VAREX IMAGING (VREX)

Jim, I'll comment and then I'll ask Sam to chime in with any perspective from his side as well. Look, what we're seeing is that the bulk of the impact of the anti-corruption campaign that the Chinese government had launched was largely behind us. There's still a trailing effect of that, it hasn't ended fully. They've left behind a longer-term program, so there's the effect of some of the slowdowns that we saw that we'll see lingering effects of that. But generally speaking, the buying behavior seems to have opened up and at this point overall as we talk to our OEM customers in China, their sentiment is more positive versus negative. We could see some optimism and enthusiasm in their sentiments. But as we've said before, we're not expecting a snapback. We're expecting a gradual improvement and so we don't think it's going to go backwards. Now things happen, things can happen, but we expect it to be an ongoing positive traction on this. At the same time, from the broader economy perspective, we didn't see any economic indicators that gives us any belief that there'll be any kind of a snapback either. The stimulus program seems to be making its way through the economy, but none of our OEM customers in China are able to correlate the increase in demand, their sales, with whether it's just natural organic secular demand from the hospitals versus anything to do with stimulus. There was really no one who could really pinpoint and say well in this province it was a result of the stimulus. But they all acknowledged that the stimulus is directed towards upgrading of equipment and that should be a positive thing. And the timing and effect of when that would really have an effect still remains unclear.

Well, we've seen an uptick in the order intake rate. It stabilized during our fourth quarter and during the first quarter we saw an uptick. And that trend for us, as we've correlated that back, gone back to our OEMs and triangulated that with them, it's a clear result of them having pretty much gotten back to their normal inventory levels. So we think the destocking event is largely behind us.

Yeah, let me start there with that last part of the question. So versus 2018-2019 timeframe, we feel we're in a more robust position in terms of being able to deal with it because we have a more diversified supply chain. In 2018, it was all about our suppliers in China and we had created a large base of suppliers in China, low-cost suppliers. Now since then, we've qualified alternative suppliers in Europe and in other parts of Asia like India for example. So we feel we're in a better position to withstand the effect of tariffs. And then in terms of operations as well, our operations in China are much further along and it's pretty much self-sufficient for what we need to do in China itself. When I say self-sufficient, we do send parts into China, we have exemptions for those, but what we make in China, we have a much broader portfolio of what we make in China for Chinese customers. So we're in a better position operationally. And at the same time, if you look at where the competitive intensity is high for us, which is in detectors, we've got full capability to make detectors in the US, in Germany, and in China. So that puts us in a good position. And lastly, with India coming online fairly rapidly in the near future, very near future, we will start to see manufacturing, in fact in the third quarter of this year we should start to see manufacturing of detectors in India. The factory is already up and running, we're going through the regulatory approvals for it. That gives us yet another alternative to be able to supply detectors globally from India. So we're in a better place. We've also done our analysis and assessment of the cost impact of the tariffs. When you look at the direct purchases, what we buy in the US from outside the US, like China, the direct impact of tariffs on the direct purchases is not significant at this time. So that's one part of it. The second part of it is what about the indirect, what we buy from our suppliers and then their suppliers and their suppliers. That we're trying to still understand and assess the impact of because that's very tough. Most of our suppliers don't have a good line of sight to the entire depth of their supply chain. What we are expecting is we'll see some of that in the form of cost increases from our suppliers and at this point our intention is to pass that on to our customers. So we're doing what's needed from an infrastructure perspective so that we can track that and be able to account for it and to be ready to take advantage of any duty drawback programs or any other opportunities for gaining exemptions that we might be able to get. So our strategy is three-pronged: one is make locally wherever it makes sense to avoid these problems to begin with. We will seek out exemptions where feasible, where possible, where exemptions are made available. We have confirmed that our Chinese exemptions that we get in China are going to continue. The new tariffs did not have any implication on our products on the US side. The old exemption programs are in place still and there are no new exemption programs yet, but we have begun the process. So we'll go for exemptions first. Second, to the extent that we have alternative suppliers, we'll switch to alternative suppliers and redirect the supply from those alternative suppliers to avoid any tariffs that might impact us. And thirdly, the rest we will pass through. That's the approach we're taking.

Yeah, let me ask Sam to respond to that. Sam is in the middle of all of that.

At a summary level, Jim, we sell about 20 to 25 million worth of photon counting detection currently and that's increasing. The uptake has been, as we had expected, much more rapid on the industrial side as it tends to be, and there's less regulatory hurdles and other things to go through. Our big play in the photon counting space is on the medical side, particularly with medical CT. So in medical in general, we have seen a lot of interest across many different modalities and we are engaged with our OEMs as they design new modalities or new applications with photon counting. And that we'll see such as in different forms of radiographic or mammography or a bunch of offerings. That's sort of our ongoing typical OEM medical business. Our main focus has been photon counting for CT and CT detectors is a new space for us, new addressable market. As we mentioned in our earnings call the last time, we've got one global OEM that is fairly solidly on track with their plans, with their programs, with their R&D plans and ours as well working with them. And they've got launch dates in mind, they're marching towards that. We're working with a couple more OEMs that are in sort of different stages of the sales process. One is further along than the other one. And that's so far the progress that we've made that I can call out. Hard to get into any more detail than that because these entities are extremely sensitive about their plans and what they're doing. And we'll continue to keep our investor base updated on progress as we feel appropriate when we reach certain milestones.

Yeah, the benefit of photon counting technologies, particularly in CT, is first and foremost very high resolution imaging. High resolution, high contrast imaging at a significantly lower dose. That is sort of to start with, that's the baseline. Secondly, with the technology the way it is, the way it's designed, it enables very much more precise material discrimination. So the longer-term clinical applications can be designed where they potentially could cross over into other modality areas with better soft tissue resolution, areas that cross boundaries of different kinds of imaging applications today. That's sort of the longer-term holy grail of this technology, better use of the material discrimination capabilities.

So Jim, first as a background, this is an area that we're very familiar with from a technology perspective and also overall ability to develop and implement systems. Long back we used to make the full systems and we still do have a lot of systems installed between the US-Mexico borders that were designed and implemented by our company when it was originally part of Varian, you know, long time ago. So it's not a brand new area for us, we know this space. That said, recently, a few years ago, we just as we started looking at the space, particularly during the downturn post-COVID, we saw that there was a gap. But then now as we look at the overall market space, we see it as being very large, very active. There's quite a bit of opportunities. We decided to re-enter the space with our full systems because we were already selling full sub-assemblies like we sell the X-ray sources, the linear accelerators, we sell detectors, we sell the software for acquisition. So we decided to go into it ourselves with full systems offerings. And in addition to selling the equipment, the ongoing value for being in it ourselves directly is that we also get to access the services side of this space that is also a pretty substantial opportunity.

I think two things are spurring demand for these types of systems. One is the world has become less secure and there's just ongoing conflict everywhere and that's number one. So there's quite a bit of demand from a security standpoint. Secondly, yes, with tariffs, the fact that these linear accelerators are capable of very good material discrimination, it allows for applications, by the way our customers have been using our linear accelerators to do this, where they use the technology to compare what's in the container versus what's in the manifest. If the container says it should be potatoes and if it's something else, it looks like something else. That's one particular use of this technology which now with tariffs potentially becomes a more important feature. We haven't seen a direct correlation between tariffs, it's too new to tell, too early to tell. But what we are seeing is that there's a pretty substantial demand for these systems and there's a lot of tender activity. Now for us, we have the competency and the capability. Our brand is very well recognized and respected. Our technology is installed in over 1,500 sites globally and customers know that we have deep domain knowledge in this space. So we do get visibility to the tenders. The receptivity in the market has been good and we're one of the only two players that are fully vertically integrated in the space. So that makes us a very good player in this space.

Yeah, so nanotube-based X-ray sources are a way to build X-ray tubes where you don't need a heated filament. So imagine this like a solid-state X-ray tube. The old vacuum tube-based electronics versus solid-state transistor-based electronics, a similar analogy. So now you have the cold cathode which can turn on and off without the need to be heated. More just like a semiconductor, it can be switched on and off to very high speed like you would with semiconductors. The advantage of that is you can build X-ray tubes with multiple emitters that can be switched on and off very rapidly. And using that technology, you can significantly simplify imaging applications where there might be movement and you don't need the movement, like in a mammography system when you take 25 projections and to do that you have to move the whole gantry, or in a CT where you have to rotate, or in a C-arm. So there are applications where there are opportunities to dramatically simplify, speed up those systems using this type of technology. That's at a 50,000-foot level the potential benefits of this technology. Simplification means cost reduction. Simplification of the hardware means you could conceive new images in a way that might not have been practical previously because of geometry or mechanical motion, things like that. So that's in a nutshell the benefit of this type of technology. Where we are with it is that the technical feasibility of both the technology itself being used to generate X-rays, our ability to manufacture them, the life and all of the sustaining, whether this technology can sustain itself, can we make it in scale, will it withstand the demands of X-ray imaging, we are satisfied with that. We've had quite a bit of work already done over the last four or five years to establish technical feasibility. We're at that stage now where we are getting OEMs to understand this. We are shipping prototypes to them so they can characterize this and play with this. There's quite a bit of interest in it, largely from a lot of the smaller OEMs who are trying to envision highly differentiated new applications. This technology is further behind in terms of market adoption readiness versus photon counting, so it will be a few years behind photon counting in terms of seeing new OEMs bring this technology to market. That said, by the way, we're done with the technology transfer with Micro-X. That's all done and in place. We are in full independent development and production mode ourselves. We did announce that partnership with Nanox. Nanox is our typical OEM customer. We have an agreement to make tubes for them and that's moving along well.

Yeah, and our stick is that the combination of nanotube-based X-ray sources and photon counting gives the world an opportunity to make really, really interesting novel imaging applications. And we as Varex have both those technologies together.

Our investment in AI has been through our MeVis business unit, which we own 73% shares of. And our focus in it is twofold. One is in AI applications in lung screening. So we have full-blown workstations and we're bidding in tenders going directly to end markets where there are country-level tenders. So we've talked about our wins in Canada and we're bidding on lung screening tenders in other global markets. And at this time, we have plans to continue to incorporate AI technologies in other application areas. We haven't disclosed publicly some of those, but we will continue to work with AI applications using the MeVis resources and their competencies.

So Jim, let me again, I'll ask Sam to complement or supplement my response. A few things. First of all, we are seeing an order intake rate improvement which gives us confidence that the destocking phenomenon was industry-wide but that's behind us. So number one. Number two, we're seeing our sentiment on China is I'd say more on the positive side versus neutral or negative. So we expect to see that continue to improve. So the prognosis there we've talked about. Thirdly, the areas where we are investing, there are three areas that we're investing in that are all hundred-million type of opportunities for new areas. Our play in India is all about radiographic to gain share back in radiographic and we expect that to be a hundred-million type of a product line. We talked about photon counting, by 2029 we expect the contribution from that to be in the range of 150 million. And the third one, cargo, we expect that to be also a hundred-million plus type of revenue contributing segment or product line over this strategic planning, this three to five-year horizon. So those are three big areas where we are seeing positive traction. And every one of those areas, radiographic, it is in our domain, it's up to us to get the factories, it's getting there very, in short order it'll be up and running. Even before that we'll be able to ship those new radiographic detectors from Salt Lake City. So that's in our control. Cargo, we're playing actively, heavily. We've talked about some wins, we've talked about several installations that we've made. So there's traction, ongoing progress, and we'll continue to give visibility as we win deals. And photon counting, that is the longer play because it's a more complex modality like in CT, CT detectors. The good news there is once you're in, once you're designed in, even though it takes a while, once you're designed in it's a 20-plus year type of a play. So that's what excites us and I don't think that's reflected in the stock.

There's always the fear of the unknown that I think continues to plague us with whether it's tariffs, whether it's China. We've talked about our position in China being strong because of the way we are designed in China. There was concern about China 2025, well we're halfway through 2025 and we've always said that we've made plans with our Wuxi operations and production. Thirdly, in terms of the tariffs themselves, the direct cost impact of that is not significant. And secondly, in the retaliatory tariffs that we've seen from China, they do not impact our healthcare products and even what we have in place is going to continue to receive exemption. So I do think it's a little overdone for us. And certainly the selloff that we saw after the earnings call was not warranted in that sense either. So look, I'm disappointed that the stock hasn't reflected all the good things that we're talking about here.

Thank you for the time today. Thank you.