Morning, everyone. Suraj Kalia, your Senior Medical Device Analyst at Oppenheimer & Co. Inc. Pleased to have management from Varex Imaging with us this morning. CEO Sunny Sanyal, CFO Sam Maheshwari, and Chris Belfiore, IR. Gentlemen, always a pleasure to connect with you guys. Thank you for taking the time.
Thanks for having us, Suraj.
Sunny, lots going on in this world, and I won't go into the political aspects of it. Since the last earnings call, obviously, you know, tariffs, there has been a dislocation in tariffs. The geopolitical considerations have changed. You know, what are the stress points you see emerging as it relates to Varex?
Well, Suraj, as you know, we get a very broad 360 view of the environment, and that's why over the last several years, as situations have unfolded, we've been able to call out fairly accurately how we expect things to unfold, which started in China, then it moved on to the supply chain issues and moved on to tariffs. Fortunately, you know, I'd say that 2025 unfolded the way we expected, and 2026, we also started off on the note that we had expected, and it still is moving in that direction, regardless of the situation in the Middle East. We don't have much business in the Middle East, at least in the affected country, Iran. Our business footprint is minimal.
That said, the happenings there do impact us, and we have yet to fully understand in what ways it'll impact us. We do carry a lot of ocean freight, but that doesn't go through the Strait of Hormuz. It goes through other routes. The broader geopolitical issues do affect us, particularly if oil prices continue to rise, then it has a knock-on effect of increase in commodity prices. We're watching that. So far, we have not seen anything of consequence yet. The year so far, the first half has been unfolding the way we had anticipated. You know, we're watching closely at the early signs for second half. For us, the lead indicators of our business are our order intake rate, and so far, the ord...
We have not seen any blip in the order intake rate, which, as you know, majority of our business is healthcare, and healthcare largely tends to be the drivers of healthcare demand are largely driven by patients, patient population dynamics, which are largely independent of some of these situations. We have not seen any impact on hospital capital budgets. We have not seen anyone telegraph any potential impact. At this point, we're in watch and assess mode.
Sunny, you know, roughly 70% of your business is medical, 30% is, or close thereof, industrial. Are you all seeing any relative shifts or sentiment from your end customers? If the medical is somewhat intact, right? No shift there. What about the industrial side of the business? Is there a pickup in security, non-destructive? Set the stage for us in terms of the other side of the ledger.
Yeah. The medical side, as I said, is at this point, somewhat unaffected. On the industrial side, we have two segments, the non-destructive testing. The non-destructive testing side, the non-destructive inspection, also appears to be, at this point, unaffected. Again, too early to tell, but no visible signs. On the security side, we would say it's, if at all, more of a positive trend in the sense that there seems to be more urgency around getting things done. We are seeing more inquiries about our technologies. If at all, it's safe, flat to positive in terms of its incremental impact, the macro environment impact.
What about tariffs, Sunny? How should we think about, you know, especially after the last call, tariffs were at least the Supreme Court struck it down. There is some new theories in Section 301, but I'm curious if, is it business as usual for you guys still, or are you all modulating some areas of the business, given this new noise?
Sure. I'll let Sam jump in and provide some additional commentary. I'll color it by saying that what we saw initially last April was a pretty drastic situation.
Yeah
[audio distortion] 155% tariffs. That was Liberation Day. That was a disaster in terms of just the way it was messaged and the way it came out. Since then, it stabilized, and we adjusted to that. We adjusted our pricing, we adjusted in the way we pass tariffs through to our customers. Since then, what you would have noticed is that we've had an increase in inventory. That's because of several reasons. Lots of reasons. Not one particular reason, but three or four different reasons. Now with the tariff situation currently down in the sense that it's reduced from where it was six months ago, we haven't fully yet felt the effect of that reduction.
It'll take some time for it to work through our system because we have some inventory that we have to absorb and adjust, that were purchased at higher tariff rates. The situation is stable at this time. That's the best way I can put it, and we've continued to operate business as usual in this current environment. With that, let me ask Sam to comment further.
Suraj, I would say that, you know, these recent developments are generally directionally positive for us. As Sunny mentioned, some of the higher tariff material is still in the inventory, and it's gonna take four, five months to kind of roll it out, roll it through the P&L. Beyond that we would see the benefit. At the same time, the administration is talking about Section 301 and other tariffs. We are also monitoring for that and whatever new information that we can obtain through the administration on those, because that may subsequently change the tariff-related strategies again. From our operational perspective, we continue to take steps to mitigate tariff-related aspects. You know, we are diversifying supply chain, we are trying to diversify more and more supply chain out of India, for example.
We've been reasonably successful in passing prices to customers, and if tariff goes up and down, we will modulate accordingly. Then also a number of other trade compliance-oriented strategies, for example, you know, with warehouse and other stuff like that. We are continuing to make progress on that. Those initiatives and activities take time, but in the last, I would say six, nine months, maybe 12 months, we've made a lot of progress in there, and we are continuously advancing our local-for-local manufacturing as well as part of this. I would say no immediate material up or down on tariffs for us.
We just continue to execute our strategies and I would say try to be a little bit more much more resilient towards these tariff-related changes because we are expecting that this up and down on tariffs will somewhat remain here for some more time.
Sam, the 33%, give or take, gross margin, now that tariffs are gone, your internal buffers essentially make the gross margin profile, specifically the sensitivity to tariffs, we should not expect any change, whether the tariffs were there, whether or not they're, you know, passed away, you know.
Yeah
almost in terms of the burden to the customers, or should we expect a marginal uplift, if at all?
Yeah. If the current tariff regime, which is there as of this week, let's say, if this tariff regime continues, I think we should see a marginal gross margin uplift when the old tariff structure costs kind of have rolled through, say, call it in four to five months, it should pick up a little bit. I would say, in terms of quantification of that, it would be in a few tens of basis points of gross margin. When the new tariffs came in, we had guided 100-150 basis points impact. Since that amount of tariffs have reduced, we would see a few tens, you know, 30, 40, 50 basis points improvement in gross margin if this continues.
What we need to be careful about is what are the Section 301s that are gonna come up when the 150 days temporary tariffs that are currently in place are replaced by those. That's something to watch out for.
Fair enough. Sunny, one of the things yesterday also we were talking to some companies in fireside chats, and there is this they're keeping an eye out for, you know, the CapEx environment, interest rates, domestic. Maybe not a pronounced effect for that. It's a different sector within MedTech. I was curious how you all are seeing domestically the environment, even if you all sell to a larger company, right? There is still a flow-through to the larger companies, and maybe there's a lag for you guys. What are you picking up broadly in terms of the CapEx environment, the domestic CapEx environment? Then maybe if you could parlay that into also the E.U. overall.
Sure. We're not seeing any signals of any sort either way. Meaning in domestic environment CapEx seems stable. As you might have seen, the diagnostic imaging side, capital equipment generally gets affected by CapEx challenges. Within that diagnostic imaging, it tends to be a little bit more resilient because of many reasons. One, it's faster. When there's a demand and you put in diagnostic imaging systems, you get faster realization of ROI on those investments. And to the extent that there is any kind of a blip, it recovers also fairly rapidly. We have not sensed yet, and no one's telegraphed to us, none of our OEMs, that they're sensing any changes in buying behavior at this time.
In the other markets, the non-domestic markets, you know, the situations also remains pretty much status quo the way it has been in the markets that were stagnating in a way. Like, for example, we've seen no growth in Japan and Europe has been, I'd say stable. It continues to be that way.
Sunny, if the message is that so far you all are not seeing any impact, you know, on a macro level, maybe if I could tweak that question a bit and ask you how long if this geopolitical tension or events continue, it doesn't mean in two weeks, you should be fine, but let's say it stretches out to two months, you know, then how does the recalibration, how do you all recalibrate? Or would you say, you know what? Still, we would not. I'm just trying to gauge, like, if we go into summer and we are still in this morass, what happens then?
Our customers, the OEMs, tend to work off of backlogs. Most of our customers carry six to 12 months worth of orders backlog. For us to feel the impact of a CapEx impact and shift in buying patterns, we'd have to see our customers deplete their backlogs for us to have an impact. That tends to be, for us, CapEx is a six to 12 month type of a lead indicator, and we will start to see it in our order intake rate. Let's say if something happens today, we'll start to see it in our order intake rate in three to six months. Our indications of whether we're being impacted or not will be driven by our visibility to the order intake rate, and so far that has been stable.
I hope that gives you a sense. You know, if someone has 12 months' worth of backlog, then they start ordering 90-120 days' worth of materials before they have to produce to ship. We're fortunate in that in certain cases we get a lead indicator, and in this case, we are the recipients of the benefit of a lag effect.
Fair enough. Sunny, China obviously is critically important for a lot of the imaging companies. You know, obviously the VBP has gone into effect and a lot of structural shifts are happening. Maybe you can give us an update on the state of the Chinese market. You and I talked in the yesteryears about the Made in China 2025, but obviously their budgets have come far short. Just give us the state of affairs specifically as it relates to China and the read-throughs for the space, really.
Let's split China up into two stories, two narratives. One is the end market and the end market demand and the dynamics there. The second, the OEMs in China, and we historically have called them our Chinese OEMs. I mean, and we're recharacterizing them as part of our global OEMs, and we'll talk about that. Let's talk the end market first.
Sure.
The end market dynamics have played out the way we had anticipated and the way we've talked about from all the way from a few years ago when the auditing of the hospital started and we had telegraphed that this would take two to 12 months, and it took 12 months. We saw the effect of stimulus. The initial effect of the stimulus were very confusing because the stimulus was rolled out and no one knew, none of the hospitals really knew how to take advantage of it, and then it kind of petered out. The supply chain debacle came. Everyone had purchased too far ahead. That worked itself out, the way that we had anticipated. We saw the stimulus-related buying sort of come back and tried to make its way through the system.
Where we are currently, what we're seeing is that China has continued to remain committed to expanding healthcare services, healthcare delivery in the rural markets. The way we saw the stimulus monies seem to play out was that the provinces were encouraging hospitals with somewhat newer systems purchased in the last three, four years, five years, to replace those with newer versions of systems and then utilize the systems that were displaced for the rural market. That was healthy in a way. It increased the installed base of systems for us, and it added new, refreshed the current systems. What we're seeing now is that the buying behavior is, seems to be somewhat, at least partially being directed to that type of an effort of continuing to spread systems in the rural markets.
Now on top of that, what we have also seen is that while you know the Made in China 2025 has come and gone and nothing's really changed in the sense that there was always a preference given to domestic players and that trend seems to have continued in different ways with different sort of connotations in the tenders that are being put out. Bottom line, the domestic players have continued to win market share, which is not a bad thing for us. It's a good thing for us. We play with almost all of them, and they win, we win, and it has continued to play out favorably for us. The end market dynamics here are that the demand seems to be stable to maybe slightly growing.
You know, we characterize it as it's sort of, it has gone to normal secular type of behavior. You know, there was a frenzied buying at some point where it was growing 25%-30% at very high rates. That has gone away. It has instead settled into more like a mature market where buying is happening for replacements. Now in China, secular growth rate is higher than, you know, our normal 2%-3% growth rate. We're seeing a more normal behavior out of the Chinese end market.
Sunny, on that note, two-part question. First, do you think there is credence to the notion that the larger player, the Big Three, are looking to dump their Chinese businesses or sell it off? Do you think there is any credence there for a variety of reasons, right? Whether it's not accretive to their organic business or whatever. The second part of the question is obviously that recently there was the scare, and I know you guys are not in this category, that, you know, helium from Qatar. There could be shortages worldwide and hence the implication for MRI machines and whatnot, and you guys are not there. But do you see any hotspots emerging for critical materials within the X-ray domain that you guys are like, we're keeping an eye out for this?
No. We don't see any particular very specific materials-related issues or availability impacting us or our OEM customers the way Helium did and it continues to in the MRI space. I think fundamentally, Suraj, our take as we look at what's going on, and who's winning tenders and what, you know, where the tenders are going and how the market share is moving, we see that the local players are predominantly winning greater share of the business there. Bottom line, that's what it comes down to, in our opinion. Now, whether the top OEMs like their business in China or not, that's not for us to really judge.
You know, what we are hearing is mostly hearsay about their, you know, whatever messages are coming out in terms of wanting to share their, you know, sell off their ownership stakes in China. That, I think, is maybe might be speculative. What we have also seen is that the partnerships formed by these OEMs with the local players, we have not sensed. That has not impacted us, and we haven't sensed whether that's working or not working, so I can't really comment on that. All I can say is that the domestic players are winning a disproportionate share of these tenders, and the tenders, government tenders have become extremely competitive, very, very competitive. I'm sure it's putting a lot of pressure on the global OEMs.
Interesting. Sam, if I could ask you a question about the India facility.
Sure.
You know, obviously, that has been on the radar screen. You guys have consistently talked about, you know, for supply chain and cost improvements. Give us the state of affairs. You know, how should we think about FY 2026 impact?
Yeah, sure.
Specifically at all, and more importantly, from an FY 2027 perspective, how should we think about the India facility ramping up and flow throughs, operational flow?
Both the India facilities are coming up quite nicely. We are making a lot of progress there. The detector facility, we have already completed that, and it is beginning to ramp. I would imagine that we would begin to see revenue, reasonably decent revenue, produced from the India facility in the second half of 2026 for the detectors. Then, on the tube side, the factory is now less than a year away from producing the product. I would say towards the end of calendar 2026, it should begin to start producing the first generation or the first batch of products from there. Both the factories are more designed towards radiographic products for the tubes and detectors.
As you know, we have low market share in that segment of the business because it has been a very price-sensitive subsegment of the market. We are hoping to release new products and then manufacture them from India. As we begin to gain market share there, we should be seeing revenue growth. As per our plans, and if we are successful in our endeavors, I would say we would begin to see linear type of a growth, not exactly linear, but somewhat linear in that profile from the beginning of FY 2027 all the way towards the end of FY 2028. In a two-year timeframe, we are expecting to pick up about $100 million of incremental revenue on the RAD side, and that's what the profile that we are targeting.
Okay. That is over and above your organic calculations on the RAD side.
That's correct. Yes.
Interesting. Okay.
Yeah. Yeah.
Fair enough. Sunny, obviously the Big Three are also now ramping up their talk on their earnings calls about photon counting. You and I, we've had multiple discussions in the past about the state of photon counting. How would you characterize what you're seeing on photon counting versus the narrative emerging from, let's say, the Big Three, in terms of adoption, the clinical differentiation, i.e., so on and so forth?
Okay. It's very early stage in the deployment and adoption of these technologies. I would characterize it as the technology is proving itself, meaning as viable technology, this platform, photon counting, is viable CT detection technology, period. That has been established. Now, in the initial deployments have been focused very heavily on high resolution. No one's really claiming any significant dose reductions, but they're saying this is high resolution, which is great. It was one of the things we had anticipated that photon counting would enable you to do because these are higher speed detectors and are dose efficient, so makes sense to put out high resolution detectors out there. The real value in this technology, and everyone will acknowledge that, is in the ability to do precise material discrimination.
The focus of where this goes, there's two things that you're likely to see. We are in the business of making this technology available to everyone, and we have used the words, you know, we, you know. Okay, the top three might have it. What about the remaining 150? You know, we are focused on everyone that, not the very high end of the market. You will see more adoption in the lower tiers, not just the top 200 or top few hundred academic institutions.
Number two, we are driving this technology with the promise of the holy grail of this technology, which is can you put in four, five, six energy bins and use it for spectral imaging, color imaging, so to say, not just to provide very good high resolution pictures, but to be able to allow clinicians to say what it is that they're seeing, and that's where the market's going. We expect that there will be continued adoption by the OEMs and continuing movement to put these technologies into more of the mid-high segments of the CT market. That's what we're driving towards, and we're seeing continued demand for the technology.
Sunny, what remains your outlook on, let's say, the photon counting CT photon-counting market for by, let's say, around, I don't know, 2028? You would
What we would like to accomplish is by 2028 to have four OEMs under our belt that are deeply engaged in the design work. As we've said, we've got two. We've got a few more in the pipeline. With our projections that we've given you, we've telegraphed, we would feel comfortable if we had three OEMs. We'd feel very good if we had four OEMs, and that's what we're driving towards, and that's what we expect that by end of 2028, that hopefully we'll be at least three, if not more.
Fair enough. Sam, you know, obviously, in terms of your core business, right? You guys have a stable business, relatively speaking, right? You guys, for all the years that I've covered you guys deliver, you know, in terms of the, all the macro level shocks. Gross margins has been one thing where, again, you and I have talked in the past, that is. It's been like we seem to have, we seem to be in the 34%, 30%, 34ish%, 33ish% range. To get back to the glory days of 40%, right? Because that's where your OpEx leverage really comes in. What needs to happen, right? The India facility can give us some. Anything you can shed on that, especially going into FY 2027.
Maybe you could also comment on your debt redemption recently, the P&L impact, you know, so that all of us from a modeling perspective can understand it better.
Sure. Yeah. Let me cover gross margin first. Yes, we do want to go towards high 30s% in terms of overall gross margin. The main drivers there are new products. We expect photon counting to be a major driver through new products and much higher than corporate average gross margin there to drive our overall gross margin up. As photon counting gets adopted, it should definitely help our gross margin to pick up. The second area is cargo inspection systems. As those systems are shipped and then they get into the service stream, because the service stream on cargo systems is significantly more accretive on gross margin. As that install base grows, we should see our gross margins pick up.
Now, the radiographic opportunity out of India is mostly expected to remain at similar levels to corporate average gross margins. So it won't drive gross margin pickup significantly, but it would drive quite nicely on the operating leverage towards the bottom line. So all these three initiatives combined, two of them will be nicely accretive to gross margin, and all three will be nicely accretive to EPS or EBITDA. So that's what we are trying to drive towards. Our goal remains high thirties in terms of our overall corporate gross margin in a few years. Then coming back to the debt refinancing. We are very happy with the debt refinancing. We were able to reduce our interest rates or the coupon rates by close to about, you know, 175 basis points.
That's about a saving of $7 million-$8 million annually. That would mean about $0.15-$0.16 on the EPS on an annualized basis going forward. We are quite happy with what we were able to achieve, even though the markets are a little bit choppy right now. Overall, it was a great outcome for us. Balance sheet is now very clean and it's a very simple, very easy to understand balance sheet now. We've really simplified the balance sheet significantly with this move.
Fair enough. Gentlemen, we are up on time. For what it's worth, you know, for all the time that I've known you guys, all the macro level shocks that are thrown at you guys, you guys still keep delivering. You know, we do appreciate how you have handled the business. Thank you so much for taking the time this morning.
Thank you, Suraj.
Thank you, Suraj.
Thank you, Suraj.
Thanks, everyone.