Novanta Inc (NOVT) 2003 Q2 法說會逐字稿

Ladies and gentleman, thank you for standing by. Welcome to the GSI Lumonics Second Quarter Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. At that time, if you have a question, please press the "1" followed by the "4" on your telephone. As a reminder, this conference is being recorded, Tuesday, July 22, 2003. I would now like to turn the conference over to Charles Winston, President and Chief Executive Officer of GSI Lumonics, please go ahead sir.

Thanks you Christie (ph.). Good afternoon and thank you for attending our second quarter conference call. This call is being broadcast live over the Internet in listen-only mode at www.firstcallevents.com on the specific URL detailed in our press release. Tom Swain, our Chief Financial Officer is with me today. Before proceeding, I mentioned that certain statements made during this conference may constitute forward-looking statements. These statements are based on the management's belief and assumptions and current information and as such are subject to risks, uncertainties, and changes. Although there appear to be an atmosphere of cautious optimism at the semiconductor [analyst] exhibit last week, the demand for computers, cell phones, and other semiconductor and electronic component products continues to remain soft. The end result is constrained by capital spending by our customers. However, there is some good news on the semiconductor side, we are now qualified at fixed accounts for our memory repair systems, these includes Powerchip, Elpida, NEC, Samsung, Hynix and IBM. These orders are a combination of technology and capacity buys from these companies. We're getting traction and this is represented in increase in sales from last years second quarter. We have good recovery potential for our memory repair and laser mark to drive to grow.

In our lasers group, we're also looking at a sales increase from last year's second quarter, due to the introduction of our JK series users and the recent acquisition during Q2 of our Spectron Laser products. Here we have an opportunity to enter into new applications with good margins. Our Components group saw a slight reduction in sales that will be offset by the addition of the DRC encoder product acquired during the second quarter. The on-scheduled integration of the encoder product line into our Billerica, Massachusetts facility will absorb manufacturing overhead, and expand our product offerings in precision motion control. Sales in the second quarter ended June 27 of 2003 were $44.7m, an increase of 12.6% compared with the $39m for the quarter ended in June 28, 2002.

Company sales have been in the range of $37-45m per quarter over the past 7 quarters. These numbers reflect the lack recovery in the semiconductor electronics capital equipment markets. New orders booked during the second quarter were approximately $42.7m compared with $35.5m in last year's second quarter. Backlog in June 27, 2003 was 42.4m compared with approximately 52.4m at the end of second quarter, 2002. Now for more detail on the Company's operations and finances, I will turn it over to Tom Swain.

Thanks Chuck. Our net loss of 3.6m or 9 cents per share compares to the loss of 11.1m or 27 cents per share for last year's Q2. We did not reflect any income tax benefit on the operating loss based on the continuing evaluation of deferred tax assets. This loss marks the end of our restructuring process and repositioning of our cost structure to breakeven at a sales level 41m with approximately a 38% gross margin in the quarter. We anticipate that the benefits of our restructuring will become visible in Q3 and completed in Q4.

Unusual expenses that appear in this quarter, as results included 1.6m for restructuring, 1.1m for proxy costs related to the August 4 special meeting, and 0.5m write-down for underutilized assets in our laser systems business. Year-to-date the company has incurred 2.4m in severance cost as a result of cost reduction and restructuring activities. An additional three-tenths of 1m will we recorded in Q3 operations. The total benefit of these changes is estimated at 2.8m for this fiscal year 2003 with net savings of 0.7m estimated for Q3 of 2003, and savings of 1.3m in Q4 of 2003. Of the total 2.7 in severance costs, 1.6m is included in restructuring expenses and the balance is distributed among operating expenses.

Gross margins for the quarter improved to 35% as compared to 31% for the same quarter last year. The combination of increased revenues and lower material costs contributed to this improvement. As compared with Q1 of this year, margins have declined from 36% in the first quarter to 35% in the second quarter. This decrease is attributed to higher fixed costs related to the acquisitions, the impact of lower service utilization and severance cost in the service operations. Looking at 2003 as compared to 2002 for Q2, sales for the Laser Group were up by 3.5m or 67%. The laser systems were up by 2.1m or 12%, and the component same product sales actually decreased by 1.2m or 7% as compared with 2002. The acquisition of the DRC Encoder product line offset $1.1m of this decline. The Laser Group increased sales of $3.5m is attributed to $1.4m from the Spectron product lines and $2.1m from new products.

Profit contribution from the component segment of $3.6m for Q2 2003 was down by [point there tenths] million from the same period last year, which is attributed to transition in operating costs of the DRC Encoder acquisition. Profit contribution from the laser system segment of $0.6m for the current quarter was an improvement from a loss of $3.3m for the comparable period in 2002. There was a similar improvement in the laser segment and that income from operations of $0.1m had improved from a loss of $2.4m in the same period last year. The improvements in the laser systems and laser group reflect the impact of cost reduction and restructuring programs helped by some increase in revenues. Our liquidity remains very strong with cash in investments of approximately $123m as of June 27th 2003, which compares to $149m in March this year. During the quarter, the company paid off a synthetic lease for $18.9m and completed two acquisitions using approximately $10m. The two buildings purchased as a result of the synthetic lease cancellation were recorded at a book value of $13m reflecting a loss of $6m on their valuation reported in prior periods. And now, I turn the comments over to Chuck.

Over the past few weeks, Tom and I visited a number of Canadian and U.S. analysts and shareholders to update on our business. One question is continually asked, what is our current business strategy? Those who have followed the GSI Lumonics Company over the past several years have seen our company progress through the three major phases since formation through the merger of GSI with Lumonics in March of 1999. This was a consolidation immediately following the merger and a divestiture of non- core businesses [supplies] approximately$100m in revenues. Next was the restructuring to a lower level of sales in the 2001-2002 period, which essentially was completed during Q2. Now we have initiated a growth phase in which we will use money from the businesses sold to acquire approximately $100m worth of revenues consisting on new technologies and new products that are complementary to our markets in current products. Now it is the time to use this cash to acquire good growth technology based companies. Our acquisition of Spectron lasers and DRC Encoder exemplify this criteria. We spent approximately $10m to acquire both companies and we will continue to deploy our cash in this manner to grow our business. I expect you will have more questions on our strategy, so at this point Tom and I will turn the call over to the conference call operator for your questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the "1" followed by the "4" on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the "1" followed by the "3". If you are using a speakerphone, please lift your handset before entering your request. One moment please for the first question. Our first question is from the Deepak Chopra of National Bank Financial, please proceed sir.

Good evening guys.

Good evening Deepak.

I was wondering may be you can imply that March as for the guidance for and how are you expecting revenues quarter-over-quarter like, if you can give us little bit more defined range quantitatively -- little bit?

Well we have them as range of 37-45m, which we have defined as we have looked back to prior quarters. I think the good news is we should be currently looking more in the higher end of that range but we still have, when we look at the orders pattern, it supports a number in the 40m range to 43m.

Do you think -- sorry regarding stepping on the new acquisitions on top?

Yes I think with the acquisitions we move to the higher end of the range, but it is still because we don't have a strong orders pattern we can't say what is going to happen in the next quarter.

Okay.

I think Deepak, there's just a, you know, still a certain degree of uncertainty in the macroeconomic conditions that face the world, especially in the North America and Europe where end-user demand for products sold, therefore our lasers and our laser systems business are subject to that end-user demand [confirming] up; we've seen confirming quarter-to-quarter. I think that, I would say, indicates a strong trend out, so we've reset our and restructured our business to run profitably at approximately to $41m breakeven point and what we are doing now is to use the cash-on-hand to acquire very good quality technology towards the globe [to confront].

Okay, fair enough. In terms of the margins do you forecast, given before the 1m break even point 38% of that, is that is actually where your looking margins are going to in the next quarter?

They'll take probably two quarters.

Two quarters to get there. Okay. And I was wondering if you can also may be give us what your expense run rate will be on R&D and SG&A, because you know, you've still got bunch of expenses loaded in there, so may be it would be a clean run rate on both of those items?

Well I think we provided the guidance, you can see the extra expense in the quarter. One of the issues is we still have, say mix up in the numbers as a result of all the changes we've made but I think as we look at the overall spending going forward, the items therefore extra for this quarter that go away and the savings that we've identified will give us the operating expenses going forward.

Just something like 3.8m for R&D and 11.5-12m for SG&A, it is a good ballpark number.

Yeah. It will be somewhere, I assume, but it is in that range.

In that range. Okay, I would let someone else go ahead. Thanks guys.

Our next question is from the line of Brian Piccioni of BMO Nesbitt Burns.

Well, hi guys, a line sort of keeps assuming in and outs, so I hope you can hear me okay?

Yeah, we can hear you, fine Brian.

Okay, great. Actually the way I reckon it, on an operating basis it seems that you made a profit, so congratulations.

Thank you.

Just a follow on Deepak's question, I am trying to sort through the comments on the -- with respect to severance over the next three quarters, we have got the 1.6 which is restructuring and I guess I am trying to work through the tenses, the figure what the operating model looks like on a go forward basis? Does that imply that basically 1.1m is to come over the next couple of quarters over the operating expense or is some part of that already gone through or, you know, can you help may be short that out a little bit?

Yes, there is [0.3m] -- 300,000 in severance cost that will be picked up in Q3. At the same time, the net benefit from severance in Q3 is going to be $700,000 and that's net of that. When you look at our run rate, we'll have $700,000 benefiting and its $3m benefit in Q4.

Okay great and I think I can work at it a little better now. Now, it's great that we are getting the sort of segmented breakdown and with respect to income and that sort of thing. On our -- over the last sort of while, it would seem that the components business is a great business to be in and then the other ones a little bit, you know, considerably less so. If that's the sort of thing that let's say when systems revenue starts to rise that it actually becomes a rather healthy business, whereas with the components, let's say, there is a much lower run rate that allows you to cover your fixed cost or is there some other magic going on there?

No, I think you've got that pretty well in hand there, Brian. The systems business has a lot of leverage, both up and down because you have to have direct sales and support people in the field and remote locations such as Korea, Taiwan, Japan to support the customers. So when you start to get orders, you start to leverage that fixed cost, which is higher whereas the components and to a large extent the laser grew as more OEM-type business, more factory support.

Okay great, thank you very much.

Ladies and gentlemen, as a reminder, to register for a question, press the "1" "4". Our next question is from Susan Streeter of Sprott Securities.

Thank you, good afternoon. Just a question with respect to the restructuring charges. You named Asia and Europe in particular I am wondering if you can elaborate on what you are seeing in those markets?

Well the -- one of the reasons for the restructuring charges was to cutback on the fixed cost base that our service and sales organization had in those areas and that reflects less strength in those markets for the Laser Systems segment which is the one that was supported by those operations. We're still selling direct certain products and we have focused more of our resources on the Far-Eastern operations in Taiwan.

Susan, what we did was we shifted the geographic territories. For example, our business has gotten better in Korea due to orders with companies like Samsung and Hynix; and they gotten stronger in Taiwan with orders from companies like TSMC and Powerchip, and also stronger in Japan with systems orders from companies like NEC and Elpida. And so we have narrowed down our focus in Asia-Pacific and eliminated offices in places like Hong Kong, in the Philippines, Indonesia, Malaysia, which were strong out, and we have the expense base there, but not a lot of sales and we have actually strengthened in the aforementioned countries where the orders are picking up. So the net affect is to eliminate the SG&A that wasn't being used to support sales and getting more efficiency.

Okay, thank you. And just the other question I wanted to ask related to the acquisitions or the revenue associated with those acquisitions. You mentioned it was approximately 2.5m in the quarter. On an operating basis, was that accretive?

No at this point. They were breakeven this quarter.

Breakeven, but your expectations, I think, you've mentioned initially that they'll be accretive in the fourth quarter, are you still on track for that?

Yes, we are. That's correct.

Okay, that is it. Thank you.

Thank you.

The next question comes from the line of Todd Coupland of CIBC World Markets.

Hi. Good evening everyone.

Hi Todd.

I just want to come back to the restructuring charge just to make sure that I have done the math right here. If I read the press release, it's 3.2m included in operating expenses and you lost more than that -- $3.6m pretax, could you just sort of update that and let me know if I've missed something there; is there -- is the severance cost included in the gross margin that we should be excluding as well and if so how much is that? Thanks.

Yes, I'm not sure how you came up with your number. The restructuring cost includes some of the severance costs. So the restructuring cost for the quarter was $1.6m. The comment that I made on the severance cost is the total severance costs that have been created as a result of all these activities. As you know not all severance costs can be charged to restructuring, and some of them have to be charged to the operations; in other words, in cases where we didn't close an office or discontinue a product line, we absorb those cost right in the operations. And that's why I identified in my comments the total severance cost that we incurred during the year -- that's the number of $2.7m, and then the benefit that we're having in the years -- that will be from the does that explain it or -- not sure where your 3.2m came from.

I apologize. I don't if I am cutting out, but you certainly cut out there at the last few seconds. My three-point [inaudible] -- just adding what you listed in your operating expenses -- three items?

Okay that was the -- okay those items -- 1.6, 1.1, 1.5, that's what you talking?

That's right.

Those are all items that are non-recurring.

Right, and then so what was this dollar amount included in Q2 for severance, -- I know you said year-to-date 2.7, but what did you include in the second quarter?

In the second quarter that's -- I don't have the number here -- 1.4m total that would have been spread between severance cost and the operating expenses.

So there is an additional 1.4 above and beyond the 3.2 that you list in the press release?

That 3.2 includes part of -- I think that about half of it went to restructuring -- [inaudible] part of the amount.

Okay so there is about 700,000 of additional severance costs that aren't included in the 3.2 and that would give you the total non-recurring items in the quarter?

Yes that's generally right, let's see if I can dig up the exact amount for you.

Okay and so then Brian's comments earlier -- that would bring you to a small profit in the quarter so, does that -- that logic is right?

Yes that's correct.

Okay and then if I could just ask you a question on the memory repair systems. I guess there is some debate out there in the market regarding market share gains and losses and claims by competitors, could you just remind us what share you actually have taken in memory repair and what is likely based on comments you are getting from your customers?

Well -- by our count of the orders placed during the quarter, so far we believe that we are running approximately 40% of this rate of the orders placed that we are having since end of the -- by the end of the quarter all [inaudible] accounts I mentioned, but [inaudible] a position to receive orders in process. I would say that probably about 40% market share at this --.

Great. Thank you very much. Certainly on my end you are cutting in and out, may perhaps it's my line and you can move on to another question and thanks a lot.

The next question comes from the line Kevin Beck from Denver Investment Advisors.

Hi. Good afternoon. You are cutting out on our line as well, so just another quick question. The 1.1m in proxy cost, is that [near] SG&A line?

Yes.

Okay. And there's no hold over of that going into the third quarter?

That we believe that should cover it.

Okay and as you start to look at a gross margin of 38%, you haven't been there in a long time how do you get there over the next two quarters?

Well what we're looking for is in [inaudible] is a systems group; it will provide along with also the lasers operations, those two are where we expect to see the [inaudible] focuses to work on cost reduction in the material side [inaudible] their expenses [inaudible].

Hello.

My answer?

I got part of it. Okay I'll try another one, here the component side if you look at the first two quarters you've seen organic revenue declines in those businesses, ex the acquisition you made in the second quarter, can you talk about what may be going on there and I believe last time saw Chuck he mentioned this group should 4-5% this year?

Yes, there is some normal ageing going on in some of the products and so they get designed out they've been, some of them been in product runs for 6-7 years, [angel] wool wear a particular quarter or two with some decline in some of these [inaudible] as to the ramping up of the new products to do so with the past year or so and more getting designed into [inaudible] doesn't quite match up one-to-one.

So we should see stronger second half growth here to get to 4-5% growth for the group of the year?

Yes.

Okay, and Tom just my final two questions, one is, the tax refund are you still hoping to get one in the second half and if is so how much?

Yes, we are looking for a refund of approximately $10m -- we have not. And that will be filed this quarter probably the refund will come in the fourth quarter.

Okay and then just lastly on the receivable side there is some weakness there I didn't know if that was related to the acquisition or where -- what's going on there?

Yes, I think we've seen some increase in the receivables and it could be the -- if we run into this periodically where you just have collection periods where it will sometimes go slower than others. A little bit of it could reflect the change over with the acquisition; we did pick up receivables as a result of these acquisitions and it's getting the collection cycles going [when] the customers online and all of that. So there is a combination of issues that work to support it.

Okay and then I guess just one final question on the acquisition front are you closed anything else and is there anything bigger out there I guess in these $9-10m in annualized revenues?

Yes, we are working on a number of situations, as I mentioned here, and we tend to focus somewhere between $5-30m range; we don't want to get above that by much because then it becomes very large and we don't want to -- the company Kevin, could you hear me.

No, you broke. I will let somebody else take another shot. That's okay. Thanks.

The next question comes from the line of Daniel Kim of Paradigm Capital.

Good evening, just one point of clarification. On your sequential pick up in revenues from North America, I would presume that is largely because your acquisitions a good part of that anyway? And then the decline within the Asia Pacific and Japan regions, again I would presume the decline would probably be from a sequential decline in memory of repair systems? Would that be correct?

I think one other the problems we have is we report these sales by region but they are based on build to frequently these sales that are made in North America are actually shipped to the Fareast. And it's knowing which ones get shipped out, which ones get used here and we haven't identified that.

Okay, but the -- I guess in terms of the acquisitions that you closed in the quarter, were they largely U.S.-based revenues then?

Yes, those would be more in the U.S.

Okay very good. Thank you.

The next question comes from the line of Max Hollet of Dundee Securities.

Good afternoon gentlemen.

Good afternoon, Mac.

A couple of questions. One is on the backlog, I wonder if you could provide a little more insight into the composition of that backlog?

We could break that down by giving a breakdown by the different segment components. What I can -- I guess we've got a fair disclosure issue. Mac, can you know beyond the--

Max, we really break that down in that detail.

Okay, that is fine. Second question was just perhaps you could just discuss maybe the prospect for your laser business and discuss any changes that you made and the outlook for profitability for the that segment.

We are encouraged with the laser business. One, we hired a good experienced managing director to run the business because that business as you know is based in Rugby, England, and [inaudible] qualified person to run that to replace on an interim assignment from the U.S and that business restructured [inaudible] it has a low operating [inaudible]. He has the new products introduced a year ago in August and just about a year ago, and they are taking hold. As a result, you are seeing the improvements in the sales. Up of that, we have now completed the acquisition and are almost finished. In fact we should be pretty well completed during the middle of Q3 with the physical relocation [inaudible]that we will both reduce some of the [inaudible] of the utilization of the Rugby facility, and of course add to having the additional revenues. So we expect the combination of the two products yielding -- the two groups yielding higher revenues will also produce higher profits.

Okay, fantastic. And just finally was -- just perhaps you could provide a little more color on efforts you are making to increase your non-Japanese agent sales, and what you doing in that area? And I will just get offline it's fairly [staticky], but thanks very much.

I am not sure, Max, maybe you could clarify your question a little bit. I'm--

Certainly. Just wondering for your Asian region, what kind of efforts you're making on the sales side to increase penetration in non-Japanese oriented or non-Japanese located end sales?

I get it. That's a good question. We have of course increased our presence in Taiwan and Korea over the past year and half, and that' s based of course on the sale of memory systems and wafer marking systems into those markets primarily and also circuits trim. As you saw, we got some good business in our circuit trim by areas. We announced a order from a company called [Lailic] which helps because we have been focused more on that market for those applications and we've also been trying to penetrate more into the China market. Of course the SARS problem held things up quite bit both in China Mainland and also in Taiwan during the most recent quarter.

Hello.

Yeah, Max, were you able to hear my question -- my answer?

Yes, I got it, thank you very much. Just wondering, a follow-up from that one, I mean just in terms of resources that you have allocated to those, what kind of increase in resources has there been made?

We added some additional sales people and some additional applications engineering support people.

Thank you very much.

The next question is from Joe Arsenio of Arsenio and Associates.

Yes, well I think most things have been covered. But your mentioning of China is interesting, obviously a significant growth market. When do you think you are going to begin to see some orders from China. If you aren't already getting them and then the second question is about the [inaudible] quarter. What was the dollar size? I think there were a number of units mentioned in the release, but I was wondering what did that represent about in terms of dollars?

China, Joe, good to hear from you by the way.

Yes nice to hear you too.

The China business, we have already begun about almost two years ago penetrating into China on a regional basis for selling components and we are also looking there to penetrate through the sale of lasers into China. We have identified certain accounts and we are working with them and it seems to be such a large country, seems to be more regionally focused as opposed to just China.

Right. What about systems into China?

I don't think we are going to have great penetration of systems into China. That's going to take a longer period of time. I think the components and the lasers will go sooner rather than the systems.

Okay, and then about the order that you announced. I don't think you gave it a dollar figure.

No we didn't. We just announced the number of units. We are kind of going to leave it there.

Okay, and then another general issue. Your revenues are holding together pretty well and obviously improved by the acquisitions, given the sort of miserable environment that you are operating in. It doesn't sound like that environment has gotten all that much better based on your introduction. But what can you attribute sort of the consistency of the revenue that you've had so far to this you know backbreaking sales effort on every quarter to make the number or is this number coming along fairly comfortably given you know the terrible environment but due to let's say relatively controlled competition?

I would say you know it's not backbreaking but it's also not coming along very easily as I would say from the -- obviously there's a different based on the market and the type of product we are in but clearly in the memory business, we've done well because there's only two competitors and the markets do want to have two competitors and they are treating us fairly and as we get qualified we get our share of orders. The other areas is circuit trim and such that's fairly competitive, very price sensitive market and we are doing well on our recovery path there by more focus into certain markets like Taiwan and Korea and Japan and then in getting ourselves priced properly and trying to work on reducing the cost of goods to make up the difference that we don't use much more and [have] margin. Our areas like wafer marking, we tend to do very well because we are dominant and we have some leading edge technology there. The lasers as I mentioned earlier has been a research in several business thereby redesigning our products and introducing them and then going back to customers who all were very friendly to us and were happy to see us come back in and now pushing forward to try and develop new customers with new applications. And the components business continues to be getting designed wins and those have a certain rhythm of their own as customers bring out new products. So, and that depends on a particular market, whether it is medical or industrial or automotive and so forth, but overall, I would say if I step back, it has been hard -work; it is not backbreaking but it's challenging, should we say, to get the orders and maintain it. I think the $41m average run rate over the last seven quarters represents to us the fact that we've kind of bottomed out, stabilized at that level so we're using that as a benchmark; that's why we've geared our expenses down to that level through these continued restructurings which we believe we've essentially completed in June of this year and maybe just some minor cross or roll over into Q3 due to social laws in different countries where [inaudible]. It has to continue for some period of time but the major portion is behind us, so if we can have that as our background, we're running $41m and breaking even and then we start to do this acquisition program that we initiated last quarter; that's where the growth could come from very nicely and of course that additional growth based on a structure we have in place will have some good upside leverage in terms of the margins and the operating incomes. So, I think that's our view of the world as because we don't have certainty on the macroeconomics anywhere in the world and your crystal ball is good as mine, Joe, and I know that you'd laugh and say nobody knows day to day, but we are counting on the fact that we've got the business stabilized at this lower run rate and then we will try to add back through using the deployment of the $100m in cash that we put away for this very purpose. And the good part is that the markets have reset some valuations so that properties that were looking for a 100 times sales 2 or 3 years ago and now more rational about what their business is worth and wanting to be acquired of ordered divestitures for larger companies.

Okay one final item here, most of the analysts feel who still don't have an average [Thompson] type number of couple of cents profit in the fourth quarter, is that committing exactly on the 2 cents number? Do you believe the profitable fourth quarter is in fact your current guidance?

Yes we believe we can be profitable in the fourth quarter and that would be implied.

I mean by doing the math that other analyst have done, the periods that you may have actually made money this quarter on an operating basis were some [inaudible] at sales. It's not unreasonable to expect a profitable fourth quarter, is that correct.

That's correct.

Okay, thank you very much, nice to talk to you.

Nice to talk to you Joe.

Ladies and gentlemen as a reminder, to register for a question press the "1" "4". We have a follow up question from Susan Streeter of Sprott Securities

Thanks very much. Just a question, what's your total headcount now?

At the end of June it was approximately 842.

842, thanks, and just I was also having a bit of problem with my line. Can you just reiterate what you said on what we can expect on the tax line going forward?

You mean the net income tax?

Yes, or the income tax, whether you would be expecting -- I mean, you didn't recognize any income tax benefit in this quarter, what can we look forward in the next couple of quarters on that front?

Yeah, we are just being conservative as to the recognition of any benefit. We feel that if we -- our net tax rate for the year would probably be at zero. It depends on how things turnout in the next two quarters, but we are just kind of minding that quarter-by-quarter. We do have a tax refund that we are going to file for which I am not sure if you are interested in that but that will create 10m in cash for the next quarter.

Right, understood. Okay. Thanks very much.

We have a follow-up question from Deepak Chopra of National Bank Financial.

Yes, just a couple of quick questions. One, on the OPEX, if I were to look two quarters like in Q4 where there are -- the proxy vote is not there and it is pretty clean, what -- are we looking at a run rate of, like on the SG&A line of less than 12m there?

I think based on the information, when you are looking at the total operating expenses I am not sure how the mix is going to come out but we are going to see some improvement.

So this is not -- I am not unreasonable on that number that?

No not really.

Okay I feel sorry. As in R&D you will stay [relatively low]. So if I were to look at it in term of the gross margin this quarter if I back out 700,000 and cost of goods sold for severance then gross margin was about 36.5% range; is that right I am just wanting to make sure that I am doing the math right here?

Well that's 700,000 you referred to for severance was in the selling cost of sales that was spread over several operating incomes.

Okay with that our----?

There was some in the service department.

Okay. So how much would be this amount of severance in the cost of sales line?

I don't think I have that number. [inaudible] between restructuring and other.

Okay, fair enough, somebody [inaudible] something like that then?

Yes it's not a very large amount, but there is some in there.

Okay. And when you guys start making money, again, do you expect to start paying taxes within the -- in the foreseeable future or no?

Well, I hope to pay taxes, but the principle is only to use up my deferred tax asset first.

Okay, okay Fair enough. Thank you guys.

Thanks Deepak.

We have a question from Max Hollet of Dundee Securities.

Hello.

Yes Max. Go ahead.

Yes sorry, thank you very much. Just a follow up. And I apologize for this if it has been announced but the line has cut in the note. Just a question on the cash. Where do you see the cash going over the next couple of quarters?

During the next two quarters I think we probably will have positive cash flow both from operations of small amount and I think the tax refund is another source. That will be approximately 10m.

Thank you. And sorry to reiterate again, but the question of -- read [inaudible] in the company. What are your thoughts on this time.

Well, we did it a number of folks like yourself and Deepak and certainly Brian and got there to use on it. We got to use from number of investors throughout Canada and the U.S., and we have been taking that for hard and these have already scheduled for August 4 at a special shareholder meeting at 10 a.m. in Billerica, Massachusetts. So we will just see what happens.

Okay. Thank you very much.

Once again, ladies and gentlemen to register for a question press the "1" "4". We have a question from Kevin Beck of Denver Investment Advisors.

Hi, most of my follow-ups have been answered but just on the property could you remind you said it was back on the books at $13.5m or so. Is that the market value you hope to get for it then?

That $13m we had booked in prior periods a $6m loss actually I think it was in the 2001 and that loss provision was applied against the purchase price and there on the books as two buildings for $13m.

Okay and any nibbles on that yet or any idea when those may be sold?

At his moment we have some interest in one of the buildings Kevin and you know, the real estate market has not been very strong and we are hoping that within a year, a year and half probably, we will have these buildings sold. But one of them we are using about half the building. The other building we had sold the business that was in that and the people leased it back from us until February when they moved out and we put that on the market now that we own it. So we believe that in a reasonable period of time it should be sold but again we think we have marked it to the correct level and shouldn't have to take any write off after this.

And if I look at the CAPEX that you guys have spend -- last year it was only 3m. You have only spent about $1m so far this year. You have made few acquisitions. What does capacity look like for you and what's the maintenance CAPEX sort of under the new business model going forward?

Well CAPEX shouldn't change too much because we are not capital intensive business. We tend to lease [inaudible] rather than buy them with expectation of the aforementioned discussion we just had. So we don't spend a lot of money on buildings. Most of our expertise is involved in the minds of people where the lot of good technical people and that's where the investment in the business goes more than into capital equipment. We don't have any -- a lot of heavy production going on and we have outsourced an awful lot, especially in our Laser systems business. We have outsourced a good portion of the frames and [inaudible] and the wiring harnesses and the back plain and printed circuit board is all made outside for us. So we don't have to have a lot of capital deployed for that purpose. So the CAPEX really should not change dramatically overtime. It should be pretty much what you see. And in terms of capacity, because we have gone through total restructuring in the past two years as opposed to just laying off people and terminating head count we really did restructure so that we can outsource and therefore we have much more capacity available to us on a ramp up. In addition I would point out that all of our locations all three major factories, the components, the lasers and laser systems only operate on a straight 8-hour, 5-day-a- week. We have the ability to have a sixth day on Saturday and to go to a half-shift or a second -- full second shift as need be to take into account more business coming into door and that's the way we intend to do it, we can leverage our fixed costs.

Great, thank you very much.

Thank you Kevin.

Ladies and gentlemen as a reminder, to register for a question, press the "1" "4". Gentlemen, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Well, thank you very much and I want to thank every body for continuing support in the company and following us and your participation in today's meeting. As we said, we believe that we've got the company restructured now and we are going forward with our strategic acquisition plan and look forward to better days ahead, look forward to reporting better results to you. Thank you very much and Tom and I say good bye.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.