Varian, Inc. F2Q09 (Qtr End 04/03/09) Earnings Call Transcript

| About: Varian, Inc. (VARI)

Varian, Inc. (VARI) F2Q09 (Qtr End 04/03/09) Earnings Call Transcript April 29, 2009 5:00 PM ET

Executives

Sean Wirtjes – VP, Finance and Treasurer

Garry Rogerson – President and CEO

Ed McClammy – SVP and CFO

Analysts

Dan [ph] – UBS

Isaac Ro – Leerink Swann

Rob Mason – Robert W. Baird

Peter Lawson – Thomas Weisel Partners

Jon Groberg – Macquarie

Operator

Good day everyone and welcome to the Varian Incorporated Q2 Fiscal Year 2009 Earnings Conference Call. As a reminder, today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Sean Wirtjes. Please go ahead, sir.

Sean Wirtjes

Good afternoon. Thank you for participating in the webcast to review the financial results of Varian, Inc., for the second quarter of fiscal year 2009, which ended on April 3rd. I am Sean Wirtjes, Vice President, Finance and Treasurer and with me are Garry Rogerson, Chairman and Chief Executive Officer; and Ed McClammy, Senior Vice President and Chief Financial Officer.

Before Garry begins his review, please note that we will be making a number of forward-looking statements this afternoon, including with respect to orders, revenues, margins, earnings, cash flows, new products, and efficiency improvement activities. These forward-looking statements are based on current information and expectations.

Actual results may differ materially for a variety of reasons, including but not limited to, the risks set forth in today's earnings release, in our last Form 10-K and Form 10-Q and in Form 10-Q to be filed with the SEC for the second quarter of our fiscal year 2009.

In this presentation, we will also be providing certain non-GAAP or adjusted financial information. For reconciliations of that non-GAAP financial information to the most directly comparable GAAP information, please see the non-GAAP reconciliations provided at the Investor's page of our website at www.varianinc.com.

I will now turn the call over to Garry.

Garry Rogerson

Thanks Sean. Considering the economic situation, results for the second quarter was down. Revenues at $205 million were 17% lower than the same quarter last year and roughly flat compared to Q1. Adjusted operating margins at 11.8% were slightly less than last year, but held up extremely well in the face of the revenue decline and improved sequentially. $25 million of free cash was generated and adjusted earnings per share of $0.55. I was particularly pleased with the adjusted margins and cash generations.

Usually now I would talk about year-on-year comparisons, but in the present time, this seems to me to have little relevance. More important is to see changes that have occurred sequentially. I will focus on these sequential changes.

We mentioned previously countries where orders slowed dramatically in Q1, including Korea, Russia, India, and the UK. Some were driven solely by exchange rate, while others related to the markets of their products mainly energy slowing down. These were often the same countries. We have seen a noticeable pickup from the lows in both Korea and India, and we have seen some hope in Russia, which is starting to place orders again. It is very important to us as we have developed strong market presence in some of these harder hit countries.

China continues to grow. I was in the region in the quarter of the opening of our newest sales, service and application center in Shanghai. In talking to customers and sales people, there appears to be little negative effect from the global economic slowdown on buying patents in China for our products and services.

In our first quarter, customers delayed placing standing orders for certain vacuum products, consumables, and some analytical instrumentation products. As Q2 progressed, some of these customers started to come back as their inventories depleted. Very few standing orders were placed, but instead customers placed orders on an as needed basis. The underlying shipments will be lower, but at least the revenue is coming back.

The interest in our products for environmental food and product safety applications was down. We are well positioned to take advantage of it across the world. Recently, I have been impressed by the increased activity through testing; it’s a topic that’s increased in importance with the current US government.

New energy, where we are seeing a lot of activity, we have reason to expect growth in both existing and emerging applications. Solar and bio fuels are here now and nuclear is emerging. Traditional energy applications remain weak.

Government spending across the globe is becoming stronger, this should help us. Academics spend driven by government is by far our largest account segment. The actual spend as yet has not increased significantly, but the quotation activity is very heavy in particular for our information rich detection products, high field magnetic resonance imaging, high field NMR and crystallography products. We have independent of this founding seen a jump in orders for our high field NMR systems more due to the superior performance of some of our products.

Our strong competitive position in high field magnetic resonance products to pent up demand from our customers and the availability of government money targeted for these product areas make this a real opportunity for us. Off the sales revenue for consumables and services which accounts for about 30% to 35% of our business, remains sound in the quarter. Some of the newer products continue to grow well for us, including the sample preparation product Plexa.

We rarely mentioned Drugs of Abuse Testing, but our new saliva based tester is doing well and we should be able to carve out a nice market niche for this product. We released a whole range of new products last year and they’re helping us now in this difficult period. Key newly released products it should fuel growth in 2010 include our new infrared product range, high field NMR, automated low field NMR systems, and MRI released in collaboration with GE, and an exciting range of crystallography products.

The biggest disappointment in the quarter was the drop off in the activities in the Americas, especially in the US and Brazil. In both areas, there was a significant freeze in high-end expenditure across most of the accounts we serve, but especially pharma. We’d also expected some pickup in Germany and that did not materialize.

In summary, Q2 was a mix of positives and negatives. This is very different from the end of Q1, where it’s difficult to see any positives at all. Looking forward, our sales folks are generally slightly more upbeat. This and the previous comments make us believe we are at or near to the bottom, a bottom that we should be able to find ways to grow from. If we look further ahead, the backdrop we should be building up in information rich detection products adds to the healthier picture we hope for in 2010.

We remain disciplined in our pricing. Adjusted gross margins was slightly down due to a mixed favor in – a mixed change in the favor of NMR. Adjusted operating margins improved sequentially. I will list some of the contributing factors for the margin improvement here. The strategic initiatives we put in place over the past few years including outsourcing of parts, sub-assemblies, and assemblies to lower cost manufacturers.

We have reported previously that we are shipping the majority of our gas crow mat graphs, liquid crow mat graphs and all the samples from Singapore and Malaysia through our partners Flextronics and Benchmark. This outsources continuing will eventually include some our consumable products. The reduction of our footprint including the closure of our Palo Alto facility that will be completed next year. The broader cost reduction activities we implemented early in the calendar year in direct response to the dramatic drop in orders we saw in December.

Lastly, the effect of exchange rate which has negatively impacted our revenues in many parts has also helped our cost structure as we manufacture significant volume out of Australia and the UK.

Cash generation was excellent in the quarter. There is certainly a strong effort in the company to maintain a strong and positive cash flow. Compensation plans for key managers were recently modified to reflect this focus.

We continue to squirrel away our cash, but at the same time, we are looking for small technology acquisitions to fill our product lines. Our focus is mainly in the area of consumables and information rich detection. We have candidates for pricing for our taste remains high.

Looking forward, we are comfortable with our long-term strategy. There can be no better application to serve than life science, environmental, and energy. We continue to move our resources into those applications. In each application even in today’s economic malice, there are niches we can grow in.

And life science is our information rich detection products now with more access to government money and pent up demand to these incredible research tools. And environmental is food testing due to both popular demand as well as increased government oversight. And energy is the need for alternatives. We should see accelerating grow from solar research, nuclear, and bio fuels.

Looking at the short term, we recognize that the next few months will be very difficult for us. The recession appears to be far from over and order delays are the current norm. On top of this, the third quarter is traditionally a very tough quarter for us, since there are no events that help us pull in orders, such as government fiscal year end or budgeting cycle deadlines.

Easter fell in April this year, which in essence closed down Europe. Because of the economic environment, Easter shutdowns were longer than normal, very similar to the pattern we experienced over Christmas. After saying that as mentioned, there are some hopeful signs that would indicate we are near or at the bottom. If that is so, our cost structure is in alignment with revenue.

At this point in time, we remain comfortable with our guidance for the year. The biggest risks include our assumptions of order levels have bottomed out and do not take another step down in the next six months. And two as always, execution on our research product backlog especially in the high field magnetic resonance products, well as you know, the timing of installations and revenues is hard to predict.

Ed will now go into the details on the financials. Ed?

Ed McClammy

Thanks Gary. The financial results for the second quarter can be summarized with three points. First, revenues were down, but did not deteriorate from what we expected after their drop off we experienced in the latter part of December and January. Second, adjusted operating profit margins held up well despite the lower revenues. They were down only 20 basis points from the year-ago quarter and actually expanded 40 basis points sequentially from Q1 even on slightly lower revenues. Third, free cash flow generation was excellent.

Reported sales for Q2 were down 17% from the year-ago quarter. Reported sales were negatively impacted by the stronger US dollar which strengthened approximately 6% on a weighted average basis compared to currencies in which we sell products and services.

Sales from businesses acquired in fiscal year 2008 positively impacted reported sales by approximately 1%. The solid adjusted operating profit margins resulted from the positive impact of efficiency improvements implemented in recent years, the benefits from the cost reduction activities we announced in January, and favorable currency movements in recent months.

We said last year that the unusually weak US dollar had been masking the benefits of efficiency improvements we had implemented. Now that the dollar has strengthened back to a more typical historical level, the benefits of these improvements are becoming more apparent. These efficiency improvements included lower cost manufacturing and outsourcing initiatives, global procurement initiatives and facility relocations and closures.

Regarding cash flow, during Q2, we generated free cash flow of $25 million. Year-to-date we have generated free cash flow of $41 million with the conversion rate to net income of 175%. These results demonstrate the ability of your business model to generate strong cash flows during challenging economic environments as well as during times of good market conditions.

Inventory turns were 3.0 in Q2 compared to 3.3 a year ago and 2.8 the prior quarter with a progress over the past quarter in adjusting our manufacturing input activity levels to reflect the demand levels. This effort is continuing in the third quarter.

DSO was 69 days in Q2, compared to 73 days both the year ago and the prior quarter. We are pleased this as we had expected, this metric improved from its increased level in the first quarter. We are continuing to closely monitor accounts receivable aging during this challenging economic environment and have not seen any significant deterioration in recent quarters.

Because the strong cash flow in Q1 continued into Q2, and because our stock price went down even further during the quarter, we decided to use some of the free cash flow to repurchase shares. During Q2, we repurchased 344,000 shares of stock for $7.1 million or $20.66 per share. This leaves $38 million for repurchases under our current authorization.

Now a few comments looking forward, the June quarter is normally our toughest quarter with revenues and adjusted earnings typically down sequentially from the March quarter. This year, we are also dealing with the tough economy and the timing of Easter which was in April this year. Having said that, at this point, we are still comfortable with the full-year revenue and adjusted EPS guidance provided in early February.

The Q2 results support that we are tracking to the level of business that we anticipated and guided to after the significant drop off in revenues we experienced in December. We believe we made the right call to typically adjust our cost structure. This should position us well for the reminder of the year.

We will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we will take our first question from Derik de Bruin with UBS.

Dan – UBS

Hi guys, this is Dan [ph] in for Derik.

Garry Rogerson

Hi Dan.

Dan – UBS

You haven’t spoken last quarter quite a bit about the lack in visibility that you had. I was just wondering whether you’re starting to get a better sense for ordering trends and patterns now that we are a few months into the calendar.

Garry Rogerson

Well I guess firstly, we got to exclude something. We got to exclude NMR imaging, those high ticket items where clearly the backlog is there – a lot of the backlog is there for a quite long period of time.

Dan – UBS

All right.

Garry Rogerson

So you have to push those to one side. On the analytical instruments and the consumables that you are talking about shipping within 48 hours from getting the order and on instrumentation our general lead times are four to six weeks on product and really that’s about the visibility we got at the present time. We haven’t got much more visibility than that. The biggest issue is delays. We are getting a lot of delays out there.

Ed McClammy

But I think that what we did see, I think Gary talked about, as we saw the order patterns, even at a lower level it did level off. And as Gary said, it appears that what from what we have seen over the last few months that we’re either – feel like we’re either at or very close to the bottom and are somewhat bouncing along there now. I think it’s a very positive news out. But I think if you had asked us a quarter ago, as you said, we basically we’re saying visibility was awful. But at least now we have got some pattern in these tough times that we can – as we start to get more comfortable with.

Garry Rogerson

It fell off a cliff in December and pulled back some of the way in January and then from there on has bounced around the bottom, which is in fact what we said I think in a conference in sometime in February that has seemed to have flatten off from that point.

Dan – UBS

Okay, that makes sense. Looking ahead, what would be the back half of the calendar year when presumably there, hopefully will be some more visibility at least from a government spending perspective? Some of your competitors are starting to put a loose figure around the potential opportunities from the NIH stimulus plan. Is that something you are able to do at this point or is it a little too early?

Garry Rogerson

I would not put a figure there, but it’s huge for us and probably has a top end of significance if you ranked us with other companies, because NMR and MRI actually specified in the – by the granting bodies and mainly talked to the side for this type of equipment. So – and we know the demand out there from scientist is just enormous. I mean this source of information we can’t get from any other source as you know and so that we have been bombarded with quotations for high-end products from $250,000 to $10 million. And clearly that is going to help us possibly not this year, maybe some of the low-end NMRs perhaps. But it’s going to certainly help us in 2010 and 2011 as we ship these products out, massive demand there. Obviously there will be a lesser demand for our (inaudible) products, our infrared products, and crystallography products as well. I think it’s going to hit the high end the best. And as you go lower then there will be less of an effect on the spend. So we’re pretty excited about.

Ed McClammy

Yes two things to keep in mind with us. One, we have a September year end. So I think a lot of people that are talking, they’re really talking about expecting to see it in Q4, which for us would be 2010, fiscal 2010.

Dan – UBS

All right.

Ed McClammy

And second, while we think there is as Gary said significant upside because there is actually some specific line items in the NIH target spending related to NMR imaging, those do typically have longer lead times. So we are liable to get a disproportionate benefit from it, but it maybe later than some other people we’re seeing.

Garry Rogerson

And at the same time, we have hit the market with new products which is pretty unique in the NMR field and the imaging field. So we have got a lot going for us in that area.

Dan – UBS

Is there a large difference between the lead times in lower end and higher end NMRs?

Garry Rogerson

Yes.

Dan – UBS

I mean obviously I know it takes longer to setup a more complex lab. But –

Garry Rogerson

No, a low-end NMR we ship within the same quarter very often, very often. 400 megahertz to 600 megahertz, you would very often get in the same quarter as you place the order. It’s a 700, 800 and above where the lead time shoot out. And on imaging, it’s all images have a long lead time probably again the bigger the magnet, the longer the lead time.

Dan – UBS

Sure.

Garry Rogerson

Even the small ones there will probably have a six months lead time. Usually though with high-end NMRs and the images you got to remember the buildings, and they usually have to have the personnel as well. By the way, the NIH is rising in that you need the people, and you need the building so it’s a whole package of things they’re wanting people to apply for.

Dan – UBS

Okay, great. Last one, just looking at the cost reduction process, how far along would you say you are in that? And when we look at the SG&A levels for the coming quarters, is there a still some to come out there? I am just trying to get at the margins going forward.

Garry Rogerson

First, we’ve got an ongoing strategic plan as well we’re consolidating factors where we are outsourcing and that’s an ongoing thing and of course we’ll shed in that gross margins and our operating costs over the next few years. On the cost reduction, we have put in place in February to try and deal with this drop in the revenue than the orders, I would say we are about –

Ed McClammy

50. As far as what was in the quarter was probably because we implemented it during the first month, so we didn’t get a full first quarter there. Probably about 50% of the impact was felt this quarter and we should be close to a 100% by the September quarter.

Dan – UBS

Okay, great. Thank you, guys.

Ed McClammy

Yes.

Operator

And we will take our next question from Isaac Ro with Leerink Swann.

Isaac Ro – Leerink Swann

Hi guys. Thanks for taking the question.

Garry Rogerson

Hi Isaac.

Isaac Ro – Leerink Swann

Hi. Just to follow up on that question regarding margins, I was just trying to kind of – I know there have been a lot of fluctuations in the margins for a lot of the companies in this space this quarter, given the currency situation. So I wanted to see if you could maybe help breakdown how FX versus cost reduction contributions might have helped your gross margins and then maybe even offset by negative volume leverage on the revenues.

Ed McClammy

Yes. I mean certainly there was – is with anyone in our space, there was negative leverage of the fall off in revenues and we haven’t given quantitative and I am not in a position of wanting to give that today. But clearly we have that and the things that offset were the efficiency improvements, these cost reductions that we made and the FX impact from – of the changes from the unusually high position that particular the Australian dollar and the pound had a year ago, so all three of those were significant for us. It’s not like one dominated over the others. All of them were significant and help offset that natural impact of the negative leverage off the lower revenues.

Isaac Ro – Leerink Swann

Okay, so without believing in too much, maybe if you could just give me a sense of – from a just regarding FX, I mean how much did that really impact gross margins one way or the other?

Sean Wirtjes

Well, we have actually given you a break down.

Ed McClammy

Yes.

Sean Wirtjes

For where the effect of the Aussie dollar on the pound on it. I think –

Ed McClammy

The things that we have given and you can go off and see how much the currencies have changed. The last time we really did a detailed analysis within Q4 of ’08 of kind of where – whether it’s gross margin cost or operating cost that 50% of our cost in Q4 were in US dollars, 22% were in euros, 8% were in pounds, and 12% were in Aussie dollars, and then 8% was in other. And that other is basically selling offices, spread all over the world.

And I can give you as well some sense that the two biggest again that impacted us there if the pound was probably down about 25% from a year ago and the Aussie dollar also has devalued about 25% from the year ago. I think the one thing you should keep in mind though is those evaluations really just put those currencies back to where they have historically have been. Aussie dollar for example is traditionally has been between about 60.65 and 60.75 and right now it’s trading around 60.70. So now is the norm. The unusual thing is where it got to a year ago where it actually got to parity with dollar.

Isaac Ro – Leerink Swann

Right.

Ed McClammy

So I view it, it’s not so much it’s giving us a benefit now is that it hurt us – it’s helping the comps because it hurt last year.

Isaac Ro – Leerink Swann

Okay. No, I understand there is a lot of uncertainty in moving parts. Just trying to get a sense of – just trying to better appreciate exactly what kind of contribution you have gotten from the actual performance, the work that you have done to improve your gross margin line?

Ed McClammy

Right.

Isaac Ro – Leerink Swann

So as currency normalizes over maybe 2000 to 2010 period, hopefully we can kind of model that more effectively.

Ed McClammy

Well another way to – another way to look at it, but again, you got the lower revenues to deal with right now. And your analysis is that if you go back a couple of years, the currencies were about the same place they are now. So if you look at now where the margins are compared to where they are then, you take some of that currency impact out.

Isaac Ro – Leerink Swann

Okay. And then just looking at sort of the emerging markets that you touched on, I think Gary you mentioned, China was still pretty strong. How about Russia, Japan, Brazil, I mean maybe a little more granularity on the various countries that you said you are seeing any meaningful change in demand?

Garry Rogerson

Again, we are certainly we are except on Korea where their currency as well all know dropped dramatically and they stopped spending in Q1. In fact they were – those companies are stopping spending at the beginning of Q1, but in fact everything else was doing so much better that we’re in good shape until December. But Korea got spending and started spending again in Q2 for us; in fact it did very well in Q2. And so we are very happy.

Russia, I have said you have had a horrendous time and we are just seeing some glimpse of light in that. So it didn’t help us in Q2, but we do think it will help us in the second half of the year, spending returns in Russia. India was slow in Q1 and picked up somewhat and the rate of decline slowed down in Q2 and it looks as though, it’s starting to spend again. Brazil was a good Q1 and actually dropped in Q2. So there was a country again which was very good for us in Q1, but came down in Q2. We assume it will come back in Q3 and Q4. What other countries did you mention there?

Isaac Ro – Leerink Swann

Japan.

Garry Rogerson

Japan was okay. I mean Japan has been lack luster for us. So you are comparing lack luster with lack luster.

Isaac Ro – Leerink Swann

Yes.

Garry Rogerson

But what we are finding is that countries where it sort of the current – where they really dropped off to virtually nothing are coming back.

Isaac Ro – Leerink Swann

Right, right.

Garry Rogerson

Some of them are coming back. It’s like the companies that stopped ordering – cancelled their standing orders or didn’t place standing orders, they are now coming back. Inventories have been depleted out. So you can imagine the same sort of thing in countries as well. The big thing for us there which is we are very strong in these smaller countries.

Isaac Ro – Leerink Swann

Right.

Garry Rogerson

So we were hurt rather badly when Russia stopped, for instance when Korea stopped and we are very strong in there – and Brazil was very strong.

Isaac Ro – Leerink Swann

Okay, great. And then just lastly on – rationalization, I think as you mentioned, you were sort of 60% of the way there hopefully by 100% by the end of your fiscal year, is that right?

Ed McClammy

About 50% in Q2.

Isaac Ro – Leerink Swann

Okay. And then can you give us a sense on a number of facilities or a square footage or is there any kind of metric you can offer beyond just sort of a percentage?

Ed McClammy

Yes most of it – most of it was headcount. And obviously it’s very –- you can get headcount out in places like the US, you can get contractors out quickly. And then once you get outside the US in the European countries and others, it takes longer to get to those plans executed. So it’s not – there was a – it was a couple of sales offices, but most of the savings really was coming from the headcount.

Isaac Ro – Leerink Swann

Okay. And then just last question would be on the guidance, last quarter you gave top line sort of down 10 to down 20 and so sort of if I had just snapped for this year, year-to-date down about 15% and year-over-year for the first half. Given an opinion one way or the other, if you think you can kind of crawl towards the higher end of that guidance range, you mentioned sort of a sequential decline in the June quarter, so just –

Garry Rogerson

Yes, we are guiding to that guidance.

Ed McClammy

Yes, we are not ready to change the guidance that we gave. But as you said, as of for the first six months, we are tracking right to the middle of it.

Isaac Ro – Leerink Swann

Okay good enough. I know it’s a tough environment. Thanks so much.

Ed McClammy

Yes.

Operator

And we will take our next question from Rob Mason with Robert W. Baird.

Rob Mason – Robert W. Baird

Yes. I don’t want believe the FX point.

Ed McClammy

Yes.

Rob Mason – Robert W. Baird

But just could you help just to try to get a better feel, was the FX contribution that you had in the second quarter at the EBIT line, the profit line, was it about what it was in the first quarter, was it higher, lower?

Ed McClammy

It was probably about the same, because if I look at how we’re – if I look at how our revenues fell by currency, they changed very little from Q1 to Q2.

Rob Mason – Robert W. Baird

Okay.

Ed McClammy

And I think as we laid out the – in that investor meeting in the New York in November, I gave you the cost percentage of breakouts a couple of minutes ago. If I look at the revenues, the US dollar is about just about 50%, the euro is about 25%, the pound 6%, the Yen probably low single-digit 7% or 8%. And that leaves about 11% that are of up in currencies.

Rob Mason – Robert W. Baird

So sequentially the other items the restructuring in your low cost efforts probably had a better impact I guess.

Ed McClammy

Yes, if you’re looking at it sequentially, if you’re looking at it sequentially, the biggest impact really came from the cost – the cost reduction efforts.

Rob Mason – Robert W. Baird

Okay. And when you referenced being 50% done as of Q2, a 100% maybe by the end of the fiscal year, you are still targeting the same savings number.

Ed McClammy

Yes, I think we had said $5 million to $6 million on a quarterly basis and that’s still the same.

Rob Mason – Robert W. Baird

Okay. And then just could you comment more in depth just on your industrial end markets and what you saw as you moved through the quarter there?

Garry Rogerson

Besides economy, the industrial markets are not very good. They're poor. Depending what you're calling industrial. If you take – I am presuming you are not talking about environmental and you are not talking about energy which is poor, except for the newer energies, things like bio fuels where we have got a lot of strength and then you are talking about heavy industrial which has and chemicals which has taken the biggest hit. But even there we – we started to get orders for diffusion pumps for furnaces from companies that have really stopped ordering from us. So even there where it truly got to zero, we are starting to get a few orders again.

Ed McClammy

And I think the same thing that we have said if you look it on a sequential basis, the same thing we have said for the overall. But we saw this steep drop off last quarter and based of that we kind of set an expectation and even the industrial markets seemed to have bottomed and are just going along and that bottom. So it’s not like there is any signs of things got worse in Q2 than what we saw in Q1.

Garry Rogerson

What we saw in the last month.

Ed McClammy

Last part, right.

Garry Rogerson

Last month in Q1.

Rob Mason – Robert W. Baird

So rate of decline is lessening, I guess.

Ed McClammy

Yes, it’s really –

Garry Rogerson

Well I think what we are trying to say is it is declining at the moment, it’s extremely slowly declining. We think we are very, very near the bottom.

Rob Mason – Robert W. Baird

Did – and shifting gears just in a model real quick, you had a number of push outs that you referenced in the December quarter, did any one of those products that you referenced that were pushed out, did any of those come back to you in the second quarter or those still at Q3, Q4?

Garry Rogerson

Yes, I am sure I can’t give you a number, but I am sure some things have come into Q2 and some more will come into Q3 and Q4, yes absolutely.

Rob Mason – Robert W. Baird

Okay.

Garry Rogerson

We got a very, very large backlog and it’s too large in NMR imaging.

Rob Mason – Robert W. Baird

So when you referenced that in the past Gary, is – are there any plans to expand your capacity on that side of the business?

Garry Rogerson

Yes in fact I was at our magnet facility last week where we were discussing how, because we are going to get a huge bubble of large magnets, and when I say a bubble, it’s going to be a two or three year process. Friends at the NIH I think is saying we have to shift within 2 years if I remember rightly. So they will place the orders and leave us in the fourth quarter this year or first quarter next year and they will be coming through to the next two years, so it’s a big bubble that’s coming and we will need to look for space to bring these magnets and we are – capacity, we are limited by space than more than anything else and we all have to look to more space to perceive magnet.

Rob Mason – Robert W. Baird

Okay, so would that impact your capital expenditures this year or should we take next year?

Garry Rogerson

No from your point, no. You won’t see any difference.

Ed McClammy

It will be within your normal, normal range of CapEx.

Rob Mason – Robert W. Baird

Okay, okay. Very good, thanks.

Operator

And we will take our next question from Peter Lawson with Thomas Weisel Partners.

Peter Lawson – Thomas Weisel Partners

Gary, anything changed in April, is the markets stabilizing more so than –

Garry Rogerson

Well we haven’t really commented on April and it’s a very tough one to comment on. I mean I do think that what we have seen so far the markets have for our fair [ph] types of products have bottomed out or they’re near the bottom. April this year is a little dodgy to extrapolate from because of course you have got Easter in April and there were extended shutdowns in particularly in Europe in April. So I wouldn’t like to take anything from what I have seen so far in April.

I have spoken to most of our sales managers across the world and they are a little bit more optimistic than they were last quarter. And I’ve mentioned a few things that give us a little bit more optimism that inventories are running dry, the countries that were ordering was going to order. I mean there is some indication that things are bottoming and perhaps turning a little. I mean I got to be really cautious when I say that I don’t want to get too carried away with myself.

So I think the biggest driver for us, the real growth is going to be the governments. I mean and I am not talking about this year now, I am talking about next year. I think the governments are spending and we have got the products that scientist actually wants. We’ve just been overwhelmed with quotations. And then really only a – there’s not that many competitors out there for this type of product. So we’re just – we should get really good growth out into 2010 and 2011, so we are pretty excited about that.

And it’s not just the US government, I mean the Chinese, the Japanese, and they all seem to hone in quite rightly on these incredibly unique product. So we are in a good position to get that type of business. It’s a product that works for the scientist and it works for the government, it works for the scientist and it gives them information, it works for the government because it gives them a product to buy, a building to build, and an employee to employ. So actually works for both sides.

Peter Lawson – Thomas Weisel Partners

And then in the quarter, did you see anything that grew year-over-year like bio fuels or environmental, was there any part of the business that grew?

Garry Rogerson

I mean there were certain countries that grew. I haven’t got that granularity at the moment to you to say that.

Ed McClammy

But if there were areas, it would have been in like food.

Garry Rogerson

Food, I am not going to say – it’s definitely group of food is clearly a strong interest, environmental is still a strong interest. Bio fuels still getting – the orders for bio fuels haven’t stopped. Even in Brazil where we actually – which is a very strong bio fuel country, it ground to – it’s a bit of a whole last quarter, but bio fuels continue. And there is where we have just have (inaudible) us is the energy market and these small countries that have stopped buying.

Peter Lawson – Thomas Weisel Partners

Which of the end markets do you think is going to turn around first taking out government, just thinking about the bio pharma side of things and the industrial side of things, which ones do you think it turns first?

Garry Rogerson

Well I am not sure. Well I think the food industry is the one that’s going to show a lot of growth without government. But even there it’s a government, in the US government regulations are timing out dramatically in the food industry. So I think government has a lot to do with a lot of our products at the moment.

Nuclear, I mean you think of the need for our vacuum products in the nuclear industry, but really that’s driven by government to get clean energy. There is so much of our product lines that are being driven by the government.

Now pharmaceuticals, we are – again we are in a good position, because the growth in pharmaceuticals, we’ve seen India picking up again, we’ve seen Russia picking up again, I can’t imagine pharmaceutical growing in the US again. But again that’s you should listen to waters, not us on that one. They have got far better visibility that we have got.

Peter Lawson – Thomas Weisel Partners

Okay, thank you, Gary. Take care.

Operator

(Operator instructions) And we will go next to Jon Groberg with Macquarie.

Jon Groberg – Macquarie

Hi, thanks for taking the call.

Ed McClammy

You bet.

Jon Groberg – Macquarie

Can you – sounds like a – as for most people, the optimism is centering around the government and everyone is talking about the request for quotes and what not they’re getting. What is your view on and you mentioned that pricing so far had been stable, but what’s going to happen with the pricing for instruments around these government orders, right? So and then more there’s like – there’s mainly two players in this pricing and end up being a feature for the government in terms of who gets these – who gets these orders and who doesn’t?

Garry Rogerson

I think it’s going to be a factor, lead times, shipping, I mean remember, I am not sure that there are many products that are being pulled out and specified, which NMR and MRI have been pulled out and specified as key products for research. They have put money to the sides for these products. Most of the other is just throwing mud at the (inaudible). And I suspect it’s going to be on the performance of the products, the lead times of the products, who is going to get what order.

Ed McClammy

And I mean I haven’t heard of anything that would say that it shouldn’t be any different than just normal grant money.

Garry Rogerson

I don’t think we are getting any – no, we are not getting any pricing pressure.

Jon Groberg – Macquarie

I was just wondering if this is only market that is going to be growing that if you guys are going to want to make sure you get the business fast as your competitors.

Garry Rogerson

With NMR and MRI, there are only two of us really in that business.

Ed McClammy

And the other things Jon, I think it’s you can see over a long period of history in aerospace, I think generally people have learned that it is very hard to gain significant market share on price that usually takes more than that and usually if you try to attack it just on price, you typically lose more than you gain. And I think that’s one reason that you pretty consistently hear people in aerospace focusing on margin expansion more than you do market share.

Jon Groberg – Macquarie

And I guess that and that’s always been an attractive aspect of the space. I am just wondering given that there isn’t going to be much growth anywhere else, this is your one shot and some others are saying while since you were –

Ed McClammy

Most of this is – most of this is coming in from us we are talking about 2010 and I think we are expecting to have growth in those areas.

Garry Rogerson

Yes. We talked about – China continues to grow, we’ve mentioned that China is the second largest country for us. So if we can keep that momentum going that’s good. We have mentioned that countries that were not buying are starting to buy to that possibility. We have mentioned that inventories are coming – have come down, people are starting to buy again because of that. We mentioned food testing which is a huge one across the world as is environmental.

So I am not sure if it is just government and I am talking about growth from the bottom not growth from the top. Clearly that the top’s finished for us. I mean they’re gone. And so when I am talking about growth, I am talking about growth from the bottom. And I think there are lots of opportunities to grow from that bottom. I don’t think the industrial market is going to jump back. I don’t the pharmaceutical market is going to jump back.

So we have to cut our cost to suite, which we have we think we have done. And if so, then I think there are opportunities for us to go in ’09 from this bottom and we will go back to 2010 from this bottom, so that we have to give it. And we are going to get back to those 4%, 5% growth rates from that bottom. That’s where it’s going to come back to. And –

Ed McClammy

The other thing is just you made the comment that the only positive point that seems to be coming out from us and the others in the space relates to the government. I think in my mind for the near term, the biggest positive that I think I feel and I think we’ve heard from some other competitors over the last few days is that if you talked to us a quarter ago, everyone was saying we don’t know what’s coming ahead. We have seen this drop off, who knows whether it is going to deteriorate a lot further. So I think the most positive news out the whole thing is that there seems to be some signs of stabilization which then should give all of us a base jump start off of whether it comes from government or other areas starting to turn around.

Jon Groberg – Macquarie

Okay and then – fair enough on that. I am just trying to then going to this point right sizing the business. Can you maybe just talk about if I look back historically your restructuring charges that you pulled out this quarter of around $7 million was more than they’ve ever been and obviously you’re going through this, you’re trying to collect anything about $5 million of cost out as you said. But –

Ed McClammy

$5 million, $5 million to $6 million a quarter.

Jon Groberg – Macquarie

Yes, so can – and you maybe just clarify was this restructuring all associated with some of the headcount reductions, is that –

Ed McClammy

Yes. Almost all of it was related to the headcount. I mean and that’s laid out in the 8-K that we’ve filed when we announced the – the one we announced that restructuring. The details of heads and even some I think by geography and so a fair amount of detail was included in that 8-K. But most of it was head – we took about I think 7% to 8% including permanent heads and contractors out. So we thought it was a necessary move to do because we did think that the downturn to last at least a few quarters and we did feel like we could afford to – to carry that excess heads waiting for the businesses to turn back around.

Jon Groberg – Macquarie

So if I just take that comment and then look at kind of what happened sequentially between 1Q and 2Q on an absolute basis, your SG&A was down almost $5 million and your R&D was down about $400,000 or so. Is – that gets you to kind of between that $5 million and $6 million.

Ed McClammy

Well we think we got about 50% of that in the Q2, because we didn’t announce until the middle of the quarter and then we had to execute on it and in fact we are still executing.

Jon Groberg – Macquarie

Right. So on an absolute basis, these numbers were even much lower.

Ed McClammy

Yes, so there were other obviously things that we did took to look very hard at discretionary spending and other things like similar to that. And a great example of that is we decided that we did not feel there was a justifiable payback for going to (inaudible). And I can tell you by the time you add up the boot fees and having those employees there that it gets very expensive.

Garry Rogerson

(inaudible) return.

Jon Groberg – Macquarie

All right. So is there anything that’s going to offset that are you expecting other kind of step down in some of those absolute charges and just an R&D, lowest you every spent in R&D as well as I go back like historically on an –

Garry Rogerson

Well you got to remember two things. Last year we released a whole host of new products about this time. And the second is an exchange rate from last year.

Ed McClammy

Yes significant change, because we have R&D in UK significant – very significant R&D in Australia. So there is a – there is an impact that again hurt us last year on that and it is come back and worked more. I think the R&D on average will still about 7% of revenues, that’s been our target and it’s been a bounce around depending on product timing for one side or the other, but it’s going to be about 7%.

Jon Groberg – Macquarie

Okay, great. Thanks.

Ed McClammy

Okay.

Operator

And we will now take a follow-up question from Isaac Ro with Leerink Swann.

Isaac Ro – Leerink Swann

Hi guys, thanks for taking the follow-up.

Ed McClammy

Yes, you bet.

Isaac Ro – Leerink Swann

Quick one, just sort of I missed you here, there has been some questions out there regarding potential flood of used equipment coming out of pharma due to the M&A activity that we are – that’s pending. And I have heard that NIH grants require in many case recipients to purchase new equipment with those dollars versus going out and buying used equipment, do you know if that’s true?

Garry Rogerson

No, no the answer to that, but I can’t imagine a scientist who works the performance product wanting to buy a second hand piece of NMR. I mean you get these second hand pieces sold to places we wouldn’t sell to anyway. We don’t go for this $50,000 stuff. The scientists who are buying our products want the latest and greatest they don’t want to use. We wouldn’t chase that type of customer.

Isaac Ro – Leerink Swann

Got it. Okay, thanks so much.

Ed McClammy

You bet.

Operator

This concludes today’s question-and-answer session. At this time, I would like to turn the call back over to Sean Wirtjes, for any additional comments.

Sean Wirtjes

That concludes today’s webcast, a replay which will be archived on our website. To access the replay go to www.varianinc.com, click on the Investors' link at the top of the page and then click on the microphone and follow the instructions. Thank you very much for joining us today.

Operator

This does conclude today’s conference call. Thank you.

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