Q2 2024 Earnings Summary
- Varex expects its photon-counting detector sales to grow from approximately $20 million currently to around $150 million annually by fiscal 2029, driven by accelerating adoption in both Industrial and Medical segments, including mainstream CT markets.
- Varex has a strong liquidity position with $190 million in cash and marketable securities, providing flexibility to address upcoming convertible debt maturities and potentially reduce debt levels, thus strengthening the balance sheet.
- Varex is well-positioned to capitalize on AI and software opportunities arising from its photon-counting technology, enhancing its product offerings and potentially opening new revenue streams.
- Significant revenue declines in China due to the government's anticorruption campaign, with no expected sales pickup before the next fiscal year. This led to a 27% decrease in APAC revenues, and China sales declined from 17% to 12% of overall revenues.
- Global softness in the Medical segment beyond China, driven by cautious purchasing behavior from OEM customers. The company expects Medical revenues to be down year-over-year, impacting overall growth.
- Delayed recovery in China is likely to be gradual rather than a significant burst, contributing to prolonged uncertainty and potentially continuing the negative impact on revenues in the near term.
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China Sales Outlook
Q: How will China's slowdown affect demand recovery?
A: The company had anticipated a recovery in China in the second half, expecting hospital audits to conclude and buying to resume. However, they now see no early indicators of significant volume recovery during this period due to ongoing audits and uncertainty around a potential stimulus package. They expect a gradual, steady recovery rather than a significant burst of pent-up demand. -
Broader Demand Softness
Q: Are you seeing softness outside of China?
A: Outside of China, there is a general softness in demand, with customers exhibiting cautious buying behavior. Many customers are asking to defer or delay shipments to adjust their inventory levels, making it difficult to pinpoint specific sources of softness since customers are global. -
Photon-Counting Growth Trajectory
Q: What is the expected growth for photon-counting revenues?
A: The company projects photon-counting revenues of $150 million by 2029. In industrial applications, uptake is steady and accelerating, while medical adoption will be gradual due to lengthy R&D and regulatory cycles. CT detectors will be in design phases for at least 2 to 3 years, followed by rapid acceleration as customers bring new CT systems to market aimed at mainstream markets. -
Refinancing Convertible Debt
Q: What are your plans for refinancing the convertibles?
A: The company recently closed $175 million in new financing, including a $155 million revolver and $20 million delayed draw term loan, putting them in a strong liquidity position to address refinancing. The existing convertibles mature in June 2025, and they are monitoring the situation to make the right decision, considering factors like interest rates and stock price. The current convertible interest rate is 4%; new rates might be similar or slightly lower. They have excess cash and may partially or completely pay down debt. -
Excess Cash and Debt Reduction
Q: How much cash can you use to pay down debt?
A: With $190 million in cash and operational needs of $100 million, the company has about $90 million in excess cash. They could theoretically pay down 50% of the $200 million convertible debt from the balance sheet and plan to generate more cash before maturity in June 2025, potentially lowering interest expenses in 2025 and beyond. -
Lowered Guidance and Medical Segment Softness
Q: What is driving the lowered guidance, and how is Medical performing?
A: Beyond China's softness, there is broader market softness in Medical, driven by cautious customer behavior from OEM customers. Medical revenue is expected to be down year-over-year. Industrial business is expected to be flat or slightly up, with the cargo segment performing well but softness outside of cargo. -
Customer Inventory Adjustments
Q: Why are customers cautious, and is there excess inventory?
A: Customers are adjusting their stocking levels due to mismatches between previous forecasts and current production needs. Factors include post-COVID buying behaviors, supply chain concerns, and the need to align inventories with demand. Procedure volumes are growing but don't directly correlate with shipments of large systems. -
Software and AI Opportunities with Photon-Counting
Q: Is there a software or AI opportunity with photon-counting?
A: Photon-counting generates more images and data, opening up opportunities for AI and more precise image processing. The company's software group is capable in CT reconstruction and image processing, and they expect to benefit by extracting more information from data and enhancing their photon-counting offerings. -
China Competition
Q: Is local competition affecting China sales?
A: The company does not see local competition as the reason for the slowdown in China. The slowdown is due to customers not needing products because their sales have dropped significantly, particularly in x-ray tubes for CT systems. -
Pent-up Demand in China
Q: Will there be pent-up demand when China recovers?
A: Procedure volumes are continuing, and pent-up demand may return when the market recovers. However, it's unclear if recovery will be gradual or a sharp inflow of orders. The company expects more clarity in the next 90 days.