Greetings, and welcome to the Varex Imaging Corporation Fourth Quarter Fiscal Year 2017 Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Howard Goldman, Director of Investor Relations. Please go ahead, sir.

Good afternoon and welcome to Varex Imaging Corporation’s earnings conference call for the fourth quarter and fiscal year 2017. With me today are Sunny Sanyal, our President and CEO; and Clarence Verhoef, our CFO. To simplify our discussion, unless otherwise stated, all references to the quarter or year are fiscal years and – fiscal quarters and fiscal years. Quarterly comparisons are for the fourth quarter of fiscal 2017 versus the fourth quarter of fiscal 2016, unless otherwise stated. Annual comparisons are for fiscal year 2017 versus fiscal year 2016 unless otherwise stated. Comparable financial statements for fiscal year 2016 and the first quarter of fiscal year 2017 reflect operating results for the Imaging Components business of Varian Medical Systems prior to our separation, and include estimates of cost allocations for various corporate functions, interest expense and tax expense. Additionally, financial statements for the fourth quarter and the last five months of fiscal year 2017 include operating results for the imaging business we acquired from PerkinElmer on May 1, 2017. In addition, we supplement our consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP, with the use of adjusted or non-GAAP financial measures of certain elements of financial performance. These adjusted measures are not presented in accordance with, nor are they a substitute for, GAAP financial measures. These adjusted measures include adjusted gross margin, adjusted operating earnings, adjusted operating earnings margin, adjusted net earnings and adjusted net earnings per diluted share. We provide a reconciliation of each adjusted financial measure to the most direct comparable GAAP financial measure in our earnings press release, which is posted on our website. We are able to provide without unreasonable effort a reconciliation of adjusted net earnings to the corresponding GAAP measures on a forward-looking basis due to the potential significant variability and limited visibility of the excluded items discussed. Please be advised that this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our use of words and phrases such as expects, intend, outlook, future, anticipate, will, could, believe, estimate, guidance and similar expressions are intended to identify those statements which represent our current judgment on future performance or other future matters. While we believe them to be reasonably based on information currently available to us, these are forward-looking statements 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 fourth quarter earnings release and in our filings with the SEC. 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 these discussions because of new information, future events or otherwise. And now I'll turn the call over to Sunny.

Thank you, Howard. Hello, everyone, and good afternoon. Fiscal year 2017 was a transformational year for us. We successfully completed our spin-off up from Varian to become a new publicly-traded company and we closed the major acquisition of imaging business from PerkinElmer. We accomplished these actions while maintaining our focus on growing revenue and providing excellent customer service. Our strong performance in the fourth quarter and the fiscal year reinforces our belief that our emphasis and commitment to X-ray imaging components has enabled us to serve our customers better and provide greater value to our stockholders. Let me start by highlighting a few financial results, a little later Clarence will discuss our results in more detail. For fiscal year 2017, our revenues increased 13% to $698 million with the Medical segment up 10% and the Industrial segment up 24% over the prior year. This growth reflects a 3% increase in revenues or $17 million from our organic business and the addition of $61 million in revenues in the last five months of the year from the acquired imaging business. Revenues from this acquired imaging business increased 5% from the same five month period in prior year. In the Medical segment, we experienced good growth from sales of our CT tubes as well as our mammography, dental and surgery components. Sales of CT tubes are up for the year driven by activity in Asia. As previously discussed, we expect demand for CTs in emerging markets, particularly China, to continue to grow. We're continuing to see evidence of that as local OEMs make progress towards introduction of new systems using our CT tubes, reinforcing our confidence in both the market opportunity and our competitive position. Growth in dental and mammography applications was mainly due to continued adoption of new 3D imaging applications…

Thanks and hello everyone. A year ago, Sunny and I had our first interaction with you on the Varian earnings call and we were explaining the challenges of the prior two years and the status of the impending spin-off. We had optimism about the upcoming year and we're also in the midst of negotiations for a very significant acquisition. Now, a year later, I'm proud to say that we have returned to revenue growth that our earnings exceeded expectations in 2017 and that our exceptional team has been expanded with the additional detector expertise from the acquired imaging business. Our guidance will reflect that we expect revenues to be nearly 30% higher in 2018 than in 2016. Let me summarize the key financials for the fourth quarter of fiscal year and then go through the outlook for 2018. This is the first full year of – excuse me – this was the first full quarter of results for our acquired imaging business and it has a large impact on the results. In the fourth quarter, it added $35 million of revenue. Including the results of the acquisition, our fourth quarter revenues were up 25% to $216 million and the fiscal year revenues were up 13% to $698 million. Medical segment revenues increased 22% in the fourth quarter to $164 million and included $24 million from the acquired imaging business. For the quarter, we have growth across all our product platforms with particularly strong growth in X-ray tubes and software. Fiscal year revenues were up 10% to $557 million. Industrial segment revenues for the fourth quarter increased 38% to $51 million and include $11 million from the acquired imaging business. Fiscal year revenues were up 24% to $141 million. We saw good results in the security market, which deliver double digit…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] We have a question for Mr. Larry Solow, CJS Securities. Please go ahead, sir.

Good afternoon, guys. Just a couple questions on Q4 and then on the outlook. Did you or can you discuss sort of the adjusted gross margin by segment in the quarter? Was there a greater impact charges on Medical or on the Industrial side? Or was that sort of equally balanced by a percentage of revenue? And then as you look out at 2018, where do you see those going by segment?

Yeah, so first of all, Larry, we don't actually do the adjusted gross margins by – at the segment level. We only do that at the total level.

Okay.

I would say though that what you see as the gross margin rates, just by doing the calculation on the P&L, you'll see that the industrial has higher gross margins than the Medical and that the amount of adjustments that happened to get it down to the adjustment number is relatively equal between the two – or comparable to those, I mean you can do a pro rata. It’s a good indication.

Fair enough. And then just sticking to the Q4 for – just one second, on the expense side, it looked like R&D was a little bit above sort of where you guys have been tracking and SG&A a little bit below. Is that fair to say? And then should we expect that to balance out a little bit as we look out into 2018?

Yeah, I think, you got it exactly right. I do think that we had R&D come in around a little bit north of 10% of revenue in the quarter. And we've got some significant projects going on particularly around CT. And when you do – when you get to the level where you're kind of in tail end of these projects and you're introducing products to the market, there's a fair amount of prototype cost associated with that. And so that's why we end up with a little bit higher costs on the R&D line. I don't think that for looking into next year, it'll be at that – quite that level kind more – maybe half a point lower, somewhere in that kind of range. So, it’s probably a better indicator of where that is. And yes, you’re right SG&A as a percent of revenue is down and some of that’s tied to the high volume of revenue, right. I mean so just – as those costs are staying relatively at the same level, but you’ve got higher revenues you get the benefit of that, which is kind of our story all along as that we want to be able to leverage SG&A with growth.

Right. And just on Perkin, it sounds like things haven't really changed your expectations. So is it fair to say revenues should be sort of flattish or at the run rate it's been on the last or – for the first and last five months of this year? Just trying to figure out back my way into what you think organic growth will be next year.

So, I guess, how I just say that is that it is now being integrated into our business very much. And so, it’s basically falls into the same growth rates that we would be expecting to have in our core business.

Okay. So – but – so do you still think for 2018, it's sort of where we were – plus or minus sort of 3% on the healthcare side and mid singles on the industrial side? Is that a good place to start for organic growth?

Yeah, I think that gets you there because I think you can do – you can work your way backwards into getting to that point by…

Right.

Using the run rate of a full year of PerkinElmer and basing that or comparing that with the 13% to 14% total top-line growth that we've – what we've given guidance for.

Okay. And just last question on the CT side. As most of the growth coming from it looks like – with back my way into these – the two Chinese contracts that you've added. I don't know. It's probably not going to be a linear 30 each year over the next three years. I don't know what your contributions are in 2018, I imagine probably less than the third, but question that's part one. And then part two, if you gain out incremental growth from that, on the Toshiba contract side, is that actually coming in a little bit or you're actually getting year-over-year growth from the – outside of Asia on CT? Thanks.

And so – I'll answer it a little bit differently, but I think it's going to give you the answer you're looking for, which is that fundamentally where we saw our growth happening in CT is in Asia, but you know you’ve got to remember that Toshiba is in Japan. And so that’s big piece of our business. And so, we had good performance in Asia all the way around and that's a combination of the activities that happened in Japan, not only Toshiba but also a few other customers there and then the growth that we’ve had happening in China. And so, relative to those contracts, I think you're right. I mean these things ramp up over time. And I'm not – I can't even necessarily tell you exactly the amount of how much of the $100 million is in year one versus two versus three, but just recognize that year three is going to be the highest of three.

Okay. And do those contracts are the [indiscernible] you saw in last quarter? Does that contribute anything in Q4?

Yeah, we have some. Yes, we've already been delivering on that contract up to a large amount, but I mean it is reflected and the fact that now we've gone to the level where our business in China is now 10% of our revenue. So, I mean, that's a little bit of an indicator of what we've seen. And a year ago, it was at 8%, I believe.

Got it. Okay, great. Thanks very much.

Sure.

The next question is from Paul Coster of JPMorgan. Please go ahead, sir.

Yes, thanks for taking my question. I'm at risk of getting a little muddled here. So the $200 million of new multi-year [indiscernible] is to close in the fourth quarter that does not include the previously announced $100 million from China or am I mistaken there?

It does not include the previously announced $75 million.

$75 million, sorry, yeah.

We had in the segment – we did last quarter for $75 million.

Yeah, got it. Okay, thank you. And then the $200 million that did closed in the fourth quarter, was it for new logos or expanded programs with existing customers?

Hey, Paul, this is Sunny. It was a combination. So obviously the – what we booked in China were new products, new product placements, but the rest were additional modalities, additional revenue streams or new revenue streams – a combination of renewals and new revenue streams with existing customers. I think the significance of what we mentioned was the fact that we're seeing an increasing – I would say that’s an increasing trend towards multi-year contracts. In the past few years, there were so much volatility and movements in the competitive landscape pricing that customers were hesitant to sign more than a one year contract, but we're seeing now they're willing to consider a three year contract, which is moving in the right direction for us.

The acquired business was in a modest decline kind of trajectory before you acquired it and it seems to send around pretty quickly. How do you account for that?

You know we're optimistic that will grow at the rates that we're experiencing that we're seeing because they're playing in the same space as we are using our same channel. And that’s a healthy pipeline of new products. So we expect it to swing back into growth mode.

Well you fixed it pretty quickly [indiscernible] did you – can you – if you can give us some sense of what action you took?

Yes, how I look at it is there a little bit where some – I not sure we can take all the credit for that because I think it have to do also with the fact that they had a decline in the prior couple of years tied to currency as just like we had some impact from currency. So to have the currency stabilize and in fact even move a little bit in the other direction is helpful from that perspective. At the same time they introduce some new products that are now starting to go to market and I think that's exciting as we look at where they're going with some of these new products. The introduction and the adoption of CMOS in a couple of different applications is one of the things that help to drive it as well the next generation radiographic detector that they have.

Got it. Last question as you look at your customer base, what's the rate of products innovation there the new product cadence. Is it constant or is it accelerating and what’s the implication for you?

I would say – maybe you can put it in two counts. In China, it's all new and many, many new products are being brought out by our customers and the rest of the world that cadence is more or less consistent with what we've seen in the past on the Medical side. Industrial, I’d classify at the same way. It’s – there's no really significant change in the cadence there.

Great, thank you very much.

We have a question from Mr. Scott Marx, Samlyn Capital. Please go ahead, sir.

Hi, thanks for taking my question. Can you just run through the guidance again for the gross margin tax rate interest expense? I couldn't get all that.

Okay, sorry about that. Okay.

No problem.

Okay, so I'll go from the top on down, okay, so revenue growth 13% to 14%, EPS $1.78 to $1.88. So – and in between gross margins 38% to 38.5%, tax rate 33% to 34%, interest expense $20 million to $22 million. And then just wanted to make sure that people were aware that we have an incremental on the – in our SG&A expense of about $3 million of stock-based comp. Those were kind of the highlights that I went through.

Perfect, thanks so much.

No, problem.

The next question is from John Koller, Oppenheimer + Close. Please go ahead.

Good afternoon gentlemen. How are you doing today?

Great, nice to talk to you John.

Yeah, same here. A quick question on the digital detector pricing pressure and margins. I'm wondering if you can talk a little bit about how you think about getting out in front of that on engineering costs of and if you have some sort of timeline to take advantage of Perkins capabilities? Thanks.

I mean, let me start and Clarence you can take it from there as well, so a couple of things. On the price erosion that there was a bolus of price erosion that occurred in the second half of 2015 and the first half of 2016. What we're feeling now in our revenues as well as the impact of the price erosion and which made its way into our product, product line and I think we’re lapping that now. On an ongoing basis, we're not seeing that kind of price erosion. It’s gone back to what I call as historical norms of single digits – mid to low single digit price erosion. So we're used to that. And that's something we can keep up with and keep pace with through reductions or through reduction on our cost of goods with supply chain actions with projects that we want to reduce material costs. And at the same time, we have been consistently introducing new detector models that are lower in cost. So, at this point, our expectation is that the cost reduction actions that we're taking will keep up with the price erosion that will occur and it's occurring primarily in the lower – the value segments and the radiographic segments. So it's returning to more of the historical norms that we're used to.

Okay.

Maybe the one thing I would add to that is this. Well we have impact of various times is the mix of what sell because there is higher-end products that have a lot more technology and just get higher gross margins and higher price. And then kind of the more fundamental systems and products have basically a little bit lower margin. So when we run into problems, where we see the margin go down, it's more driven, a lot driven by the mix of what we sell probably more than what you actually see from just actual price erosion itself.

Okay, great. Thanks for the clarification. I appreciate it.

Sure.

[Operator Instructions] The next question is for Mr. Anthony Petrone of Jefferies. Please go ahead, sir.

Thanks and good afternoon, maybe just to start a little bit on the quarter and then a couple on just the tender process over in China. On the quarter just a little bit more on medical organic growth and some of the issues raised last quarter just the aftermarket business sort of impacted things there a bit. So maybe just an update on the CT tube aftermarket sales and how that played out in the fourth quarter and then do you see that – how do you see that trending into 2018?

I'll start with that one. So we saw – basically aftermarket was stabilized I guess because we've seen several quarters in a row where it had declined previously. So even though for the overall year, it is a decline, the Q4 was stabilized from that perspective. So I’d say that it's still an area that we're watching closely and a lot of it is dependent on kind of the large OEMs that we are providing for – replacement products for and what their strategies are in the market.

Okay, and then the tenders in total, so just to be clear 275 inclusive of the 75 last quarter, but I think you were actively engaged in a number of tenders. So can you give an update on looking ahead how many OEM tender processes as the company actively involved in? And what do you think the win rate on those can be this year?

Yeah, Anthony, these are – these are not – let me clarify. These are not tenders. We are – in China, we're engaged with, I would say, the top 10 OEMs there. And these are – for the last several years we've been actively involved in engineering our components into their products. Now as they get ready to bring these products to market, one of the last steps in the process is they submit for their Chinese FDA registration. It’s around that time that we start asking them for forecast because the launch is that insight. It’s within a sort of 12-month window so to say. And we signed pricing agreements and locked them into a pricing agreement for one to three year period. So that's what these agreements reflect. It's our customers maturing their R&D pipeline and getting to a point where they're getting ready to launch. And so we announced one last quarter. There's another one that we signed and we're confident there are several more to go as this year 2018 evolves.

Got it. And then just jumping over to industrial, the underlying organic growth number jumped out. And so just the moving parts there, was it more dental, was it more mammography security just the moving parts there. And then last one for me would just be your outlook on M&A whether that would be in 2018 or beyond? Thanks.

Okay, so on the industrial – growth in industrial came from both the – we call low energy and high energy segments, which is our – it was a good solid strong performance across the board. However, in this quarter we saw we were encouraged by the number of linear accelerators that that we sold and it was driven by the – it was driven by a combination of both cargo and NDT. So it was balanced across the board. So we saw strength in industrial, I would say, across the board. In terms of our M&A going forward, we’re absorbing PerkinElmer and that's going very well and we're – I'm very happy about that. We're back into the mode of looking at our pipeline and building – the business is settling down from the spin related activities and our management team is regaining their bandwidth. We're going back towards what we've already always done, which is of course keep looking at the pipeline for adjacencies and those kinds of opportunities and we'll keep doing that.

Okay.

Ladies and gentlemen, we've reached the end of the question-and-answer session. I’d like to turn the call back to management for closing remarks. Please go ahead.

Thank you everyone for your questions anticipating in our earnings conference call for the fourth quarter and fiscal year 2017. A replay of this quarterly teleconference will be available starting today through November 23rd and can be accessed at the company's website or by calling 1-877-660-6853 from anywhere in the U.S. or 1-201-612-7415 from non-U.S. locations and the password is 13672496. And with that good-bye.

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