Novanta Inc (NOVT) 2004 Q1 法說會逐字稿

Thank you operator. Good evening and thank you for attending our first quarter conference call. This call is being broadcast live over the internet in a listen only mode at the www.firstcallevent.com on the specific URL detailed in our press release earlier. Tom Swain, our Vice President and Chief Financial Officer, is joining me this evening. We are in London, England, having just completed our Board of Directors meeting at the Westwind facility earlier in the week. Before proceeding I must mention that certain remarks made during this conference call may constitute forward looking statements. These statements are based on management's beliefs, assumptions and current information and as such they are subject to risks, uncertainties and changes. And our Safe Habor statement that can be found on any of our financial press releases available on our website applies to this call.

We are pleased to report continued improvement in revenues and profitabilities for this quarter. Our strategic repositioning of the company has played a key role in these results. Also we had the benefit of improving market conditions. Sales were up 82% for the same period last year. Earnings per diluted share were 21 cents for the quarter compared to a loss of 4 cents in the same period last year. Orders were 88.3% an increase of 102% over last year. Book to bill was 1.18:1 for the first quarter of 2002 -- 2004. Backlog at April 2, close of the quarter was $92.0 million or an increase of 17% compared with the backlog of 78.6% at December 31, 2003. Overall we are experiencing a continued market recovery based on the visibility of just one quarter at a time which is continuing. We believe this cycle has fundamental strength and is not showing signs at this point of maturity. We have restructured our fixed expenses to provide leverage in this upturn. We are also seeing the benefits of our strategic acquisitions. These acquisitions are providing technologies and products that are expanding our range of offerings in multiple niche markets.

Before reviewing our performance, you may have noted that beginning with this quarter in addition to reporting revenues and operating income, we are reporting gross margins by segment as well. In the laser systems business which is focused on semiconductor and electronic production, sales were $34 million this quarter compared with $17.8 million in the same period last year. An increase of about 91%. These increases were driven promptly by increased sales of equipment to support the rise and demand for WaferTrim capacity to produce mixed signal devices used in a multitude of mobile communications, computer, consumer electronics and automotive applications. We have significant new camp penetration in Asia in this quarter with our latest generation of CircuitTrim equipment due to growing production of circuit boards for use in electronic devices such as mobile phones, cameras and PCs. In our laser segment, sales were $11.7 million this quarter compared with $7 million in the same period last year. An increase of approximately 67%.

It was another strong shipping quarter across a broad range of market applications. Our acquisition of nearly a year ago contributed significantly to this increase. Regionally we saw large sales growth in Europe and Japan in the first quarter with Asia Pacific and North America flat to slightly down compared with the same period last year. But we saw the first in a series of laser deliveries for a new application in the pharmaceutical field where we now have established a leading position. Sales for light automotive applications also continue to be solid. The business out look for laser segment continues to be positive reflecting the general worldwide business confidence. However, as with the systems group, visibility continues to be limited to approximately one quarter. Precision components generated $33.4 million of sales in the first quarter compared with $16.7 million during the same period last year, which includes the first full quarter of Westwind acquired December 8.

Sales were strong across a wide range of niche markets including medical, materials processing, automotive and electronics applications. Our recent acquisition of Westwind experienced strong demand from continued growth in printed circuit board production. Earlier this month we announced a definitive agreement to purchase Micro-E systems for $55 million. While we are not able to comment in depth at this time, we can see that Micro-E's high performance motion control technologies are complimentary to those of GSI Lumonics products. It's products and technologies expand our capabilities and add to our diversity of component products. It is a leader in data storage and it's products are targeted at medical semiconductor, industrial and measurement markets as well. The company has sales in the last quarter of $7.65 million and strong bookings. We expect that once the agreement is completed, Micro-E will be accretive after the first full quarter after acquisitions are complete.

This first quarter in 2004 has been a strong indicator that the new strategic direction of our company is proving for our customers. While semiconductor recovery has been signficant over the past few quarters, our acquisition of precision in motion control and products and technologies is building a strong solid foundation for future growth. Going forward we will continue to investigate possible acquisition candidates that can provide value to our shareholders and customers and as always our focus will be on improving our margins. Now here's Tom with details on these and other financial highlights.

Thanks, Chuck. We continue to see the results of our concerted efforts to reduce expenses and management our resources more efficiently. From a working capital utilization viewpoint, we generated cash from operations of 6.5 million while also funding working capital requirements to support a 36% increase in revenues from the previous quarter. Inventory turnover for Q1 improved 3.5 turns, our highest level since the fourth quarter of 2000. This compares to three turns last quarter. Additionally day sales outstanding has approved in receivables from 93 days in the last quarter to 78 days in the current quarter. Our liquidity continues to improve as a result of cash generated from increased operating profits, recovery of U.S. income tax benefits and better working capital utilization. We have 114.2 million in cash and marketable securities at the end of Q1, with the Micro-E acquisition requiring 55 million at the expected close in the second quarter.

Our gross margins have increased to 39.7% this quarter compared with 35.8% in Q1 of last year. The improvement over the same quarter last year is primarily attributed to higher sales volumes and margin improvements in the laser systems business. Our margin increase is consistent with our expectation for gradual, incremental margin improvement. Our business model target at 44% remains value -- valid, however, the achievement of this target is dependent on a margin improvement over the next several quarters as well as the impact over any future acquisitions. Looking at gross margins and our first reporting of them on a business segment business, the gross margin for laser systems is up significantly at 45.4% for Q1 of 2004 as compared to 29.4% from the same period last year. Reduced overhead as a result of restructuring and outsourcing programs combined with sales volume increases were the major drivers to increased profitability allowing us to leverage the market recovery. Favorable fluctuations in inventory loss provisions accounted for approximately four percentage points of the margin improvement over the same period last year for laser systems.

The gross margin for the laser segment has been impacted by the strengthening of the British pound against the value of the U.S. dollar. Currently approximately 50% of laser segment products are sold in U.S. dollars. The exchange impact of the Q1 result is estimated at 3.8% reduction in gross margin over the same period last year. Price adjustments to U.S. dollar price list will be reflected in future quarters and will have impact beginning with the latter half of Q2. Should the dollar continue to gain against the British pound, we will see additional benefit in Q2 over the current quarter. Gross margins for the components business was down to 33.9% versus 44.7% in the same period last year. Lower margins and acquired Westwind and DRC products combined with lower margin and company revenues together representing 54% of the revenues of this business segment for the quarter account for approximately 64% of the decrease in margin from last year. Sales of products offered prior to the acquisition accounted for the remaining 36% of the margin decline.

This margin decline reflects a combination of sales and exchanges relocation costs and other costs variances incurred in the quarter. Without these cost variances and relocation costs, this group of products would have had an approximate margin of 41%. On a consolidated basis, research and development expenses increased to 4.8 million in Q1 of this year from 3.3 million in the same quarter last year reflecting both the Westwind acquisition and increased activities. Selling, general and administrative expenses increased to 13.5 million in Q1 of 2004 as compared to 11.8 million in the same quarter last year. Most of this increase is attributed to acquisitions. In summery, our overall profitability in cash flow are on a study course of improvement as we continue to focus on operations particularly in the laser and component segments. And now I turn the comments over to Chuck.

Thanks, Tom. As I stated earlier, we are seeing the benefits particularly in the laser systems business of our restructure of operations earlier. We expect to drive continuous improvement and performance in all three business segments. At this point Tom and I are available to answer your questions and I do thank you for staying a little later to take this call. Operator, would you please proceed with the question period?

Certainly gentlemen, thank you very much. Ladies and gentlemen, if you wish to ask a question, press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Questions will be taken in the order received. Please press star 1 to begin. And your first question, gentlemen, come from Daniel Kim from Paradigm Capital.

Good evening gentlemen, thank you and good quarter. I was just wondering if you can comment on recently both UMC and TMC -- TSMC have reported very strong results and one interesting comment came out of UMC in particular, they suggested that the current capacity is not added as fast as the equipment can come on line and that the lead times for capital equipment has extended now to one year and their comment I guess basically was saying, even for the two largest players in the world, they're finding that they are having difficulty obtaining equipment. I was wondering if you can speak to what's happening with your lead times and your expectations for how things may unfold in '05, please?

Well, Daniel. I saw the comments earlier and it's true, but it's not reflecting in our equipment. Our equipment especially for [inaudible] manufacturing laser systems, we've actually shortened our lead times and can provide them in a shorter period after we receive an order than ever before. But the placing of orders for our equipment winds up being somewhat impacted by their ability to get other pieces of equipment. However, what we've seen is a nice steady pace, which is continuing, of orders coming in from all of our customers for our equipment. So the paces about a study, not seeing anything pushed out.

Okay. Could you hazard to comment with regards to your view on 2005? I guess there is some expectation that 2004 is going to be a big year in terms of capital spending on equipment. And have you seen any data points that indicate what may happen in 2005?

Well, based on all the reports we're getting back from our sales people, our general manager, customers that they talk to on a regular basis daily, we're not getting any indication that 2004 is going to get softer and everybody seems to be feeling very good about really the early part of 2005. But, again, as I commented on each of the calls for the last several quarters, our visibility in terms of firm, hard orders coming in the door continues to be limited to one quarter but it's a very high confidence one quarter. So we're -- you know, we're very confident this quarter is going to be a good one. Our next quarter, everybody seems to be feeling good about it. And there isn't anybody talking to us now in terms of our customers saying anything that would give us alarm about the future.

Very good. And just a couple of questions for Tom. Just quickly, could you hazard to guess what your amortization rate may be assuming that Micro-E acquisition comes through on a quarterly basis say existing '04?

We haven't had that totally figured out at this point, Daniel. So I can't hazard a guess.

Okay, how about your tax rates?

The tax rate that we're using is actually the one we project for the year and it's based on all facts and circumstances now. So I would feel the 9% we have this quarter based on what we know now will be the rate this year.

Okay. Do you think that would -- then do you think it would go back to a more normal rate in '05?

Oh, definitely.

Okay, and Tom, I wonder if you can comment on Westwind and could you give us a sense of the relative contribution from that acquisition in the quarter either on top or bottom and/or bottom line, please?

We don't disclose our, either the product line sales or the margins like product lines. I think from the comments you can see it is a lower margin than our traditional products. And there it's a matter we acquired that operation because of the future potential and the new product lines. But it's --they, they do run at lower margins.

I guess what we can say, Daniel, is that the business is very robust. Getting a lot of business from obviously the printed circuit board manufacturing sector which uses their high speed spindles and they have a dominant position there and we have aggressive programs in place to improve the margins going forward in the next several quarters. But it was definitely was accretive in the full quarter that we had here in Q1 as we had said it would be at the time of acquisition.

Great. Thank you very much.

Thank you, Daniel.

Thank you very much, sir. Gentleman, your next question from David Hodgson of Orion Securities Please proceed.

Thanks very much. Nice results, Chuck. A couple of questions. One is on the longer term model, the operating model given the Micro-E acquisition and Westwind and your moving more toward an OEM model where SG&A and R&D as a percentage of sales are going to shake out over the next couple of years?

Yeah, we're still staying true to that model. Obviously as you bring an acquisition on board adjustments get made. We change manufacturing efficiencies so we'll see changes in gross margins. We'll also see there'll be more money spent on R&D so we'll tend to get more up to the 10% range. It doesn't happen in one quarter or two. It takes place gradually over several quarters. So, while we're getting close to the run rate that we advertise the model would work at, these happening through some large acquisitions coming in the door so that says it will take a little bit of time to get the model shaken out. But we will get there in roughly the same time frame.

Okay, can you at all disclose where the current gross margins of Micro-E are and whether they'll be any associated integration costs with that acquisition?

No, we can't comment about that other than to say it's a very good business for us in the strategic sense and it will be accretive in the first full quarter after acquisition. We don't expent -- expect any abnormal expenses to be associated with it. But I would also come back to pointing out that we're -- on a pre-tax operating income number we're close to the 15% number we advertised but it's the lines in between that are going to be getting adjusted, the gross margin lines and the R&D lines and SG&A lines still need work over several quarters but we don't expect to fall backwards on the operating income line.

Okay. And lastly, I apologize I was late getting on the call, I'm not sure if you disclosed what percentage of revenues at the semiconductor sector was in the first quarter and how you expect that to change going forward?

Well, you know, the semiconductor and electronic sector for lasers is pretty much our laser systems business. So we really reflected mostly in that segment. And we don't - you know, we expect it to remain robust. We're not seeing signs of falloff in the industry. Will be some minor perturbations quarter to quarter which is always due to the fact that you get large order shipments that fall on one side of the line or the other plus cyclicality coming through the different quarters.

Terriffic. Good luck in the rest of the year.

Thanks, David.

Gentleman, the next question from Todd Coupland from CIBC World Markets.

Yeah, good evening everyone. Just a few questions on the P&L. From an operating expense perspective, R&D and SG&A, at the current run rate, that obviously includes Westwind for a full quarter. Are those reasonable run rates excluding Micro-E for the balance of the year?

Yeah, they are fairly close. The -- of course that would obviously exclude Micro-E. There might be -- to put it on an average basis, I would call it a good level to look at. The one thing we don't know is what's going to happen with revenues at this rate of revenues, it's a fair level.

Okay. And, you know, clearly you had setbacks in the gross margin in the current quarter, what is your feeling on when you might get to that 44% level, do you think you can exit 2004 at 44% or is that more of a later 2005 goal?

I think it's going to be more into 2005. As I said in my earlier comments and answered to an earlier questions, you know, it's taking a little bit of time to get the model adjusted in actual working operations when you bring in a Westwind that runs at a fairly good rate of sales and has a different formula to it and then we -- we're working on very specific gross margin action items as well as R&D and SG&A action items. But, you know, we're pleased to the fact that the bottom line is getting closer sooner because that's what's the most important thing. But we have to make changes, structural changes within the operating lines and that would take several quarters to do.

I think you did say earlier that you thought even though it was coming in slower than you thought, gross margin could increase sequentially throughout the year. Did you say that?

I don't believe we did. But we're, you know,that's what we're working toward making happen.

Would that be a reasonable expectation at this point?

Well, we have programs in place to make that happen. And some of them, by the way, involve currency.

Okay, and just a clarification on the tax rates, so you're saying 9% for the balance of the year and a normal tax rate for '05. I think people had modeled in kind of 20 ah, modeled in 31% as a normal rate for you. Is that what you mean by normal rate?

We would be going back to statutory rates most likely in 2005. I can't exactly say when. It depends on how much income we earn this year and the impact is the benefit of U.S. deferred tax assets as we bring those back because they were valued down last year. And once those are in effect brought back for full value which could happen this year, then we would be back to the normal rates that you would expect.

Okay. So statutory rate for you would be, what, 35%?

Probably in the range of 35-40%. It depends on a lot of factors. I haven't had the pleasure of working on that side of it yet, which I hope to have next year.

Okay. Great. And just on the acquisition pipeline, one last question. Could you talk about what you're seeing out there and I know you had stated you had a goal of getting one more done which you've done that now, what is your balance of the year in terms of what can be done and what's in the pipeline?

Well, we're still looking at a couple of prospects and candidates. Again, these are as you know Todd, from our prior conversations, there is a great deal of uncertainty in terms of whether the deal will go forward or not, depends on many factors that are quite, some of them have nothing to do with economics, just purely people's emotional outlook on life and their attitudes so we have several candidates that we're looking at again, all similar in nature, component level, laser-based products that are technologies that are complimentary that we're doing that will expand our range of offerings in both the technology as well as products and fit in the niche markets that we're in so yeah, there's several more and hopefully get one more done after Micro-E this year.

And the thinking of the component deals will be the same as the last couple of deals where you look to leverage the sales force and give them something else to sell?

Correct. And see if we can't offer more to the same customer base that we that we already have because, for example you look at Micro-E, they sell a lot of their encoders to the same that Westwind goes to. So that's -- that' the sort of thing we're looking to do, where we can gain some, some sort of leverage out of it and the metrics remain the same. As you can see Micro-E came in on a little bit on the high side of our ranges for both with multiples of revenue and EBITDA but I think it's worth it. It'll be really a great acquisition. So we'll stay within the range that we advertised previously.

Thanks a lot.

Thank you, Todd.

Gentleman, your next question from Susan Streeter of Sprott Securities. Please proceed.

Thanks and congratulations on the great results. Just a couple of quick questions here. I was a little bit surprised, pleasantly surprised but there was not a increase in the SG&A despite the fact that Westwind would have been included for the full quarter in Q1. Does that reflect sort of lower costs associated with that or continued improvements in your own core businesses?

Actually what it is if we had not had the acquisitions SG&A would have been a little lower. So we did have some benefits compared to the first quarter of last year that came through.

Great. And then just, the other question I had, given, sort of, that what you've indicated is a fairly high level of activity or -- or order activity out of Asia Pacific customers, I'm a bit surprised that that doesn't account for a higher percentage of revenue. Wondering if you can comment on that at all?

Not sure, Susan, could you rephrase the question? I lost you on that.

Okay, sorry. It was about the Asia Pacific, Japan and Asia Pacific together were 30% of your total revenue and that compares to about 35% the previous year as well. I'm just -- I would have expected, I guess, a bit of a shift away from North America towards that region, given we've indicated a fairly high degree of order activity there.

Yeah. We have, again, confusing situation on our hands because what that statement, those figures reflect the invoice billing address and places like Samsung we bill them in the U.S. but the equipment winds up going overseas. Also companies like Maxim who buy in the U.S., they're in the U.S. and wind up shipping it over to Indonesia where they have a plant operating. So it't -- it's a little bit confusing.

Okay. No that's, that's -- thanks for the clarification. And then just lastly wondering, you commented about the WaferTrim product and how that was contributing to strength in terms of the laser systems business, I'm just wondering if you can comment on the memory repair and what you're seeing in terms of activity for that product?

Memory repair is remaining nice and steady. I mean, we're continuing to get good order flow in there and getting our share. And we see looking forward, continuing demand by the customer base.

Okay. Thanks very much.

Thank you, Susan.

Thank you very much. Gentleman, your next question comes from Jim Ricchiuti of Needham & Company.

Thank you, good evening. Chuck, I wonder if you can comment about the laser systems business. You had a pretty significant sequential increase in volume there. Were there any inefficiencies from having to ramp to those levels that may have impacted margins? I wonder if you could just talk about that, how you've been able to manage this kind of ramp?

You know, I think overall they did a good job because we've outsourced so much of the products they were able to respond quickly. I don't think there was much in the way of impact to efficiency. I think they did a really good job on it and that's why the margins did improve significantly in the systems part.

Okay. And just with respect since you are giving the margins on the three segments, I wonder if you could talk in terms of where you'd like to see some of these margins go relative to your overall goal of 44% gross margins?

The overall goal is to continue to have the systems business up about where it is, maybe a little bit higher. You know, 45-50% is good for that business and getting the other two segments into the low 40 range, 40-42% range is really the long-term target for that.

Okay, and in terms of looking at the -- any sense on the time frame as to when you could, you could get the margins up in the component business excluding say Micro-E?

Well, part of that, of course, is we just put increases in place in both areas, components and lasers to counter act the exchange rate problem, because of weaker dollar. So that will help going forward. But our target has always been toward the fourth quarter of 2005 to be on that model. We may be able to get there sooner. Of course, we're trying to. We've got projects in place to reduce cost of goods and some other projects in place to increase R&D in certain areas and other projects in place to try to reduce SG&A. So overall, you know, it's going to take some fine-tuning quarter by quarter to make the improvements and we don't want to lose the operating income pre-tax line which is getting closer to the 15%. So it's conceivable we could get to that line before we get the other pieces structurely in place.

I mean it also sounds like, you know, given the progress you're making, that 15% operating margin goal looking out to '05 could actually be conservative. I don't know if you want to comment on that at all.

That would be nice, wouldn't it, Jim?

Chuck, any issues at all with components or subassemblies, any constraints you're facing right now?

No, we're not really constrained. Our real focus which I think will also help on our margins especially in the laser business is to get the cycle times down. If we can reduce cycle times, I think we'll see better improvement in our gross margins, for a number of reasons. So it's a really, it's our own efforts that have to, we're not constrained by any one thing or any vendor in particular, it's just getting ourselfs to perform at a better level. We've managed to do that in the laser systems business through last year and our cycle times are down there. We have to do that in the other two segments as well and that's where the focus is being placed.

Just last question. You talk about order placements being steady, but are you seeing orders come in multiple, kind of in clumps and if so, I mean, what gives you, you've got visibility I guess just into this quarter, but even within this quarter how, how does the progression of the orders looking this quarter?

It's looking pretty much like it did in the prior quarter and that is it seems to come from a variety of different areas and the areas seem to shift. You know, there are different market niches and we see some strong orders coming in certain segments and then all of a sudden in another quarter it moves to another segment. They seems to be moving around. Like we were, you know, it was a very strong shipments in the WaferTrim area. We saw some good orders coming in there earlier. Then the order pattern starts to shift to other areas. So it's just been interesting and I think that reflects more of a general recovery economically on the world scene because we're seeing a lot of different segments where things pick up. We're not just seeing one specific market driving everything and that, that's healthy.

Yeah, and the bulk of it, would you say the bulk of the increase you're seeing in the laser systems area is really capacity driven right now as opposed to...?

Yeah, it is. Most of it is capacity right now.

Okay, thanks a lot.

Thank you very much. Gentleman, your next question from Deepack Chopra of National Bank Financial. Please proceed.

Great quarter, guys.

Thanks, Deepak. How are you?

Not too bad. I was wondering, I know you guys are not giving too much in terms of guidance. but is it fair to say that Q2 is going to follow normal seasonable patterns being stronger than Q1?

Can't comment on that. So many things floating around. What we're seeing is we came in with a strong order book, our backlog is strong and I can tell you so far into this quarter the order flows continuing to be good.

And in terms of the memorial repair area, what's your sense in terms of market share that you guys are currently standing at? And in terms of what type of capacity levels do you see your customers currently at?

Well, they keep adding capacity and they keep telling us going forward they are going to continue to add capacity at a fairly steady rate. They don't see it just falling off anywhere in the near feature and that's because they are measured. They haven't been buying large, large numbers of equipment. They've been buying smaller amounts on a steady basis.

And in terms of market share?

Oh, I think we're holding pretty much where we should be in terms of getting our fair share.

Say 40-50% is a fair ballpark range?

Of the new generation of equipment that would be right.

Then I was - maybe a couple questions for Tom. Your cash position after the Micro-E position, what do you think, what's the targets range at that point?

Well, we feel we're going to continue to generate cash from operations. I'm not going to forecast where we'll be but obviously with the profitability such as we have this quarter and the tax benefits that we have that will continue to generate cash. We -- we will obviously be able handle the Micro-E acquisition and a cash balance afterwards and that should build over the year.

What's the current head count at?

We're about not quite 1100. Is it 1078? And,uh yeah, it's about 1100 would be the high end, that would be all the permanent employees. There's a -- particularly at the Westwind there's a significant amount of what we call temporaries. They're contract people.

And how much would Micro-E add to the total?

We can't talk about Micro-E at this point.

Okay. Fair enough. I think that's pretty well, all my questions. Great quarter, guys.

Thank you. Deepak.

As a reminder, ladies and gentlemen, it is star 1 to ask a question. The next question from Duncan Stewart of Terra Corporation. Please proceed, sir.

Good evening.

Good evening Duncan, how are you?

Fine, thanks, Chuck. Hope you're doing well. Good quarter.

I am.

One of the things that by having multiple product lines, I guess I've got a couple of questions from this. By having multiple product lines and if the same sales team can sell different products to the same customer, does that going to, or is that going to lead to a little more customer concentration over the next year or two? I mean, probably in any given quarter is it possible you're going to end up with more 10% customers?

No, actually, Duncan, it's a little confusing. Maybe I can clarify it a bit. In most of the cases, it won't be the same sales person coming in with a bag filled with more products, but what happens is you have a sales guy who is selling one line of products to a particular customer and he recognizes immediately that they also use one of the other divisions' products.

Or he, it could be within the components segment of our business we have somebody who's going in there, for example, and he's selling a scanner and he recognizes this customer also uses Air Bearing products so he'll introduce the guy, who's an expert, from the Westwind group. So, and that guy now gets introduced - we are a qualified vendor by the customer so it really cuts the selling cycle down. But these sales are, as you would appreciate, very technical sales so each individual has to know the technology of his products and it's hard to get one guy to just know everything. It's really a technical applications-based sale.

So you're the only one who understands it all then.

I wish. I wish I understood it all. But I think the real benefit is the leverage having a salesman who's in there talking to a customer, he's seeing projects going on and he goes in to bid on a project and he says well there's other projects going that these other guys should be bidding on. For example they need a laser, they're going to need a laser with the scanner we're selling him. And he tells him about our lasers and, of course, one of our laser salesmen shows up to see if we can bid on that.

And same things with Micro-E encoders. Pretty much everywhere we go with our components, we're finding they are using or need to use an encoder. So this helps offer the customer, it's more of one stop shopping at one company as opposed to one guy carrying the entire load. I don't know if that helps.

That, that does. That answers the question very well. You've, just to follow up on that earlier question about operating margin and 15% being conservative. Without you in any way guiding us to a higher number or anything like that, can you comment on given how GSI is being set up at this point and given the normal cyclicalty of the industry, let's say 15% is a target. Would you be able to give us any sense of stretch goal throughout a cycle? Is it 15, 20, is it 21? I mean, it's unusual to have operating margins in access of 20. Maybe could you narrow that range for us?

I really can't. That'd be too forward-looking.

No, no, I'm not what you think you'll get to but based on the business model, kind of, through a cycle what's the stretch goal versus 15?

We're trying to get the maximum leverage we can get, Duncan. I think if you look at it, if we can manage to contain growth in our fixed cost base the way we've been doing so far, you can see the improvements year over year. I think you can pretty well model it.

Okay, and then finally just in terms of visibility, you're still at only one quarter. Do you have any sense that maybe with the diversification you're having on different product lines that that visibility is going to extend in any way or do you think that maybe that's almost a permanent condition now, that sort of, I guess as a result of inventory control and so much outsourcing, that we're only going to have one quarter of visibility?

I really personally and, again it's a personal comment, I personally believe we're in a restructured world in which, because of the outsourcing and everything you just said, supply conrestraints and people don't want to get stuck with inventories, even non-cyclical industries like the medical industry, people don't want to put large orders out there because any event in the world, which is so uncertain today, causes customers to pull back and not buy. So, everybody's trying to fine tune their food chain and we're doing the same thing so that nobody wants to take risk of committing beyond a quarter and I think that's healthy. I think it's really healthy because it has us focused on very strong working capital.

Okay. I think that's a great answer. Thanks very much, Chuck.

Thanks Duncan, look forward to seeing you again soon.

You bet.

Thank you very much sir. Gentleman, there are no further questions in queue, I would like to turn it back to Mr. Charles Winston for his closing remarks. Please proceed.

Thank you, Bill. And I want to thank everybody on the call tonight for participating and your continued interest and support in the company and Tom and I and the rest of the folks at the company are absolutely determined to continue this type of improvement going forward. So we look forward to having another good conference call with you next quarter. Good night, now.

Ladies and gentlemen, that concludes our conference call for the evening. We thank you for your participation. You may now disconnect. Have a good night.