Novanta Inc (NOVTU) 2008 Q1 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I'd like to welcome to the GSI First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions).

Thank you. Mr. Ray Ruddy of Investor Relations, you may begin your conference.

Thank you, operator.

Good morning and thank you everyone for attending our first quarter 2008 conference call. This call is being broadcast live on the Internet in listen-only mode at GSIG.com.

Dr. Sergio Edelstein, President and CEO and Bob Bowen, President and Chief Financial Officer joining us this morning.

The following presentation will include forward-looking statements within the meaning of the federal securities laws. These include statements about the Company's expected sales performance, operating results, financial condition and business strategy.

These statements are subject to a number of risks and uncertainties, including those detailed in the Company's press release issued yesterday and on its 10-K and other filings with the Securities and Exchange Commission that could cause actual results and outcomes to differ materially from those projected in the forward-looking statements.

Our assumptions may change over time.

Please remember that these statements speak only as of today's date, and GSI will not be updating them.

You are encouraged to review the written risk factors and business information set forth in GSI's SEC filings carefully before making any investment decisions.

First let me begin by quickly reviewing GSI's product positioning for any new listeners. Our precision technology segment which generates about 60% of our revenue, sells to equipment manufacturers and markets like the electronic, medical, and industrial manufacturing markets.

This segment is diversified. It is made up of six main product lines, and these are encoders, scanners, high speed air bearing spindles for the printed circuit board industry, lasers, medical printers, and optical components.

Our semiconductor system segment generates about 40% of our revenue manufactures end user capital equipment that is used in the production of memory chips and high performance analyte devices.

This is composed of three main product lines--wafer repair, wafer trim, and wafer mark.

I would now like to turn the call over to Dr. Sergio Edelstein.

Thank you, Ray. Good morning, everyone. Thank you for attending our call. I will first summarize our quarterly results, and then provide a progress update on the execution of our strategy.

In the first quarter of 2008, revenues were $71.1 million, down 17% sequentially.

Bookings fell 36% from Q4 of 2007 to $56.1 million. Backlog at the end of the quarter was $74.8 million. The book to bill ratio was 0.78 and the cash balance was relatively unchanged at $171 million.

Our overall results in Q1 were driven primarily by the cyclical downturn in the semiconductor and in the printed circuit board markets as we anticipated in our last call.

However, I am pleased with the performance of our key precision technology product lines, particularly encoders and scanners over the last quarter.

Moving forward, we see continued strength for our encoder and scanning products, especially in data storage and key industrial customers in Asia. Very recently, we have begun to see a rise in demand for our printed circuit board drill heads. We anticipate that we would realize the benefits of our 2007 UK-China Margin Improvement Initiatives as that market recovers.

Consistent with the general industry outlook, we see the outlook for semiconductor systems segment as soft through the first half of this year.

I will now turn to our strategy. While we are a diversified company selling into multiple markets, most of our products share core technologies -- lasers and precision motion.

At the beginning of last year, we started to shift our focus and spending to a core subset of our markets, with a goal of creating a more concentrated business with a critical mass necessary to drive growth.

This strategy includes rapid new product introductions in our targeted markets, new business acquisitions, and divestments where appropriate.

We continue to make good progress along this path, and I anticipate that progress will accelerate this year on all fronts. New product introductions is a key part of our strategy and an area of renewed focus for GSI. These efforts are beginning to pay off.

We are beginning to ramp production shipments of precision technology products we introduced last year, most notably, our new generation of lightning scanners. And just this quarter, we began shipping new derivatives of our Mercury tape encoders.

We are also offering high performance beryllium galva mirrors from our new Compton, UK Facility, and are introducing new integrating scanning subsystems to address the needs of that portion of the scanning market.

We continue to make progress with the introduction of a new fiber laser to extend our JK product line, and are successfully completing prototype testing in anticipation of moving into full production.

Many of our component products have a slower OEM adoption cycle but I anticipate their contribution to our results will accelerate this year.

In the meantime, we are taking advantage of this cyclical slowdown by placing our new product offers into evaluations and multiple customer sites. This will enable us to get these new products accepted into our customer's design cycles as the market turns.

At the same time, we are continuing to work with our customers to consolidate and prune older legacy product lines. We are also pursuing opportunities to complement our internal efforts with acquisitions and partnerships that fit into our strategy, and can help us strengthen and grow a more concentrated core.

The key objective is to put out cash to work for our shareholders.

Finally, we continue in our aggressive drive to integrate our company and realize greater efficiencies across our businesses. Last quarter, we reported the completion of our UK-China project announced last year. During this quarter, we will move three operations into our new single headquarters in Bedford, Massachusetts.

As part of this consolidation, we recently announced a 10% work force reduction in North America. We have also made organizational changes to facilitate integration of our infrastructure to increase the focus and leverage on our supply chain and to step up our sales efforts of new precision technology products, particularly in Asia.

In sum, while our systems and spindle business are coping with temporary industry-wide slowdowns, I am very confident in our strategy and in our long-term prospects. With that, I will now turn the call over to Bob.

Thank you, Sergio.

As Sergio mentioned, total company bookings for the first quarter were $56.1 million and the book to bill ratio was 0.78.

Systems bookings were 65% lower sequentially, and we are expecting softness through the second quarter.

First quarter revenues total $71.7 million, precision technology revenues totaled $44 million, up 1% from the first quarter of '07. Excluding printed circuit board drills where we are seeing cyclical market weakness, and adjusted for the aerospace R&D contract that concluded in the fourth quarter, this segment actually grew 11% year-over-year organically.

Our encoder and scanner business continue to perform well, and we believe the new product introductions in these areas will drive more sustainable growth overtime.

The medical printer business in rebounding off a soft 2007 and in lasers, we are planning for introduction of a fiber laser in the second half of this year.

Revenues of $28.8 million in the semiconductor segment were 26% lower sequentially, reflecting general industry conditions.

Company-wide, gross profit margins at 38.1% was as anticipated and about equal to last quarter. Precision technology gross profit margin was 38.4%, 1.6 points higher than the fourth quarter of '07 and 2.5 points higher than the first quarter of '07.

The rate of improvement was driven by higher volume as noted above and improved mix. The cost benefits associated with the move of UK production to China, have largely been offset by lower PCB volumes.

As those volume levels rebound, we would expect to see further improvement in the precision technology margin rate.

System margins of 36% were lower sequentially, largely as a result of lower volumes.

Operating expenses, including the restructuring charges, total $25.6 million compared to $25.7 million in Q4 and $25.7 million in the first quarter of 2007. R&D expense was up slightly from Q1'07 and we plan to continue to invest in new product development at about this rate through the down cycle.

The increase in SG&A from Q1'07 is largely driven by the legal settlement in Q1'07 which had a favorable $2 million effect on Q1'07 SG&A costs.

Operating profits excluding restructuring charges total $1.5 million, and net earnings were $2.1 million or $0.05 per diluted share at the high end of our guided range.

Net cash provided by operating activities totaled $3.9 million in the quarter and we used $4.2 million for additions to plant property and equipment. Largely related to lease hold improvements in the facility, we will combine our Boston operations in June of this year.

In addition, during the first quarter, we repurchased approximately 365,000 shares of GSI stock, at a total cost of $3.1 million. As of the end of the first quarter, approximately 25.2 million remains in the repurchase program.

Now, turning to guidance.

In total, second quarter revenue is expected to be in the range of $64 million to $68 million, reflecting continued weakness in the systems business. We expect our gross margin rates to be around 38% to 39%, slightly better than Q2 levels.

Operating expenses, including restructuring charges of approximately $1.6 million and also including the gain on the sale of one of our UK manufacturing facilities, are expected to be approximately $25.5 million.

We expect fully diluted earnings per share including restructuring charges to be at about break-even or slightly better.

I will now turn the call back to Ray.

Operator, any questions?

(Operator Instructions). Your first question comes from the line of Chuck Murphy.

Good morning, guys.

Hi, Chuck.

Can you just repeat what you are expecting restructuring charges to be in the second quarter?

$1.6 million.

So somewhere around $0.01 or $0.02 roughly on EPS?

Yes, and that's largely related to -- Well, we issued a press release early in the quarter, largely related to the workforce reduction and the closure of one of our facilities in Michigan.

Okay.

Probably more like $0.03, Chuck.

Okay. I'm just wondering, I realized that the volume have come down, that it is compressing margins, but do you feel like you're seeing any improvement in margins because of the changes you have made over the past year or so?

We have seen some improvement in our laser business, but we have not yet seen improvements in our air bearing spindle business where most of the improvements were really expected to come from that business, but the lower volume levels, I mean, that business was down pretty sharply in Q1 versus Q4. I think Q4 was the biggest quarter they had in several years and Q1 was probably down somewhere on the order of 30%.

And so on the lower volume levels, they just didn't have enough volume for those benefits to pass through to the P&L and in addition, they were still working off some of the higher cost inventory that had been manufactured externally to support the transition level, the equipment was either en route to China or being set up in China. Which is why we believe the margin rates in precision technology still have further improvement because as those volumes in air bearing spindles improve, which they will, as the market returns, that should flow through the P&L. We fully expect that to happen.

All right, I guess I'm just kind of looking back here at 2005's results and you're doing sales anywhere from $62 million to $66 million and EPS was more like mid to high single digits for most of the quarter. I'm just kind of wondering, would you say that margins have generally trended down over the past couple of years?

I have not calibrated immediately to the variance analysis from '05. But I don't think our gross margin rates are substantively trended down from the '05 trough levels.

We do have some stock option expense in our numbers now that did not exist in '05, but that is a piece of it.

Okay, yeah, that may be the reason. Anything new on the acquisition front, I mean, why not you'd be buying stock at these levels?

I think, Chuck, we are aware of the cash we are holding and putting that cash to good use is extremely high on our list. I have said repeatedly that we have some unique opportunities to grow and accelerate the implementation of our strategy through acquisitions, so we are moving forward with multiple discussions on several fronts, particularly in some of our most attractive markets with the most upside in which we look particularly at complementary acquisitions with reasonable to low integration risk in markets that are familiar to us and where there is a lot of market upside for us.

And we feel confident enough in the progress, although there is a number of imponderables and some unpredictability to the process as I'm sure you know. But we feel comfortable enough that we want to prioritize that approach for the cash until, and if we learn otherwise. But right now, that is the approach we are taking and I firmly believe that from what I know right now, this is the preferred approach from a shareholder's perspective.

I would point, how long do you do this search, does this go on forever? Have you set an internal time limit and then you say you move on to something else such as repurchases?

Of course, I prefer not to put a date on it because if come that date, we are very close to closing on a very, very attractive opportunity, I would artificially kill an opportunity that may have a lot of upside.

But, of course, we have to use reason. It is something we are moving on with a very high level of urgency. And it is not just a process of selecting or screening or learning. It is active discussions toward closing deals.

So, at some point, it is not just about learning what other opportunities might exist, but about driving discussions toward closure.

And so, sooner rather than later, once you are on that part of the process, you learn whether a selected number of potential merger, joint ventures, acquisitions can be closed or not, and of course, if they don't close, then you look other uses for the cash. Our strategy is not to just sit on a large amount of cash. We want to put it to good use and we will one way or the other, but we first want to exhaust what I believe is the preferred approach for the shareholders.

All right, that's all I have. Thanks.

Sure.

Your next question comes from Brian Piccioni.

Can you hear me okay?

Yes.

Okay, sorry. I'm on a train. I was wondering, on the guidance you talked about, the gain from the factory, did you quantify that? The gain on the sale?

No, we haven't -- it is approximately equal to the restructuring charge.

So sort of net on equal items. It would be about zero then.

That's right.

Okay, on the balance sheet it seems that the days receivables has gone up significantly, is there any signal in that or is it just a question of timing of orders?

It is mostly timing of orders.

So you had a fairly back-end weighted quarter I guess?

Yes.

And in the bookings and backlog, can you somehow separate that out by let's say, semiconductor and PCB versus precision instruments so we can get a sense for the vulnerability there if there is any?

On the backlog?

Yeah, sure.

Well, the precision technology backlog, for the most part, they run with about one quarter's worth of backlog.

I see.

Okay. So we could probably guess on how that works out then.

Yeah.

And we have certainly seen in downturns in the semi industry before that customers sort of cancel orders, is there any risk in that or do you figure that your orders are all pretty firm at this point in time?

We had not seen any cancellations. We have seen a very low level of push-outs, but nothing that is overly alarming as of this point. But we have not seen any cancellations.

Okay, great. Thanks a lot.

(Operator Instructions). Your next question comes from [Thomas Clog].

Hi guys. Two things. One is, did I hear you right, Sergio, that you guys expect a pick up in the spindles or not? I did not quite understand. You mentioned some kind of pick up or something.

Yeah, what happened in that market, Tom, is that we saw a very unusually high level of demand in the fourth quarter of 2007, a long time record. And then going into the early part of Q1, the number of orders dropped extremely sharply and then there was a lot of discussion with the customers about the outlook for the industry for the year and what their requirements for capital equipment were going to be.

And then following that and very recently, what we have seen as an uptick in orders, so that there's a number of customers starting to come back and say that they now see new orders on their side. This is an OEM product, so we sell to systems integrators, who in turn are starting to see an increase in orders for systems.

So we are seeing an uptick and this is very recent information.

Okay, and then the cost savings from the facility consolidation, you are doing a building consolidation in Boston and I guess the layoffs, have you guys quantified what that is yet?

We have not quantified what that is.

Then we will see that when?

I think you will see the savings occur overtime, following move-in.

In the September and December quarters?

I think probably toward the latter part of this year and into '09.

I think the way to think about this is effectively, we are taking three different types of operations. A part of our overall strategy is to try and integrate the business to a greater extent than it had been historically, and to operate it off of one common platform.

And so effectively, we are taking three different operations that handle daily operations differently. And we bringing them into one building as a step toward driving this integration and the sorting out of a new set of processes is going to occur overtime and we would expect the productivity improvements of that to be reflected overtime as well.

It is almost like the integration of acquisitions that never occurred in this company that is now beginning to occur.

Laying off 10% of the workforce, what is the headcount?

The overall headcount for the company is about 1,200.

So that is going to be 120 people, around there?

Yeah, from the start of the year, yeah.

Okay, thank you.

Your next question comes from Chuck Murphy.

Just a quick follow up. Any change in the competitive environment and encoder, scanner, and spindles in the past year?

I think that is not a very extremely dynamic fast-moving market -- none of those three markets are markets in which market share or market position change very dramatically quarter to quarter as they do for example, in the semiconductor area where there are major orders that can change supplier's fortunes from one quarter to the next.

So these are slower moving markets so there haven't been dramatic changes in the competitive landscape. However, we have started to focus a lot more in making sure that we lead with the best technologies in those few markets that you mentioned.

So that pays off overtime. And we have started to see the payoff of that already and we are driving to accelerate that because we see a lot of upside for the company in that regard. Bob mentioned that apples to apples, that particular part of the company grew in one year about 11%. So we want to sustain a double digit growth rate in those markets, and then as we bring new products into those markets, then those come with higher margin as well.

So overtime, that starts to make a bigger and bigger impact on the profitability numbers for the whole company.

The other thing I wanted to say, that in many of those markets, we have relatively low marketshare, but very good technology. So we have been making steady gains as the underdogs in some of those markets. And we are well positioned with the technology to go after the next set of requirements for the next generation.

So I'm personally very optimistic about our outlook for those markets, but the short answer is no dramatic changes but steady gains for us.

All right, thanks.

Sure.

(Operator Instructions). There are no further questions.

Okay, thank you everybody for attending. We look forward to seeing you on the Q2 quarterly earnings call. Thanks so much.

This concludes today's conference call, you may now disconnect.