Novanta Inc (NOVTU) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the GSI Group first quarter 2011 earnings conference call. During the presentation, all participants will be in a listen only mode. Afterward, we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference call is being recorded, Monday, May 16, 2011. I would now like to turn the conference call over to Glenn Davis, Vice President of the GSI Group. Please go ahead, sir.

Thank you, very much. Good afternoon, everyone, and welcome to GSI Group's first quarter 2011 earnings conference call. With me on the call today are John Roush, Chief Executive Officer of GSI Group, and Robert Buckley, Chief Financial Officer. If you haven't received a copy of our earnings press release, you may get one from the investor section of our website, at www.gsig.com. Please note this call is being webcast live and will be archived on our website.

Before we begin, we need to remind everyone of the Safe Harbor for forward-looking statement that we've outlined in our earnings release, issued earlier this afternoon, and also those on our SEC filings. We may make some comments today, both in our prepared remarks and in our responses to questions, that may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future, even if our estimates change. So you should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to reference during this call to the most directly comparable GAAP measures is included in our earnings release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP in the earnings release, we will provide reconciliations promptly. I'm now pleased to introduce the Chief Executive Officer of GSI Group, John Roush.

Thank you, Glenn. Good afternoon, everybody, and welcome to the call. We appreciate your continued interest in the GSI Group. I'm very pleased to report that we had good results in the quarter. We have made tremendous progress as an organization, and we delivered strong financial results.

Before I get into the quarterly results, I would like to provide updates on a couple of key items. First, as communicated in this morning's, announcement, we have now settled the two-year SEC investigation into GSI's accounting. We believe that the settlement was fair and reasonable. It did not include a civil penalty or any monetary damages. We are pleased to put this matter behind us and will now be able to increase the focus on our customers, employees and shareholders.

Second, I would like to announce the realignment of our organization into 3 new and distinct operating segments; Laser Products, Precision Motion and Technologies, and Semiconductor Systems. With this change we are now aligned by technology and end market both in our internal structure as well as our external reporting. This new structure will serve as the basis for how we manage the Company every day and for how we focus our growth strategies in the future. It will help us to better prioritize our investments, align resources, and optimize business performance, both within and across the segments. We also believe the new structure will be more useful for our shareholders in understanding the Company and making relevant, external comparisons.

In addition to those 2 items that I just mentioned, we have made substantial progress in rebuilding the Company in a number of other areas. We filled numerous key corporate staff positions since our last earnings call, allowing us to significantly increase our forecasting and analytical capabilities. This was a major factor in our decision to now provide full-year guidance with respect to our 2011 performance, which, we believe, will be of benefit to our investor base. While we continue to have significant work ahead to rebuild all the necessary controls, processes and capabilities of the Company, every new hire we make is now contributing to expanding our capabilities, shaping our culture, and accelerating our progress towards our goal of becoming a world-class operating company.

From a financial perspective, our results were strong, and Robert will comment on them in greater depth, but I will provide a few highlights. GAAP revenue for the quarter was $91.9 million. Adjusted EBITDA was $16.2 million. In both cases, performance was strong relative to our prior guidance. I will note that our guidance did not include benefits from adoption of a new revenue recognition accounting standard in the quarter. Robert will comment more specifically on the accounting change. But even when taking this into account, we performed at or above the high end of our guidance range, both on revenue and adjusted EBITDA.

From the perspective of our new reporting segments, Precision Motion and Technologies had year over year growth in revenue of 28%. Laser Products had revenue growth of 8%. And Semiconductor Systems revenue was down 77% year-over-year, but this was primarily a consequence of $41.4 million of revenue recognized in the first quarter of 2010 that had been deferred from orders placed prior to 2009. We are pleased with the quarterly results and they reflect strength across nearly all of our markets. So far, we have seen very limited impact from disruptions in Japan. Our backlogs for the second quarter are healthy. And we expect our performance to be strong for the balance of 2011.

All in all, we are very encouraged by the progress we have made as an organization in a short period of time. I think the progress is also reflected in the financial results. We believe we are well-positioned to deliver profitable growth going forward, and to build a truly great company. So, at this point I would like to turn things over to Robert Buckley, our CFO, to cover the financials in more detail. Robert?

Thank you, John. Good afternoon, everyone. I will now provide some additional details about the first quarter results. Following my prepared remarks, we will open it up for questions.

As John mentioned previously, we had another good quarter of revenue and earnings growth. For the first quarter of 2011, GSI generated revenue of $91.9 million, down 20% from $114.6 million in the same period a year ago. However, as John mentioned, the Company recognized $41.4 million of revenue in our Semiconductor Systems business in the first quarter of 2010. It had been deferred from orders placed by customers prior to 2009. During the first quarter of 2011, the Company recognized the final remaining $400,000 of such deferred revenue. Furthermore, the Company recognized in the first quarter of 2011, $2.1 million of revenue that had been deferred related to multiple element arrangements delivered over multiple periods and entered in prior to the adoption of ASU 2009-13. ASU 2009-13 amended the revenue recognition guidance for multiple element arrangements. Following the Company's adoption of ASU 2009-13 in the first quarter 2011, the Company did not defer any revenue on new orders placed in the quarter, related to multiple element arrangements delivered over multiple periods.

As John mentioned before, the Company conducted a thorough review of its go-to-market and operating structure in the quarter. As a consequence, we realigned our internal organization in 3 distinct operating divisions, focused on different customers and technologies. These changes resulted in an update to our external reportable segments. I will be discussing our financial results this quarter in the context of these reporting segments. In addition, we will be posting our restated 2009 and 2010 quarterly segment information on our website and as an 8-K filing tomorrow.

The Company operates in 3 reportable business segments -- Laser Products, Precision Motion and Technologies and Semiconductor Systems. In the first quarter 2011, our Laser Products division recognized revenue of $30.7 million, an increase of 8% from $28.4 million in Q1 of 2010. Revenue increased among most of our laser product lines due to stronger demand, primarily in our fiber lasers and our laser systems for the scientific industrial markets.

Our Precision Motion and Technology division, recognized revenue of $50.6 million, an increase of 28% from $39.5 million in Q1 of 2010. The revenue increase was largely the result of strong growth in our precision motion devices, and air-bearing spindle component businesses. These businesses serve a variety of industries including electronics, industrial, medical and scientific markets.

Our Semiconductor Systems division recognized revenue of $10.5 million, a 77% decrease from $46.7 million in Q1 of 2010. The decrease in revenue is primarily related to the $41.4 million of revenue recognized in the first quarter of 2010, that had been deferred from orders placed by customers prior to 2009. During the first quarter 2011, the Company recognized the final remaining $400,000 of such deferred revenue.

Turning to our financial performance, the first-quarter operating income was $11.1 million or 12% of sales. Adjusted EBITDA, which included the adjustments noted in the reconciliation provided in the press release, was $16.2 million in the first quarter 2011, down from $27.3 million in the first quarter of 2010. While this was terrific performance, I would like to provide context and describe some of the difficulty in trying to compare this quarter's results to our first quarter of 2010 results. Adjusted EBITDA in the first quarter of 2010 included $17.4 million of gross profit from the previously mentioned $41.4 million of deferred semiconductor systems revenue.

In comparison, adjusted EBITDA in the first quarter 2011 included $1.2 million of gross profit from the aggregate of the $400,000 of deferred Semiconductor Systems revenue and the $2.1 million of revenue that had been deferred under multiple element arrangements entered in prior to the adoption of ASU 2009-13. The complexity around describing our year-over-year results will not diminish until 2012. Finally, the Company recorded a tax expense of $1.6 million, or approximately a 20% tax rate in the first quarter of 2011. This resulted in earnings per share of $0.19. We expect our tax rate for the year to be approximately 15%.

Turning to the balance sheet, we finished the first quarter with approximately $46.8 million of net debt, versus $50.8 million of net debt at year-end. We define net debt as short-term and long-term debt minus cash and cash equivalents. The Company's total debt is comprised of $108 million of senior secured PIK election notes which mature in July of 2014, and accrue interest at a rate of 12.25% per year. As a result of the relisting on NASDAQ, we are no longer subject to the additional 2% per annum interest penalty, related to the reporting default. I would also mention that it is our intent to refinance our existing debt. While this does require significant effort, we believe we are now in a position to make this happen. We have a treasurer onboard and we are making significant progress on the refinancing. We hope to complete it in the third quarter of 2011.

As we continue our way in 2011, we expect business conditions to remain positive and the macroeconomic conditions to remain favorable. As we progress through the year we expect the business to return to more normalized growth patterns, particularly as we cycle up against more robust comparisons. For the second quarter of 2011, the Company expects revenue to be in the range of $94 million to $99 million. Adjusted EBITDA is expected to be in the range of $16 million to $19 million. This guidance includes approximately $3 million of expected revenue and approximately $1.5 million of expected gross profit, that had been deferred from the multiple element arrangements entered in prior to the adoption of ASU 2009-13, and which is expected to be recognized in the quarter. For the full year 2011, the Company expects revenue in the range of $375 million to $385 million. Adjusted EBITDA for the full year in the range of $68 million to $73 million. This guidance includes approximately $8 million of expected revenue and approximately $4 million of expected gross profit that had been deferred from multiple element arrangements entered in prior to the adoption of ASU 2009-13, and which is expected to be recognized during the quarter.

Finally, I would like to comment on an issue that some investors have asked about in relation to the relatively wide range we have provided around our guidance. This is really the result of the revenue recognition process for our Semiconductor Systems business. While our actual product shipments are fairly predictable within a quarter, plus or minus $1 million to $2 million, our reported revenue of profit with our Semiconductor Systems business can vary significantly. This is a consequence of both the inherent volatility of customer demand in the semiconductor capital equipment market, as well as the lengthy and unpredictable revenue recognition process associated with these systems.

This concludes my remarks. I'd now like to open up the call to questions. Thank you.

(Operator Instructions) Arnie Ursaner, CJS Securities.

Hi, good afternoon, and congratulations on the results. I'm sure we're going to get a lot of additional information tomorrow when your 8-K comes out, but my question relates to the gross margin by segment. On a year-over-year basis it was down in Laser, down in Precision Motion, but more than offset by a very strong jump in gross margin in Semiconductor Systems. How should we think about those 3 for the balance of the year?

Hi, Arnie, how are you? It's John, here. Thanks for the question.

Yes, you are correct that year-over-year, there was some, let's say, downward trend in the margin within Laser and Precision Motion. As we've looked at it, it was predominantly the mix of sales that changed within the 2 segments. So in Laser Products we had a higher mix of scientific business, and more fiber lasers, both of which have lower-than-the-average margin for the laser products group. And within Precision Motion, MicroE encoders actually had slightly lower sales than a year ago. And we also had significant sales to a particular customer of our thermal printers business that are at lower-than-average margin. So there was some shifting occurring within the groups.

In terms of how we think about that going forward, I think it's not something we can put a tight range on. I would say there's the opportunity for some of that to trend back up. And we've incorporated that into our guidance. But it's difficult to say whether it's going to trend up more in Laser or more in Motion. But I think we just caught it at a point in time where the mix was a bit against us. But still, overall, it was relatively good margins for the overall Company.

Right. My second question relates to your operating expenses. You've been very clear, and I give you credit, of the challenges of building out the organization, and the steps you needed to take to make that happen. But you've added a lot of people during the quarter. How should we think about a run rate SG&A level? And I'm assuming you're still building during the current quarter. So, again, could you help us have a view of how SG&A ought to play out for the balance of the year?

I think it's a good question. We do expect that there may be some trending up of SG&A in the second and third quarter. By the latter part of the year, we expect it to be trending back down because it's really what you have is an overlap. That we're just not able to bring the new hires on and basically release consultants at exactly the same rate as the new hires come onboard. There is a training cycle, and there are some projects this year we need to get done that are very temporary in nature, like reimplementing all of the SOX controls. So I would expect a slight upward trend from the Q1 run rate into Q2, probably an even more slight increase in Q3, and then a trend back down in Q4.

Okay. And just my final question. In your business, normally the seasonal pattern would be -- revenues would grow during the course of the entire year. You obviously have given us your view about Q2. Should we assume that Q3 and Q4 will follow the normal seasonal pattern of improvement sequentially in both Q3 and Q4?

If you really do the math on this, there's not necessarily a big sequential increase that is happening Q2 to Q3 to Q4 there. If you take a look at where we ended up in Q1, there is some move forward in Q2. I would say probably less so in Q3 and Q4. I would say very modest, sequential increases through the rest of the year. And if you work the math out, you'll come to that conclusion.

Eric Rubel from MTR Securities.

Hello, gentlemen, good afternoon, thanks for taking my question. Congratulations on a great quarter, and also on the structural realignment. We've gotten a lot of questions about how the Company operates, in what markets, what were the differences between Excel and the Precision segment. So, I think this will definitely help the Company communicate much better.

I have a question on, as you realign the Company around these 3 new segments, are there additional opportunities to drive more operational synergies on the margin from this realignment? You talked about the mix shift that happened in the completed quarter. Aside from the mix up opportunities that could happen from those products that are sold, are there opportunities to drive more cost savings in the margin from the realignment?

I think there absolutely are. I would say, if you look at the different businesses, they have somewhat different profile of opportunities in front of them. I would say the Laser business and the Precision Motion business have the opportunity to optimize across what they do. And that has a flavor of cost savings and consolidation certainly, where you can look at facilities and where we do those things. You can also look at how we are spending, let's say, the R&D money. And when you're operating 5 or 6 different separate P&Ls, separate divisions, you're spending pockets of resources. And when you think about that more holistically as an operating group, you can imagine spending the same money more wisely and getting more for it. You might be able to, in some cases, reduce what you are spending, although that's really not necessarily our goal. But we think we'll be able to drive more growth opportunity by optimizing what we spend within the Groups.

In terms of the margin expansion, which is really what you asked, I probably see somewhat bigger opportunities in the Laser group than in the Motion group to do that. Primarily because there's just more natural -- I don't want to say overlap, but more natural tie-ins to what the different laser businesses do. We have 2 different businesses playing in the scientific space. We have 2 different businesses playing in the laser systems space. We have 2 more industrial, commercial OEM-oriented laser businesses. So there's a lot of opportunity to collaborate there. And that may yield some margin expansion opportunities.

And certainly some of that is in real estate, too. We do have a lot of real estate, both owned and leased real estate. And a fair amount of it is not that well-utilized, so we're looking at different alternatives to make better use of the real estate.

Are any of those potential upsides factored into the guidance? Or is that potential upside as you execute during the year?

I would say it's more of a 2012 event versus a 2011 event. And that's largely because the focus in 2011 is about rebuilding the teams and the organizations. It's about getting the right people onboard that know how to execute on these initiatives. And so it's more of a 2012 event.

Some of the steps we are going to take get initiated this year, but I don't really think you see the benefit from that until next year, as Robert said.

Fair enough. Then, also, as you've completed the restructuring, or as you completed the divisional organization rebalancing, are there opportunities to potentially divest some non-strategic businesses? And how much do you think that could generate from asset sales during 2011, 2012?

We're certainly looking at the portfolio across all of the Company. And we have our point of view on areas we'd like to grow and add. Of course, we want to grow organically, but also through acquisition and partnering. So we're really more interested in where we can add than where we can subtract.

But we do have some thoughts on businesses that may ultimately not fit long term. I don't think we're in a position to say which ones those are, or what time frame we're talking about, or how much. But I would just say our priority is on adding to the Company through acquisition, and when we are successful doing that we will probably then come back and make some adjustments to exit a few businesses.

But we will be in a position to be more specific on some of those things, I think, later this year. We're not really ready to lay it out right now. We're just to the point where we now have these organizations set up. We have leaders identified for them, but in some cases those leaders haven't come onboard yet. In one case, we did name an individual a short time ago into one of the roles.

But the structure is new. We have a corporate view of these things, so you have corporate strategy and corporate portfolio look. But then you're going to have a within-the-segment look at strategy and portfolio. And that process is still early. But we're not talking a year from now, we're talking a quarter or 2 from now we're in a position I think, talk more about that.

Fair enough. And then 1 last question on the capital structure. Could you provide any color on the thoughts you are thinking about what you would be looking to do with the notes? What types of refinancing alternatives are you considering?

I would say there's no shortage of opportunities presently. We don't need to go out knocking on people's doors. The vast majority of people are knocking on our door right now. We have to go through the process. It's going to take a little bit. We just got the right people onboard to do that. We do expect it to be completed in the third quarter. But to give you the specifics around it, I would say we're not there yet. But by the time we talk to you in another month and a half, we will be able to give you very specific.

There's a trade-off between doing what's easiest to get done and what may be assessed in the short term, versus a more permanent kind of debt structure that we can put in place that might have some longer-term advantages. But it takes a lot longer and a lot more effort to get done. So we're trying to optimize that, and I think we know where we're going to be, but we're not ready to make an announcement on that yet.

(Operator Instructions) Rick Hoss from Roth Capital Partners.

Hi, good afternoon. John, on the seasonality for Precision Motion, was there much in the first quarter?

You're just saying was there any performance in the quarter that would be atypical of being a Q1?

Yes, I think you talked about there was some of the spindles which contributed to the strong results. But I would think that the year-over-year growth rate is not really indicative of that particular industry, is it not?

Yes, I don't know that I would say that the Q1 growth rate in Motion is a growth rate that necessarily is in place for that business for the long term. There is a lot of dynamics going on inside of the business. You're right that spindles, which are used in PCB drilling, is experiencing a mini up cycle, if you will. We don't know how long that's going to go on. We've tried to be somewhat conservative with that as we looked at the full year. But that definitely was a positive in Q1. But by the same token, our MicroE business, which is precision encoders, has a tremendous amount of potential as a business, but actually had its revenue a bit down in Q1. So, there's dynamics going in both directions.

Sure, okay. And as far as improving the overall corporate profitability, I know you and Robert just showed up there, but if we think about the goal I guess would be on the operating margin, call it upper teens or somewhere similar to your peers. How long does it take for you to get there? Is it a year? Is it a couple of years? What do you think your improvement basis-point perspective is on just say a year-over-year basis?

I think that's a little tough for us to comment on, because right now we're still very early in working through what the strategic focus is really going to be for each of the businesses. And then what organic growth can they drive. To a certain extent, your margin expansion is tied into what organic growth you have. There's a big difference between a business that's growing 5 and growing 10 on the top line in terms of the natural flow through. And then, of course, you can do things with your infrastructure and your cost structure to take fixed costs out. But if you don't know what the flow through is going to be, it's tough to nail that down.

I would say that we're getting through, in 2011, the anomalies in the costs that we had. There's expensive corporate structure, in some areas, but yet we had a lack of investment in other areas. We're doing a lot of hiring, and then we will be releasing consultants. I think this all normalizes when we exit 2011 with a normal run rate, finally. And then the noise is out of the system.

Then you can trend from there and say, so if you're growing a certain top line, you're going to convert that to a margin expansion, and then maybe there's some productivity that goes with that. We're just not in a position to say that. But I would say it takes us a couple of years to optimize once we exit 2011. I just can't tell you what that goal really is right now.

Sure, okay. And then, Robert, on the ASU 2009-13, in the guidance you said $8 million top line, $4 million in EBITDA. Does this end in 2011? And is 2012 clean, or do we have to refer to this again?

No, I hope to God never to refer to it again. So it's a 2011 event, and you won't see it in 2012.

See, what that really is, is that's the transactions that were booked and delivered under the old rules that were previously deferred. So under the new rules, we will no longer make deferrals like that. But this is the run-out of the balance of stuff that was deferred under the old rules. So what you have is -- we're taking previously deferred revenue and putting it into recognized GAAP revenue, but we're not making corresponding deferrals of new orders. So it's providing a temporary benefit to the revenue. But once the balance is gone, then you won't see that any more.

(Operator Instructions) Chris Mittleman from Middlemen Brothers.

Hi, guys, great quarter. John, I just wanted to ask you about the fiber laser business. I didn't think you guys had a meaningful presence there, but I saw you announced a new product introduction. I was just wondering, would you be willing to quantify how much you are doing in fiber lasers, and what your ambitions are in terms of new products there?

Yes, it's an area of interest to us. We have a relatively small business. We don't disclose exactly how big it is because there are competitive reasons around that. Right now, it's relatively small. But it's growing significantly off that small base. So it has the potential to be a meaningful contributor to our growth in the future.

It's, right now, lower margin than other parts of our business. So as it grows, it's a little bit dilutive to our margins, but there's a lot of actions that we are taking and that we can take that will enable us to at least bring the margins back up to our average. So it's a focus area. We will be continuing to introduce new products.

And what I'd tell you, the real advantage here for us is we're not necessarily going out and targeting other people's customers in fiber lasers. We're walking our longstanding, historical customers that want to use fiber lasers over to the new technology. So we're working with the people we know, and it's helping us be competitive. We're able to win business because of the longstanding customer relationships that we have. But it's still a pretty small business for us.

Okay, I've just been given information that there are no more questions in the queue. Operator, are there any more questions?

There are no further questions at this time, Mr. Roush. I will turn the call back to you. Please continue with your presentation or closing remarks.

Okay, thank you very much. I'd like to thank everybody for joining us on the call today. We do appreciate your interest in the Company. We're genuinely excited about the continuing progress at GSI, and we are optimistic about our future. There is a lot of hard work that lies ahead, but every day our confidence in the Company's prospects increases. We're convinced that GSI has a bright future, and we are committed to making it a reality.

I look forward to joining all of you on our second-quarter 2011 earnings call in mid-August. Thank you very much for joining us. This call is adjourned.

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