise here and there from quarter to quarter. And we are working through it. But a lot of these other factors have now actually been recovered or we have Already, those are we are behind it and that is the cause of the margin improvement.

Speaker 6

Fair enough. So you sort of signed that 100 bps on So it feels like once you hopefully get that sometime maybe by the end of the calendar year, and maybe there's a little bit more on the operating end. But Going forward beyond that, it would just have to be new products driving higher prices or operating leverage, I guess, right?

Speaker 2

Yes. There will be 3 things, Larry. One is what you said exactly, sales volume. 2nd will be the and that will drive the operating leverage. And then the new products will be a major factor in that.

Speaker 2

And the 3rd element there is the segment mix. As industrial becomes a higher portion of The business then it has a positive gross margin effect on the overall margin.

Speaker 6

Got it. Okay. Let me just squeeze in one more question. Just on the guidance, I guess the gross margin maybe down a little bit because you had a nice quarter mix This quarter and usually Q4 medical is usually stronger, seasonally stronger, that's a little bit lower margin. But if I'm just trying to figure out how come As we look out to Q4, I thought seasonally and with medical being stronger and being majority of revenue, Usually you have a better Q4 than Q3.

Speaker 6

Is there any reason why we're kind of at the same guidance range or is it anything missing

Speaker 2

Yes, sure. So Larry, I'll let me take that question for you, 3. So if you look at our 2nd half of FY 'twenty three versus the first half of FY 'twenty three, we are up around 7%. If you look at Last year, second half to first half, we were about 8%. So I would say if you look at it a little bit broader than the quarter, we are pretty much showing the Same pattern, but within the quarter, what can end up happening is $2,000,000 $3,000,000 $4,000,000 comes into this quarter versus the next quarter and so that Can give that optics of quarter to quarter.

Speaker 2

But if you look at it from a half versus half, we are pretty much doing what we said. And then also for the full year, we kind of guided 3% to 5%. And at the midpoint here, we are looking at 4.3% or Something for the full year growth. So essentially, from our perspective, we are achieving what we set out to do for FY 'twenty three, But then a couple of 1,000,000 here and there between the quarters can have that optics effect.

Speaker 6

Got you. Fair enough. I appreciate all the color. Thank you.

Speaker 2

Thank you, Larry.

Operator

Our next question comes from the line of Young Lee with Jefferies. Please proceed with your question.

Speaker 5

All right, great. Thanks so much for taking our questions. Maybe to start on the Industrials performance, good to see the Continued growth and margin contribution there. I guess I'm wondering if you can maybe talk a little bit about the Sustainability of the growth trend, your visibility into the ordering patterns there. And is this sort of Are we still in the early innings of a multiyear growth cycle for industrials?

Speaker 3

So industrial has been strong for us, and it has been I think post COVID, it has come back and been consistently strong and it has been growing. So we're very pleased with it. We're also at a point where, there are certain segments of the market that are We're adopting imaging fairly rapidly, and so we continue to be benefit from that effect. So look, we're fairly optimistic about continued adoption of technology in industrial. And it seems to be There are parts of that industry that are tender driven that can be lumpy, but non destructive inspection in General industrial areas are fairly have been fairly steady and strong for us.

Speaker 3

So I'm optimistic about the long term Prognosis because it's largely a greenfield market. It's also it's growing faster than medical as well as we've discussed in the

Speaker 5

past. Okay, very helpful. I guess my follow-up just On China, 18% of revs that implies, I guess, low single to Mid single digit growth year over year, that's below the historical growth trend. Would be great if you can provide some more color on the growth that you saw this quarter. How did it perform Relative to your expectations and what's the outlook for growth for China going forward?

Speaker 2

Yes, sure, Yung. So China performed as per our expectations. There was neither a positive versus expectations or a negative in this last quarter. And then coming back to your question of year over year growth, I would say that the numbers for China are now becoming Fairly are becoming reasonably large for us. So the law of large numbers as well as is coming in as well as You know, it's difficult for a region to continue to grow 15%, 20% ongoing basis, but even smaller percentage is now reasonably large size in terms of the dollar amount.

Speaker 2

So you are seeing year over year growth kind of moderate, but we are seeing strength But in terms of percentages, that strength is moderating, which is natural. And we have talked about this in the past that Over time, China growth will fall back in line with the rest of the world, but there is still some more room to go there in terms of China growing faster than the rest of the world. So China is as of now, China is Behaving and sales are happening like how we would expect it to do.

Speaker 5

All right. Thank you very much.

Operator

Our next question comes from the line of James Sidoti with Sidoti and Company. Please proceed with your question.

Speaker 7

Hi, good afternoon and thanks for taking the questions. Can you talk a little bit about inventory at your Medical OEMs, I know at the beginning of the year you were worried that because they were having supply chain issues that they maybe had an oversupply of your And might be cutting back. Now 6 or 8 months down the road, Have those supply chain issues subsided and where is inventory of your products at the OEMs?

Speaker 3

So hi, Jim, this is Sunny. I'll generalize. Yes, a couple of quarters ago, there was a there were some acute problems with some of our OEMs with Getting their factories to flow because of supply chain issues and they had huge backlogs and there were some amount of our products that were in inventory. And you may recall that's why our Q1 was faced a lot of stress as a result of that. But since then, the flow seems to have improved through the production environments of our customers, and they're not declaring victory yet.

Speaker 3

There's still supply chain issues, Spotty and we are seeing those as well. While broad based supply chain issues have been have eased, there are still spots where we get Fewer vendors, but there are situations where things get caught up. So it's not fully out of the woods yet, But I would say that the overall inventory levels of our product, let's say, Our customers are lower than where they were in, I'd say, a couple of quarters ago.

Speaker 7

Okay. And then one of the other concerns you had 2 quarters ago was hospital capital spending. You thought it might slow down because of the economic uncertainty. And Again, 6 months down the road, it seems like the recession may not be as bad as we thought initially. Have you seen pressures there subsided as well?

Speaker 7

Have you seen hospitals more willing to step up their capital spending?

Speaker 3

What we are seeing is that the labor related costs Are easing up and increasingly we're hearing hospitals doing better with their use of temporary labor. So We see that as a positive. That increase improves profitability. We've also seen some amount of buying continued buying by hospitals. So it's I'd say it's more positive than it was before.

Speaker 3

But beyond that, it's hard for us to speculate what that environment looks like, particularly on a generalized global basis. These things Very by geography.

Speaker 7

Okay. All right. And then I'll just sneak in one more on the balance sheet. Prepared expense and other current assets that was up about $15,000,000 $16,000,000 in the quarter. Is that where some of the cash is?

Speaker 2

Yes. Jim, I just want to make sure I hear it correctly. Did you say prepaid and other current assets?

Speaker 7

Right.

Speaker 2

Yes. Some of the cash because it is beyond 90 days is considered other current assets and that's where it is, yes.

Speaker 6

Okay. All right.

Speaker 7

Is there any other reason why that was up so much in the quarter or is that just the basically the cash equivalents?

Speaker 2

That is basically the cash equivalents. Now it might be a few $100,000 here on there, a noise level change, but most of it is the cash

Speaker 7

Right. Okay. All right. That's what I thought. I just wanted to make sure.

Speaker 7

All right. Thank you.

Speaker 2

Thank you.

Operator

And our next question comes from the line of Anthony Petrone with Mizuho Securities. Please proceed with your question.

Speaker 8

Thanks for questioning me in here. Just manufacturing mix, just kind of want to get an update on what amount is actually being Produced at a Wuxi versus Salt Lake and how that influences margin, overall gross margins. And then as we look ahead over the next couple of years, where can that mix trend? And I'll have one follow-up question.

Speaker 2

So Anthony, this is Sam. Good to hear your voice. So in terms of Wuxi production, Wuxi In the overall scheme of things, even as of now, is a smaller site for us. I would say about Closer to 70% of value or revenue volume is done through Salt Lake City and the remaining is done through Germany, Philippines, Netherlands and Wuxi. So that gives you a little bit of a perspective.

Speaker 2

I would say it is still on an annualized basis Less than 10% of our overall revenue volume going through Vushi. So that gives you a little bit of a perspective there. And then in terms of overall gross margin, it just depends From what type of modality that we are shipping from there and it can change. So it is not something which is due to Labor difference or anything else, it gets impacted largely depending upon which customer, what modality that we are shipping from Wuxi This is Salt Lake City. So it's a little bit of a hard question to answer.

Speaker 2

It can vary from quarter to quarter.

Speaker 8

And maybe just an update on the mix between tubes and flat panel detectors, other components. Last year, Extending maybe even 18 months ago, there was pressure in pricing on flat panel detectors, but CT tubes in particular were holding price Quite well. So anything of note on the pricing side between tubes and flat panel detectors as we look into the Back half of the year, maybe even into 2024. But thanks again for taking the questions.

Speaker 2

Yes. So in general, a few years ago, I would Say our business used to be 45% sources, 45% panels and detectors and 10% would be Connect and Control or CNC and Software. As of now, I would say we are around 10% CNC and Software, But that the 90% split, which used to be equal between sources across Industrial and Medical segments used to be 45% 45%, but now that has moved 50% towards tubes and 40% towards Panels driven by the factor that tubes, the sources side, the medical sources side has grown a bit faster than the panel side. And so that is the overall distribution between panels and X-ray sources and other components of the business. What was the second question, Anthony?

Speaker 6

Price.

Speaker 2

In terms of pricing, as you know, 18 months ago 18 or so months ago, we had a broad initiative across the entire base for price increases. I would say that we've been successful at that. We've been getting prices. And then it has been somewhat in phases for some time, semiconductors, which largely go into panels, those prices spiked up And that enabled us to that helped us to increase prices on the panel side a bit more. But then on the tube side, since it's It's more

Speaker 6

of a

Speaker 2

mechanical and a hardware type of a product, those metals and all those prices, those costs go up and based on that we were able to increase prices on sources. I would say, as of now, as I look back at the last 12, 18 months of experience, Our price increases on the sources side has been a bit higher than on the panel side.

Speaker 6

Thank you very much.

Operator

And we have reached the end of the question and answer session. And I will turn the call back over to Chris Belcherie for closing remarks.

Speaker 1

Thank you. Thank you for your questions. I'll now hand the call back to Sanjay for some final comments.

Speaker 3

Thank you. Thank you, Chris. In closing, we're very pleased with the solid third quarter results and on track to achieve our target growth rate for the year. And as always, I'm very proud of our global team and employees that who make a difference on a daily basis. And thank you all for taking the time to join us today and for your continued Tristan Varex.

Speaker 1

Thank you, Sunny, and thank you all for your questions and participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived and answer session. A replay of this quarterly conference call will be available through August 15 and can be accessed on our website, veriximaging.com/investorrelations. Thank you and goodbye.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for

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Earnings Conference Call
Varex Imaging Q3 2023
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