Larry Solow

Larry Solow inquired about the implications of the Q1 guidance (flat to 8% growth) for the full fiscal year, seeking a high-level outlook. He also asked for clarification on the China market's outlook, given Varex's internal flat modeling versus customer expectations for growth, and the strong Industrial segment performance, particularly the gross margin, questioning if it was driven by unusual factors like service revenue mix.

Answer

President and CEO Sunny Sanyal indicated expectations for full-year revenue growth, with Medical (ex-China) and Industrial segments growing, while China is modeled as stable to flattish due to geopolitical uncertainties. He clarified that Q1 and Q3 have easier comps for FY2026, expecting gradual growth throughout the year. Sanyal attributed the strong Industrial gross margin in Q4 to a higher-than-usual proportion of service revenues from the Linux install base, noting this was not the norm but could be a long-term tailwind. He also followed up on cargo system orders, confirming some of the $55 million in orders have shipped, with more expected in 2026, and discussed the 100-150 basis point impact of tariffs on gross margin.

Larry Solow inquired about the implications of the Q1 FY2026 revenue guidance (flat to 8% growth) for the full fiscal year, seeking a high-level outlook. He also asked for clarification on the China market, where Varex assumes flat growth despite customer expectations for growth, noting difficulties due to increased shipping from China. Solow then questioned the strong Q4 industrial segment performance, particularly the high gross margins, asking if it was driven by standalone systems or service mix. He followed up on the $55 million in security screening orders, asking if the majority had not yet shipped and if more shipments are expected in FY2026 than in FY2025. Lastly, Solow asked about the current impact of tariffs on gross margin and how the India factory might mitigate this.

Answer

President and CEO Sunny Sanyal indicated solid demand and expected full-year revenue growth for FY2026, with both medical and industrial segments growing. He projected medical ex-China growth and a flattish China. Sanyal noted easier Q1 and Q3 FY2026 comps due to unusual patterns in FY2025, expecting normal gradual growth. For China, he confirmed modeling stable to slight growth (flattish) due to global customer supply chain changes and US-China uncertainties. Sanyal attributed the strong Q4 industrial gross margins to a higher-than-usual proportion of service revenues from the Linux install base, which are higher margin, clarifying that this is not the norm but expects long-term margins to return to 38-40% as hardware goes into service. He confirmed that some of the $55 million orders have shipped, with a lot still pending, and expects more shipments in FY2026 than in FY2025, noting a six-month cycle time from order to shipment. Sanyal stated tariffs impact gross margin by 100-150 basis points, and the India tubes factory (12+ months away) could help mitigate this.

Larry Solow from CJS Securities questioned the drivers for the Q4 revenue guidance, the reasons for a lower gross margin outlook despite revenue growth, and the high-level forecast for fiscal 2026 as OEM order patterns normalize.

Answer

CFO Shubham Maheshwari stated that Q4 growth is expected from both Medical and Industrial segments. He attributed the lower gross margin guidance primarily to the ongoing impact of tariffs (a 100-150 basis point headwind) and a product mix shift towards lower-margin cargo systems hardware. Maheshwari confirmed that inventory destocking is complete and anticipates fiscal 2026 will be a growth year, barring unforeseen external events.

Larry Solow questioned Energy Recovery's confidence in CO2 adoption given the extended timeline, asking if the delay stems from OEMs needing customer validation for new technology and if the shift to a top-down OEM-to-customer strategy is impacting speed. He also inquired about the company's visibility for desalination backlog building into 2026.

Answer

President and CEO David Moon affirmed that confidence in CO2 adoption remains strong, despite commercialization likely shifting to 2027 after another testing season in 2026. He explained that large retailers rely on OEMs for new technology adoption, necessitating a lockstep approach where OEMs like Hillphoenix will promote the PXG to major customers for test stores in the first half of next year. Regarding desalination, David Moon stated that backlog for 2026 should begin building, following a pattern of a relatively slow first half and a heavy second half, consistent with previous years.

Larry Solow followed up on the CO2 business, asking about the impact of delayed commercial agreements on confidence in adoption, the strategy of working with OEMs to reach large customers, and the visibility for desalination backlog building into 2026.

Answer

David Moon (President and CEO) confirmed that confidence in the CO2 product's value proposition remains strong despite the timing shift, with commercialization now expected in 2027 after another season of retailer testing in 2026. He explained that large retailers rely on OEMs for new technology adoption, necessitating a lockstep approach where OEMs like Hillphoenix promote the PXG to major customers. Regarding desalination, he noted that backlog for 2026 should start building, following a typical pattern of slower first half and heavy second half.

Larry Solow sought further clarification on the Q3 guidance miss, specifically how the company's Q4 outlook accounts for the industrial and field services shortfalls, and the confidence in a rebound. He also inquired about the PFAS business, asking what is needed for further acceleration in sales beyond internal progress, such as governmental legislation or the National Defense Authorization Act.

Answer

EVP and CFO Eric Dugas explained that Q4 confidence stems from strong growth in technical services, increased waste volumes from a diverse customer base, and continued margin expansion across businesses. He noted that industrial and field services are not forecasted for rapid improvement in Q4, but margin accretion is strong. Co-CEO Mike Battles emphasized that all lines of business showed good year-over-year margin accretion, and the Q3 miss is viewed as temporary. Co-CEO Eric Gerstenberg stated that PFAS market activity is extremely strong, especially after the EPA study publication, and the pipeline continues to grow 15-20% quarter-over-quarter. He believes significant regulatory changes are not necessary to drive accelerated growth, though a lifting of the Department of Defense moratorium would be an additional accelerator.

Larry Solow sought further clarification on the Q3 guidance miss, specifically how the company's Q4 outlook accounts for the shortfalls in industrial and field services, and what factors provide confidence in meeting Q4 expectations despite these challenges. He also inquired about the acceleration of PFAS-related sales, asking if governmental legislation or acts like the National Defense Authorization Act are necessary to translate the growing pipeline into actual sales.

Answer

Eric Dugas (EVP and CFO) expressed confidence in Q4 due to strong technical services growth (12% revenue), increasing waste volumes from a diverse customer base, and continued margin expansion across businesses. Mike Battles (Co-CEO) added that all lines of business showed good year-over-year margin accretion, and the Q3 miss is viewed as temporary. Eric Gerstenberg (Co-CEO) stated that the EPA's published test results for PFAS incineration have significantly boosted market activity and pipeline growth, and he believes major regulatory changes are not necessary to drive continued and accelerated PFAS growth, though a Department of Defense moratorium lift would be an additional accelerator.

Asked about the impact of tariff uncertainty on projects and for an update on the PFAS opportunity, including the status of the EPA study and the impact of state-level actions.

Answer

Project growth is unrelated to tariffs and is driven by a strong, materializing pipeline. The PFAS incineration study was successful, and while awaiting the official EPA announcement (expected Q3), the market is already moving forward, and their PFAS business is growing.

Larry Solow asked about BrightSpring's visibility on 3-5 year growth, specifically the sustainability of rapid growth rates (25-30%) compared to the historical 15% CAGR and street estimates of low double-digit growth. He also inquired if the bankruptcy in home and community pharmacy would be a drag on EBITDA this quarter or the next couple.

Answer

CEO Jon Rousseau acknowledged the historical 15% CAGR and recent higher growth due to platform positioning and investments (AI team, new marketers, development teams). He stated it's impossible to predict 25-30% growth for the next 4-5 years but expects next year to be well above the historical CAGR. He outlined aspirations for most businesses (except personal care) to grow at or above 20% through quality, operational processes, and advocacy. Mr. Rousseau anticipates acceleration from integrated care (e.g., combined offerings in ALFs), primary care, and value-based contracting. He confirmed that the home and community pharmacy bankruptcy is not expected to be a drag on EBITDA, noting it was a non-event in Q2 and was only mentioned due to its impact on year-over-year script comparisons. He highlighted strong growth in other pharmacy businesses and significant automation and process innovation in home and community pharmacy.

Larry Solow asked about BrightSpring's visibility on growth rates for the next three to five years, specifically if the recent 25-30% growth levels are sustainable or if growth will normalize closer to low double digits, given the historical 15% CAGR. He also inquired if the home and community pharmacy bankruptcy was a drag on EBITDA this quarter or for the next couple of quarters.

Answer

CEO Jon Rousseau acknowledged the historical 15% CAGR and recent higher growth due to platform positioning and investments, but stated it's impossible to expect 25-30% growth for the next 4-5 years. He expects to grow well above the historical CAGR next year, aspiring to 20%+ growth in most businesses through quality, operational processes, and advocacy. He highlighted acceleration from integrated care, home-based primary care, and value-based contracting, alongside strategic growth and operational/technology investments. He clarified that the home and community pharmacy bankruptcy was not expected to be an EBITDA drag, only affecting year-over-year script comparisons, with strong growth in other pharmacy businesses and a robust customer pipeline.

Larry Solow of CJS Securities asked for an update on the progress of bundled services and value-based care contracts with ACOs, including the viability of the previously stated $100 million EBITDA target. He also inquired about the performance of the Haven Hospice acquisition.

Answer

CEO Jon Rousseau reported that the value-based care business is progressing well, is profitable, and is expected to become a more material contributor by 2026-2027; he also confirmed the $100 million five-year EBITDA target remains an internal goal. He cited the Haven Hospice acquisition as a prime example of their M&A success, noting it has moved from losing money to performing 'extremely well' and is on track to a 4x purchase multiple.

Larry Solow inquired about the strong gross margin performance in Q3 and whether it reflects an improving mix within HVP components towards higher-margin products like NovaPure.

Answer

CFO Bob McMahon confirmed that the strong gross margin was driven by the positive mix of HVP components, increased efficiency from past investments, higher average selling price (ASP) products, and focused efforts on reducing costs, scrap, and improving yields. He also mentioned building capabilities in sourcing and streamlining production.

Larry Solow of CJS Securities inquired about the strong gross margin performance in the quarter, specifically asking if there's an ongoing improvement in mix within HVP components towards higher-margin products like NovaPure.

Answer

CFO Bob McMahon confirmed that the strong gross margin, up 120 basis points year-on-year (or almost 300 basis points excluding the incentive fee), was driven by the proprietary HVP component business. He attributed this to the positive mix of higher-value products, increased factory efficiency from past investments, and efforts to drive down costs, improve scrap/yields, and optimize raw material input costs.

In a follow-up, Larry Solow of CJS Securities asked about the drivers behind the approximate 16% underlying increase in SG&A expenses during the quarter.

Answer

SVP & CFO Bernard Birkett responded that there were no specific, unusual items to call out and noted that foreign currency exchange rates, particularly the movement in the euro-dollar rate, had an impact on the reported figure.

Larry Solow asked for clarification on the Security division's flat organic growth in the second half of fiscal 2025, the current composition of the record $1.8 billion backlog with a focus on the reduced Mexico portion, and the reasons behind the significant sequential increase in accounts receivable and its implications for fiscal 2026 free cash flow.

Answer

EVP and CFO Alan Edrick explained the flat growth was due to a very difficult comparison with massive Mexico revenues in the prior year, noting the core security business ex-Mexico and acquisitions grew over 50% in Q4. He confirmed the backlog is now highly diversified away from Mexico. Regarding receivables, the increase was driven by a lack of collections from Mexico in Q4 combined with record, back-weighted revenues from other customers. Edrick projected free cash flow conversion could exceed 100% of net income in fiscal 2026 as these receivables are collected. CEO A. J. Mera added they are not concerned about Mexico's payments, citing it as a matter of bureaucratic timing.

Larry Solow of CJS Securities inquired about the high-level strategy for the iCAD acquisition, specifically whether the focus is on upselling RadNet's AI or creating a combined offering, and if the acquisition would reduce previously planned organic spending.

Answer

Howard Berger, Chairman, President & CEO, clarified the strategy is to blend iCAD's ProFound suite with RadNet's DeepHealth products into a more comprehensive solution for both domestic and international customers. Mark Stolper, EVP & CFO, confirmed that the iCAD acquisition provides infrastructure that RadNet had planned to build organically, and that updated Digital Health guidance in November will reflect these synergies.

Larry Solow of CJS Securities inquired about the high-level strategy for the iCAD acquisition, specifically whether the focus is on upselling RadNet's AI to iCAD's customer base or integrating iCAD's ProFound suite with RadNet's technology. He also asked if planned organic spending would be reduced due to the acquisition.

Answer

Howard Berger, Chairman, President & CEO, clarified that the iCAD and DeepHealth breast AI products are different and the teams are working to blend them into a comprehensive offering for both customer bases. He highlighted iCAD's international presence as a key benefit. Mark Stolper, EVP & CFO, confirmed that the iCAD acquisition provides infrastructure that reduces the need for some previously planned organic investment, and updated guidance will reflect this in Q3.

Larry Solow of CJS Securities, Inc. inquired about the primary drivers behind the raised sales guidance, asking if it was concentrated in a specific segment like Specialty Sports. He also questioned whether future top-line growth would depend more on macro improvements or company-specific product initiatives.

Answer

CEO Mike Dennison and CFO Dennis Schemm clarified that the guidance increase reflects broad-based outperformance in the first half, with the $50 million beat simply added to the full-year forecast. Mike Dennison emphasized that future growth is driven by their product roadmap and innovation, which allows them to outperform the market and positions the company as a 'coiled spring' for when the economy recovers.

Larry Solow of CJS Securities asked if the strong growth in visits per day and cost efficiencies were largely driven by the closure of underperforming clinics in the prior year. He also inquired about the progress of cost-cutting initiatives, the performance of the large MetroPT acquisition, and requested a breakout of commercial pricing trends.

Answer

CEO Christopher Reading acknowledged that multiple factors, including efficiency initiatives, contributed to the strong results. CFO Carey Hendrickson added that the MetroPT acquisition, which averages higher visits per day, also lifted the company-wide metric. Hendrickson highlighted Metro's success, noting its net rate increased from ~$101 at acquisition to $107.50 in Q2, and provided a pricing breakout, stating commercial rates were up about 1-1.5% year-over-year.

Larry Solow of CJS Securities inquired about operating expense assumptions in the updated guidance, the revenue ramp and timeline for ZELSUSMI's peak sales target, and the current state of the M&A and business development pipeline.

Answer

CFO Tavo Espinoza noted a slight increase in operating expenses. CEO Todd Davis stated that ZELSUSMI revenue expectations are modest for the current year, viewing it as a long-term asset. SVP of Investments, Paul Hadden, described the business development pipeline as robust and confirmed the team is actively working to close additional deals.

Larry Solow asked if the TEG heparinized cartridge was driving competitive share gains in addition to upgrading the existing base. He also questioned the macro outlook for plasma, contrasting Haemonetics' view of flat collections with reports of double-digit volume gains from collectors like Grifols. Finally, he asked for color on the cadence of operating margin improvement throughout the year.

Answer

CEO Christopher Simon explained that the primary opportunity for TEG is driving broader adoption of viscoelastic testing rather than direct competitive capture, noting the U.S. market is only about 50% penetrated. On plasma, he attributed the discrepancy to a lag between collection and sales reporting, reiterating that actual collection volumes were seasonally flat in the quarter. Regarding margins, Simon projected a back-half weighted improvement, with the most significant jump from Q2 to Q3, and an overall EPS split of roughly 45% in the first half and 55% in the second half.

Larry Solow of CJS Securities inquired about the common factors behind recent order push-outs, their potential shift into 2026, and the company's long-term margin expansion outlook.

Answer

President Brad Williams clarified that the push-outs are due to a higher proportion of large opportunities in the sales funnel across body armor, duty gear, nuclear, and EOD, not budget cuts. He confirmed some orders are now expected in 2026 while others remain in the current year's guidance. CFO Blaine Browers added that long-term gross margins are expected to reach the mid-to-upper 40s, driven by the Cadre operating model, despite the slightly lower initial margin profile of recent acquisitions.

Larry Solow from CJS Securities asked for the proportion of Polarify business under contract versus non-contracted and sought clarity on whether Lantheus lost share even within its strategic agreements.

Answer

CEO Brian Markison confirmed the "vast majority" of business is contracted and that the company chose to walk away from some volumes where discounting demands were too aggressive. President Paul Blanchfield elaborated that while contracts leveled the MUC reimbursement field, a competitor's pricing forced renegotiations, some of which were accepted while others were declined to protect long-term value.

Larry Solow of CJS Securities asked if the reduced full-year outlook was driven entirely by the Rail segment, inquired about currency impacts, and sought clarification on Clean Earth's performance, including potential tariff effects and drivers of its quarterly margins.

Answer

SVP & CFO Tom Vadaketh confirmed the outlook reduction is entirely due to weakness in the Rail segment and noted that the negative foreign exchange impact for the year is less severe than initially anticipated. Chairman & CEO F. Nicholas Grasberger added that Clean Earth has seen no negative impact from tariffs and that its slightly softer quarterly margin was a temporary issue caused by higher disposal costs from partner outages and a less favorable project mix in the soil and dredge business. He affirmed the underlying business trends remain strong.

Larry Solow of CJS Securities asked for an update on the profitability and margin impact of the Fishers and Latina plants, and also inquired about the long-term margin recovery potential for the Engineering segment.

Answer

CFO Marco Dal Lago reported that the Latina plant is now gross profit positive while Fishers is not yet, though both are improving quarterly and remain dilutive to overall margins. For the Engineering segment, both Dal Lago and CEO Franco Stevanato expressed confidence in returning to historical profitability levels of 2022-2023 as legacy projects conclude.

Larry Solow of CJS Securities inquired about the supply chain and logistical preparations for the large-scale conversion to natural colors, the expected timing for a significant revenue increase from this trend, and the key drivers of the company's strong gross margin improvement in the quarter.

Answer

Chairman, President and CEO Paul Manning emphasized that supply chain is the single most critical factor, noting Sensient has been working on it for over 15 years through diversification, new source identification, and vertical integration. He confirmed that 2027 is a fair assumption for a significant revenue inflection point, driven by regulations like West Virginia's 2028 deadline. VP & CFO Tobin Tornell attributed the strong margin performance to volume growth, favorable product mix from new wins, and disciplined cost control, stating that pricing was immaterial.

Larry Solow inquired about the sustainability of the parts business's mid-teens growth, the acceleration of market share gains, interest in the defense aftermarket, and the timing of sales growth in ETG's defense segment.

Answer

Co-CEO Eric Mendelson confirmed accelerated market share gains and long-term optimism for the defense aftermarket. Co-CEO Victor Mendelson explained that ETG's slightly lower defense sales growth was against a tough prior-year comparison of over 20% growth and that the segment's backlog remains healthy.

Larry Solow questioned the persistent negative margins in the Asset-Light segment, asking if profitability is dependent on a macro recovery or if structural improvements can be made to achieve it in a challenging environment.

Answer

President Seth Runser expressed confidence in returning the segment to profitability regardless of the market. He outlined a multi-pronged strategy: improving account profitability, shifting the truckload mix towards more profitable SMB business, controlling costs, accelerating the growth of the profitable managed solutions business, and leveraging technology for further productivity gains.