Varian Medical Systems Inc VAR
Q2 2013 Earnings Call Transcript
Transcript Call Date 04/24/2013

Operator: Greetings and welcome to the Varian Medical Systems Second Quarter Fiscal Year 2013 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Spencer Sias for Varian Medical Systems. Thank you, Mr. Sias, you may begin.

Spencer R. Sias - VP, Corporate Communications and IR: Thank you. Good afternoon, and welcome to Varian Medical Systems conference call for the second quarter of fiscal year 2013. With me are Dow Wilson, President and CEO; Elisha Finney, CFO; and Clarence Verhoef, our Corporate Controller. Dow and Elisha will summarize our results, and we'll take your questions following the presentation.

To simplify our discussions, unless otherwise stated, all references to the quarter or year are fiscal quarters and fiscal years, quarterly comparisons are for the second quarter of fiscal 2013 versus the second quarter of fiscal 2012.

Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, could, should, believe, can, estimate, will, looks, plan 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 second 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 discussions because of new information, future events, or otherwise.

Now, here is Dow.

Dow R. Wilson - President and CEO: Good afternoon and welcome everyone. Varian's revenues and net earnings continued to grow during the second quarter in line with our expectations for the Company.

Net orders on the other hand were mixed, with strong growth in our X-Ray Product business and a decline in our Oncology business. To quickly summarize our results, revenue rose 7% to $768 million. Our gross and operating margin improved. Earnings per diluted share increased 9% to $1.02 and our backlog grew 4% over the year ago quarter to $2.8 billion.

Net orders fell by 2% in Oncology Systems, grew by 10% in X-Ray Products and declined $131 million in the other category versus the year ago period when we booked orders for two Proton Therapy Systems in Saudi Arabia and Russia.

I will cover the operational highlights for the quarter and let Elisha walk you through the details of the P&L and balance sheet.

A 9% decline in North American Oncology Systems net orders offsets a 4% increase across the markets outside North America, leading to an overall 2% decline in net orders, which totaled $555 million for the quarter.

North American Oncology market is experiencing slower capital spending related to ongoing uncertainty regarding Healthcare Reform and potential reimbursement changes. For example, many of our customers appear to be focused on developing new partnerships across clinical specialty to prepare for operating in an Accountable Care Organization or ACO environment and the possibility of bundled payment for cancer therapy services as well. We are also seeing some continuing consolidation activity among hospitals and clinics, which may be contributing to purchasing delays.

U.S. market uncertainty will likely extend in the next fiscal year. However, for the long-term, we believe the transition to an ACO environment could lead to renewed investment in more advanced and cost efficient clinical capability to support outcome driven standards of care and pay for performance.

Radiotherapy and Radiosurgery are among the least invasive and most cost-effective ways of treating cancer and Varian's technology and product portfolio fits this scenario to a tee.

During this period of uncertainty and transition in the U.S., we expect bigger variations in net orders from quarter-to-quarter. A host of factors including deal size, timing and changing purchasing processes will contribute to this increased variability.

Net orders in our EMEA region rose by 4%, while Western Europe continued to be impacted by austerity and recession in several countries. We received sizable equipment orders from customers in Russia, South Africa, Switzerland and the United Kingdom during the quarter. We also the first TrueBeam systems installed in South Africa and Bangladesh.

Emerging markets are driving growth and the BRIC countries, in particular, grew product orders by nearly 20%. An example of our strength in these markets is in Russia, where we have nearly doubled our order volume year-to-date.

Among the highlights in the second quarter was the large order from a multiple linear accelerators including a TrueBeam that will be installed in several Russian hospitals.

We booked our first orders for the new EDGE Radiosurgery system during the quarter and several other customers ordered EDGE Radiosurgery upgrades, accessories and software for their existing treatment machines. Customer interest in this technology is high and the sales funnel for our radiosurgery solutions looks solid.

We hope to receive CE Mark to sell EDGE in Europe later this year. This month we are celebrating the shipment of our 500th TrueBeam. This is the fastest adoption of any treatment machines in the history or radiation oncology.

Today TrueBeam represents nearly 60% of our high energy machine orders and average pricing on this system remains stable even with the shift to markets outside of North America.

Our service business remained a growth driver as we continued to see a high-capture capture rate. Net orders were up by 8% for the quarter and 10% year-to-date. Customers globally are recognizing the value of comprehensive service in software contracts. We expect there is a same growth in service as more than 300 TrueBeams moved out of warranty in the next 18 months.

Our Siemens partnership is making good progress. We now have the software complete to enable connectivity with about 80% of the Siemens installed base. The first clinical treatment using a Siemens accelerator and Varian's ARIA software took place this month.

The auction to equip public cancer centers in Brazil with more than 80 treatment machines is now set for the end of June. Meanwhile, business continued normally in Brazil where we received orders for three TrueBeams and the unique system during the quarter.

I'd like to take a moment to call your attention for some new clinical studies that demonstrate recent advances made in radiotherapy and radiosurgery. In March, the International Journal of Radiation Oncology, Biology and Physics published a paper on follow-up prostate research involving 1,002 patients treated from August 2007 until December 2008 at Memorial Sloan-Kettering Cancer Center.

The paper shows that IMRT makes it possible to deliver higher doses to the prostate without increasing normal tissue complications. By escalating dose to the prostate, investigators demonstrated excellent biochemical control rates without incurring higher toxicity.

Another article published in the April issue of cancer on a study of 112,000 breast cancer patients between 1990 and 2004, showed breast conserving therapy including a lumpectomy and radiotherapy had improved survival compared with mastectomy.

Finally, an online article in the Red Journal on research into stereotactic radiosurgery for inoperable liver metastases reported promising planning in a Phase II prospective study of 61 patients between February 2010 and September of 2011.

Researchers of the Oncology Institute of Southern Switzerland achieved a 94%, one-year local control rate with acceptable toxicity using radiosurgery. These findings warrant further investigation and may someday lead to an ultimate treatment option for liver metastasis. The big picture in all this is that significant clinical research in radiotherapy and radiosurgery continues to advance in existing and new cancer indications.

Before leaving Oncology Systems, let me recap our long-term view of the market. As noted earlier, we believe the U.S. market will exhibit a high degree of variability. Growth in EMEA is expected to be mixed with stronger growth in Eastern Europe, the Middle East, Africa and India, offset by lower growth in Southern Europe. The outlook for Asia, Latin America and the Rest of World remains robust. Overall, we believe the longer term global market will continue to grow on average in the mid-single-digit range.

Turning to X-Ray Products, this business had another good quarter. Net orders for X-ray grew by 10% during the quarter to $144 million. Revenues grew by 14% to $140 million and the X-ray team managed to improve its operating margin despite pricing pressure in the flat panel business.

New products in our X-ray tube and flat panel lines helped to drive the growth. The tube business grew with the help of strong demand for CT tubes including our newest high performance CT tube. The tube business is benefiting from the performance of its main customers Toshiba, which continues to do well in the tough diagnostic imaging market. We began delivering our new series of panels for high-resolution, low-dose imaging and radiographic and dynamic applications. Our new wireless panel is now being designed as the next-generation systems for portable radiography. Some customers are reporting that these more sensitive panels may help them to reduce the X-ray dose to the patient by more than 20% without any loss in image quality.

Customer interest in our new panel and workstation packages increased during the quarter. Several customers are seeking integrated imaging solutions that shorten the development time it takes to get their new products to market.

With new products gaining momentum, good growth prospects for panel workstation packages and an ongoing conversion to digital imaging, our outlook for the X-Ray Products business remains bullish.

Net orders for the other category were $37 million for the quarter versus $168 million in the year ago quarter when we booked $124 million in proton orders for systems in Saudi Arabia and Russia. Second quarter revenues for the other category were $46 million compared with $32 million in the year ago quarter.

We did not book any new orders for proton installations during the quarter, but the pipeline continues to look good. We are on track with the Scripps installation where the first patient treatment is slated to begin in September.

Construction is continuing on the center of University of Maryland and we're hopeful that financing will be complete and an order booked before the end of the fiscal year. Meanwhile, construction is expected to begin soon on a new center at Emory University in Georgia and the financing works needed to book this order is underway. We will be at the groundbreaking ceremony there next week.

Net orders in our security business were down versus a very strong year ago quarter. This business grew revenues by more than 50% in the quarter. We've now refocused our security business R&D efforts on new components to address currently underserved markets and Varian has introduced more compact industrial linear accelerators, as well as a new class of panels able to support megavoltage imaging systems.

Now, here is Elisha.

Elisha W. Finney - EVP, Finance and CFO: Thanks Dow and hello everyone. While Dow has already covered net orders, I want to briefly talk about the constant currency growth rates for the quarter. In comparing quarter-over-quarter exchange rates, there was a significant effect from the weakening of the yen and a small effect from the weakening of the euro and other currencies.

Oncology net orders declined 2% in dollars and were flat in constant currency. Oncology's North American net orders were down 9% in dollars. EMEA's net orders increased 4% in dollars and 5% in constant currency. In Asia, where we saw a roughly 15% weakening of the yen, was a drop in dollars, but up 7% in constant currency. Oncology net orders in rest of world region grew by 16% in dollars and 17% in constant currency.

Second quarter revenues for the total company increased 7% in dollars and 8% in constant currency. As expected, Oncology Systems posted a 3% increase in revenues during the quarter with 56% coming from outside North America. Oncology revenues were particularly strong in Asia, as well as in Africa and the Middle East.

X-Ray Products posted a gain of 14% with double-digit growth in both tubes and panels. Revenues from businesses under the other category increased by 43%. We recorded $20 million of Proton revenue as a percentage of completion accounting commenced for both the Saudi and Russia's project.

Well I'm talking about Proton, so let me remind you that we are expecting about $80 million in Proton revenue with roughly a 10% to 12% gross margin for the year. Our Proton revenue and margin expectations for the year assumed that financing for the University of Maryland project will be completed in our fourth quarter and that we will then be able to book about $40 million in revenues for this project.

Returning to the P&L, the second quarter gross margin for the Company increased 40 basis points to 31.6%. Oncology Systems gross margin improved by 60 basis point to 42.8%, even including the $2 million or 30 basis point impact of the excise tax. This gain was primarily due to a product mix that included a higher proportion of service and TrueBeam revenue.

X-ray Products gross profit dollars increased by 13%, driven by volume gains in both tube and panel businesses. The gross margin rate, however, fell by 0.5 to 42.5% from the year ago quarter, principally because of pricing pressure in the panel business, partially offset by volume and productivity gains in both tubes and panels.

Second quarter SG&A expenses were $113 million or 15% of revenues, essentially even as a percentage of revenue from the year ago quarter. This included the previously announced $2.5 million restructuring charge to complete our enhanced retirement program. Second quarter R&D expenses was $51 million, or 7% of revenue, also about even as a percentage of revenue with the year ago quarter.

Moving down to income statement; second quarter operating earnings totaled $156 million, up 8% from the year ago quarter in dollars and up 30 basis points to 20.3% of revenue. The restructuring charge and excise tax together reduced our operating margin by about 1 point for the quarter.

Depreciation and amortization totaled $16 million for the quarter. The effective tax rate was 27.9% for the quarter and for the second half, we estimate that the tax rate will be about 28% to 29%. Fully diluted shares outstanding decreased significantly from the year ago quarter to 110.7 million, due largely to our ongoing share repurchase program. Including the $0.03 impact from the restructuring charge and exercise tax, and roughly a $0.02 impact from the weakened yen, diluted EPS was 9% to $1.02.

Turning to the balance sheet, we ended the quarter with cash and cash equivalent of $740 million, debt of $238 million and stockholders' equity of $1.6 billion. DSO increased by four days from the year ago quarter to 87 including a five day impact from Proton Therapy business and reflecting a continued shift to international delivery.

Second quarter cash flow from operations is $31 million, as net income was more than offset by working capital changes. Year-to-date, cash flow from operations was $103 million. Primary uses of cash were $90 million for the repurchase of 1.4 million shares of stock. At the end of the quarter, we had 5 million shares remaining under the existing repurchase authorization.

Now, I will turn it back to Dow for the outlook.

Dow R. Wilson - President and CEO: Thanks, Elisha. The Company remains on track for achieving its fiscal 2013 growth targets. For the third quarter of fiscal year 2013, total Company revenues could increase by about 7% over the prior year quarter. Net earnings per diluted share for the third quarter should be in the range of $0.98 to $1.02.

For the fiscal year, we continue to believe that total Company revenues could increase by about 8% over the prior fiscal year and that net earnings per diluted share for the fiscal year could be in the range of $4.09 to $4.14.

We are now ready for your questions.

Transcript Call Date 04/24/2013

Operator: Amit Hazan, SunTrust.

Amit Hazan - SunTrust: So I think going straight to the orders where I think a lot of people were focused. You have talked about a lot of things. What probably surprised me the most is you're referencing of ACOs and bundling? ACOs, I think, there is probably like 500 of them now. So I'm kind of wondering with regard to that if you are seeing radiation therapy for some reason is seeing more of the hospital systems that are going to ACOs that also have radiation oncology clinics inside of them, or why you'd reference that at this point since it is a pretty small number relative to the number of hospitals in the U.S. Then bundling as well, if you could just talk about whether you are referencing freestanding centers or whether you're thinking that that could impact the hospital setting – outpatient setting as well?

Dow R. Wilson - President and CEO: I think though overall message about the U.S. market should be one of uncertainty. There is just a lot of people don't know exactly what they are shooting at and the market continued rumors of reforms and reimbursement and where it is going to go. We do see, especially on the freestanding side, people lining up with other cancer services, so that they can offer a bundled cancer therapy offering. So I think that's where we're seeing some of that kind of pause on that side of the market. The software market is still solid. We're seeing pressure on folks to replace product so that they can have stereotactic radiosurgery and stereotactic body radiation therapy capability. Our funnel looks good, but we've definitely seen kind of a transition in the market and you kind of look back last four quarters we've had one very good quarter, one outstanding quarter and two not so good quarters and that's little bit of the reflection of I think what we're seeing in the U.S. market.

Amit Hazan - SunTrust: Then maybe let me ask the question in terms of reimbursement, and just going into the next round here, what's your understanding of where CMS might be in terms of the hospital outpatient setting. Maybe separately just talk about whether you expect kind of the ASTRO reimbursement proposal to play out in the freestanding side?

Dow R. Wilson - President and CEO: I think the – clearly the ASTRO floating proposal is going to have to go before the American Medical Association in their CPT panel. We do expect modifications in that and don't have lot of visibility on which way that is going to go. We do not expect significant reductions in the freestanding center reimbursements and I think that that will probably maintain.

Operator: Amit Bhalla, Citi.

Amit Bhalla - Citi: Dow, I just want to – just dig into North America, the minus 9% order growth. Can you just give us a better sense of software and service versus like linear accelerators, were all three of those areas down or was there any pockets of strength in North America?

Dow R. Wilson - President and CEO: Service remained very good and as I mentioned in the call, we're bullish about where that goes both in North America and long term, interesting little highlight there. I think I said in the call that we have 300 TrueBeams coming out of warranty over the next 18 months. That's one per working day, and that's a big contract opportunity for us as we look out the next 18 months. Software was okay and clearly, it was the hardware market that was (softest) in North America.

Amit Bhalla - Citi: Dow, when you talked about the overall radiation oncology market, you said it's a kind of mid-single-digit growth market. I think last time around you said mid-to-high, so clearly some slowing. The first half of this year has seen the oncology orders declined roughly 2%. So as we look out to 2014, are we looking at the potential for revenue to be down next year?

Dow R. Wilson - President and CEO: We'll give guidance later, but as we said, we think the market is in the mid-single range; last two quarters where that down 2%. Fourth quarter was a strong double-digit performance. Just going around the horn, as I mentioned, we still see a very good funnel in North America, so it will be interesting to see what happens here in the second half in North America. Europe is mixed. Central Europe, Germany, France, have been very strong for us. The U.K. has been strong. Southern Europe is very, very quiet. So Italy, Spain, Portugal, Greece, kind of the usual (corporate there) has been very, very quite. So, we think that's going to be kind of mixed. We still see Asia as very strong. Orders do take about a year to translate into the P&L. So, it's going to be really a second half discussion. Elisha, you got it comment?

Elisha W. Finney - EVP, Finance and CFO: Yeah, Amit, I would just add that total company backlog is up 4% and if you just look at the Oncology backlog quarter-over-quarter, it was up 6%, which is right in line with the 5% to 6% that Oncology is going to grow revenues this year. Obviously, not much services in backlog and that's growing at a faster cliff. So again, not guidance in the FY '14, but I think it kind of sets us up for the next 12 months and we do have backlog to support mid-single-digits growth as we sit here today.

Amit Bhalla - Citi: Elisha, just a quick one on expense cuts, I mean you are – you did a little restructuring, how much revenue you still have for the back half of the year for reducing the expenses if needed?

Elisha W. Finney - EVP, Finance and CFO: For the full fiscal year, we've got $6.5 million of restructuring that's built into these numbers, we've got excise tax, we've got negative impact on the yen. All of that said, we're still going to see a relatively flat year-over-year operating margin. So I think from an expense perspective with all of those things built in, it's a huge win for FY '13 that we can have a flat operating margin year-over-year and I think sets us up pretty well going into next year, but again we'll give guidance on next year when we get to the end of this fiscal year.

Operator: (Anthony Petrone), Jefferies Group.

Anthony Petrone - Jefferies Group: Couple for Dow and then a couple gross margin questions for Elisha. First on the guidance, Dow, if we look at the third quarter guidance, you put up 7% growth for the top line. On my math if you run that through, you need about 9.5% to 10% growth to come in that the 8% range for the year. So the comments on North America were little apprehensive, I'm wondering where that fourth quarter confidence comes from if we look at Oncology, X-Ray and perhaps Proton.

Elisha W. Finney - EVP, Finance and CFO: Let me take a stab at that one. It really is reflective of the Proton business which is going to grow significantly in the second half versus the first half. So if I look at third quarter, the guidance on sales of about 7%, when you compare that to the full year, you can do the math and deduct that we have to have a double-digit revenue growth in Q4 and really a significant piece of that is coming from the Proton business, where again we expect that we will get the financing completed on the Maryland field and be able to take close to $50 million of revenue in Q4 in our Proton Therapy business?

Anthony Petrone - Jefferies Group: Was that a change also in the – the expectation to actually realize some profitability on that, and I thought that there was no expectation for any profits on that this year?

Elisha W. Finney - EVP, Finance and CFO: Well, the good news is, for the first few of these, they were booked at a zero margin so of course Scripps is under the percentage of completion, we are deferring any profit until we get to the very end. Saudi, Russia, a little bit, but by the time you put all of this together for this fiscal year, our expectation is that the gross profit on that total $80 million or so should be in the 10% to 12% range. So again, significantly below the Company margin level, but starting to contribute some dollars.

Dow R. Wilson - President and CEO: Again that's at a gross margin level.

Anthony Petrone - Jefferies Group: To stay on gross margin for a sec, Elisha you spoke about pricing pressure in the panel business, can you just elaborate there on how extensive that was in the quarter and if you expect that to continue?

Elisha W. Finney - EVP, Finance and CFO: Yes, so let me just kind of back up and say, for the full fiscal year, we still expected X-Ray is going to be in the 42% to 43% gross margin range. Just as a data point, if you look back three years ago, they were at 40%, so this panel business carries higher margins than the tubes. It's has been growing at a much faster pace than the tubes. So I think it is just the reflection of a product line that is maturing and is becoming more mainstream, although I think Spencer would still tell you we're only in the third or fourth inning in terms of adoption of digital imaging. But we're just seeing some normal pricing pressure associated with that, but this is a highly profitable product line and as it continues to grow faster than tubes, I think it's going to – the X-ray segment should continue to be able to hold that margin level.

Dow R. Wilson - President and CEO: That just was on the side for that business. Last year, we made 3,000 panels, and this year we'll make about 13,000 panels.

Anthony Petrone - Jefferies Group: Last one for me. I'll hop back in. Dow, you mentioned a lot about the North American market. One of the things you mentioned was consolidation, perhaps of freestanding clinics into hospitals. How many of your freestanding customers do you believe are actually in discussions to be acquired and sort of how long do you think this consolidation phase takes to unfold?

Dow R. Wilson - President and CEO: I think we're seeing two things in that. Let me just emphasize what I said on the call. I think what we're – the consolidation that we're seeing, first of all, is people trying to round out their product baskets to make sure they can compete in a bundled pricing environment, whether that's ACO or bundled reimbursements, or whatever it might be. So I'd say that's probably the leading trend at this point in time. We are seeing some consolidation. We've tried to quantify it. I can say that, inside, we don't have any real current data. We're scratching at that pretty hard. We're seeing some consolidation. I think the bids are all very comfortable. When you look at U.S. Oncology, 21 Century, Vantage kind of customers would probably represent majority of this market. They are evaluating investment opportunities. They see this as an opportunity to grow in this uncertainty and they are certainly want to be consolidator not consolidatee as they go into this environment and so, they are not part of it. I made a mistake, on the panel, the panel grew up 3,000. We went from 10,000 to 13,000. My math was bad.

Operator: Jeff Johnson, Robert W. Baird.

Jeffrey Johnson - Robert W. Baird: So sorry, I've been jumping between calls here. If I ask something that's already been asked (indiscernible) to do that instead, but, Dow, I've heard some of the discussion on the U.S. market. I was wondering if you could touch on maybe your competitive positioning within the U.S. market. I hear some of the broader issues maybe impacting all of market, but your competitive positioning there, obviously, the M. D. Anderson news, are your competitors want to play that up as they got a couple of systems sold into there, but you feel like you're gaining or losing share in the U.S. market, especially mindshare maybe with some of your bigger customers?

Dow R. Wilson - President and CEO: We think our market share in the U.S. is actually up. We look at it two ways. We look at it on both in orders basis and trailing revenue basis. Trailing revenue you heard us talk about that before. On a trailing revenue basis, we think our market share is actually up a couple of points globally and probably even a little more than that in the U.S. There is always some puts and takes in the markets as you mentioned, but in the core of the market, we're doing very, very well. TrueBeam continues to capture the imagination of our customers and it's winning a lot of market share. Elekta is a new product. It's clear it is no TrueBeam. In fact really all it has done is narrow the gap to the Clinac iX and Trilogy product. It can't match us for SRS, SBRT capability for efficiency of delivering those, for throughput, for flattening filter free capability and for motion management, it's still significantly behind. So from a product positioning point of view, we are very comfortable from market share point of view. Obviously, we'll be looking at their year-end numbers to see how they do, but when you look at the last 12 months of orders, we think our share is growing faster than theirs globally and in the U.S.

Jeffrey Johnson - Robert W. Baird: Just one last follow-up. Just on the radiosurgery side, a lot of discussion here over the last, well, more than just last few weeks – that heightened over the last few weeks here as we think about what kind of impact that might have on system sales if we go to hypofractionation. I think long-term we all see that could be a risk but in the near term, meaning in the next two, three, four, five years, is that really an opportunity, more of an upgrade opportunity in really to drive higher priced systems and new technology into the market before we have to start to worrying about volume declines on the linac side?

Dow R. Wilson - President and CEO: No, absolutely. I think in the short-term, this is going to drive an upgrade cycle for customers to be able to do SRS and SBRT with confidence. You need image guidance, you need very fast delivery time, and you have to really know where that tumor is and you're going to want to do that on new technology. So in the short-term, I think it's very positive news. In the long-term, I also think it is very good news because it brings more patients from other cancer therapies into radiation. I think it's a win in that way in the long-term as well. So I kind of view it as good news and good news.

Jeffrey Johnson - Robert W. Baird: Do you think linac per million population all the different stats that we look at by country in that five years from now starts trending down not up or do you think because of the increased utilization across new indications that it could at least hold steady?

Dow R. Wilson - President and CEO: I think for the next five years it's only going to go one direction and that's up. There is just so much need out there that it's going to go up. Beyond that, I think we're going to be talking about new applications in cancer and maybe even outside of cancer that can even drive more penetration of linac. You've heard say before that just to get their rest of the world to kind of the Europe standard for linacs for million people we need 10,000 new linacs which is basically a doubling of the global installed base. For the long-term when you look out at the horizon here and look at the long-term, we're still very comfortable where this is going, there is lots of opportunity and very confident about where we're headed.

Operator: David Roman, Goldman Sachs.

David Roman - Goldman Sachs: I wanted just to follow-up on your previous comments regarding sort of the long-term growth rate of the business and maybe just to ground us. Can you just remind us how big emerging markets are as a percentage of your sales today?

Dow R. Wilson - President and CEO: Emerging markets today are about 10% and as I said, they grew this last quarter about 20%. That's just going to keep picking up. This last quarter in orders, our OUS business was 58% of the quarter. What's that? Have we done bigger than that before, that's got to be pretty close to high watermark for us.

David Roman - Goldman Sachs: So when I think about the growth rate, is it too simplistic to say that your 90% of the business in developed markets kind of paces along at a low-single-digit rate may be consistent with where healthcare spending is growing or hospital CapEx and then you're dependent really on that emerging markets bogy, continuing to grow at that rate. Is that how we should think about the aggregate top line growth rate and now it sort of get you to a mid-single-digit type number? Obviously, below where you've been historically, but somewhat consistent with where the industry is going.

Dow R. Wilson - President and CEO: From a geographic point of view, as I said, we see the global market in kind of this mid-single-digit range, which is going to be made up of a tough and lumpy environment in North America. Developed Europe is going to be kind of tale of two cities. There is going to be those economies that are strong and I think we'll see them grow at mid to single-high-digit kind of growth. Then Southern Europe is going to be (denied) for a while, I think until credit crisis get solved. We had a huge performance in Africa. We haven't talked about Africa much. I think you'll hear us talk more and more about Africa. India, China, Brazil – when you look at Asia, Rest of World scenario, it's going to be a double-digit growth scenario and then, of course, the piece we haven't talked about is service and the service business continues to be a double-digit grower for us.

David Roman - Goldman Sachs: Then my last question, on similar topic just related to the operating margin and gross margin profile of that geographic mix. I think one thing they came up last year that negatively surprised investors to the extent to it, margins were negatively impacted by geographic mix last summer. Have you gone to a point where either that stabilized or there are things you're doing with your cost structure that can maintain the profitability profile of the franchise even as the greater percentage of sales come from developing markets?

Elisha W. Finney - EVP, Finance and CFO: Yes, David, and I think that's reflected in the quarter where you're absolutely right. In the year ago period we had a reset on the Oncology gross margin for the half and for this Q2 it is absolutely in line with where we expected to be. If you were to take out the excise tax the margin will be up about a point to 43% and that's even with a four point shift in revenues to international deliveries during the quarter. So I think the Oncology team has done a great job of being on track with cost reduction and that we can hopefully be in that 43% to 44% as we go forward with the cost reductions offsetting this continued shift to international market. I also think service is obviously helping and if I were to look out over the next five years, I think we're going to take service from policy, 30% of our total Oncology business, probably closer to 40% nice recurring revenue stream at a higher margin.

Dow R. Wilson - President and CEO: Yeah, and that's one of the things we get as we grow in these emerging markets is early on it's all about the equipment business and then as you grow you build the installed base and a good service in software business that goes with it. So that will be a positive long-term upward pressure on margin rate.

Operator: Jeremy Feffer, Cantor Fitzgerald.

Jeremy Feffer - Cantor Fitzgerald: Just wondered on the bigger picture, I mean Dow, you've gone through all the headwinds here. I think what we're all pretty familiar. What I'm wondering is – you can probably only speak about it qualitatively, but if you can talk a little bit about the impact on pricing – presumably we see customers that are delaying or lengthening replacement cycles. You have new competition in there that I imagine is coming in at lower prices. So to what extent is that going to play a role in you trying to drive order growth over time?

Dow R. Wilson - President and CEO: I'd say so far as you heard me say, share is health and the mix, the TrueBeam is very positive, so our customers want capability and that capability is around – it's around throughputs, stereo-tactic radiosurgery, stereo-tactic body radiation therapy to do these new applications. As a result, we're maintaining price on TrueBeam, even given a geographic mix that went a little bit against us, at least just looking back on the quarter, we feel very good about that. Obviously, we're going to keep innovating. Innovation is what drives price in this industry and we're going to keep working on new applications, better outcome, and productivity for our customers. At least, historically, when we've done that, they've paid for those innovations. So that's a strategy and what we're working on and at least so far thus we have seen stabilization in pricing.

Operator: Jonathan Palmer, CLSA.

Jonathan Palmer - CLSA: Dow, it sounds like your Brazil tender has been pushed back here multiple times, how confident are you that June decision comes to fruition?

Dow R. Wilson - President and CEO: No, I mean what we know right now is that they have announced the date. I think they've issued a tender and that's big progress. They made – they had the tender before. They had some changes to make and so we do have a date for the reverse auction and right now, that's the end of June and I'd say everything that we know at this point in time is that the Ministry of Health is dragged in this and it's going to happen. It might get slipped a week or two. I mean there's always that possibility, but given what we know to-date, this auction date is supposed to happen end of June. Now, as to when orders get really placed, they are going to complete their auction at the end of June. When do we see purchase orders? I think there is more uncertainty around that, but the actual auction date that Ministry of Health will bring on that timing is probably better than we've seen it – visibility on that is probably better than what we've seen at least so far in time.

Jonathan Palmer - CLSA: Then just staying on the topic of emerging markets. You gave a great review earlier on your competitive position in the U.S. I wonder if you could provide a similar overview in emerging markets from product offering perspective.

Dow R. Wilson - President and CEO: Sure. I'd say we continue to do extremely well at the high-end. Depending on the markets, TrueBeam is at least a third of even – the most emerging of our emerging markets. So we clearly do very, very well there. We are seeing uptick in UNIQUE. So we had some good volume on UNIQUE products here this quarter in the low energy and fairly low price segment of the market. I think customers are looking for products that have a lot of capability, that have a high throughput. (Helping with a) customer recently that is doing over 140 patients in a 24-hour day. Just really kind of staggering volume and that's not – that volume is a typical, but north of 80 patients a day is not unusual at all in these market and so to do that with high reliability and image-guidance and RapidArc is kind of what the market wants and I think our position is very good. I think in China, we can probably enhance our coverage and our relationship with some key accounts better in China, but I think that's a little bit more about kind of sales coverage and relationship than it is product. I think we're pretty comfortable across the market at each price point with where our position is at this point.

Jonathan Palmer - CLSA: Then Elisha just one quick housekeeping question here, I apologize if you mentioned it. What was the growth in product and services for the quarter in Oncology Systems?

Elisha W. Finney - EVP, Finance and CFO: Make sure I understand the question. So oncology, you are talking revenues were up 3% in the quarter with service revenues up about mid-teens in the quarter.

Operator: Tycho Peterson, JPMorgan.

Tycho Peterson - JPMorgan: I want to go back go back to David Roman's question earlier on the margins and I understand your answer on the gross margin, but can you just talk a little bit your willingness to show little bit more of balance sheet, middle of the balance sheet leverage. In other words, these are cost structure in terms of sales and R&D properly aligned with where the growth is coming from today and is there chance you can get back on a path that 22% to maybe 23% operating margin over time. So, maybe just talk to the operating margin dynamics?

Elisha W. Finney - EVP, Finance and CFO: That's a tough question Tycho. I mean the business is obviously going to change as we move forward into the coming months, quarters, year and we will be looking at this. I mean we have been committed to getting increasing leverage year-over-year. We went from 11% at the time of the (spin) to 21%. You are not going to see anywhere, anywhere close to that, but if we can get 25 to 50 basis points, I mean that is what we are striving for. It is really going to be dependent on what kind of growth opportunities do we see, both if we're looking internal at our organic growth opportunities as well as through our M&A opportunities which most of those end up being dilutive in the short term, it is going to come down to where we place our debt and where we think we can drive continued growth and where those investments need to be. So I can't sit here today and absolute tell you we're going to get a one point improvement in the operating margin next year. I will say that we are committed to growing the corporate costs slower than the top line. We will likely continue to grow R&D at least as fast as the top line growth and SG&A is again, it's going to dependent on where the opportunities are. I do think we have made a good effort at putting resources where the growth is and that was all part of this whole retirement restructuring that we announced and we will continue to do that as we move forward.

Dow R. Wilson - President and CEO: As we kind of said on the call too, I think one of the big questions here is where the U.S. market grow – where does it go and what we're seeing in our funnel right now suggest that it is going to be lumpy and a little bit crazy, but funnel still looks very good. So if the U.S. market remains stable, then I think it's a little bit challenging for us, but as the U.S. market declines then clearly we'll have an opportunity to reallocate more resources to our growth markets. So I think you've got an important six, nine months here to kind of watch where that U.S. market goes and I'll maybe do some rebalancing as we see where that market goes.

Tycho Peterson - JPMorgan: Then Elisha you mentioned M&A, can you just talk a little bit about your capital allocation priorities. I mean as the growth rates changed over the years a little bit, can you talk about how you're thinking about your capital allocation strategies and potential to – I mean, you've got (perhaps) cash problem, so how do you think about repatriating or maybe levering up, do you consider potential dividend at some point, can you maybe just talk to some of these dynamics?

Elisha W. Finney - EVP, Finance and CFO: So, Tycho, we have, I mean, we've done fairly limited M&A over the last several years. Mostly tuck-in acquisitions and I think you should expect that we will continue that strategy going forward, but nothing that I would sit here today and say it's going to be transformational. Therefore, the cash that we do generate and virtually every dollar plus has been allocated to the share repurchase program over the last year and so we have taken on some short-term debt in the U.S. We ended with our revolver at about $200 million as we completed our Q2 share repurchase. Since that time the net debt is almost half of that, so collections have been good. We have been getting cash in. So you should expect that we will continue to execute on the share repurchase program. We do talk about dividend extensively, we formally debate it probably every quarter. We talked about it at the Board level. For us to do anything meaningful with the amount of cash we have tapped offshore it just – it would not make sense and we would become a serial borrower at significantly higher rates if we were to do down that path. So we have elected to do a share repurchase program and have consistently been in the market quarter-in, quarter-out, somewhere between 1 million and 2 million shares per quarter.

Tycho Peterson - JPMorgan: Then Dow back to your comment a minute ago on just the U.S. market, can you talk a little bit about any impacts you seen from watch for waiting in terms of impacting discussions around the installed base? In other words, if hospitals have (indiscernible) they are going to replace four of them over time because of the prostate dynamic?

Dow R. Wilson - President and CEO: I think for most of our customers, it's anniversaried. So I did notice that 21st Century in their quarterly report a couple of weeks ago pointed to prostate volume being down and we actually (pinged) the number of our other customers, and they thought that their volumes to a year ago were roughly the same. So I think for most of our customers, that impact is already anniversaried. Now people are actually – a lot of our customers are seeing prostate volumes come back up with re-treatments and surgical failures. So I think there might be a few folks out there left, who haven't seen the watchful waiting impact, but I think most of our customer – that report was published, I want to say, a year to a year and half ago and kind of found its way into the market. So, yes, it's a little bit of – there is a little bit of see me now, see me later going on, and maybe we do have some patients delaying and watching what happens to their PSA and other markers, Gleason score and delaying, but eventually they'll come to us. So I'd say, at least at this point, that I have as many customers telling me that they're seeing prostate volume come back as I do saying that they're seeing a watchful waiting of.

Tycho Peterson - JPMorgan: Then last quick one. Can you talk on linearity in the quarter? Was March any different than January and February, or any change post the ASTRO proposal?

Dow R. Wilson - President and CEO: No, I don't think so. I think....

Elisha W. Finney - EVP, Finance and CFO: The third month is always the biggest just because it's (445) in terms of how we allocate the fiscal month.

Operator: Steve Beuchaw, Morgan Stanley.

Steve Beuchaw - Morgan Stanley: Dow, I wanted to dig in a little bit on your comments on ACOs. As far as we know, there is one Oncology ACO in the U.S. that's functioning right now, but I guess a pretty large number maybe 40% of hospitals are participating in ACOs not necessarily oncology specific in some way. So I guess what I'm getting at it to why now, why is it that today and not 90 days ago were – was this a factor? Is there something about these pilot projects that has people thinking this is going to be a common issue, a bigger issue and faster but why now?

Dow R. Wilson - President and CEO: Let me just say again that ACOs was one of five or six items in a list and not the main item. So ACOs is a factor I think what we're hearing from our customer base is lot of these reimbursement scenarios, what they want to make sure is that they have a service offering that they can take to the payor and give the payor comprehensive cancer services. So I think that's kind of the net impact of this, whether it's reimbursement, bundled payment, accountable care organization, pay-per-performance, other quality measures that that's the impact that we're seeing in the marketplace as it causing our customers to really look to each other and what kind of partnerships they should be forming. So that they can go to the payors with a full service capability, I wouldn't want you to leave here today thinking the ACOs is the end all or the end of the world. It's one in a list of items that our customers are thinking about as they prepare for what frankly is uncertain in most of their minds about where it is going and I think it's kind of that uncertainty that most people are facing in today, they just don't know and frankly we don't either.

Steve Beuchaw - Morgan Stanley: Then the comment that you made around capital spending in the U.S., some of that is clearly tied to what's going on in DC. Why wouldn't there be a case for that to reverse and the capital spending environment in the U.S. actually to get better over the course of the year as…?

Dow R. Wilson - President and CEO: I think we've got – I mean, I think we've got into next fiscal year some uncertainty. I mean, in my own experience, I have got some scars on my back from DRGs in the early 80s, and HillaryCare in 1992 and in both of those scenarios the markets stalled for 12 to 18 months and then came roaring back with the vengeance. I think, we are seeing a little bit of that here. People are uncertain in the environment, I don't it's – I don't think it's 1983 to 1992, but there is a lot of uncertainty out there. The good news is, there is a fleet of equipment in the U.S. that's old and ready for replacement and there is a new clinical applications, new clinical applications, (indiscernible) that's a real reason to trade up. So I think people are going to an uncertain time and that the mid-term and long-term looked very, very good. I think we can talk about – is that a six month impact or a 12 month impact and I don't really know, but I think it is – keeping our eye on horizon, we think it's optimistic.

Steve Beuchaw - Morgan Stanley: Then just one housekeeping item. On TrueBeam, I'm sorry if I missed it, but what was the number of TrueBeam orders in the quarter?

Dow R. Wilson - President and CEO: I think I mentioned that we shipped about 500. In keeping with our practice, we stopped reporting numbers of TrueBeams since it's an established product.

Operator: Jason Wittes, Brean Capital.

Jason Wittes - Brean Capital: Dow, I think you gave a pretty distinct answer in terms of why TrueBeam is a more successful product than (Versa) is probably going to be. But I can imagine there are still going to be some sort of (accounting) I look at those systems and therefore, some delays. Is that accounting for in your thinking for the rest of the year, especially in North America?

Dow R. Wilson - President and CEO: I think we've seen very little of that. It's their fourth quarter and they are out pushing the business hard and so this is – it's a – in our fiscal second quarter, there is a lot of activity going on because it's their fourth quarter and at least feedback from our team is (Versa) is not causing any delays. It's the other thing that we've been talking about.

Jason Wittes - Brean Capital: Then proton is actually...

Dow R. Wilson - President and CEO: Let me just state one other item on that and that is (Versa) ain't new news. We have been competing with this thing for – yes, they formally introduced it at ASTRO or whenever it was, but this thing has been out there on the marketplace for – in one way or another for some time. So at least from a kind of a market point of view, this is kind of old news.

Jason Wittes - Brean Capital: Also just wanted to switch gears. Proton is actually going to be somewhat contributed to the bottom line this quarter. Elisha, I think you said you are going to assume there is going to be about 10% to 20% margin on that business or gross margin on that business?

Elisha W. Finney - EVP, Finance and CFO: Gross margin, but it is not contributing to the bottom line. It is still dilutive and will be for the remainder of this year and next year most likely. So, it's going to real clear. It's just contributing gross profit dollars that are more than zero on the Scripps deal.

Dow R. Wilson - President and CEO: The contribution margin level not in the bottom line level.

Jason Wittes - Brean Capital: Could you quantitate what is the impact of EPS is from proton because traditionally it's been about 10% to 15% hit per year? Is that still the case in 2013?

Elisha W. Finney - EVP, Finance and CFO: I think we said about $0.15 and that is still the case.

Jason Wittes - Brean Capital: Then the other thing about proton. I mean obviously you are starting to book revenues and even some modest profits here, although again not enough to offset the dilution. But last year you seemed like you were in a pretty good cliff announcing quite a few of contract wins. This year other than Maryland ones which I think has been in your pipeline but not fully funded yet, haven't really heard that much for proton this year in terms of potential orders and what sort of the pipeline look like in terms of potential orders?

Dow R. Wilson - President and CEO: As I mentioned on the call, we are aiming for a couple of orders. The pipeline looks pretty good. We think by end of the year we should have a couple of orders in the order book. Maryland will be one of those and then one other one. There is number of prospects in that funnel. It's always about financing and obviously have pretty good idea who those prospects are. In some cases, where (account) selected as vendor of choice, I think I mentioned, we're headed off to (Emory) for the groundbreaking actually where we've been selected as vendor of choice. We will not book that order until their financing is complete and that one is probably not a this year scenario, it is probably next year.

Jason Wittes - Brean Capital: Then last proton question. Some of your competitors, they don't have them operating, but they have been selling single-room centers. It seems like the marketplace has a fair level – a high level demand for the single rooms than versus the large sort of $200 million centers. Is Varian working on a single room center or – and can we expect any kind of announcement on that in the near-term?

Dow R. Wilson - President and CEO: We do have a single room product today. It's a little more expensive, but it works. We also with the Cyclotron we have the most economic position for folks to be in is in a multiple gantry facility. Now, obviously we have to have the patient volume for that and it gets a little more expensive, but we have a nice economic price point for a two-room two gantry center. I think are pretty well-positioned in this marketplace. Frankly, I think right now in proton, the game is all about credibility. We haven't done a patient yet. We are going to do our first patient late this summer August, September timeframe. Other competitors in the marketplace have sold a lot of PowerPoint and waiting to do their first patients as well. So I think the market is very much waiting to kind of see what happens do these systems come up, do they deliver dose and get curative intent and get good care for patients and there is a lot of folks out there just kind of watching. And I think that's probably the biggest factor right now.

Operator: Ladies and gentlemen, I would now like to turn the floor back over to management for any closing comments.

Spencer R. Sias - VP, Corporate Communications and IR: Thank you all for participating. Replay of this call can be heard on the Varian Investor website at www.varian.com/investor where it will be archived for a year. To hear a telephone replay, please dial 1-877-660-6853 from inside the U.S. or 1-201-612-7415 from outside the U.S. and entering confirmation code number 410801. Telephone replay will be available through 5.00 pm this Friday, April 26. Thank you all again for participating.

Operator: Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.