Earnings Call Transcript - VREX Q1 2024

Operator, Operator

Greetings and welcome to the Varex Q1 2024 Earnings Call. All participants are currently in listen-only mode, and there will be a brief question-and-answer session after the formal presentation. This conference is being recorded. It is now my pleasure to introduce your host, Christopher Belfiore, Director of Investor Relations. Thank you, Chris. You may begin.

Christopher Belfiore, Director of Investor Relations

Good afternoon, and welcome to Varex Imaging Corporation’s earnings conference call for the first quarter of fiscal year 2024. With me today are Sunny Sanyal, our President and CEO; and Sam Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex’s website at vareximaging.com. The webcast and supplemental slide presentation will be archived on Varex’s website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the first quarter of fiscal year 2024. In addition, unless otherwise stated, quarterly comparisons are made year-over-year from the first quarter of fiscal year 2024 to the first quarter of fiscal year 2023. This is a change compared to prior quarters where since COVID, we have compared results sequentially. We believe going forward, this will be a better representation of our results given that the impacts of COVID are largely behind us. Finally, all references to the year are to the fiscal year and not calendar year unless otherwise stated. Please be advised that during this call, we will be making forward-looking statements, which are predictions or projections about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Item 1A, Risk Factors of our quarterly reports on Form 10-Q and our Annual Report on Form 10-K. The information in this discussion speaks as of today’s date, and we assume no obligation to update or revise the forward-looking statements in this discussion. On today’s call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with, nor are they a substitute for GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website. I will now turn the call over to Sunny.

Sunny Sanyal, President and CEO

Thanks Chris. Good afternoon, everyone, and thank you for joining us for our first quarter earnings call. Revenue of $190 million in the first quarter of fiscal 2024 was in line with our expectations. Lower volumes and unfavorable mix in both Medical and Industrial segments impacted profitability. As a result, non-GAAP gross margin was 31%, and non-GAAP earnings per share was $0.06. Revenue in the first quarter was down 8% year-over-year. Revenue in the Medical segment decreased 13% year-over-year, while the Industrial segment revenue increased 10% year-over-year. Non-GAAP gross margin in the first quarter was 31%, which was below our expectations and down approximately 100 basis points compared to the same quarter last year. Adjusted EBITDA in the first quarter was $19 million and non-GAAP EPS was $0.06. We ended the first quarter with $195 million worth of cash, cash equivalents and marketable securities on the balance sheet, up $87 million compared to the first quarter of fiscal 2023. Let me give you some insights into sales detailed by modality in the quarter compared to a five-quarter average, which we will refer to as the sales trend. In our Medical segment, global sales of CT tubes were seasonally softer than usual and below its sales trend. Fluoroscopy and oncology modalities were weaker in the quarter and were below their respective sales trends. The lower volumes in these three modalities contributed to the unfavorable mix in the quarter for Medical. Dental improved slightly in the quarter, but remained below its sales trend. Mammography continued to be solid with revenues above the sales trend in the quarter, while radiographic was below its sales trend. Global sales of our industrial products in the quarter were solid but below its sales trend in the quarter. We continue to see strong momentum in our cargo inspection business. Outside of cargo, we're experiencing softness in industrial end markets, particularly in semiconductor, automotive and electronics. The lower-than-expected industrial revenue contributed to lower gross margin in the quarter. At the end of November, we attended the Radiological Society of North America Show, which is the world's largest imaging-focused event and attended by radiology professionals and diagnostic imaging companies globally. We had over 150 meetings with our customers and prospects, and it was a very productive business development event for us. We displayed and discussed several new products across our entire portfolio, including a prototype of our photon counting detector module. Unlike in the last couple of years where supply chain related matters dominated the agenda, nearly all discussions with our customers at this RSNA were focused on new product development, including for CT, mammography, surgery, interventional and general x-ray systems. We also met with several new OEMs with novel technologies that would benefit from our Azure and photon counting detectors and our software applications. Photon counting continued to be front and center in many of our discussions. I'm happy to say that a major global OEM has expressed their interest to incorporate our photon counting technology into their next-generation CT scanners. Discussions with others are ongoing. With the acute supply chain problems behind them, our customers' focus has returned to new product introductions, and so have our discussions with them. In summary, we continue to be excited about the prospects for new imaging products like photon counting CT and our unique position to support our customers in bringing innovative systems to market. With that, let me hand over the call to Sam.

Sam Maheshwari, CFO

Thanks Sunny, and hello, everyone. As a reminder, the first quarter is generally a seasonally low quarter for us. Our revenues were at the midpoint of guidance, while gross margin was below the guided range and non-GAAP EPS was lower than the guidance midpoint. During the quarter, we experienced unfavorable product mix in both Medical and Industrial segments, along with seasonally low volumes. As a result, revenues were $190 million. Non-GAAP gross margin was 31%, and non-GAAP EPS was $0.06. Further, operating cash flows were $10 million for the quarter. First quarter revenues decreased 8% compared to the first quarter of fiscal 2023. Medical revenues were $140 million and Industrial revenues were $50 million. Medical revenues represented 74% and Industrial revenues represented 26% of our total revenues for the quarter. Looking at revenues by region, Americas decreased 6% compared to the first quarter of fiscal 2023, while EMEA increased 1% and APAC decreased 16%. As highlighted last quarter, the decline in APAC was primarily the result of lower sales in our China business due to the government's anticorruption campaign into its healthcare system. China accounted for 17% of overall revenues in the first quarter, even though sales in China declined approximately 10% compared to the same period last year. Let me now cover our results on a GAAP basis. First quarter gross margin was 30%, 100 basis points lower year-over-year. Operating expenses were $53 million, up $3 million compared to the first quarter of fiscal 2023, and operating income was $4 million, down $9 million. GAAP net loss was about $0.5 million, and EPS was a loss of $0.01 per share based on fully diluted 41 million shares. Moving on to non-GAAP results for the quarter. Gross margin of 31% was down 100 basis points compared to the first quarter of fiscal 2023. R&D spending was $20 million, flat compared to the first quarter of fiscal 2023. Overall, R&D was 11% of revenues. Generally, our target is 8% to 10% of revenues on an annual basis. SG&A was approximately $29 million, up $1 million compared to the first quarter of fiscal 2023. SG&A was 15% of revenues. Operating expenses were $49 million or 26% of overall revenues. Overall, operating expenses were in line with our expectations. Operating income was $10 million, down $8 million compared to the same quarter last year. Operating margin was 5% of revenue compared to 9% in the first quarter of fiscal 2023. Tax expense was $1 million or 20% of pretax income compared to $2 million or 15% in the first quarter of the prior year. We continue to expect a tax rate of 21% to 23% for the full fiscal year 2024. Net earnings were $2 million or $0.06 per diluted share, down $0.15 year-over-year. Average diluted shares for the quarter were 41 million on a non-GAAP basis. Now turning to the balance sheet. Accounts receivable decreased by $24 million from Q4 of fiscal 2023, primarily the result of lower sales in the quarter. Days sales outstanding increased by 2 days to 67 days. Inventory increased $12 million sequentially in the first quarter and days of inventory increased to 198 days. This was the result of an increase in raw materials ahead of higher expected sales in subsequent quarters as well as higher finished goods held in inventory during the quarter. Accounts payables increased by $9 million and days payable increased 11 days to 50 days. Now moving to debt and cash flow information. Net cash flow from operations was $10 million due primarily to the higher collections. We ended the quarter with cash, cash equivalents and marketable securities of $195 million, up $87 million compared to the first quarter of the prior year and flat compared to fiscal 2023 year-end. Please note that $195 million includes $141 million of cash and cash equivalents shown on the balance sheet, $53 million of marketable securities and $1 million of deposit certificates. Gross debt outstanding at the end of the quarter was $448 million and debt net of $195 million of cash and marketable securities was $253 million. Adjusted EBITDA for the quarter was $19 million or 10% of sales. Our trailing 12 months adjusted EBITDA was $125 million, and our net debt leverage ratio was approximately two times on a trailing 12 months basis. Now moving on to outlook for the second quarter of fiscal 2024. Revenues are expected between $195 million and $215 million, and non-GAAP earnings per diluted share are expected between $0.10 and $0.30. Our expectations are based on non-GAAP gross margin in the range of 32% to 33%. Non-GAAP operating expenses in the range of $49 million to $50 million, tax rate of about 22% for the second quarter, and non-GAAP diluted share count of about 41 million shares. With that, we'll now open the call for your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from James Sidoti with Sidoti & Company. Please go ahead with your question.

James Sidoti, Analyst

Hi. Good afternoon. Thanks for taking the questions. Just want to confirm with China, it sounds like revenue for the quarter was about a little over $32 million this quarter compared to a little over $36 million a year ago. Does that sound about right?

Shubham Maheshwari, CFO

Yeah. So, Larry, this quarter, yeah, they were about slightly above $32 million. And then last year, they were mid-30s, 34%, 35%, something like that. Sorry.

James Sidoti, Analyst

That's fair. All right. No, I don't mind if you call me Larry. He's a smart guy. It sounds like the decline was less than it was in the previous quarter. So, are you starting to see things level off there?

Shubham Maheshwari, CFO

So, China continues to remain soft due to two reasons; the macroeconomic situation in China as well as the anticorruption campaign there. But from quarter-to-quarter, you're going to see some variation, Jim, just because we're talking $1 million or $2 million here or there. But overall, it is soft. And also, we are hearing that the anticorruption campaign kind of moves from one province to another. So, you're going to see some variation or some fluctuation around that. But overall, China is still continuing to be low.

James Sidoti, Analyst

Right. And then on last quarter's call, you talked about some initiatives for some products and non-organic infection and even the products. Can you give us an update how that's going? I'm sorry, or it was, I guess, organic products, things like cannabis.

Sunny Sanyal, President and CEO

Jim, so we did launch our irradiation product, and one of the first applications of that was in cannabis radiation. Yeah. That's going well. The product is showing well, and we've got a few customers on it, and it's moving forward.

James Sidoti, Analyst

So, if I look at the guidance, you're expecting revenue to be down again in the second quarter, and I assume that's largely due to the situation in China. Do you think that by the time you get to the second half of the year, do you think those trends start to reverse and you get back to top line revenue growth in the second half of the year?

Shubham Maheshwari, CFO

Yeah. Jim, as we mentioned in the prepared remarks, we are expecting a rebound in the second half. The rebound in the second half is gated or it's dependent upon China coming back as well as somewhat of a pickup in the Industrial segment. Right now, we are seeing softness in non-cargo domains of Industrial, particularly in semiconductors, automotive and electronics related applications where our product is sold in the Industrial segment. So, we are expecting both of them to pick up at this time, and that should drive a rebound in the second half for us. So that is what we are expecting at this point.

James Sidoti, Analyst

And you talked about new product launches on the Medical side, our customers are starting to talk about that. How long does that take to turn into a real product and real revenue for Varex?

Sunny Sanyal, President and CEO

There have been many discussions regarding successor products. A CT scanner currently on the market is expected to lead to the next generation of CT scanners, which typically comes within a two to three-year timeframe. These have a relatively short cycle. Many of our discussions revolve around the upcoming versions of this modality and the new market segments they aim to target. In the long term, the newer platforms, such as photon counting and nanotubes or other entirely new technologies, tend to have longer development cycles of five years or more. While we've been discussing photon counting for some time, it's progressing and getting closer to realization.

James Sidoti, Analyst

Okay. All right. That was it for me.

Shubham Maheshwari, CFO

Thanks, Jim.

James Sidoti, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Anthony Petrone with Mizuho Group. Please proceed with your question.

Anthony Petrone, Analyst

Thanks, Sunny, Sam. Hope your afternoon is going well. Maybe revert back to China. Just a couple of questions there. You mentioned, one, the anticorruption headwind, but also just underlying economy. On anticorruption, is there anything you're hearing on the ground as to when the program can be completed? Is it safe to assume that it can be completed by midyear? Or could it extend further into the year? And when you talk about just underlying economic pressures, that's a new one. Is that something that you're hearing most recently from OEM partners in the region there? And then I'll have a couple of follow-ups.

Sunny Sanyal, President and CEO

So, let me get it started and then have Sam add on. There are always two parallel situations. One is the economic health of the provinces after COVID, considering the expenses related to their zero COVID policy. That has always been in the background. However, the direct slowdown can be linked to a halt in purchasing due to an ongoing audit. What we're seeing now is that the audit has made significant progress. As Sam mentioned, it's advancing through the provinces, and the expectation remains that it will begin to taper off in the second half. Our understanding is that the audits may not necessarily conclude at that point; it represents a new method for the Chinese government to oversee how funds are managed within the public hospital system. Overall, we are sensing a slight easing of the environment. Therefore, we continue to believe that in the second half, we should anticipate a pickup in activity in China.

Shubham Maheshwari, CFO

And I can just add there, Anthony, is that you know that there are no specific announcements or there are no sharp cutoff dates or deadlines that are announced. It is generally as we perceive and hear from our salesforce. So, we just need to be open to that and there can be various interpretations. But in general, we are thinking things will improve because the government does want to spend money on the infrastructure and provide better healthcare facilities and services to its citizens. So, there is the positive pressure there along with, we would say, taking care of the healthcare system for the long-term goodness of the system. So in that way, that's also positive for the long-term.

Anthony Petrone, Analyst

Is it safe to assume that the lead time on new deals is possibly longer due to the ongoing audit process? Are there initial checks and balances before a deal is finalized, either in the provinces or major coastal cities? Understanding the mechanics behind the scenes would be helpful.

Sunny Sanyal, President and CEO

Since we don't have direct visibility into hospital purchasing, I can't provide a precise answer. However, we believe that hospital buying has paused due to ongoing audits. Once those audits are finished, hospitals will return to their usual operations. We expect the deal cycles and timeframes to revert to normal for those hospitals. When the process resumes, it will not be extended; it will simply return to how it was. The key point is that this won't all happen simultaneously; it will gradually start coming in, and we are already observing early signs of that occurring.

Anthony Petrone, Analyst

Thanks for taking my question. Can you provide an update on photon counting technology in CT detectors? Specifically, where we currently stand in the cycle, what you're observing in terms of demand for conversions to photon counting, and your expectations for this over the next few years? Thank you.

Sunny Sanyal, President and CEO

It's safe to say that the technology is here to stay, as the broader radiology community has recognized photon counting as a viable and clinically exciting option. We believe it will persist based on how our medical OEMs are discussing their future products and their intent to integrate photon counting technologies. Initially, these introductions were focused on high-end CTs, but the market demand is shifting towards more accessible models. We are targeting this segment with our products, aiming for CTs that are not necessarily ultra-high-end, but more widely available.

Operator, Operator

Thank you. Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

Shaymus Contorno, Analyst

Hi, Sunny and Sam. This is Shaymus on for Suraj. Thank you for taking your questions.

Sunny Sanyal, President and CEO

Hi, Shane.

Shaymus Contorno, Analyst

Hi. Just looking at kind of outside of China, what are you seeing in terms of the capital equipment environment? And then kind of more specifically, I think you noted in the geographic mix, the Americas was down as well, and EMEA was pretty much flat. I guess, any color you could provide there as to what's happening to in those regions as well?

Sunny Sanyal, President and CEO

Our perception is that the hospital environment in the U.S. has improved, with hospitals generally becoming more profitable. Their cost structures, particularly labor costs related to nursing and clinicians, have improved, allowing for better management. This increase in profitability suggests a positive outlook for capital availability in diagnostic imaging. Therefore, we remain optimistic about the U.S. market. However, we haven't observed any significant change in Europe or Japan, which are our two largest regions. So, while the U.S. remains strong, the situation in Europe and Japan is still uncertain.

Shaymus Contorno, Analyst

Got it. Thank you. And then looking at it, the Medical segment was down a little bit. I guess, how should we think about the relative health over the next three to four quarters? And where would you describe any soft spots that maybe need to be monitored?

Shubham Maheshwari, CFO

In the Medical segment for Q1, which is typically a slower quarter, there may be a slight decline compared to Q4. We have observed some softer trends in oncology and CT during Q1. However, CT has been growing steadily for five consecutive years, indicating that the business is in good shape. The downturn is primarily due to seasonal factors and a bit of impact from China. We anticipate improvement in CT as conditions in China improve. Beyond this, there are no significant issues to report.

Sunny Sanyal, President and CEO

In the past few quarters, we have mentioned that our customers' manufacturing environments have been impacted by supply chain issues. As a result, in some areas where there has been a decline, they had built up inventory. This led to some adjustments and softness in inventory levels. As China begins to recover, we anticipate part of the recovery in CT will also occur.

Shaymus Contorno, Analyst

Got it. Appreciate that. And one last one from us, and then I'll hop back in queue. Just any latest thoughts on the convertible debt, how you're going to potentially address it? And I guess, what's the optimal structure that if you had your choice you'd be looking for? Thank you.

Shubham Maheshwari, CFO

Sure. Yes. So, we are currently considering various approaches to refinance the convertible debt. And as and when we make a decision, we will be sure to share with all of you. I just want to remind that the debt is maturing next June, which is June of 2025. So that's an update on the convertible bond side. Secondly, in terms of overall structure, we would like to bring down the overall gross debt that the company is carrying, and I would like to see that we maintain overall adjusted EBITDA based net debt leverage ratio to be 3.0 or below. Right now, we are running at around 2.0, so we are fairly comfortable with our overall leverage situation. I would also say that we are currently in an excess cash situation, and we are purposely carrying excess cash on the balance sheet to deploy some of that for the refinancing purposes and bring the overall gross debt for the company down.

Operator, Operator

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

Lawrence Solow, Analyst

Thank you for your questions and I appreciate Mr. Sidoti's insights.

Shubham Maheshwari, CFO

Sorry, Larry, for that.

Lawrence Solow, Analyst

No, that's okay. Well, that's all good. I'd say a lot of work by the people. So that's fine. I guess, first question, just on the Medical side, and you touched on it a little bit, but excluding China, it looks like you were down double digits, or close to it, just in Medical alone because most of the sales into China today are Medical, right? And they were down only 10%. I say only because I think we thought that would be more like 25% or 30%. So just trying to figure out, was that some of the weakness in the quarter with Medical being down a little bit more and the mix? I know you've called out that maybe Industrial was down as well, but Industrial was actually up 10% year-over-year. I know it was down sequentially, but I'm trying to figure out if Industrial was also below your expectations. What was driving the mix? And going forward, it looks like the gross margin this quarter was supposed to be 33% to 34%. Now you're rebounding in revenue, which seems to align with original projections, but your gross margin is still below what you thought Q1 would be. So, can you provide a little more insight on that, if that makes sense?

Shubham Maheshwari, CFO

Sure, I can begin with the gross margin. In Q1, we experienced a decline in gross margin primarily due to unexpected weakness in the Industrial segment. The total volume for the company was quite low at $190 million, leading to underutilization in our factories across both the Industrial and Medical sectors. This resulted in decreased volume. Additionally, the unfavorable mix within the Industrial segment contributed to lower gross margins. Currently, we are also seeing a weak mix in Industrial for Q2, and the overall volume is not meeting our expectations. Factors such as the situation in China and the mix within Industrial are impacting our gross margins, which we anticipate will improve in the second half of the year. That is our expectation at this point.

Lawrence Solow, Analyst

More focused on Industrial, there seems to be a greater emphasis on Industrial compared to Medical, while the situation appears to be less favorable outside of that.

Shubham Maheshwari, CFO

In terms of…

Lawrence Solow, Analyst

Yeah. Right. Okay.

Shubham Maheshwari, CFO

Could you please repeat your first question or the initial part of your inquiry?

Lawrence Solow, Analyst

My other question was about the guidance you provided at the beginning of the year or at the end of last year regarding a 3% to 5% decline in full-year revenue. If I recall correctly, you mentioned that you anticipated the Medical segment outside of China would be flat or increase. Do you still hold that view?

Shubham Maheshwari, CFO

I believe that regarding our guidance of a 3% to 5% decline, we are leaning closer to the lower end of that range, which indicates a decline of around 4% to 5% rather than 3% to 4%. This is due to our initial expectations for better performance from our Industrial segment. I'm uncertain if we've specifically addressed Medical excluding China. The situation in China remains uncertain; it was previously a strong growth area for us, particularly with CT and other products. Besides the two issues we've mentioned, macroeconomic factors and anticorruption, we expect China to recover, but the timing is unpredictable. Ultimately, the full year's performance will depend on whether China shows recovery at the start or the end of Q3, which will significantly impact our overall Medical results.

Lawrence Solow, Analyst

Okay. Regarding the Industrial segment, I know you don't categorize by segment, but you had a strong performance last year. This quarter was up 10%, although there was a slight decline sequentially. You are also facing tougher comparisons as we go into the next quarter. It seems a bit mixed. Do you still believe you’ll grow sequentially or that you are factoring that into your expectations? Do you expect growth in the second half compared to last year? For the segment overall, you achieved 220 last year. Is that a reasonable starting point for this year, or do you believe there is potential for more?

Shubham Maheshwari, CFO

There are a few factors at play here. Let me clarify that. Yes, the comparisons are becoming more challenging. In the Industrial sector, we experienced significant growth last year, achieving a 19% increase year-over-year in 2023. This indicates strong growth in Industrial. You correctly noted that we generated $220 million in that area. However, within Industrial, there are two different trends to consider. The cargo inspection segment remains robust, as we are sending out a substantial amount of hardware, including our large linear accelerators or LINACs. When we ship these LINACs, the gross margin on the hardware is lower, while the gross margin on services is much higher. Overall, we are seeing some softness outside of the cargo sector, and the mix of systems and services within cargo is currently tilted more towards systems, which is affecting the overall gross margin for the segment. This situation is positive because it will lead to...

Lawrence Solow, Analyst

Right.

Shubham Maheshwari, CFO

Yeah. Exactly. So that's happening on the Industrial side. In terms of overall volume or sales levels for Industrial, obviously, we would not be able to repeat the percentage growth factor in Industrial of 2023. But we are still hopeful of having a year-over-year growth in Industrial, again, provided the timing when it comes back. The cargo inspection business, we have good visibility for the rest of the year. On the non-cargo industrial business, we need to see how it develops. If it comes back sooner than later, then the overall year will be a growth year for sure. So that is something that we are monitoring, and that's where we are.

Lawrence Solow, Analyst

Just to clarify, the cargo segment, which includes security as well, is roughly one-third of the total, right? And the remaining portion is about two-thirds. Is that correct?

Shubham Maheshwari, CFO

So security inspection is around in that range.

Sunny Sanyal, President and CEO

For cargo.

Shubham Maheshwari, CFO

Yeah. Sometimes it can go higher, Larry, in certain quarters when we're shipping, right?

Lawrence Solow, Analyst

Okay.

Shubham Maheshwari, CFO

Okay. Just one last question regarding the photon technology and its adoption. It seems like we're still in the early stages of this process. You mentioned one specific OEM, but I wonder if you could address a broader question. Will this technology potentially replace the existing technology? And is this customer currently utilizing your existing technologies? Larry, before we go to this photon counting related question, I just want to correct that cargo is around 20% of the segment, not 30%.

Lawrence Solow, Analyst

Okay.

Shubham Maheshwari, CFO

And with that, I'll ask Sunny to comment on photon counting for CT. Specifically, what Sunny mentioned is that we are not participating in that market today. Therefore, there is no cannibalization. It represents a new market and new business development for us.

Sunny Sanyal, President and CEO

Yeah. And Larry and everyone, in general, the photon counting detectors go into a whole new type of applications, where someone needs a flat panel or a large area detector, they will go with a flat panel detector and where they need a different type of performance, particularly in high-speed imaging or a different type of dynamic imaging, they'll use photon counting detectors. So, we are not seeing cannibalization or we don't expect cannibalization at this stage between flat panel detectors and photon counting. So that's one thing. So within existing customers, these would be new applications, new products. And then, of course, as Sam said, the CT is a brand new space, new addressable market.

Operator, Operator

Thank you. Our next question comes from the line of Michael Toomey with Jefferies. Please proceed with your question.

Michael Toomey, Analyst

Hey, guys. Thanks for taking my questions. Mike Toomey here from Jefferies covering for Xuyang Li. Most of my question has been answered, but just two, please. Can I ask a follow-up on the photon accounting? When do you think that this could start contributing to the revenue for you guys? Are we talking in the next two years or longer term? And anything you'd highlight on either pricing from your side or costs kind of easing or stabilizing, whether that's globally or in China? Thanks for taking my question.

Sunny Sanyal, President and CEO

This is Sunny. I didn't catch the second part of the question. So, let me answer the first one.

Michael Toomey, Analyst

Sure.

Sunny Sanyal, President and CEO

I believe we should address the cost question later. Regarding photon counting, we have discussed its applications for CT quite a bit. This is a longer-term project, typically taking three to five years, especially since it involves new technology, likely leaning towards the five-year timeframe. However, we have been collaborating with our customers for the past couple of years, so we anticipate that our CT detectors will begin to make a measurable contribution in about three years. In the meantime, we expect to see some prototypes and low-volume shipments. There are also other photon counting applications being considered that will fall within a two to three-year timeframe, but those pertain to different modalities and will have modest revenue contributions. A significant portion of our photon counting detectors is being sold into industrial sectors for food inspection and high-speed, real-time imaging applications. These shorter cycle projects are ongoing, and we are counting on the industrial sector to drive near-term growth in photon counting.

Michael Toomey, Analyst

Okay, that's really helpful. I just want to confirm the second question was whether there is any pressure on the pricing you're charging and if there have been any significant changes in costs.

Shubham Maheshwari, CFO

At this time, the supply chain driven issues they are largely behind us. I would say that freight is quite manageable at this time. And from the raw material cost perspective, things have begun to normalize or they're rather stabilized at this point. We talked about price increases about 12 to 18 months ago. That round of price increases has largely been completed. And other than on a spot basis, we are not embarking upon any new across-the-board price increase type of a campaign at this point. But we are looking at here and there different situations where we need to work on certain price-related initiatives, which we would do. And in case inflation picks up much more than what we are planning, then we would address it through a campaign of price increases. But that is not front and center for the situation at this time.

Michael Toomey, Analyst

Okay. Great. Thanks very much.

Operator, Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to Chris for closing remarks.

Christopher Belfiore, Director of Investor Relations

Great. Thank you. I'll now turn over the call to Sunny for some final comments.

Sunny Sanyal, President and CEO

Thank you, Chris. In closing, as always, I'm very proud of all the hard work of our employees globally as they work to support our customers every day. We're looking forward to our customer successes with incorporating our technologies and also looking forward to their success this year with new product launches. So thank you for taking the time to join us today and for your continued interest in Varex.

Christopher Belfiore, Director of Investor Relations

Thank you, Sunny, and thank you all for your questions and participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived on our website. A replay of the quarterly conference call will be available through February 20th and can be found at vareximaging.com/investorrelations. Thank you, and goodbye.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.