Varian Medical Systems Management Discusses Q3 2012 Results - Earnings Call Transcript

Varian Medical Systems (VAR)

Q3 2012 Earnings Call

July 25, 2012 5:00 pm ET

Executives

Spencer R. Sias - Vice President of Corporate Communications and Investor Relations

Timothy E. Guertin - Chief Executive Officer, President and Executive Director

Elisha W. Finney - Chief Financial Officer and Corporate Executive Vice President of Finance

Analysts

Steve Beuchaw - Morgan Stanley, Research Division

Dalton L. Chandler - Needham & Company, LLC, Research Division

Jason Wittes - Caris & Company, Inc., Research Division

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Amit Bhalla - Citigroup Inc, Research Division

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Anthony Petrone - Jefferies & Company, Inc., Research Division

Junaid Husain - Dougherty & Company LLC, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Varian Medical Systems Incorporated Earnings Conference Call. My name is Ann and I will be your coordinator for today's call. [Operator Instructions] As a reminder this conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Spencer Sias, Vice President of Investor Relations. Please proceed, sir.

Spencer R. Sias

Thank you. Hi, folks, just move your slide to Varian Medical Systems and I apologize for the lateness of getting this call started. We had trouble with our conference operator. But welcome, though, to the Varian Medical Systems Conference Call for the Third Quarter of Fiscal Year 2012. Participating in this call are Tim Guertin, President and CEO; Elisha Finney, CFO; Dow Wilson, Executive Vice President and Chief Operating Officer; 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 year are fiscal quarters and fiscal years, the quarterly comparisons are for the third quarter of fiscal 2012 versus the third quarter of fiscal 2011.

Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, could, should, believe, think, appear, opportunity, can, expect, potential 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 third 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's Tim.

Timothy E. Guertin

Good afternoon, and welcome. And today, we're reporting results for the third quarter of 2012 with healthy growth in revenue, margins and earnings. Net orders were up slightly in constant currency, but even with the -- excuse me, net orders were up slightly in constant currency, but even with the year-ago period on a dollar basis.

To summarize the third quarter results compared to the year-ago quarter, company revenues rose to $705 million, up 9% in dollars and 11% in constant currency. Our gross and operating margins improved even in the face of a weakened euro and net earnings increased 16% to $0.96 per diluted share. Net orders were up in Oncology Systems and were down in our X-ray Products and Security businesses. Our quarter ending backlog rose 16% to more than $2.6 billion with Oncology backlog up 9%.

Let me give you more detail about our Oncology Systems Business first. Third quarter revenues for this business were $546 million, up 7% from the year-ago quarter. The gross margin was 44%, up nearly 40 basis points from the year ago quarter and up 2 percentage points from the second quarter. We achieved this improvement while continuing to experience a significant shift to International business, which accounted for 57% of total oncology revenues.

Oncology net orders totaled $562 million, up 2% in dollars and 4% in constant currency. Reported net orders were up 4% in North America but down 1% internationally with currency-driven declines in EMEA that offset double-digit growth in Asia. Oncology orders were split 46% in North America and 54% internationally.

Our flagship TrueBeam system continues to be ordered and deployed in healthy rates. Since the product launch, we have received 550 orders and some 270 installations are complete or in progress. TrueBeam comprise about 50% of total high-energy machine orders in the quarter.

During the quarter, we received several multi-Linac orders including 6 TrueBeams at 2 centers in New York. We also received our first 2 orders as part of a program in the U.K. to stimulate replacement of machines in public hospitals. We were selected to supply a minimum of 10 TrueBeam machines that hospitals can acquire through the National Health Service between April 2012 and March 2013. The first 2 of these have been ordered for our new cancer center in Hereford and to replace a competitor's machine at Clatterbridge, near Liverpool.

Service orders and revenues, which represent a long-term annuity for oncology, grew at a faster rate than the overall oncology business. Year-to-date, services achieved double-digit growth and is nearly 35% of Oncology Systems revenues.

Shortly after the quarter ended, CMS announced its initial proposals for 2013 reimbursement rates in the U.S. This calls for slight increases in hospital rates, but painful and inappropriate cuts for freestanding clinics. As a consequence, we are working with clinic operators in the industry to oppose these cuts in order to help ensure continued access to cancer care for patients. Freestanding clinics in the U.S. represent about 10% of Varian's global oncology business. With ongoing pressure on reimbursement rates, it's clear to us that the market will place a greater and greater premium on fast, cost-efficient delivery of both radio therapy and radiosurgery without compromising treatment quality. This is a strength for Varian because we offer greater performance and value than any of our competitors.

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