Novanta Inc (NOVTU) 2008 Q2 法說會逐字稿

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the GSI second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the call over to Mr. Ray Ruddy, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning. Thanks for attending our second quarter 2008 conference call. The call is being broadcast live over the Internet in listen-only mode at GSIG.com. Dr. Sergio Edelstein, President and CEO; and Bob Bowen, Vice President and Chief Financial Officer join us this morning.

The following presentation will include forward-looking statements within the meaning of the Federal Securities laws including 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 today and in its 10-K and other filings with the Securities & Exchange Commission that could cause actual results and outcomes to differ materially from those projected in the forward-looking statements. Assumptions may change over time. Please remember that these statements speak only as of today's date and GSI will not be updating them.

GSI has also extended a tender offer to purchase the outstanding shares of Excel Technology that is filed with the SEC on schedule TO and related amendments. Investors are encouraged to review the documents if there are questions related to the tender offer or its terms. You're encouraged to review the written risk factors and business information set forth in GSIs SEC filings carefully before making any investment decisions. I would now like to turn the all over to Dr. Sergio Edelstein.

Good morning. Thank you for attending our call. I will start by summarizing our quarterly results and then provide more details on our merger with Excel technology. Second quarter revenues were $66 million, bookings were $51.2 million. Our cash balance grew $12.6 million sequentially to $183 million. With the exception of our Westwind printed circuit board spindles business our precision technology segment continued to grow during the last quarter. Our three main product lines in this segment, scanners and coders and lasers all grew in the past year. An increasing portion of our growth in these key businesses came from new products including our lightning scanners, Mercury 2 encoders and JK lasers.

As I have stated on our prior calls, each of these product lines is an area of focus for us, and I am pleased to see these products start to get good traction in the OEM design cycle and start to generate additional revenues. Our spindles business did lose some volume on the general cyclical slowdown in the printed circuit board equipment market. We're confident that the move of Westwinds manufacturing to our plant in Suzhou, China will position it for good margin improvements when the market turns.

In our systems business our lower second quarter results were largely driven by the cyclical downturn in the semiconductor market. While the outlook for this segment will likely remain weak for the remainder of the year, we're encouraged by recent reports that side fab utilization levels approaching 91% overall and 96% for 300-millimeter fabs, if their reports are correct, those are levels that have historically triggered new capital spending in the industry.

On the acquisition side, as most of you know, we recently announced the execution of a definitive agreement to acquire Excel Technology, and we have a pending cash tender offer that is scheduled to conclude on August 19. We announced earlier this week that the HartScottRodino waiting period expired without comment from the Department of Justice. We see this as an important milestone towards closing the transaction quickly and efficiently.

I have been asked why Excel. The fact is during the last two years I have looked very carefully at our markets and at acquisition opportunities. Excel stood out above all the other candidates as a company that had directly complementary product lines that would significantly increase our footprint in those markets where we have the best opportunities to grow and that are noncyclical including the overall laser and laser systems markets. Excel also happens to be a very well-run company with a history of good profitability. Over time I believe the result will be a Company with enhanced shareholder returns.

Why take this step now? Excel has been courted by other companies in the past. Given its size, product lines and profitability, we believe that failing to move now could result in a lost opportunity that would be very hard to recreate with another acquisition candidate. Finally, I think that acquisition integration programs are best carried out during slower business cycles rather than after market have turned.

Through my ongoing discussions with Excel's CEO Antoine Dominic I have every confidence that we can complete the integration of the two companies quickly and smoothly. The deal creates significant opportunities both on the revenue and cost savings side. From a revenue perspective, the ability to cross-sell product lines is a natural fit. At GSI we have direct sales and service teams in Taiwan and Korea and a growing team in China. Excel has a presence in India. We do not. We expect to train our Chinese, Taiwanese, and Korean sales forces to sell several of Excels products. For example, Excel's non-semiconductor laser based systems in applications that we're currently not addressing. We also have a smaller European presence than Excel, so the reverse opportunity presents itself there.

On the cost side, I will direct you to the GSI investor presentation that is part of our tender offer filing with the SEC. It identifies a number of synergies based on its bottom's up analysis we have conducted. In general, I would note the following.

Elimination of duplicate corporate costs, elimination of duplication in Excel's and GSI scanner businesses which are located within a short drive from each other and a duplication in the laser business. This includes the acceleration of the move of our laser manufacturing out of the United Kingdom including selected transfers to Excel's operation. Also, elimination of duplication in some field offices, examples being Germany and Japan. We have quantified savings from these obvious synergies at no less than 6 million to $8 million with significant potential upside. The integration of our two companies will not affect the operational transformation currently under way at GSI including the recently completed move to a single facility in Massachusetts, and an ongoing effort to streamline our manufacturing and logistics practices as a result of the move. At the end of the second quarter we have implemented a 40-person restructuring plan, that restructuring should provide approximately $3 million a year in annual savings beginning in Q3. We're also working on further operational efficiencies in the current Q3 quarter.

Finally, we will be looking closely at our entire portfolio of businesses as we go forward to make sure we concentrate on those that bring us the appropriate combination of return on investment and growth opportunity. Those that present less direct opportunity will be candidates for this decision over time under appropriate circumstances. Available proceeds will be reinvested in our leading businesses and/or used to pay down Excel acquisition debt without penalty, an option that we negotiated into our financing agreement. I want to conclude by reiterating that I firmly believe that the ultimate result of this transaction will be a Company with higher return to our shareholders. With that, let me turn the call over to Bob.

Thank you, Sergio. Today we'll provide an overview of our second quarter results, guidance regarding the third quarter, and information regarding 2009 financial information for a combined GSI and Excel business. Please refer to the Safe Harbor language noted at the outset of this call as well as in our press release and SEC filings. Total Company bookings for the second quarter were $51.2 million. The book-to-bill ratio was 0.78, and the total Company backlog going into Q3 is $60 million.

Systems -- semiconductor systems continues to mirror general industry conditions. Systems bookings were 3% higher sequentially, and we have been encouraged by some recent reports on increasing levels of fab capacity utilization, but internally we are not expecting any up turn in the systems bookings until the fourth quarter at the earliest. Second quarter revenues totaled $66 million. Precision technology revenues totaled $45.4 million which on a reported basis were down 3% from the second quarter of 2007. However, precision technology external revenues grew 9% excluding our Westwind spindle business where we are seeing cyclical market weakness and adjusting for a low margin aerospace R&D contract that concluded in the fourth quarter of 2007.

On a similar basis year-to-date precision technology external revenues grew 10%, and all of our precision technology product lines other than the PCB spindles business had positive external revenue growth through the first half. We believe the new product introduction in these businesses will continue to drive growth over time, and Westwinds move to China positions it well for an eventual recovery of its markets.

Revenues of $21 million in the semiconductor segment were 27% lower sequentially reflecting general industry conditions. Companywide gross profit margin at 38.5% was as anticipated and slightly improved from the prior quarter. Precision Technology gross profit margin at 39% was 0.6 of a point higher than the first quarter of 2008 and 0.6 of a point higher than the second quarter of 2007. On a year-to-date basis all precision technology product lines other than printed circuit board spindle are showing gross profit rates equal to or better than 2007.

In printed circuit board spindle the cost benefits associated with the move of U.K. production to China have been offset by lower PCB volumes due to cyclical weakness in this market segment. As those volume levels rebound, we would expect to see further improvement in the precision technology gross profit rate. Systems margins of 37% were lower sequentially, largely as a result of lower margins.

Operating expenses including restructuring charges totaled $25.3 million compared to $25.6 million in Q1 and $25.9 million in the second quarter of 2007. Both R&D and SG&A expense were lower on a quarter over quarter basis. Year-to-date R&D expenses are essentially flat and the increase in SG&A is largely driven by the legal settlement in Q1 2007 which had a favorable $2 million effect on Q1 2007 SG&A costs. As Sergio mentioned, late in Q2 2008 we had a reduction in force of approximately 40 people in our Bedford facility and recorded approximately $700,000 in severance related costs. We expect this reduction in force to deliver approximately $3 million in annual cost savings starting in Q3.

Net earnings were $1.1 million or $0.03 per diluted share, above the break even guidance provided on the first quarter conference call. Net cash provided by operating activities totaled $22.3 million, and we used $12.5 million for additions to plant, property and equipment largely related to renovations associated with our new Bedford, Mass facility which replaces three older Boston facilities. We also sold a facility in the U.K. for $3.2 million that had been vacated as a result of a move of production to China.

During the second quarter we repurchased approximately 375,000 shares of GSI stock at a total cost of $3.3 million and cash and cash equivalents at the end of June totaled $183.3 million. During the third quarter we expect to close on the Excel and U.S. Optics transactions and will likely be announcing an additional reduction in force largely associated with the consolidation of facilities in the Boston area. Given the difficulty of predicting the specific timing during the quarter of these events, we will not be providing third quarter earnings guidance. However, third quarter revenues revenues on a stand alone basis are expected to be in the range of 55 million to $60 million reflecting continued weakness in printed circuit board spindles and systems. We do see continued good performance at our encoder, scanner, and laser businesses.

In view of our recently announced acquisition of Excel Technology, I would like to provide some color around our planning for the balance of 2008 and 2009 compared to how the two companies might perform on a stand alone basis. Our bottom's up planning for expected synergies is taking shape, but is still in the early stages. I would also like to emphasize that we will be very focused on cash generation from continuing operations as well as cost efficiencies. We believe conservatively that cost synergies will be at least 6 million to $8 million in 2009 and 8 million to $10 million in 2010 with very good upside potential. Cost synergies will come from manufacturing overhead as well as operating expenses and from both companies. Initially the targeted areas for cost savings include consolidation of corporate activities, integration of the two scanning businesses which are within 20 minutes of each other, and rationalization of field offices in Germany and Japan.

To give you a sense of why we believe these synergies are conservatively stated, in the Corporate cost area Excel spends approximately $8 million per year and clearly does some things more cost effectively than GSI. We think there are easily 5 million to $6 million of savings available here. Also, we have communicated that we will be integrating the two scanning businesses. The Excel scanning business is dramatically more profitable than the GSI scanning business. And we conservatively expect to get no less than $2 million of integration benefits in the first year. We also plan to look closely at the distribution organizations both companies have in Germany and Japan and expect some savings in those areas. Those synergies will be combined with other cost reductions GSI is in the process of executing.

On a GAAP basis offsetting some of the cash savings will be noncash increases in intangible amortization stemming from purchase price allocation. We have not yet completed that study, but have a place holder in our model of 13 million to $15 million per year for incremental intangible amortization largely. We expect the combined pro forma 2009 tax rate to be approximately 25%. I will now turn the call back to Ray.

Operator, we're ready for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Chuck Murphy with Sidoti and Company.

Good morning, guys.

Hi, Chuck.

Could you just you go talk a little bit more about the sales guidance? Are you assuming that Precision Technology will be flat or up, and I am sure semi would be down?

Yes. We see continued weakness in semi and spindles, but we are continuing to expect our Precision Technology segment to perform well.

Well, as in sequentially flat, up?

Well, as you know, Chuck, we don't give guidance specifically with regard to the two segments.

Okay. All right. Next question. Obviously some big changes in your cash flow and balance sheet. Could you just talk a little bit about the CapEx, why it jumped so dramatically, what it will look like in the third and fourth quarter and then in '09?

The CapEx was largely influenced by the renovations, the leasehold improvements performed on our Bedford, Massachusetts, facility. There were no material CapEx expenditures other than normal maintenance items in the business during the quarter. Those expenditures are largely complete. I might have maybe one to $1.5 million worth of incremental bills to pay in Q2 related to the building. We also received an allowance from the landlord related to these items. So the net CapEx spend for the building in total is $12 million, and that will be completely resolved at the end of the third quarter. From there on the two companies on a combined basis spend between 6 million to $8 million a year on CapEx items.

You said combined?

On a combined basis, basis, yes.

Okay. Remind me, is Bedford the new facility or the old one?

Bedford is the facility we just moved into in June of this year. We took our Wilmington facility which housed our systems business and our NADIC facility which housed our micro-e-business which is part of the Precision Technology segment and our Billerica building which houses our corporate offices as well as the rest of the Precision Technology segment in the U.S. outside of our California office, and combined them into one building that is smaller in footprint than the three of those buildings combined.

Yes. And did you own any of those buildings that you moved out of?

No. Those are all rented or leased. Those leases have now essentially all been -- have all ended. They all ended around the second quarter of 2008. We actually did have some duplicate rent on a book keeping basis in the first half of this year which will now go away as we move forward.

Okay. And the sharp reduction in accounts receivable, what would accounts receivable look like, the remainder year and why was it so sharp?

Well, the role of a receivable balance basically reflects two things. One is that the revenues have come down, and the other is collection of some of the systems box receivables that are due based on final acceptance. We basically got final acceptance for some of our systems installations that were out there.

Okay. All right. I will turn it over to somebody else. Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [Rama Rayo] with RR Capital Management.

Good morning, guys. Thank you for taking this call. I have one comment and and a few questions. First, we strongly support the combination of GSI and Excel. We believe this will be a powerful combination with $0.5 billion revenue base and becomes one of the five biggest players in the industry and a job well done. Now, my question is can you please share more of your view of combining these two forms in terms of the dynamic that will play in integration of the product, economy of scale, and expansion in the geographical area?

Sure, Rama. I will be glad to do so. Thank you for your comments. Basically I think it is helpful to look at a few key segments that make up the combined companies. The first one of course being lasers, so the two companies have fully complimentary laser technologies as you know building a larger more successful laser company hinges on a number of factors, an important one being having a broad selection of all the key laser technologies. Excel has had a stronger presence and a more diversified portfolio of laser technologies with a lot of strength on CO2 industrial lasers in which we have a very extremely marginal presence and none in the type of technologies that Excel has as well as a number of many of the other advanced emerging laser technologies such as the ultra fast lasers, high energy lasers, et cetera.

How about existing laser, like a YAG laser and all these things, you guys have or it will be complementary addition to your Excel laser business?

That's complementary. Our strength on the GSI side is medium power, 100 watts to about a kilowatt or a bit higher. YAG industrial lasers, particularly for welding and cutting applications which we would bring to Excel as well as our new emerging fiber laser technology.

I see.

There is almost practically no overlap and now the two companies combined have almost all the existing laser technologies.

Excel does not have the fiber laser systems, right?

They have some technology, but of course we bring fiber laser technology that they currently don't have and that will add to the combined portfolio.

Now, how does your industrial laser business revenue compare with the control laser business? Is it much smaller or comparable size?

Our business is smaller in that particular segment, and the business you mentioned is very interesting opportunity because Excel has a number of laser system -- you know that in the laser systems area we're primarily focused on semiconductors.

Yes.

And they have laser system products outside semiconductor with some very attractive new applications.

Yes.

That have high potential for growth in which we currently do not participate.

I see. So very complementary, semiconductor laser business to the industrial laser business?

Yes.

That's very good. Okay.

Then of course we have complementary technologies at the component level such as encoders and scanning. We will -- we mentioned combined our scanning businesses which are also largely complementary, and we bring to Excel encoder technology as well, so at the component level--.

So you're planning to basically combine the Cambridge technology to your operation?

Yes, we're going to continue to offer all the options to our customers. All the products will be available but from an operational perspective we have largely duplicate operations within short driving distance from each other, and so there is a big opportunity there.

Yes. Now, in terms of the geographical extension, right, Excel has a very poor presence in China and Asia, I believe, where you people have a much stronger presence, right?

Well, as you know, of course, Asia is very big, and in each country each Company has particular strength, and it so happens that in most countries either one Company or the other has more of this strength because of our semiconductor business we have built more of a sales and service capability in many countries where semiconductor chips are made, particularly Taiwan and Korea.

Yes.

And because of our industrial lasers and spindles business in China, we have built an operation in China including a factory which we're growing. In fact, that's the region where we grew the fastest in terms of our head count last year, so we bring that channel to Excel, and I believe that those teams are going to be able to sell to more to additional customers in many of these regions.

You have the physical presence in China, China and India are the growth opportunities so you can use the presence at this time to promote additional product either from Excel or from anywhere else? Excel reinventing the wheel of establishing themselves you present (inaudible) their product to be promoted in this emerging area where you see the growth, right?

Yes, exactly. In India, for example, where there is a lot of potential opportunity. We currently have a very insignificant presence at GSI, and Excel is ahead of us in India, so that's a case where Excel will help establish also a presence with GSI products, I believe.

Yes. Now, how do you say the dynamic playing in Europe in terms of a marketing sales and distribution of the product?

Well, in Europe we both have offices in Germany. Of course we have more of a presence in the U.K.

Okay.

But we're going to be able to combine forces there and emerge with a stronger combined presence in Europe.

Your next question is from the line of [Tom Geigoff] with Graham Partners.

Hi, guys, it is Tom (inaudible) I just want to make sure I understand going forward what's going on. So sequentially most of the fall from this quarter to next quarter is Westwind, correct, roughly?

It is Westwind and memory, Westwind and systems.

But you said systems bookings were flattish. Is that what I heard?

They were up. I said they were up 3%.

Sequentially, right?

Yes.

Okay. And then if we can just go over a little bit better on costs because I am just trying to -- if I do your guidance and keep the SG&A flat we're at minus $2 million (inaudible) or so, so -- and I am assuming you're cutting, so I want to understand exactly how much you're saving on the rent to some degree going into Q3 and then anything else? You guys have done a good job on cost control. Don't get me wrong. I think you have. I am just trying to understand what it looks like in the next quarter, give a little bit of flavor ex Excel?

Okay. Well, we let 40 people go at the end of Q2 which is about a $3 million annualized savings, so 750 a quarter. And we spent nearly $800,000 in the first half on duplicate rent, so say half of that, 400 per quarter.

And are there any -- is there anything additional to those measures at this point or not yet?

No. That's it. We're currently working on another cost reduction action that we just haven't completed yet.

One other weird question when I look at the numbers kind of gets at me. Why is it that most of the movement in the revenue in terms of the downward trend has been revenue oriented in North America and it seems like that's where the big swing is and not in Europe, Japan, APAC which is where I was expecting it?

I mean, to be perfectly candid, I would have to go back and look at those numbers in more detail to give you 100% accurate answer, but the way we construct those numbers, Tom, is based on the ship-to location, and so it is not unusual even in the system's business for product to get shipped to a domestic North American location, for example this frequently happens with Samsung, they will then on their own it is not unusual for them to reship that to one of their facilities in Korea. I think in this most recent quarter there was some shipments to their facility in the U.S. and they were not reshipped, so I don't know exactly how all of those numbers factor into the regional movement, but that's what causes ups and downs.

When I see the year-over-year growth, I mean, sequentially it was down pretty substantially in North America, but I was looking at the year-over-year growth being up the most of any geography. Is that due to scanners and encoders or not really or I can't even make that imprint?

I would have to go back and look at the details of those numbers.

I think the changes for scanning encoders and components in general are not that dramatic. They're spread out across industries and regions, and these swings have to do with changes in, mostly in the systems business, and mostly it's customers like Bob mentioned that happen to accrue sales in their North America subsidiary even though in many cases the ultimate use of the product happens in Asia.

I got it, and last thing, is there any reason to expect -- your gross margins held up a lot better than I was expecting. What's the expectation for next quarter at that lower sales volume, should we expect some impact on gross margin?

I would expect gross margins to soften a little bit because of the lower volume.

All right.

I think it is temporary, Tom.

Okay. Thank you.

You do have a follow-up question from the line of Chuck Murphy with Sidoti and Company.

Does the sales guidance include or exclude General Optics?

It includes about two months of General Optics. We would expect that to close -- our best guess is it will close sometime around the end of August and so we've got two of the three months in there for General Optics.

So that partly explains the lower sequential?

Yes.

Okay. And Sergio, could you kind of give an example of a cross-selling opportunity, one where you have your sales guy cover a certain account and maybe you could use an Excel laser to sell to them as well? That they weren't buying before?

Oh, yes. Well, we have the sales teams in those particular countries that I mentioned which are already selling our lasers would be ready to get trained to sell the additional lasers brought in from the Excel businesses. That's one example.

What kind of customer would be buying both of your lasers? They don't always do the same thing, right, so?

It is not so much the same customer doing different things, but lasers systems are sold to multiple customers in a region, and on a sales team that's familiar with with the region and the accounts happens to be selling to a subset of the customers they can access based on the portfolio of product that they have. With a broader portfolio they can go to an expanded set of customers and sell more. In fact, we're doing much of that within GSI already where through the most recent organizational changes we have many of our teams in Asia who were dedicated to single product with a prior organization now got trained to sell more of our own GSI products, and they are already selling a lot of -- and several of our increases that we mentioned before in some of our product sales come from initiatives like that, so we're already doing it, and now what we do is provide those same teams that are already growing their sales in the regions by having more products available to them to sell now have a much expanded set of product that they can sell.

Okay. Thank you.

Sure.

At this time there are no other audio questions. Mr. Ruddy, are there any closing remarks?

Thank you very much for attending our call, and we look forward to speaking to you on the Q3 earnings call. Thank you.

Thank you. This concludes today's GSI second quarter earnings conference call. You may now disconnect.