Varian Medical Systems, Inc. ( VAR)

F1Q2011 Earnings Call

January 26, 2011 5:00 p.m. ET

Executives

Tim Guertin - President & Chief Executive Officer

Elisha Finney - Chief Financial Officer

Tai Chen - Corporate Controller

Spencer Sias - Vice President of Investor Relations & Corporate Communications

Analysts

Sean Lavin - Lazard Partners

Amit Bhalla – Citigroup

Amit Hazan – Gleacher and Company

David Roman - Goldman Sachs

Mark Arnold - Piper Jaffray

Josh Jennings - Jefferies & Company

Jeffrey D. Johnson - Robert W. Baird & Co.

Junaid Husain - Soleil Securities

James Terwilliger - Duncan Williams

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Varian Medical Systems earnings conference call. My name is Kara and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions) As a reminder this call is being recorded for replay purposes. And I would now like to turn the call over to your host for the day, Mr. Spencer Sias, Vice President of Inventor Relations and Corporate Communications. Please proceed, sir.

Spencer Sias

Thank you. Good afternoon and welcome to Varian Medical Systems’ conference call for the first quarter of fiscal year 2011. With me, are Tim Guertin, President and CEO; Elisha Finney, CFO; and Tai Chen, our Corporate Controller. Tim and Elisha will summarize our results and we’ll take your questions following the presentation.

To simplify our discussion, unless otherwise stated, all references to the quarter or years are fiscal quarters and fiscal years. Quarterly comparisons are for the first quarter of fiscal 2011 versus the first quarter of fiscal 2010. Annual comparisons are for fiscal 2011 versus fiscal 2010. All results are for continuing operations which exclude the sales and research instruments portions of XL. Net order and backlog comparisons for the company also exclude a $62 million proton order that was booked in the fourth quarter of 2009 and canceled in the first quarter of 2010.

Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, could, should, believe, opportunity, can, estimate, and similar expressions are intended to identify those statements which represent our current judgment on future performance or other future matters.

While we believe them to be reasonable based on information currently available to us, these statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the important risks relating to our business are described in our first quarter earnings release and in our filings with the SEC. We assume no obligation to update or revise the forward-looking statements in this presentation and discussion because of new information, future events or otherwise.

And now, here is Tim.

Tim Guertin

Thanks, Spencer. Good afternoon and welcome everybody. Today we are reporting our results of the first quarter of fiscal 2011 with strong growth in margins and earnings and solid gains in revenues. We had double-digit net order gains for our x-ray products business and moderate growth for oncology systems, which great well in most regions with the notable exception of Japan. Revenues rose by 7%, or 8% on a constant currency basis, with a remarkable 62% coming from international regions. Our operating earnings increased by 15%, reaching nearly 24% of sales. Net earnings for the company increased by 22%, and earnings per diluted share rose by 27%.Our quarter-ending backlog expanded by 10%, reaching a record $2.2 billion. As discussed in our last call, we'll talk about net orders within each business unit rather than for the company as a whole.

Cash flow from operations for the quarter was $138 million, and we ended the quarter with a record $704 million in cash and cash equivalents. All in all we're in excellent financial shape, and our global outlook continues to be optimistic.

I'll focus now on orders and operations in each of our businesses. Oncology systems first quarter net orders totaled $459 million, up 5% with a 20% growth in North America and a 6% decline in the overall international market. Oncology achieved double-digit order growth in North America for the third consecutive quarter with the help of new products, higher unit volumes, and some recovery in the healthcare market from the year-ago periods. European net orders grew in double digits with particular strength in France, Russia, Denmark, Austria, UK, and the Middle East. Orders in Asia fell sharply because of a $45 million decline in Japan, which has returned to more normal spending patterns following a two-year stimulus program that ended last March. Excluding Japan, orders in Asia were up in double digits. As our longtime followers know, this business typically experiences regional lumpiness, but the underlying global need for high quality, cost effective cancer treatment capacity is tremendous. We remain confident in the overall strength of this global market and our business.

From the product perspective, TrueBeam was again the leading growth driver for oncology systems. As of the end of the quarter we had more than 170 orders for this state-of-the-art radiotherapy radiosurgery platform since its introduction in the second quarter of last year. It comprised more than 30% of global unit orders for high-energy machines during the quarter, and it represented a majority of the high-energy machines ordered in North America during the period. Installations of TrueBeams are proceeding smoothly with more than 40 installations complete or in progress.

As clinicians gain experience with this new system, we are seeing tremendous treatment possibilities. One center has already treated more than 220 patients, most of them with hypofraction radiosurgery for paraspinal lesions. Another center is routinely performing normal time-consuming radiosurgery on up to 10 patients per day using RapidArc and high-intensity mode to deliver doses quickly and precisely. In one such case involving metastatic cancer, this medical team took just six minutes to complete delivery of an 18 Gray radiosurgical dose to a spinal lesion. RapidArc upgrades also contributed to the oncology order growth during the quarter, as more clinics moved to modernize existing equipment to streamline treatment processes and increase their capacity to help more patients.

Our service business continued to grow, and our relations with our customers are excellent. I'm pleased to report in the newly-published 2010 IMV customer satisfaction survey, Varian received the top ranking in seven measures out of eight measures of manufacturer's performance. This included service, system installation, training, documentation, and overall manufacturer performance. We also got top marks in our system performance, and both of our field service and software engineers received the top rankings.

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