Hello. Good afternoon. I'm Larry Solow, partner and research analyst at CJS. I'm happy to welcome Varex Imaging with us today, our Sam Maheshwari, CFO, and Chris Belfiore, Director of Investor Relations. They're going to give us about a 15-minute or so overview of the company, and then we will open the floor for a Q&A, which I will moderate. Please feel free to submit any questions you might have through the portal, and I will certainly try to ask them. With that said, I'll hand it over to Sam. Please go ahead, Sam.
Thank you, Larry. Good afternoon, everybody, and welcome to this presentation of Varex Imaging, and thank you for your interest in our company, so with that, let's go to the next slide, and please review our forward-looking statements here, and also, please do review the risk factors that we've highlighted in our 10-K for the fiscal year ended 2024. Next slide, so with that, let me start by providing a quick overview of our company here. Varex spun out of Varian in 2017 and became a standalone public company. Between standalone company and Varian, we've been in business for more than 40 years. We are a large manufacturer of X-ray components in the world. The two main products for us are the X-ray sources and X-ray detectors, which we sell to large global OEMs like Canon, GE, Siemens, Rapiscan, United Imaging, and many others.
We lead with innovation, and we have a strong portfolio of more than 635 patents. On the top right side, you can see our revenues were 72% in the medical segment and 28% in the industrial segment. Geographically, our revenues are well diversified, with roughly a third across each of Americas, EMEA, and APAC. China is roughly half of APAC revenues for us. We are headquartered out of Salt Lake City and have roughly 2,300 employees. With this overview, let me now go over to each of the two segments in detail. Let me first cover the medical segment. Medical sales, as I said, are about 72% of total Varex sales. We participate in nearly all of the modalities in X-ray imaging. CT sales is the largest portion, at about 40% of total medical sales.
In CT, nearly all of our sales are from X-ray tubes, since today we do not participate in the CT detector space. Total available market for medical segment is roughly $3 billion, and it's growing about 2%-3% per year. The key drivers for market growth are population, aging of population, new X-ray applications, and affordability of health care. Let me now cover some of the imaging technologies on the next slide. So there are various technologies available in the medical imaging area. However, Varex's domain is only X-ray and CT, and CT is also an X-ray application. So we primarily do only CT and X-ray. We do not sell components in MRI and ultrasound and PET scanning applications. So with that, let me cover on this slide a schematic of a generic X-ray system.
And here you can see the various components that are in the system and where we contribute. We are focused on X-ray tubes and detectors, as well as accessories, including high-voltage cables and certain software. Overall, at a company level, the majority of revenues derive from X-ray sources and detectors, and they contribute about 90% of our revenues. The remaining 10% of sales is made up of high-voltage cables and connectors, AEC, as well as software business. The majority of our software instances are related to breast imaging applications. So with that, let me now cover our growth initiatives in the medical segment. We are working on three key growth initiatives in the medical area. The first is related to photon-counting detectors.
Photon-counting allows, as a technology, it allows a significant reduction in dosage, while at the same time, it provides a much higher quality of image with a higher resolution. And also, the quality of image is improved because of the ability of this technology to provide spectral imaging. The primary driver of adoption for us in photon-counting is CTs, currently in the CT detector area. And Varex is a leading merchant manufacturer of photon-counting technology. So we are, at this point, in development agreement with one large OEM, and it is our goal to get into development agreements and subsequent release with more OEMs after we complete our engagement with the first OEM. The second area for growth for us is the high-volume radiographic components. This is a competitive market, and we have known this market in the past.
However, this market is somewhat price competitive, as I said, and our cost, it is our aim to bring down our cost with our manufacturing initiative in India, and that would enable us to compete more effectively in this market, and then the third one is on nanotubes. We recently completed our technology transfer from Micro-X, which is an Australia-based company, and at this time, we are shipping evaluation kits to several customers. From a revenue perspective, significant revenues from nanotubes are still four to five years out because it is a pretty significant, it is a game-changing technology, and it'll take some time for its release and adoption to become significant in terms of revenue contribution, so with those growth initiatives, let's go to our smaller segment, which is the industrial segment.
This segment makes up 28% of our revenues, and the total available market here is $1.3 billion for us. It is growing a bit faster than the medical segment. It is growing somewhere between 5%-7% per year because there are a large number of greenfield and evolving applications. On the top right, you can see that security inspection in FY24 was a large part of this segment for us, almost 40% of our sales. This segment, it's a highly fragmented market, and we sell many products to many different customers in many different verticals. Historically, our X-ray applications have been adopted from our medical business, but recently, technologies like photon-counting, as I discussed, have more of field uses in industrial first.
Today, we are already generating revenues from photon-counting in the industrial segment in between $15-$20 million annually, and it is also growing quite rapidly for us. There is a lot of demand for that, and particularly in terms of new applications of photon-counting in industrial. So with that, let me talk about some of the growth drivers in industrial. So even though the market is quite fragmented, some of the fast-growing verticals are shown here, and the energy levels of X-rays vary quite widely for the industrial applications. Here, security, which is a very high-energy application for X-ray, and then food quality or fish inspection, it is kind of on the low-energy side. But some of the areas which are high-growth drivers for us are related to pipeline inspection, refinery pipeline inspection, border patrol, border and port area-related applications for security, fish and poultry, EV batteries.
Then also, in the last few years, we've announced standalone systems in verticals like irradiation from a consumer safety perspective. I also want to highlight that recently we announced that we are also planning to enter the security inspection cargo systems market. Let me cover a little bit more about the growth initiatives in this segment. The first one is the industrial scanning systems that I just mentioned. Historically, we've provided imaging components in the security inspection market and other scanning systems. Our plan here is to leverage our core component expertise and then to vertically integrate scanning systems and sell them to the end customer. Our plan here is to offer systems, including portals, gantries, mobile scanners, and also cargo scanners to the security market. This market is fairly large, and it's growing.
Our estimate is that this market is more than $1 billion in total market and available as we release these products. The second area of growth for us here is related to the industrial flat panel detectors. Our goal here is to drive conversion from film to digital with the help of new flexible detectors, and then also release a number of products related to higher resolution, larger area, or higher energy detectors. We estimate that TAM is about $600 million currently. Let's go to the next slide. Let me now cover some of the highlights for investment in Varex. These include a number of characteristics like market leadership, high barriers to entry, deep customer relationships, experienced management team, and also a long-term track record of revenue growth and profitability. I'll cover some of these in a little bit more detail in the following pages.
With that, let's go to the next slide. We are a market leader with many decades of innovation. You can see that we invest close to 10% of our sales in R&D, and we own more than 600 patents. We have global and diverse R&D teams that collaborate effectively. We also provide a comprehensive portfolio of our component offerings, which differentiates us significantly from our competitors. Participating in such a wide variety of products not only allows us to cross-sell, but also develop deeper relationships with our customers. And this truly is a key investment highlight for Varex. Let's go to the next page. Here, this page shows the milestones in our journey. We've been a standalone company for seven years, but we have 75 years of experience as part of Varian. And then we've made some strategic acquisitions over time.
The one I want to highlight here is Direct conversion in 2019, through which we were able to start out with our photon-counting technology. Let's go to the next slide. And then here, given the long-standing relationships and being part of the imaging systems, we have a very large installed base. Our components, especially X-ray tubes, have a finite useful life, and they therefore need a frequent replacement. The large installed base for these tubes creates a recurring replacement revenue stream for us. And our current estimate is that we are generating 25%-30% of our total revenues from replacement demand in the field. Detectors also do get replaced, but the frequency is much less than those of tubes. And then when a tube is replaced, the customers also tend to replace the connectors and cables that go along with the tube.
So the majority of our replacement revenue comes from X-ray sources, but there is also contribution from cables, connectors, and to some extent from detectors. And then on the software side, we do have maintenance revenue streams, so that also provides us replacement revenues. So with that, let's go to the next page. Here, I wanted to emphasize that we lead with innovation. Over the last many decades, we have released many game-changing and enabling products and technologies to the market. And the market has come to expect new technologies and products from us. These innovative products, along with the trust-based relationships that we have with our customers, and then the regulatory backdrop, they all combine together to create a high barrier to entry in our space. Next page. So here, a perspective on our customer relationships. We have long-standing relationships with our customers.
Just to give you a perspective, our R&D teams begin to work with our customers' R&D teams two to three years before customers would launch a new system, and then this system might be in forward production for 7-10 years, and then beyond that, there is a need to service it in the field for another 7 years, so in that regard, once a product is provided, there is a need to provide our product for 15-17 years. For this reason, we've won our customers' trust that we would be there to support them for their needs through the entire life cycle of a given system, and while we are providing that trust-based support, we are also bringing forward new technologies and products for our customers.
And so as a result, you can see on the right-hand side that with many of our customers, we have many, many decades of relationships. Customer number two here is 7 years just because we entered into a relationship with them in the last 7 years, and that's why that relationship is only showing 7 years. Other than that, with many of our customers, it's quite customary for us to have 20, 30, 40-plus years of relationship with them. And as a perspective, top five customers make up about 40% of our revenues, and then top 10 customers contribute slightly more than 50% of our revenues. And Canon is our largest customer, and our sales to them ranges anywhere between 15%-18% annually, and we disclose that in our 10-K. So with that, let's go to the next page.
I want to highlight here that we have a global footprint and a scale, and we are operating at scale in manufacturing, not only in manufacturing, but also in sales and service so that we can serve our customers at any level and compete effectively. We are continuing to invest in our local-for-local manufacturing strategy, and as of now, we are investing in India. We are trying to bring up two factories there. The plan is to start producing products there within fiscal year 2025. Let's go to the next page, and then this is my last slide here. We have a proven track record with a long-term history of revenue growth. We have experienced solid growth through business cycles driven by our medical segment as well as the industrial segment and also benefit through the replacement revenue stream.
In 2020, you can see sales decline, and we were impacted due to COVID, and in 2024, sales were impacted due to two main reasons. One was the anti-corruption campaign in the healthcare sector in China, and then second, due to the inventory normalization by our customers since they had increased their inventory levels prior to FY24 as a result of the supply chain crisis, and now that in the last 12 months, the supply chain crisis has abated, so the customers have brought their inventory levels down, and as they do that, we saw an impact to our sales, so with that, I conclude my presentation, and Larry, we can now open it up for questions.
Great. Great. Thank you very much, Sam. I appreciate that very detailed overview of the company. I'm going to go ahead and begin the Q&A again. If anybody has a question, please type it into the portal. I guess kind of to leave off, segue from your last comments just about some issues you have with COVID and now you're a little bit of some inventory destocking. Because you talk about a lot of good things in the presentation: long-term growth outlook, distant growth, technology leader, market leader. But yet your financials are kind of pretty flattish almost since you go back even just before COVID. So I guess the question is, what's your confidence level that we can return to once we get some of this stuff in the rearview mirror, get back to a positive growth trajectory without even putting a timeline on it?
But maybe you can discuss some of the issues in a little more detail and sort of the forward-looking outlook.
Sure. We are excited about our growth, Larry. Since COVID, we've been growing. In FY24, we did get impacted both in industrial and medical due to the inventory normalization, and that was a widespread impact, but not just one headwind, we got the other headwind from China due to the anti-corruption campaign over there, and we have 15-18%, about high teens % of our sales coming from China, so China, we are seeing we saw the anti-corruption campaign impact of our growth, and then outside of China, we got impacted by the inventory normalization or the destocking effect, and both of those headwinds are now kind of getting behind us, or they are getting abated, so we should get back to resuming our growth, and it happens. We grow for three, four years, and then there is an impact, but then we begin to grow again.
That's why in this long-term history of, say, 15-20 years, you can see that we've grown quite nicely at 6-8%, 7-8% CAGR over the last many, many years.
Yeah. No, absolutely. It just feels more like macro things have impacted you guys, and they've been, I won't call it the perfect storm, but several things lined up. Going back, even initially, you had tariff exposure, right? And then you had COVID, supply chain. So I guess the question I have now, another sort of one that's maybe out of your control somewhat, is in this environment, people are now focused a lot back on the tariffs or potential impact. And it's probably early or hard to tell what the impact's going to be, but maybe just from a higher level, your exposure outside the U.S. and what you can do, what's in your control, what you can do to prepare for sort of some of these uncertainties.
Yes. So Larry, as you rightly said, when it comes to tariff and our strategies or what we can plan to do, some of it is in our control, and some of it clearly is macro and not in our control, and the details related to the tariff situation are still largely not known at this time, but outside of that, what we have been doing over the last three, four years is that we've been continuously moving forward with our local-for-local manufacturing strategy, so in the last three to four years, we now have a manufacturing footprint in China, and our plan is to service our China-based customers from our China factory, and we've been moving more and more in that direction. We also have a footprint in Europe.
Of course, we do have a large manufacturing footprint in the U.S., and now we are in the process of putting up a footprint in India. So in a way, we are slowly moving towards clusters of manufacturing for those specific geographies. And India and Europe may be a little bit more neutral in the sense that with the help of India, we can get low-cost manufacturing, but it can also be leveraged to produce in India for global consumption. The native demand in India is not very high at this point, but as affordability increases, we are expecting, because of the population, that the demand in India will grow. So if you look at it a little bit at a higher level and with a longer-term outlook, we are positioning ourselves better and better from that perspective.
Now, when it comes specific to the incoming administration and what they have talked about in terms of tariffs, one of the good things that is a little bit better for Varex is that you look at our exports. Our revenues, 66% of our revenues come from exports. So there is the WTO-based, it's been there for quite some time, duty drawback regime, and also a free trade zone and some other mechanisms that we've looked at, and we are working on, we've been working on it in terms of getting ready. So whatever tariffs or whatever duties that are paid to import raw material into the U.S., if you convert it into a product and then export it out for foreign consumption, then the current laws already allow you to draw back those duties.
So there is a little bit of a 3-6 months delay because first you pay the duties, and then you can claim them back. So in that regard, we are much better situated than a company whose sales are predominantly for domestic U.S. consumption insofar as the product is produced in the U.S. So that puts us in a little bit better situation. So that's what we are looking into.
Okay. No, that's great. Let's focus more on some positive things. You've discussed and you've been discussing about the photon counting opportunity for quite some time, going back to the acquisition you made in that area a few years back. And obviously, I think the greatest or the largest single opportunity for you, at least in the near term, next few years, is on the CT detector market. Maybe you could just give us a little more color on that, where you stand today. You mentioned one large OEM, a customer already signed on. Just today, I think you don't participate in that market at all, right? So could you size that market, that opportunity versus, I guess, the tube side and the competitors in that space today?
Sure.
I guess you're trying to displace.
Yeah. Sure. So when it comes to photon counting and its application in the medical segment, the largest opportunity, at least in the short term (and when I say short term, it means in the next 10 years), is really related to the CT detector space. And we do not participate in the CT detector space as of now. We have signed this one large OEM, and we hope that they release their system in calendar 2026. And once it is qualified and launched for full production and adoption in the market, we should be seeing revenues from the second half of 2026 with a further pickup in 2027 and beyond with this one large OEM. At the same time, we are also in discussion with other OEMs, and they would like to work with us so that we can start the development agreement with them.
However, it is quite R&D resource-consuming, this activity. So right now, we're able to work with only one OEM. But as soon as we make progress or reach a certain milestone in terms of development, then we'll begin to work with other OEMs as well. We believe a large OEM can potentially provide us $20-$40 million of photon-counting detector-based revenues for us per customer. So you can see that it can scale up very quickly based on the number of OEMs we are able to sign. So that's on the medical side. Our current projection that we highlighted before is we are looking at about $100 million in medical CT detector business by 2029, and we are hoping by that time we have signed and we have developed a product for three OEMs, and they are in production by that time frame.
Those are our assumptions, and we are making progress towards that. Separately, on the industrial side, we are somewhere in the $15 million-$20 million range for revenues for photon counting. There is a lot of demand for applications in that area also. We expect that to grow a little bit more on a linear fashion as opposed to step manner when it comes to the medical side. We expect this $20 million business to grow to $50 million by 2029 for the industrial space for photon counting.
Gotcha. Okay, and your initiative is in India. So it sounds like you're building out manufacturing there, but it's not like building it and saying, "Hope they will come," because initially, this will be more to support current markets you're in today at a lower cost, and then over time, if that build-out's successful, and there's also it feels like there will be demand within India, and then you'll have a much more local presence. Is that a good way to look at that initiative today?
Yes, that's a good way to look at it. In terms of further simplicity, you can look at us putting up two factories in India, and phase one is production in India for global consumption, particularly for radiographic components, and currently, as you know, those markets, the price points are challenging, and we generally do not have a whole lot of market share in that segment, the radiographic segment, tubes and detectors both, but with the help of India-based manufacturing, we hope to achieve higher market share there and compete more effectively, so through India, we expect to grow for global consumption. That's phase one, and in phase two, as native India demand increases, we are already there. We've built relationships with OEMs over there, and we are seeing some activity of Indian OEMs now coming up, but it takes time.
In phase two, we will be producing from India, not just for global consumption, but also for India-based consumption.
What's the timeline just for phase one? Maybe not without telling me how much sales you're going to get, but when are you ready to sell? When will you have supply at least coming out of India?
Yeah. For detectors, we are expecting to produce out of India before fiscal 2025 ends, so say summer to fall timeframe. And then tubes will be in 2026, call it towards mid to late 2026. Tubes is a little bit more complicated product. So that is our expectation right now. And so we would be shipping those products, detectors and tubes, from India in 2025 and then in 2026.
Got it. Okay. I think we only have a few minutes left. Just a couple of more global questions that we've been trying to ask most of our presenters today. And again, these are global, high level for you. Just as we look out over the next, say, 12, 18 months, 24 months, what are some of the specific milestones or positive catalysts that investors should look for? And then on the flip side, what are some of the risks or, to say it another way, some of the concerns or some of the things that maybe keep you up at night that maybe aren't company-specific, but things you can't control? So kind of positives and maybe some negatives of things that hold you back over the next few years that we can look for.
Yeah, sure. On the positives first, I think the key markers for investors from our side would be milestones related to photon counting, particularly in the medical segment, signing up more OEMs or other milestones with the existing OEMs on the photon counting CT detector side. That would be something that we look forward to. We have plans, and so we are making good progress there. And so that will be great. The one piece, Larry, that we did not touch today is our entry into the cargo inspection market. So there, also, it's a large market. And from a growth perspective, that is an important area for us to focus on. So investors can look forward to hearing from us more about our installations or us winning certain orders or business, obviously, which will then get shipped out and get installed, etc.
Monitoring the markers on the cargo inspection side would be something for investors to look forward to. The third one is India, completing India factories and beginning to ship products from India in the radiographic segment would also be something that we are monitoring, and we are very excited about. It will be good for investors to also hear about. On the risk side, obviously, the thing that is up front and center for many companies is, of course, the incoming administration and the tariff-related discussions and decisions that may come about. Of course, nobody knows the details yet in a concrete manner, but we may need to adjust things. That is what we would be focused on in the next six, seven months. Outside of that, the destocking phenomenon is kind of getting abated. It is kind of getting over.
So that puts us in a positive situation going forward. And then the last one that is also somewhat of a risk abatement is if there's positive development out of China where the anti-corruption campaign is kind of winding its way down, then that may also be positive for us. And we are hoping that the business environment pans out that way because it's been there now for quite some time, and it just has to get ended at some point. So those are some of the things on the positives as well as on the risk side.
Great. I think that's a really good way to sort of end it. Just about out of time. I want to thank you, Sam and Chris, for joining us. Thank everybody out there for listening in, and have a great afternoon.
Thank you, everybody.