Varex Imaging Corporation (VREX) Q4 2024 Earnings Report, Transcript and Summary

Greetings, and welcome to the Varex Fourth Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Belfiore, Director of Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to Varex Imaging's earnings conference call for the fourth quarter of fiscal year 2024. 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 at Varex website at vareximaging.com/news. The webcast and supplemental slide presentation will be archived on Varex's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the fourth quarter of fiscal year 2024. In addition, unless otherwise stated, quarterly comparisons are made year-over-year from the fourth quarter of fiscal year 2024 to the fourth quarter 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 or 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. 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-K. 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. On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly-comparable GAAP financial measure in our earnings press release which is posted on our website. I will now turn the call over to Sunny.

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our fourth quarter earnings call. Fourth quarter revenues were at the high-end of our guidance range, driven mainly by continued strength in our Industrial segment. During the quarter, we experienced the continued effect of destocking actions by our customers in the medical segment outside of China. However, we believe customer inventory adjustment actions are beginning to stabilize and expect the effect of destocking to subside in the second quarter of fiscal 2025. Gross margin in the fourth quarter was at the low-end of our guidance range as unfavorable sales mix in our Industrial segment due to high proportion of equipment sales continued in the quarter. We expect the strong growth of equipment sales to drive higher margin services in the future. Revenue in our China business remained stable for the quarter, although that business overall is running at a lower levels than in fiscal 2023. We are optimistic that medical imaging demand will improve in China and Varex is well-positioned to benefit when growth resumes. While we have not yet seen a measurable uptick in our incoming order rate, we are encouraged by the potential of stimulus funds making their way into the healthcare system. Turning to fourth quarter results. Revenue in the quarter decreased 10% year-over-year. Revenue in the Medical segment decreased 12% year-over-year, while Industrial segment revenue decreased 4% year-over-year. Non-GAAP gross margin in the fourth quarter was 33%, adjusted EBITDA in the fourth quarter was $23 million and non-GAAP EPS was $0.19. We ended the fourth quarter and fiscal year with $213 million of cash, cash equivalents, and marketable securities on-balance sheet, up $18 million compared to prior fiscal year end. Let me give you some insights into sales detailed by modality in the quarter compared to a five-quarter average, which we refer to as sales trends. Sales in our Medical segment were down in the quarter, primarily due to continued inventory management by our customers. Global sales in CT and oncology modalities in the quarter were flat compared to trend, while sales in radiographic modality continued to be above trend. Sales in fluoroscopy, dental, and mammography modalities in the quarter were all below their respective sales trends. In our Industrial segment, our customers continue to benefit from strong demand in security screening, driving sales of our cargo inspection products in the quarter. Other industrial end markets, primarily semiconductor, electronics, and battery inspection continued to remain soft in the quarter. Switching gears to fiscal 2025, we're excited about several initiatives that will drive growth in future years. A significant portion of our business each year comes from repeat product purchases from existing customers. This is what we refer to as our core business. To grow the core, we need to continue to innovate and refresh our current product portfolio to get designed in into subsequent system models that our customers plan to release. To accomplish this, we work closely with our customers as they develop or update their imaging systems, primarily in areas of CT, dynamic detector applications and in industrial imaging applications. In our existing CT tube business, we're investing in the premier tier to include capabilities to support high-resolution, higher speed, and cardiovascular applications. We believe the premium tier is growing at a higher rate with higher margins compared to the rest of the CT market. Since CT tubes are the largest revenue contributing modality within our medical segment and require replacement at a higher frequency, staying in step with our customers' R&D plans is important for profitable growth for us. We are very happy with the performance of our IGZO-based Azure detector platform, which we launched last year with great success. This platform enables high quality imaging cost effectively as compared to CMOS-based detectors. In fiscal 2025, we are going to continue to expand our portfolio of Azure dynamic detectors to include additional products for premium applications such as surgery, oncology, and cardiology. We are continuing to migrate customers from legacy amorphous silicon products to the Azure platform and pursuing design wins in premium applications. In our Industrial segment, radiographic inspection applications for castings, pipelines, and additive manufacturing continue to evolve from using film to digital detectors. These applications demand versatile detectors with high-resolution that are bendable to address complex use cases. We believe we are well-positioned to address both these needs along with differentiated software and image processing to accelerate analog to digital conversion in the growing non-destructive inspection space. In addition, we're investing in digital detectors for automotive and aerospace verticals, where we see a growing need for large area imaging with high-energy x-ray sources. Investment in platforms like CT, Azure, and bendable industrial detectors in growing application areas enable us to expand our leadership position with margin-accretive revenue contribution. We expect fiscal 2025 to be a year where we take meaningful steps with a number of novel technologies. We have been laser-focused on developing our photon counting technologies, which we believe can be a key enabler for fast, high-resolution and low radiation dose spectral imaging. We expect adoption of photon counting technology, especially in next-generation CTs to be a new and significant revenue growth driver for Varex. Varex is a leading merchant manufacturer and supplier of photon counting technologies. We are actively engaged with large imaging OEMs to integrate our photon counting detectors technology in their next-generation CT system designs. We are excited about the prospects of working with these OEMs as well as other medical imaging OEMs to drive further adoption of photon counting technologies. In our Industrial segment, where we currently generate the majority of photon counting revenues, we are expanding applications and our customer base. Specifically, we're seeing continued interest and adoption by new OEMs in both food and recycling inspection applications. We're excited about these verticals as well as growing opportunities in battery, oil and gas, security and aerospace inspection. We believe that the industry is at an inflection point in both our medical and industrial segments with photon counting and we expect to see increased adoption in fiscal 2025. Given the potential size of photon counting market and our position as a leading merchant supplier, we anticipate an increase in revenue ontribution from products using this technology in the near future. As we highlighted earlier this year, we target Photon Counting Technologies to contribute approximately $150 million in annual revenue by fiscal 2029. In our Industrial segment, we are excited to bring a portfolio of cargo inspection systems that include a portal, a gantry, a mobile scanner, and a car scanner to the security inspection market. In fiscal 2025, we plan to launch these solutions, utilizing our years of experience integrating our high-energy linear accelerators into third-party scanning systems. We know these applications very well as we have provided the core imaging components such as linear accelerators, detectors, software and services for these types of systems for many years, and we believe we can provide differentiated value directly to end customers. I'm happy to say that we have successfully completed a few cargo inspection systems installations and have additional installations underway. We are working actively to establish distribution channels and participate in tenders worldwide. This end-market is tender-driven and can be very lumpy, but we see a long-term potential for revenue and margin contribution from equipment and services with these solutions. Our India expansion plans continue to make progress and we remain on-track to begin production of components in India during the third-quarter of fiscal 2025. Our initial objective for India is to establish low-cost manufacturing for our radiographic components in a very competitive market. We have outstanding product knowledge and with an improved cost structure, we're confident that we can grow our sales of radiographic components. In the past, we have talked about our investments in Nanotube or cold cathode technology. We recently completed a full technology transfer with Micro-X. We're pleased to announce that we will begin shipping evaluation kits consisting of nanotube-based x-ray tubes and tube control electronics to several customers. In addition, our R&D teams are engaged with OEM customers who are in early stages of commercializing this novel technology, and we look forward to working with them to bring innovative systems to market. As we look-forward to fiscal 2025, we believe we are taking the necessary steps to expand our leadership and drive future growth. As noted earlier, in terms of market dynamics, we expect the impact of destocking by medical OEMs to subside in the second-quarter of fiscal 2025. In China, while we have not seen a measurable uptick in our incoming order rate, we are encouraged by the potential of stimulus funds making their way into the healthcare system. Before handing the call to Sam, I'd like to briefly touch on the effect of potential changes to tariffs on our business. The effect is currently unknown, but we will continue to monitor developments in this area and adjust our operations where possible. Meanwhile, we continue to advance our local-for-local manufacturing as well as supplier diversification strategies. Our initiative to manufacture in India for global consumption may also help mitigate some of the impact of potential changes in tariff policies. With that, let me hand over the call to Sam.

Thanks, Sunny, and hello, everyone. Our revenues in the fourth quarter were $206 million towards the high-end of our guidance range. Although our non-GAAP gross margin was 33% at the low-end of the projected range, our non-GAAP EPS was $0.19, exceeding the high-end of our guidance. Comparing the fourth quarter to the same period in fiscal 2023, revenues decreased 10%. This decline was primarily due to a 12% reduction in our Medical segment attributed to ongoing inventory adjustments by our customers. Despite a strong performance, our Industrial segment experienced a 4% decline year-over-year, largely due to the challenging comparison against the record revenues achieved in Q4 of fiscal 2023. By segment, medical revenues amounted to $144 million and industrial revenues were $61 million. Medical revenues constituted 70% of our total and industrial revenues were 30%. Over the fiscal 2024, these proportions were 72% for medical revenues and 28% for industrial revenues. Analyzing revenue by region, Americas saw 11% decline compared to the fourth-quarter of fiscal 2023. EMEA revenues decreased 8% and APAC revenues declined 9%. For fiscal 2024, our sales to China reached $118 million, reflecting a 20% decline compared to the previous year and represented 15% of Varex's sales. We are cautiously optimistic about the sequential quarterly increase in sales to China. Although we observe early signs of the anti-corruption campaign easing and stimulus funds gradually making progress, major capital equipment investment is still pending. Let me now cover our results on a GAAP basis. Gross margin for the fourth-quarter was 33%, a decrease of 170 basis-points year-over-year. Operating expenses were $56 million, an increase of $2 million compared to the fourth quarter of fiscal 2023. Operating income was $11 million, a decline of $13 million from Q4 of fiscal 2023. Net loss was $50 million, primarily due to a valuation allowance related non-cash tax charge of $52 million. GAAP EPS represented a loss of $1.22 based on fully-diluted 41 million shares. For the quarter, non-GAAP gross margin was 33%, down 270 basis points year-over-year, mainly due to lower-volume and an unfavorable sales mix in our Industrial segment. Higher equipment sales and lower service sales contributed to this unfavorable mix. For full-fiscal 2024, gross margin was 32%, down 110 basis points compared to full fiscal 2023, due to the same reasons of lower-volume and unfavorable industrial sales mix. R&D spending in the fourth quarter was $22 million, similar to the fourth quarter of fiscal 2023, representing 11% of revenues. SG&A was $31 million, an increase of approximately $2 million compared to the fourth quarter of fiscal 2023, representing 15% of revenues. Consequently, operating expenses totaled $53 million, an increase of $2 million year-over-year, representing 26% of revenues. For fiscal 2024, operating expenses were $210 million, an increase of 5% compared to fiscal 2023, representing 26% of revenues. Operating income was $14 million, a decrease of $15 million compared to the previous year and operating margin was 7% of revenue, down from 13% in the fourth quarter of fiscal 2023. For the full-year, operating income was $52 million with an operating margin of 6% of revenue. Tax expense in the fourth quarter was a benefit of $2 million or negative 30% of pre-tax income compared to $1 million or 6% in the fourth quarter of fiscal 2023. The tax benefit in the fourth quarter was due primarily to reflect favorable adjustments in the US and Germany on full-year tax returns. Due to this, for full-fiscal 2024, the tax expense of $1 million or 3% of pre-tax income was unusually low. Net earnings were $8 million or $0.19 per diluted share compared to $0.45 in the year-ago quarter. Average diluted shares for the quarter on a non-GAAP basis were $41 million. For fiscal 2024, net earnings were $22 million or $0.55 based on average diluted shares of $41 million for the year. Now turning to the balance sheet. Accounts receivable increased by $6 million and days sales outstanding increased by four days to 70 days in the quarter. Inventory decreased by $17 million in the fourth-quarter and days of inventory improved by six days to 174 days. We are pleased with our inventory reduction efforts in fiscal 2024 and while some of this was the result of lower sales, we remain focused on maintaining efficient inventory levels moving forward. Accounts payable decreased by $11 million and days payable decreased by six days to 39 days. Now moving to debt and cash-flow information. Net cash-flow from operations was a solid $26 million in the quarter due primarily to the $17 million reduction in inventory. We ended the quarter with cash, cash equivalents, and marketable securities of $213 million, an increase of $21 million from Q3 of 2024 and $18 million from fiscal year end 2023. Please note that $213 million includes $169 million of cash and cash equivalents shown on the balance sheet, $41 million of marketable securities and $3 million of certificates of deposit recorded in prepaid expense and other current assets. Gross debt outstanding at the end of the quarter was $447 million and debt -- net of $213 million of cash and securities was $234 million. Adjusted EBITDA for the quarter was $23 million and adjusted EBITDA margin was 11% of sales. Our fiscal 2024 adjusted EBITDA was $89 million and 11% of sales. Our net-debt leverage ratio was 2.6 times of adjusted EBITDA on a trailing 12 months basis. Now moving to the outlook for the first quarter of fiscal year 2025. In terms of market dynamics, we expect sales to China to remain stable at current levels. We are encouraged by the potential China stimulus funds making their way into provinces, but we have yet to see a follow-through impact on our incoming orders. Elsewhere, we expect destocking by medical customers to subside in the second quarter of fiscal 2025. Before I provide guidance details, please note that Q1 of 2025 will include 14 weeks of operating results. It is important to keep this in mind when evaluating seasonal trend for the subsequent quarter. The additional week is expected to contribute approximately $15 million in revenue in Q1. Revenues for the first quarter are expected between $195 million and $215 million and non-GAAP EPS is expected between a loss of $0.05 and a profit of $0.10 per share. Our expectations are based on non-GAAP gross margin of approximately 31%, non-GAAP operating expenses of approximately $53 million, including $1 million for the final Micro X-related milestone payment and the extra operating weeks. Interest and other expense net in a range of $7 million to $8 million, tax rate of about 22% for the quarter and non-GAAP diluted share count of about 41 million shares. With that, we will now open the call for your questions.

Thank you. We will now be conducting a question-answer session. [Operator Instructions] Our first question comes from the line of Suraj Kalia with Oppenheimer and Company. Please proceed with your question.

Sunny, Sam, hope you're well. Congrats on a nice quarter.

Thank you.

Thank you.

So Sunny, couple of questions for you and one for Sam. Sunny, obviously, China stimulus, right, it has been part of your prepared remarks. How are you all thinking about the level of China stimulus? And part of the reason I ask is, our field checks are suggesting that China stimulus, the level of -- or the amount of stimulus may not necessarily jive with original expectations. I'd love to get your color on that. And how you all are adapting to the level of the stimulus?

So, Suraj, as we indicated that we've seen an uptick in our orders in China, but we are not yet attributing that to the stimulus. It hasn't been large-enough for us to be able to say that the stimulus program has made its way through the whole-system to the provinces, to the healthcare systems and then buying OEMs and to us. So we haven't felt the effect yet. So that's why we -- it's muted for us right now and we're watching it. Now any stimulus is good and we appreciate that, but we have not seen the effect. And so that's why we've been careful about our projections for China growth.

So FY 2025 is not necessarily predicated on a certain level of stimulus flowing through. Is that the right way to think about it?

That is correct. And the way we're seeing it at this time, we have not made any baked any significant assumptions based on any stimulus.

And Suraj, just one other element I wanted to add is that I think we would agree with you that only a portion of the overall package is going towards healthcare and perhaps we would have been more pleased if that quantum for healthcare was a little bit more.

Fair enough. Sunny, photon counting, right, I think the benefits of photon counting are pretty obvious. At least theoretically, they are pretty obvious, right? But Sunny, as you all rollout and this is on an apples-to-apples basis, it is a smaller market currently, how do you think about differential marketshare gains as the velocity of photon counting picks up, adoption picks up, GE has their own photon counting, Phillips has their own, you guys providing to OEMs of their own. So what differentiates necessarily one from the other to cause marketshare gains for you all?

Yes. So great question, Suraj. So photon counting, first of all, as you said, the benefits of the technology is now understood. And that's why we feel good about the fact that we think it's reached a tipping point where this is where adoption starts to increase as many OEMs start to experiment with applications. The way we see -- photon counting for us falls into a few different categories, all of which we think can -- we can differentiate on those. It's a combination of there is the hardware and then there's the software. So on the hardware side, the -- there's the speed, the speed of the detector and its ability to process very large number of photon counts per millimeter square per second is important to be able to do two things. First of all, the type of application that it supports. And secondly, its ability to create many different energy bins. So that's one of the main attraction of photon counting that the energy separation can be large enough that you can do things with more precise material discrimination, you'd be able to get to the higher-tier of clinic -- potentially clinical benefits of being able to perhaps improve the workflow by reducing the need for contrast media, contrast agents. Once you get to that type of benefits that the application can take advantage of, then you start to see the separation of the crowd of the technologies. So we're focused on those things, resolution, speed, sensitivity of the detector and ability to process with multiple energy bins. This is mostly on the hardware side. On the software side, we bring our years of experience with digital detectors to the same to do image processing in a way that further enhances what comes out of these detectors. So those are the -- in a simple way, that's how I see our ability to position ourselves in a leadership role.

And this would -- there would -- the price elasticity of demand in photon counting?

At this time, most of the applications are focused on the higher tiers, the premium tiers of the CT systems. We have customers who are working with us that are looking at both the high tiers, but also looking at democratizing the technology, so that it can be more broadly available in the mid-upper type of tiers. And then we also have customers that are looking at other applications, various forms of tomography, tomosynthesis type of applications, right? So it's early, the technology is in its early phases. So the costs are higher. And once we start to scale-up, we'll see that the industry itself will move towards perhaps better pricing, better cost structures that will allow the technology adoption to accelerate. We went through this exact same cycle with digital detectors. So I'm not exactly sure what your -- what you mean by price elasticity. I think at this point, the -- our OEMs are focused mainly on getting the right applications out of the door, knowing that it's early-stage in the technologies and it's costly. Now that said, one of our advantages is that we -- since we serve both the medical and industrial segments, we're able to do two things. We aggregate scale across OEMs and across two different market areas. So that gives us the ability to take the benefits of scale. The most expensive thing in photon -- sorry, the most expensive part of this technology is the material itself, cadmium telluride.

Yes, got it. Sam, I promised last question and I'll hop back in queue. Sam, gross margins, right, you all had a roadmap -- you all have a roadmap in terms of gross margin expansion. At this stage of the game, how much would you say gross margin -- incremental gross margins are more macro event specific driven how much is company-specific synergies changes that can be implemented to squeeze-out marginal gross margins from this point on? Gentlemen, congrats again, and thank you for taking my questions.

Yes. So thanks, Suraj. There are company-level energies and efforts and initiatives that we've been taking to improve our gross margin. If you look at our medical segment, and as you know, we disclose gross margins by medical and industrial code segments. On the Medical segment, gross margins have improved steadily over the last few quarters. And there we are benefiting from freight cost reduction, supplier diversification efforts, vertical integration, also currently in medical gross margin benefits because the mix is a little bit less from China. And then also at this time, we are benefiting from the pricing-related efforts that we executed on previously. So on the Medical segment, we have improved the gross margin. But when it comes to the Industrial segment and our Industrial segment has been growing faster than our Medical segment and that is also a segment where generally we have higher gross margins. So what is happening with Industrial segment, even though sales are increasing, our gross margins have steadily come down. So generally, if industrial proportion of sales is increasing, we would have seen our gross margins pick up, but that has not been the case. And that is because we are shipping unusually high volume of linear accelerators into the cargo inspection market. And these [indiscernible] are at low margins, much lower than corporate gross margin. And as their volume has picked-up, that has brought the overall gross margin for the industrial segment down. So overall, corporate gross margins have been weighed down by the industrial segment's gross margin. We hope and some of this is our energies, but then at the same time, some of this is also market-driven. We hope to swap this volume with higher-margin industrial tubes, industrial detectors or cargo systems. So as industrial segment picks up, along with the medical segment gross margin improvements that we have made, I think we remain on point to continue to work towards mid-30s type of gross margin. But those are the things. I would also say that the overall volume needs to pick-up, particularly destocking needs to subside. We are seeing tailwinds of that, so that should be helpful. Also when China comes back, although from a mix perspective, it would be margin-dilutive, but overall volume perspective, it might help us. So those are some of the market-driven dynamics and I also talk about some of the energies that we've been working on in this area.

Thank you.

Thank you. Our next question comes from the line of Kyle Bauser with B. Riley Securities. Please proceed with your question.

Hi, everyone. Great quarter and thanks for taking my questions. Maybe I'll start in the oncology segment. It looks like it stabilized compared to last quarter and the five-quarter average. Can you talk about any dynamics that cause this or is there anything to call out here?

Hi, Kyle, this is Sunny. No particular dynamic that I can pinpoint to other than perhaps the destocking phenomena, you know, was started to subside there as well. It's been more or less the same type of same products, nothing unusual.

Got it. And maybe we'll stick on the destocking situation. So glad to hear you expect it to kind of stabilize by the second fiscal quarter and you talked about it kind of already seeing that pattern in the oncology segment. Can you talk a bit more about what you're seeing here to give you confidence? Is it the ordering patterns or discussions with clients that give you confidence here? Any color would be great.

Yes, I'll get it started and maybe Sam can chime in and provide his color as well. A few quarters ago, when we started pointing this out, the -- for us, the leading indicator for us is our inbound order intake rate. You know, we have fairly fast-moving order to shipment process and the inbound order intake rate as we see ups and downs in there, that gives us early indicators into what's going on in the market and we can generally look at something that's 90 days out. In there, we saw this phenomenon. And as we looked at the rate, the downward slope on the order intake rate, we started working with customers and then we saw it start to stabilize and now we've begun seeing early indications of upticks, particularly in China. So that's what's giving us and plus that's the data plus the conversations we're having with our customers, giving us an indication that they're in sort of the tail-end of their cleanup process, so to say. Plus this is also year-end. December is year-end for most of our customers. So you also see the traditional year-end cleanup. So that's what's giving us the early indications that this might be behind us and starting in the first calendar quarter, we expect this will be behind us.

Great. I appreciate that color. And then lastly, if I may, maybe regarding capital expenditures, how should we think about this line-item to trend given the company's kind of current initiatives and growth strategy, should we anticipate the similar kind of quarterly cadence of $5 million to $6 million?

Yes, Kyle, this is Sam. Let me take that question. So in terms of our capital expenditure plan of a majority of our investment in fiscal 2024, we just completed and also into this coming year is targeted towards building up the infrastructure and the manufacturing capability out of India. So 2024 was a little bit higher than our five-year average on capital expenditure. And 2025 would also stay somewhat elevated. I would expect it to be in the $25 million to $30 million range. Call it flat to FY 2024 or somewhere around that. And beyond that, it should come down, but that's what we are expecting as of now for the capital expenditure for this coming fiscal year.

Okay. Excellent. Well, thanks for taking my questions.

Thank you, Kyle.

Thank you. Our next question comes from the line of Jim Sidoti with Sidoti & Company. Please proceed with your question.

Hi, good afternoon. Thanks for taking the questions. Can you get a little more specific with China? You said it's stable there. I know you did about $29 million of revenue in the third quarter. Can you break-out exactly what the revenue was in the fourth-quarter and what it was a year-ago?

Yes, sure. So China in the quarter just completed, Jim, was $31 million and it was $31 million in the year-ago quarter. So it is stable, although it is stable at lower levels. So the way I would characterize China is that it has stabilized at lower levels. We are not seeing any worsening. And this last quarter was $31 million, but in Q3, it was $29 million. So one might think that it has picked-up. But I would say that is just quarter-to-quarter variation. We need to see a little bit more in terms of orders from China before we begin to say that it is going to pick-up. The timing of that pickup is still uncertain in our mind, but it is definitely not worsening. And that's what we mean by saying that China has stabilized.

Okay. All right. And with regards to inventory management, you said you expect that the destocking to subside by the second-quarter. Are you seeing end-user demand -- your customer demand continue to grow? Is that what gives you confidence to say that?

I would say that on that aspect, it is mostly qualitative and it is mostly based upon our conversations with our customers, although we would get a little bit more rich conversation, so to say, although we have active dialogues with customers all the time. But once they complete their fiscal year in December and when it comes to January, February timeframe, they begin to get us much more concrete with us in terms of what their expectations for the coming year are with us. So the conversations have been happening and based on I would say order rate as well as these qualitative discussions, it leads us to believe that destocking has begun to taper down. Although it will take all the way until January or something like that to fully be done January, February, when we are currently expecting that we would be able to say that destocking is behind us.

Okay. And then last one for me is a balance sheet question. Your plant property equipment, it's up to about $5 million from the June quarter, it's up about $10 million from a year ago. Is that India or what else is contributing to that?

Sorry, Jim. The first part of your question, it got cut out. I could not hear it. Could you repeat?

Sure.

Yes.

Sure. Yes, on the balance sheet, PP&E is up about $5 million from June. It's up about $10 million from a year-ago. Is that India coming up or why is that increasing?

Yes. So PP&E is really a proxy for capital expenditure and that you are right, it is mostly India. And if you look at full-year, that PP&E should be around for the fiscal just ended should be $26 million, $27 million or in that neighborhood. And coming year, we expect it to kind of remain at those levels. Somewhere between $25 million and $30 million, yes.

So should we assume from that the PP&E plant is nearly complete and that should start contributing?

Yes. We are working on two factories in India, Jim. One factory, we are expecting to begin to produce product in the second-half of fiscal 2025. So we have made pretty good progress there. And then the second factory is a little bit behind the first one and that would be probably nine months behind the first one. So the second one, we expect it to go into production in first part of FY 2026. But a big quantum of capital expenditure or PP&E would be behind us by the time fiscal 2025 ends, but there will be still some equipment-related spending, say, in the first-half of FY 2026, but the rate of PP&E or invest -- the rate of investment would come down as we end FY 2025.

And should we assume the products made at those plants that will stay primarily in India and other parts of Asia?

No, not necessarily. Our strategy in India is focused around production in India for global consumption. Our initial strategy is to produce somewhat more competitive products in India, so that we have somewhat of a cost advantage out of production from India. So, essentially, it is a global consumption on the competitive products out of India. And that is the strategy. Yes.

Okay. Thank you.

Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Please proceed with your question.

Great. Thanks. And I guess good late afternoon to you guys. I guess first question, I know you don't -- hey, I know you don't like -- normally don't give annual guidance, but I think in years past, you've given us just a -- at least some high-level revenue guidance or trends. It looks like for Q1, if we exclude the extra week or adjusted extra week, you're about flat year-over-year. I think 190 midpoint, you did 190 last year, right? So -- but could you -- is that what you're expecting for the full-year? Obviously, qualitatively, I think you've spoken about improvement or waning of the inventory destocking. So maybe you can just give us at least some high-level thoughts on where you think that we're going beyond the seasonally slower Q1?

Yes. So I think Larry, China is running at low levels, but it has stabilized. However, the timing for the growth of China is unknown at this time. And also on the destocking side, you know, we are getting more-and-more constructive or feeling better about destocking trends to kind of get completed by January, February timeframe as we said previously. So all of that is good. Those two tailwinds might be coming up our way as we get into Q2 and beyond. However, we need to be cautious at this time due to the incoming administration and potential changes to the tariff regime. So we feel like that we are not in a position to guide full-year at this time. In anyways, we generally do not guide full-year. We go quarter-by-quarter. And so when you take all of these perspectives in mind, we are just providing one quarter at a time.

Okay. And the tariffs specifically, I thought you guys have reduced most of your exposure to that already. So how would the tariffs actually higher tariffs impact you specifically or if you can just not quantify it, but just qualitatively?

Larry, this is Sunny. Tariffs for us the impact comes two-ways. One, for input costs, stuff that we import into the US and those are -- if they're coming from China, they'll be at a higher-rate, if they're somewhere else in the world, 20% rate. So that's input costs. And we have way -- in the past, we've been able to get exemptions. We've been able to get duty drawbacks for what we export out. So some of that can be mitigated. That's number-one. But the more -- I'd say the more difficult part of dealing with tariffs is what happens when we ship completed products out of the US where we -- to the extent that there are retaliatory tariffs and that impacts sales can impact gross margins. That part is unpredictable right now. We don't know exactly -- we don't know what the retaliatory actions will be. So that's the -- anyway, that's the framework for how we're looking at tariffs. Now, to your point, when this happened in 2018, we were in a different place. Since then, we have more local-for-local presence, so we can manufacture certain products in China -- for China. We also, if you look at our detector products, the last-time this happened, we didn't have detector manufacturing in China that you know that could allow us to hold on to that business. However, now we can make the detectors that we make in the US in many of those in Germany and in China. So yes, our resiliency level has increased that should help us in that -- this whole scenario. Also, we have been -- the whole purpose behind making these investments in India is also to have another redundancy in our ability to supply the world from another location so longer-term, that's going to give us additional advantage.

Got you. And the gross margin outlook for 31%, again, I know you don't want to guide to future quarters, but I assume that margin is also artificially depressed because of seasonality, right? Your slower volumes is an extra week, but you also have an extra week of cost, right? So I feel like, again, you don't know what's going to happen with tariffs or I feel like it doesn't impact you that fast anyhow, I would say. But as we look out over the next couple of quarters, I would feel like gross margin probably should come up a little bit, right? I mean that the quarter-over-quarter drop is that based on lower sales over the next extra one-week or what's that drop, I guess, the starters? Is it industrial?

Yes. So Larry, couple of themes in there. When you compare this Q1 guidance of gross margin and stripping out the extra week, we are at $190 million. The year-ago quarter was $190 million also and at that time gross margin was also 31%. So that is one year-over-year compare for you. So we are kind of holding steady there. So business at $190 million is definitely, I would say, below scale and so there is a scale or volume effect on gross margin if you were to look at Q1 as a 13-week quarter. So clearly, scale is there. So we hope to pick-up on a 13-week to 13-week basis, we hope to pick-up volume during the year that should help gross margin. So that's definitely there. And as the quarters come up about in the -- up beyond Q1, we do hope to expand gross margin, just like we did in FY 2023.

Got you. Okay. If I could just ask just one last question. Just on the sort of increased security, gaining solutions. I guess first question, is it -- I know that the players out there say the large -- those couple of larger players, right, would you be competing against them? These are your customers, I guess, right, that you're selling the linear accelerators to? Is that a challenge to compete with your customers? I guess is question one. And then Part B or two to that question is are you going after the same, you got most of the sales today or at least the ones that I'm focused on have been sales to government bodies, whether it's in US, Mexico or other international places. Are you targeting the same customers? Are you -- is your equipment? I looked at it a little bit on the website, some of the pictures you have there. Is it -- I see you have some drive-through stuff and looks like some for cargo vehicles and maybe some for passenger vehicles. Is your stuff targeting the same customers or is it smaller or maybe more private customers? Any feel for that would be great too. Thanks.

Yes. Larry, we believe we can play in this space both as a supplier of components to the other players in this space and also with full systems. Now even historically, we have sold subsystems, which consists of our linear accelerator detectors, our software packages, a variety of things that then someone else, a systems integrator would take and go-to-market. And so we believe we can do a good job of doing both. And we've spoken with our customers about this. They know what we're doing, they understand it and we have differentiated products that makes it worth their while to buy those from us. The space is big. It's large, it is growing and we believe that the types of applications are continuing to grow as well. It used to be only ports and borders now with smaller footprint and mobile applications, it's expanding to other sites. You're seeing them at venues, you're in future, you're going to see them in garages and other places. So we think there's plenty of opportunity in this market for differentiated applications.

Got you. So you will be targeting more some smaller one-off type places or maybe not one-offs, but maybe garages, maybe you get a string of 10 garages that is owned by an operator, but it feels like you're also going to be targeting some more smaller locations than at least the bigger guys have been speaking to. Is that fair to say?

Look, we'll participate based on what we have in terms of products and capabilities. I think you're referring to car scanner. Car scanners, an example of a product that we have where we can go into a niche and do well would be a car scanner. So yes, other players like the ones who are established in this space have the scale and potential and footprint. We're starting out. We're starting from a small number. By the way, many of our -- many people may not be aware, but that there are several of our systems that are installed and continues to be in-service in the US Mexico border through Customs and Board of Patrol. There's probably 20 of these that are already installed. They have been there. We have been in this space. So we do have a good bit of experience, but initially, we're going to look for deals where we believe we have a differentiated opportunity.

I appreciate that. I appreciate the color. Thanks. Bye.

Thank you, Larry. Thank you.

Thank you. We have reached the end of the question-and-answer session. I'll now turn the call back over to Christopher Belfiore for closing remarks.

Thank you. Thank you all for participating in our earnings conference call for the fourth-quarter of fiscal year 2024. The webcast and supplemental slide presentation will be archived on our website. A replay of the quarterly conference call will be available through December 3rd and can be accessed at vareximaging.com/investor-relations. Thank you, and have a great evening.

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