Q3 2024 Earnings Summary
- Stabilization of China business with potential for future improvement: While Varex's China business has been operating at low levels due to the government's anticorruption campaign, management noted that sales have stabilized and are not worsening. There's potential for improvement if stimulus measures or investments in healthcare materialize, which could positively impact orders and sales.
- Strength in Industrial segment, particularly cargo inspection: The company's Industrial segment is showing strong performance, driven by solid demand for cargo inspection products. Management has good visibility for this strength to continue over the next few quarters, indicating a robust pipeline and sustained revenue from this segment.
- Progress in photon-counting technology and cost initiatives: Varex is making very good progress on new products with photon-counting technology, which is expected to contribute to growth in the long term. Additionally, cost-reduction initiatives, such as investments in India, are expected to help regain market share in modalities like radiographic and dental imaging where the company has lost ground.
- Persistent softness in China due to the ongoing anticorruption campaign, which is now expected to continue for another 2 years, leading to significant uncertainty and reduced sales in a key market. The company does not expect meaningful improvement in China in the foreseeable future, as orders have stabilized at low levels. , ,
- Increased competition from Asia-based detector manufacturers, particularly in low-end modalities like radiographic and dental, leading to loss of market share and pricing pressure. In a market where demand is soft and muted, the company is seeing intensified competition from these manufacturers.
- Softness in other industrial end markets, notably in semiconductors, electronics, and battery inspection, due to capacity digestion, leading to decreased demand. While the cargo inspection business remains strong, the company is experiencing softness in these industrial segments.
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China Outlook
Q: Any expected improvements in China business?
A: Management noted a slight sequential uptick in China orders and sales but doesn't see this as a durable trend. The effects of audits and the anticorruption campaign, now extended from 1 year to 3 years, continue to impact business. They do not anticipate significant improvement in China in the foreseeable future and expect it to remain at low levels. -
Fiscal '25 Expectations
Q: Early thoughts on fiscal 2025 outlook?
A: They expect fiscal '25 to be slightly better than '24, with gradual improvement from inventory normalization starting early 2025. However, due to ongoing issues in China, they are not expecting meaningful improvement from that region in fiscal '25. -
Capital Allocation Priorities
Q: What are your capital allocation priorities post-refinancing?
A: Over the next 12 months, priorities include funding operating needs and capital expenditures, like investments in India and automation in the Salt Lake factory. They aim to deleverage to an optimal debt level between $300 million and $350 million. Beyond that, they will consider growth opportunities via M&A and further deleveraging. -
Industrial Business Growth
Q: How is the Industrial business performing, especially cargo?
A: The Industrial segment grew significantly last year and is expected to grow again this year. The cargo business is strong, with good visibility for continued strength over the next few quarters. Cargo's proportion of total sales is increasing and expected to be much higher in fiscal '24 compared to '23. -
Debt Refinancing Plans
Q: Update on refinancing some of your debt?
A: They recently completed credit financing, providing flexibility. Their convertible bonds mature in June 2025, and while no decision timing is provided, any decisions will be communicated when made. -
Photon Counting Technology
Q: Progress on new products with photon counting technology?
A: Significant progress is being made as part of their long-term strategy. They remain optimistic about its future growth contribution and plan to regain market share in radiographic and dental areas through cost-out initiatives and investments in India.