Novanta Inc (NOVT) 2003 Q3 法說會逐字稿

Good day ladies and gentleman, and welcome to the GSI Lumonics Third Quarter 2003 Financial Results Conference Call. My name is Carlo and I will be your conference coordinator for today. [operator instructions]

I would now like to turn the presentation over to your host for today's call, Mr. Charles Winston, President and CEO. Please proceed sir.

Thank you operator. Good afternoon and thank you for attending our Third 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 recently. Tom Swain our Vice President and Chief Financial Officer is joining me today, but before proceeding, I must mention that certain remarks made during this conference call may constitute forward-looking statements. These statements were based on management's beliefs, assumption and current information and as such are subject to risks, uncertainties and changes.

Our Safe Harbor statement that can be found on any of our financial press releases available on our web site applies to this call. First with review of the overall company performance for the third quarter, just ended 2003 compared with the same period for last year. Sales were $44.9 million up 20%, 7.5 million increase over the third quarter of last year. Net income was $550,000 and earnings per share were 1 cent for the third quarter of 2003, and this compares favorably with a loss of $5.4 million or 13 cents per share during the third quarter of 2002. Overall orders for the quarter were $50.1 million, which increased by $11 million were 28% above last year's third quarter.

Gross profit as a percentage of sales increased to 37.1% from 30.2% in the third quarter of last year. Cash flow generated by operations was $7.8 million in the quarter as compared with $1 million for the same quarter last year. And lastly, the backlog increased to $47.6 million improving from $42.4 million at the end of the second quarter of 2003. We are pleased to report these continued improvements and margins in profitability, which commits the directories open to the company's market focused action plan in sales and deliberate fixed expense reduction, plan. The break-even point during the third quarter without restructuring cost was approximately $42 million.

Now lets review our performance by business segment. In our laser systems business, which is focused on the semiconductor and electronics market, sales were $20 million for the quarter versus $15.1 million during the same period last year. That is an increase of approximately 32%. Steady increases in global semiconductor sales and DRAM's in particular are the underlying drivers in this quarter for our memory systems, which was the key source of revenue growth during this segment. As a dominant supplier of wafer marking equipment, our sales continued firm during this quarter in this product line.

Based on the continued transitions to 300 mm wafers and we have experienced increased code activity recently in China and South East Asia for circuit trim and wafer marked products. We hope that this activity will shortly translate into orders. Additionally, our wafer trim capacity utilization in the industry is rising for the production of devices such as power management integrated circuits and automotive sensors. As a result, customers are projecting the need for additional capacity during 2004. Recently, we received orders for this equipment during the quarter.

In our laser segment, sales were $8.5 million for the quarter compared with $6 million in the same period last year, an increase of 42%. The sales increase consisted of $1.9 million as a result of the Spectron Laser acquisition and approximately $600,000 from existing product revenue growth. With the integration of Spectron completed as expected during Q3, we launched a new range of Spectron Compaq Q lasers which are targeted towards OEM's and laboratory uses for marking, drilling and laser oblation. The addition of the lower power spectrum lasers gave us the opportunity to expand our profit offerings to an even broader range of customers. Our current activity is now focussed on emerging of our world wide distribution network through these laser products.

In our component segment, $18 million of sales in the third quarter compared with $16.7 million during the third quarter of 2002. This $18 million includes $2 million in sales from our recently enquired encoded products that are receiving increased sales interests from the automotive and medical equipment segments. We expect that this will lead to increased sales for this product family in the near future. The encoded revenue increase was partially offset by a decline of approximately $700,000 in existing product sales.

This decline was due to the delay in introduction of a new printer product by the request of the major customer along with an anticipated decline in an older line of scanner products. Other scanner products are experiencing a recovery in orders for laser marking equipment in Asia and China. The applications include general industrial marking and optical templets for this fashion industry. Sales of precision optic also improved over last year as a result of our focus on aerospace and industrial markets. Going forward, we will continue our acquisition program in the deliberate fashion outline previously with a focus on investments, that can be quickly integrated and accreted to earnings. We are targeting complimentary, technology, products and margins and generally these acquisitions are targeted in the range of $5 million to $35 million of revenues. Now, here's Tom Swain, with more details on the company's operations and financial results.

Thanks Chuck, we are now seeing the results of our concerted efforts to reduce operating expenses and manage our resources more efficiently. Our gross margins have increased to 37.1% this quarter from 30.2% in Q3 of last year. This improvement is attributed to reduce inventory loss provisions and completion of restructuring activities. Acquisitions impacts of transition costs and additions to the overhead structure, because higher operating costs in the quarter that partially offset these savings.

Our net income of $550,000 and earnings per share on a fully diluted basis of one cent for the quarter compares with a net loss of $5.4 million, a loss of 13 cents per share during the same quarter last year. The net income reflects an income tax provision of $322,000 for the quarter, necessarily because of profitable foreign subsidiary operations. Additional tax provisions may be required in Q4.

Restructuring costs which were $264,000 primarily reflecting a loss on the anticipated disposition of the Canado facility. Also included in the cost of its sold an operating expenses were $300,000 in cars, both in our component segment for consolidation of optics operations in more part.

The company incurred $550,000 of extra cost included in operating expenses for Q3. These related to the proposed shareholders, the proposals of the shareholders to become a U.S. domicile company that we terminated in August. We have an operating profit of $654,000, an improvement over the operating losses of $9.4 million in the third quarter of 2002. Going forward, the chipping noted, let's say in Q2 of 2004, amortization cost will be reduced by $1 million each quarter. This reflects the full amortization of a portion of technology cost that were capitalized from the acquisition of general scanning in 1999.

In our laser assistance segment, we went from a loss of $7.1 million in the third quarter of 2002 to a profit of $2.7 million this quarter. This resulted from improvements in revenues, gross margins as well as operating expense reductions. The laser business generated a $507,000 profit from operations this quarter compared to a loss of $1.4 million in the same quarter last year. Higher revenues and lower fixed costs contributed to this improvement. The components segment saw a $3.5 million profit from operation this quarter as compared to $4.4 million in Q3 of 2002. This reduction was due mostly to lower gross margins based on a shift in product mix and approximately 500,000 in transition related costs to the encoder acquisition and relocation of the PM.

Now to the financial condition of the company. As of September 26, 2003, our cash, cash equivalent's, short-term investments and other long term investments totalled $132 million. Cash flow generated by operations during Q3 was $7.8 million with inventory reductions contributing $1.9 million. It should be noted that inventories have been reduced to $38.4 million from $52 million in Q3 of 2002, a reduction of 26%. In the next quarter, we expect a $10 million tax refund. Our deferred tax assets lead cash flow over the coming quarter is based on utilization of net operating loss carried forward available for offset against US income. The company remains free of debt.

In summary, our Q3 results reflect another step forward in our improvement program. And now I turn the comments over to Charles.

Thanks Tom. The stamina (ph) exceeded, we have focussed on reducing our operating expenses, expanding our market opportunities both by requiring and developing new technology and products to improve our margins. We thank all of our dedicated employees at GSI Lumonics for their hard work and achieving these improvements. At this time, Tom and I, will open this conference call to your questions. Operator, please proceed with the questions.

Thank you, sir. [operator instructions]

Our first question comes from Daniel Kim with Paradigm Capital.

Good evening and thank you. Gentlemen, I have a few questions and I was around memory pair, I was just want to get a better sense of how that market is shaping out for you and how you view to whole sustainability of growth in that market place my first question is you previously indicated in past presentation that you are qualified or believe with six vendors I am wondering if you can tell us today how many you are qualified with?

Its fractionally the same and we're involved in qualifications with several more.

Can you tell us who exactly those vendors are?

We really don't disclose it

Fair enough. With regards to market share can you discuss at all where you believe you are today and market share were you'd expect to be at the end of this year or even next year please?

Yes we can tell based on the new orders been given out for those customers where we are qualified and meet the requirements. We appear to be getting approximately half of the business.

Half of your business.

Yes.

Right. OK. And do you have any expectations for where your market share will fall out for even at the end of this year or next year.

What we hope to be qualified at more locations going forward and start to picking up additional business there and as we do that gaining half of the orders at each other knew accounts

OK. Great. One thing can you respond at all to your competitors putting out a pressure relief that they launched to a new product, stating that their new memory pair system has one of the world smallest part sizes using 0.13 micron wave length laser do you have any response to at all?

We looked at it from what we understand and know about the product there is nothing there that has a competitive advantage to what we are doing. Our product is a that we speak better than and most of our respect

OK. Great and just one last question within the press release you kind a gave some loose guidance that post margins will improve in the next quarter. Wonder If you can quantify that and what type of revenues you are assuming going forward please.

Daniel, looking at the margins we said we expect to be at the target of the 38% margin in the fourth quarter every thing we see now puts us headed in that direction beyond that we cannot able to give any particular guidance on revenue because we still don't have the real visibility

OK. Thank you very much

Our next question comes from Susan Streeter with Sprot Securities.

Thanks. Good after noon. Just wondering that you can comment on the composition of your back log at all you had nice sequential growth in the quarter I am wondering was that the memory pair side of your business that contributed to large part that increase? Sorry can you hear me

Yes

Great

Susan we really don't break out our back log and disclose that by product line that we can tell you that it was but we can tell you that it was strong looking in the semiconductor portions of our business,

OK. fair enough and just I am wondering you mention in Q4 when you will expect to see the $10 million tax refund could you just outline for me the accounting what that will look like in terms of your PN&L

Yes actually if you look on our balance sheet there is a receivable of $9900,000 million and that's where I would go against.

And just lastly, sorry to ask you to repeat this, but if I understand it correctly, there was sort of $564 or so in the growth margin or in the cost of good fit that are related to one time or restructuring type items?

It is 264,000 and that was related to-- we have entered into a sale contract for Kannada Facility that was about 220,000 and then the balance of it which is only about 44,000 was some left over restructuring cost in the far east and that closed out all of our restructuring activity. The building is going forward but we hopefully will get rid of those.

OK then it was an additional 300 that was split between (inaudible) and operating expenses?

That 300,000 we don't classify as restructuring as a consolidation where we are simply moving our optics operation in the PN somewhere part, California.

OK.

There will be some operating cost savings from that in future quarters.

OK, terrific thank you.

Thank you. Our next question comes from David Houtson of Dundee Securities

Following on behalf of David, who just had to step out. One nice little number are today's gentlemen, doing very nicely, I am wondering if first a couple of questions in the research and development. Looking at your numbers for this quarter, you were sort of back in line, when you were within the first quarter, the same with the SG&A and I wonder if you are now going forward with those numbers where you look out or when we turn back up to the next quarters.

You are talking about the match, you are talking about the---

Both the R&D and then the SG$A, comparing them between this quarter and the first fiscal quarter of this year.

Max, as we look at those, we don't see any significant changes in those levels.

OK

There is well nothing on the rise and that we think it will have any dramatic impact.

OK, I guess into the special R&D in terms of you are not going forward with new projects and so forth, what the site say of that how you are too expensive on (inaudible).

Well we introduced the state of new products in the past year especially in the semiconductor area and also in the laser area and those things come and go in batches. We needed to do a lot of R&D work in the down cycles to get ready for what we hope now is the beginnings of an up cycle which appears to be.

So the products are out there and we therefore, once the projects are done and they go into manufacturing, we reduce our R&D, because some of that is contract labor that we bring in to software and deliver special designs but we have our core group of engineering and that stay with us and they start to work on the next wave of projects, but those things as they started up, are in much lower of firm rate on expenses.

So you do see normal fluctuations in R&D as you start bringing on more and more R&D as the project bills, though at this point, we don't see any dramatic change because we are not going to forward lot of new products but we will be waiting into those as we get into the later part next year.

OK. That's what I was looking for. Second question, this is around the new laser pack you brought to market, the marking on the place and perhaps you could sort of dwell more into that and discuss those of you could please.

Well, we could probably better off line, it is suggest another line of lasers that performed at a more precise level and can do more of these applications that we couldn't do before because the power was too high.

Thank you very much.

And we have a follow up questions from Daniel Kim with Paradigm Capital.

Actually my follow up has been answered. Thank you.

Currently we have no further questions.

There is no further question. I want to thank everybody for their continuing interest in GSI Lumonics. Tom and I look forward to meeting with each of you individually as we move through the next few quarters, and again thank you for attending.

Thank you for your participation in today's conference ladies and gentleman. This does conclude the presentation the he may now discontinue your line, good day.