Good afternoon, everybody, and welcome back to the CJS Securities' 26th Annual New Ideas for the New Year Conference. I'm Larry Solow, a research analyst and partner here at CJS, and joined by the management of Varex Imaging. I know it's one of our last presentations of the day, but just wanted to remind everyone briefly of the format of our fireside presentations. We're going to start with a 10-15-minute overview from the company management, and then we will open the floor for a Q&A, which I will moderate. Please feel free, anybody out there on the webcast, submit any questions you have through the portal, and I will absolutely try to weave them into our conversation. With that said, very happy to welcome Varex Imaging back to our conference.
As most of you probably know, Varex is the largest independent provider of components for X-ray imaging systems for both medical and industrial applications, well positioned for an improving operating performance as order patterns and its core medical markets normalize. They've had a rough couple of years, but things have been improving on that front, and expect double-digit sales growth to continue in the industrial segment led by rising adoption of their new fully integrated security screening systems. So with that said, happy again to welcome Varex with us today are Sam Maheshwari, the CFO, and Chris Belfiore, Director of Investor Relations. Thanks, guys. Take it over.
Thank you, Larry. Good afternoon, everybody. This is Sam, and welcome to our presentation, and thank you for your interest in our company. With that, let me first share the forward-looking statements here. Yeah, so here are the forward-looking statements, and I would also encourage you to visit the risk factors that are listed in our 10-K that we recently filed for our fiscal year ended 2025. With that, let me start by providing a quick overview of our company here. Varex is headquartered out of Salt Lake City, and we've been in X-ray business for more than 40 years, even 50 years. Since 2017, we've been doing business as a standalone public company, and prior to that, we were part of Varian for many, many years. On the top right-hand side here, you can see our revenue breakdown.
We have about 70% of our revenues in the medical segment and about 30% in the industrial segment in the last fiscal year, fiscal year 2025, which we concluded as of September end 2025. Geographically, our revenues are quite well diversified, with about a third of our revenues in each of the three geographies of Americas, EMEA, and Asia. We have a global workforce of about 2,300 employees, and the two large products for us are X-ray tubes and X-ray detectors. Between the tubes and the detectors, they make up about 90% of our revenues, and then the software and connect and control and cable type of products, which are somewhat lower in ASPs, they make up about 10% of our overall revenues.
And then from a customer perspective, in the medical X-ray space, we sell to nearly all of the global OEMs, with OEMs like GE, Siemens, Canon, Philips, United Imaging, and others. They are our customers. And then so with that, now let me cover each of our two segments in a little bit more detail. So here's an overview of our medical segment. We participate in nearly all the modalities of the medical X-ray imaging. CT is our largest modality, where we have about 40% of our medical sales go through CT business. I want to remind everybody that in CTs, most of the CT business is generated through selling CT tubes.
As of now, we do not really have a whole lot of participation in the CT detector components, although it is our strategy to penetrate that market or that subsegment of our market, of this market, by leveraging photon-counting CT detectors. Medical business is a little bit more heavy towards Asia, with a large contribution from customers like Canon, Fuji, Hitachi, etc., in Japan, and then United Imaging in China, so APAC is above 40% for medical segment, and this is about a $3 billion overall market, which is growing 2%-3% a year. The driving force for growth in this market are increases in population worldwide, aging of population, affordability of healthcare, and then, of course, new applications. For example, we are looking at a long-term secular growth by leveraging photon-counting here for the next many, many years.
New applications do increase the market for a longer duration in terms of the growth rates. Let me now go to the industrial segment. Here, the market is somewhere between $1-$1.5 billion, and this market is mostly greenfield. Here, what we do is we take our technologies from the medical area and then deploy them towards the industrial applications. This market is growing a bit faster. It is growing 5%-7%, and driven by our own specific strategies to Varex, we are currently growing faster than the market growth rates, given the new products that we are launching in this space. As we break down the subsegments or subverticals of the industrial segment, you could see that the security business is a large part.
That's about 40% of our industrial business, so about a $100 million business for us in FY 2025. So here, we are including linear accelerators that we sell, as well as cargo systems business. And then non-destructive testing, that is non-destructive testing for the automotive sector, aerospace, space, etc., those types of sectors, oil and gas. So NDT also for NDT is also about 40% of our revenues in the last fiscal year for us. The rest of the verticals here are related to government labs, EV battery inspection, food inspection, also agricultural product-related irradiation or sterilization, etc. This business is a little bit more heavy towards Europe and EMEA just because of the cargo space and a little bit less towards Asia. So this is a highly fragmented business.
We are servicing many verticals and many, many, many, many customers, so somewhat of a little bit more of a fragmented market. So with that, let me go to the next page here. So let me now cover a summary of key investment highlights for Varex. The key characteristics here that we are a market leader and we have a comprehensive product portfolio, and we've been in this business for a very long time. There are high barriers to entry in our business due to our IP portfolio, along with a very strong track record for innovation and significant investments in R&D and global manufacturing scale, as well as regulatory barriers to enter the market, particularly in medical. Then I will talk about we have very deep and long-standing customer relationships with very high switching costs.
Then we have a very experienced management team with a proven track record of growing revenues over a long term here, and I'll show some of that data very quickly here in a few seconds. Then also, we are well diversified in terms of our manufacturing footprint so that we can service our global customers who have product needs across various geographies, and we can meet their needs across those geographies. With that, let me quickly cover some of these characteristics and show you a little bit of information there. Here I'm showing Varex's very diverse portfolio compared to our competition. We have a very diverse and deep portfolio. We have about 660 patents, 210 are pending, and then we have R&D teams across various geographies so that they collaborate very effectively.
So participating in all dof these products not only allows us to cross-sell, but also enables us to develop deeper relationships with our customers, and that creates a good competitive situation for us. Okay, next one. Here I'm showing you at the bottom large install base for each of these products that we currently have. What I want to highlight here is that tubes, which is the largest business for us, X-ray tubes, they fail after every few years, and so they need replacement. Similarly, in detectors, customers tend to replace detectors due to electronic product cycle with better resolutions and various other things. So overall, we believe about 25%-30% of our revenues are generated annually due to the replacement demand, and that provides us a good and stable driver for our revenues, at least 25%-30% of that. Let's go to the next one.
There are high barriers to entry in our business. We lead with innovation, and the market has come to expect a lot of innovations from us. We have a rich history of providing these innovative technologies to the market. So this innovation, along with long and sticky relationships with the customers and a regulatory backdrop, creates a high barrier to entry and gives us that advantage in this space. So that's what I wanted to highlight here. Let's go to the next page. Here, what I want to highlight on the right-hand side, some of our top customers and how many years of relationships that we have with them. Customer number two has only seven years. It seems a little bit low, but they have come up very fast.
They are based out of Asia, so they've come up very fast, and that's why that number is low, just because they are a new entrant in this space on a relative basis. Also, on the left-hand side, I want to provide you a perspective on our customer engagement cycle, where our engineers start to work with customers' engineers two to three years before a system is launched. So we start our working relationship on a system two to three years before it is launched. Then that system remains in production for, say, five to seven years. And then after the last system or last unit is manufactured there, there is a need to service that product for another seven years in the field.
You can see that the customers need to trust a vendor that would be there to service the needs all the way in a cradle-to-grave manner for 15 years. And this is the trust that the customers pose with us, and that is one of the reasons why we have such long-standing customer relationships. I do want to highlight that Canon is our largest customer. We have 15%-17% of our revenues that come from Canon, and then top five customers make up about half of our overall revenues. Let's go to the next slide, Chris. And so here I'm showing a history of our revenue growth. Over these 25 years, there's a CAGR of about 8%. We have a very experienced management team now in both medical and industrial, and we have a track record of revenue growth and successful operations.
So with that, Larry, we can go to your questions.
Great. Thanks, Sam. Appreciate that overview.
Thank you.
Why don't we start with a couple of general questions that we're asking all our presenters? I guess the first question for you is just from a high level. How would you compare the current environment today as you look out versus where we stood 12 months ago? Any thoughts on that?
Yeah. So the current environment, we definitely feel we are in a much better position where we are today compared to where we were 12 months ago. 12 months ago, we were dealing with the last stages of destocking by our customers in both medical and industrial segments, and we were also just coming off of the ongoing healthcare industry-related investigations that were going on in China against some of the hospitals and whatnot. So at that time, we were wrapping those up. At this time, all of that is behind us. Of course, between last January and this January, tariffs have been a major area of discussion, and a lot of work has gone on in tariffs.
But at this time, tariffs seem to have become part of the baseline, so to say, and we have rejigged a bunch of our supply chain and moved production between factories and this and that. But at this time, we are dealing with tariffs. It's become part of baseline. We are passing on price increases to our customers. So I would say overall, we feel we are in a better place as of now versus where we were 12 months ago.
Great. We'll come back to that for sure. But then I guess the second kind of just general question. The market increasingly talks about the AI build-out. What does that even mean for Varex? Are we in early innings for you? Are there any areas you're focusing on with AI? Perhaps not. We're just trying to get a little feel for that across our companies.
So, for the AI as an infrastructure build-out, that really we don't have a whole lot of play there. There might be small play in terms of some sort of an inspection through our industrial segment, but that would be small. I would say we are more in the category of AI beneficiary or AI user, so to say, and we are beginning to deploy AI in our manufacturing and testing areas, quality control, and this and that. So we are a little bit. I would say we are in the journey of AI user as opposed to a beneficiary of the AI infrastructure stream.
Gotcha. Okay. Good. Let's move onward to some more specific Varex questions. First question, and you kind of touched on it with some of the issues that I think impacted the last year, but a lot of questions sometimes we get just from people who don't know the story. We look at you have a great track record of growth, but if we look back since fiscal 2022, revenue has been basically flat, and your earnings have been, I think, declining. You had a nice little rebound in 2025, but if we look at just kind of the 2022- 2025 timeframe, again, you sort of touched on it, but can you maybe elaborate on it a little bit more and why we think we're at a period now where we should continue to have growth going forward?
I think the add-on to that is the R&D pipeline, and I think the outlook there is a lot stronger today than it was in fiscal 2022. Maybe.
Yeah. Yeah. So let's unpack that question into two parts. One is on the sales, and the second one is on the earnings. So on the sales front, there have been certain events, including, say, tariff and prior to that, supply chain and this and that. But as you said, look at it from a three, four, five-year perspective. I would say that both of our segments are growing markets. One is 2%-3%, as I highlighted, and the other one is 7%-8%. We've been growing very nicely in industrial, as the data clearly suggests, and then you can look at it. But our medical business has not grown at that rate. And I would say detectors has been a particular challenge for us in the sense, particularly the Rad segment of detectors.
So high-end detectors, they've been fine, but on the lower-end Rad detectors, in the last four, five years, the competition from Asia has really created a very price-sensitive market for us. So we've seen price erosion there in the Rad business and detectors overall, and then we've seen also market share loss for Varex in the Rad detector space. So that has caused some deceleration in the sales growth for Varex in the past. However, as a result of that, we've started to build two factories in India focused on the Rad market so that we can release much more lower-cost products. So we've been doing some engineering work on coming up with lower-cost products and then also manufacture them out of India so that we can compete effectively against the Asian competitors in the Rad space.
So at this point, and as I project out next three, four years, I'm looking at it as a source of growth, which has been a source of lack of growth, so to say. So that has been the reason for the flat sales overall. And as you peel the onion, so to say, tubes has been growing. Connect and control business has been growing. All the other businesses have been growing, and of course, industrial has been growing the fastest, except the detectors, as I explained. And then in this environment, what has happened is that we've been investing quite a bit in R&D and also SG&A, as well as CapEx to bring up two factories in India. So it's been now two years we've been doing the construction, and we are towards the tail end of that phase. So one factory just went live.
Now we are ramping it up. So there are operating costs to bring the factory up, and then the second one also we are expecting to bring it up over the next 12 months. So what I'm trying to say is that the P&L has had a bunch of R&D costs for cargo systems-related product development with only a little bit of revenue. We've started to see traction there now. We've also had a lot of investment in photon counting, and we are continuing to invest in photon counting. So we expect to see top line there in maybe two years or so here. And so between India Rad, photon counting, and also cargo systems, we've been investing, and that is the reason for the earnings. But we are hoping to turn the corner here and go on to the positive side.
Great. Now, that's a great segue into my next question because I know you mentioned R&D has gone up significantly. I know you took some of the tax savings from way back, six, seven years ago, and applied that to R&D, and these are long-cycle products. But you mentioned a couple of, I guess, three initiatives that maybe we can talk about a couple of minutes from each. I know maybe you can discuss a little bit more on your investment in India manufacturing, and then we can talk about you mentioned the photon counting opportunities. I guess you have a little bit of existing revenue, but you could talk more about the opportunity. I think you mentioned CT. And then lastly, the cargo, the fully integrated systems, that'll be great.
Yeah, sure. Let's start out with cargo inspection first. Right now in cargo inspection, we have released a couple of products, and it is our strategy to release a few more products. When I say products in cargo inspection, I mean a mobile rail scanner, portal, gantry, etc. Those are the different product types. We have released some, and we are working on releasing a few more. Our strategy is to complete the portfolio release out on the products in cargo inspection area. We released some, and then some of them are already deployed. We have very good success in the early deployment. We have one business of about $55 million. A few of those systems are already out there operating, and then a few others are through the factory to get deployed soon here in the next six months or so.
So that is what we've been working on in cargo. And for cargo manufacturing, I forgot to mention that we brought up a factory in the U.K. So in Stoke-on-Trent in the U.K., that is where we have ramped up our manufacturing for cargo systems. So linear accelerators are produced in Las Vegas. They are then shipped to England, and then from there, the systems go to the end customer. So that's there. In terms of an opportunity, that is the cargo systems market itself is about a couple of billion dollars in size, and we are saying in three-to-four years, we are targeting $100 million or more in terms of ongoing revenues. So that is a fairly good opportunity for us. We have seen very good early traction and more to come on that.
We are in the very early innings of that strategy and the deployment of business there. So that's cargo inspection systems. Secondly, let's come to photon counting. In photon counting, we are doing on a run rate basis about $30 million annualized revenue as of now. It's been growing, but most of that revenue is being generated by industrial applications, particularly food inspection and oil and gas and a couple of other applications there. So that business in the industrial side is growing. It is growing secularly in a very nice way. But the main focus area for us is leveraging photon counting technology to enter CT detector market. That market, we estimate that's the size of that market. We estimate it is close to $400-$500 million because one CT detector is a couple of hundred thousand dollars a piece.
The ASPs are very high. We have been working with two OEMs already. With the first OEM, we started working a couple of years ago. We've made a lot of progress with them, and now they're working on their system side so that we are hoping that they release their system. As you know, in our business, we work on our side, and then we wait for our customer to launch their product. That is where we are on the first customer for CT detector. We are now working on the R&D aspects very heavily with the second OEM. That's where they are. That's where we are. We are looking, and we are also then doing qualification work with a few others. We hope to. Our aim would be to get four OEMs with whom we are designed in.
But we are, as of now, well set with two, but then we have two more to go. But there's a lot of traction there. It just takes time. And then in terms of photon counting, what we are saying, because this business takes a little bit longer, it has long cycles before it fully ramps up. So we are targeting about $100 million of incremental business in photon counting by our fiscal 2029. So I would say about four years. So that's photon counting opportunity. And then the third one is the Rad opportunity, which we used to have revenues in the market, but then we had the market share erosion.
And with the India strategy and low-cost products as we release them, both in tubes and in detectors, we are targeting, again, about another $100 million in growth in our Rad segment. Now, for Rad, all the customers in medical, they know us. Our name is very well known. The quality of our imaging is well established. It's just that we need to meet the price points. And so that is what our strategy is to regain market share in Rad. That said we are thinking because Rad does not require that much of a qualification cycle, we are thinking we may be able to achieve our goals sooner, provided we are successful, and maybe we are able to have a meaningful pickup in 2027 in Rad with getting close to $100 million by 2028, 2029. So those are the three opportunities that we are very, very excited about.
Gotcha. No, that's great. That's a really great color on all that stuff. So on the build-out of security, I guess around the world, I guess you're benefiting two ways, right? So you're selling the linear accelerators still to OEMs, but then you're also building out your own systems. The question there is, do you ever cross with your current customers today? We get that question sometimes. Is the market big enough where you can both coexist without any issues?
Yes, so the market is big, and you are right that we are, it's kind of like a co-opetition in which we have our customers, and then we also are competing with them. That is true. That is happening, but we have created a governance model in which we are, it is our desire to maintain the current customers. And as long as we are providing good delivery, we are not changing priorities in our favor versus our competing customers, so to say, so as long as we have good transparency on delivery, we are also providing decent prices, and then we are not moving around on prices.
So as long as delivery, pricing, customer service, and all of that is taken care of, we are hoping that the trust is maintained by our existing customers so that they can continue to buy our linear accelerators, and at the same time, we can compete effectively against them with our own cargo systems. Now, keep in mind that our linear accelerators are very, very well established in the market. In fact, in many tenders, the tenders would say that the cargo system is required to have a Varex linear accelerator. That happens, and so the end customer really does know Varex, and our footprint through linear accelerators may be wider and broader than any of the other competitors on the cargo system side, so all these end customers do know us.
Our brand is very well known, is trusted, and they all know that we provide a very stable, reliable, high-performing linear accelerator, which is the most complicated part of a cargo system unit, so to say. So we have recognition. We have a brand. Customers know us. And so those are the things, and that is our strategy that we are trying to leverage to be successful in that side of the business.
Gotcha. I know we have a couple more minutes left, but I just want to discuss, you mentioned pricing and tariffs a little bit. So I guess two questions there. Just on tariffs, will the impact be a little bit greater this year because you only had, I guess, a couple of quarters of your impact in fiscal 2025? And with pricing, I guess, have you implemented additional price increases to offset some of these tariffs?
Yeah. So we have implemented price increases for all of our customers to be compensated for the tariffs, and we are being successful at it. You are right that tariff becomes more and more burdensome as we go with it because the way accounting works is that it gets capitalized into the inventory, and then it bleeds from inventory into the P&Ls. But at the same time, the pricing also is working similarly in the sense for certain customers, as we increase the prices, we had to give them notice, and there's kind of a delay between price increase and when we begin to realize that price increases. So our goal will be to offset the price increase with the cost increase. It may not work out exactly that everything matches to the dollar on a quarterly basis, but that is where we are.
Now, I do want to highlight that our gross margin as a percentage is getting impacted by the tariffs because we are not putting a markup on the tariff cost. We are simply passing on the same tariff cost to the customer. So on a percentage basis, it has a little bit of a degree of effect, but not on gross profit dollars.
Not absolute dollars. Right. No, I get that. Great. I appreciate that clarity. And okay, and then a couple of minutes left, just free cash flow, capital structure. So your debts, actually, your leverage, I think it's down, but it's back to its lowest it's been since you spun from Varian. I guess a couple of questions. I think you have a bond outstanding that may be called soon and then goes. So any thoughts on the bond there? And then I guess your appetite for M&A now that your leverage has gotten improved.
Yeah. Yeah. The net leverage is in a very comfortable position. I believe we are around two and a half times our EBITDA turns on net leverage ratio. That is very comfortable for us. We have said that we don't want to be crossing beyond three. So yeah, that does create a capacity or room for some sort of deployment for M&A. But at the same time, right now, I'm focused on taking care of the upcoming refinancing. And what I mean by that is our current high-yield bonds go current. They'll go current on balance sheet in October of 2026. So I'm looking at refinancing these bonds before then. And my goal would be to slightly reduce the overall gross debt. I'm also looking at gross debt to equity. So I'm looking at reducing the gross debt.
In that regard, in the very short term, in the next six, nine months, I'll be looking at further reduction in leverage ratio. And then some of the goals for financing for me would be to reduce the interest burden for us so that it reduces the coupon and then also reduce gross debt a little bit so that we can reduce the overall interest burden on the P&L and then refinance it successfully. That's what I'm looking forward to do on the capital structure side. Beyond that, you are right that it may free up some capital for us to do M&A. And we may have opportunities, small opportunities to pick up channel partners for industrial because it is a very fragmented and diversified business. So there are some opportunities in the industrial segment for us.
We may do that, but I would say right now, my main focus is deleveraging.
Gotcha. Okay. Great. I appreciate that, Sam. And I think we're just about out of time. I want to thank everyone for joining. I want to thank Sam, you, and Chris as well. And I'm going to hand it back to you just for any closing remarks you might have.
Yeah. Well, thanks, everybody. Thanks for interest in our company. And I would just say that we've been investing quite a bit, and I think there are a number of really exciting opportunities ahead of us, and we are really excited about them and would like to share that excitement with you. And we are happy to answer any questions. Please reach out through Larry to us or reach out directly to Chris, and we'll be happy to help out any and every question that you may have.
Great. Thank you, Sam. Thank you, everybody, for joining, and have a great late afternoon or early evening.
Thanks.