Earnings Call Excerpt
Key Technology, Inc. (KTEC)F1Q09 Earnings CallJanuary 29, 2009 5:00 pm ETExecutivesDavid Camp – President and Chief Executive OfficerJack Ehren – Senior Vice President and Chief Financial OfficerCathy Burlingame – Investor RelationsAnalystsArnold Ursaner – CJS SecuritiesMatt Burg– CJS SecuritiesJames Ricchiuti – Needham & CompanyRick D’Auteuil – Columbia ManagementMark Sinskey – 21st Century Equity
Unidentified AnalystPresentationOperatorGood evening ladies and gentleman, and welcome to the Key Technology fiscal 2009 first quarter conference. Today’s call is being recorded, and now I would like to turn the conference over to Cathy Burlingame.Cathy BurlingameGood afternoon and thank you joining us for the Key Technology fiscal 2009 first quarter conference call. Hosting the call today will be David Camp, President and Chief Executive Officer, and Jack Ehren, Senior Vice President and Chief Financial Officer. Today’s call is being recorded and will be available for replay on the investor relations homepage of our website at www.key.net. Before we begin I’d like to remind you that comments made in today’s call may include forward-looking statements within the meaning of the safe harbour provision of the private securities litigation reform act of 1995. These statements are based on management’s current expectations or beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These and other cautionary statements are listed in today’s release. For more detailed discussion, please refer to the company’s annual report on Form 10-K filed with the Securities and Exchange Commission in December 2008.Now I’d like to turn the call over to David Camp, President and Chief Executive Officer, for a discussion of the company’s results.David CampGood afternoon. Jack Ehren and I were in New York City earlier this month and met with many of you as part of the CJS and Needham investor conferences. We renewed acquaintances and met new potential investors. We were aware of the overwhelming effect that the global economic situation has had on the psyche of Wall Street. We recognize there is a great deal of pessimism that has resulted from significant loss. Key Technology has been affected by these global events and resulting pessimism and has taken actions to mitigate the effects on our shareholders. In our first quarter, we’ve taken a number of actions already and reduced operating expenses such as forced vacations to reduce accrued liabilities, a hold on new hiring, and reduce travel expenses. We also made alignment changes in our European organization to improve our ability to respond more rapidly to customer quotations, service, and other requests. Additionally, we’ve combined sales and service in one organization, led by John Boutsikaris, Senior Vice President of global sales and aftermarket, so that all customer facing activities are coordinated and linked together. In our current quarter, we will continue to take actions as appropriate to control or reduce spending.Total new orders for the quarter did not meet our original expectations; however, we have reason for encouragement. In the October meltdown, new orders were down because many of our customers went to the sidelines. Subsequently, orders increased in November and increased again in December. In fact, December 2008 is our largest December for new orders in the company’s history, so while we are disappointed in the net bookings of $22.9 million for the first quarter, we are cautiously optimistic.One area that we have not reduced is R&D where we continue to invest aggressively for the future. We are committed to introducing new products such as Smart-Arm which was introduced last week at the Northwest Food Processing Association show in Portland, Oregon. This product monitors the health and operation of Key Iso-Flo shakers, sending wireless information from all the shakers in our processing facility to a central location. The advantage to our customers is that they instantly know remotely if anything has changed in their processing system that will affect the throughput in their facility, thereby reducing downtime, increasing output, and process yield.We’ve continued to invest in a new Symetix system which will be introduced in New York in March 2009. This revolutionary offering fits through most laboratory entrances, uses laboratory air for cooling, is more easily cleaned, and has enhanced software designed for the pharmaceutical/neutraceutical marketplace. New product releases also include a product extension of our 2.0-meter Manta sorting platform into potato chips and a new online optical sorting training program that our customers can use to ensure their operators are trained to get the full benefit from our sorting systems. Additionally, we’ve released new G6 upgrade software for our ADR4c and ADR5 products, and we have redesigned and released several new products with a focus on the evolving customer needs in the fresh-cut industry.Our investment in the ERP system continues, and we are deep into the testing phase. We expect that we will be going live in the United States and the Netherlands in the third quarter. We’ve taken a very close look at the rest of 2009. Jack Ehren and I analyzed our new opportunity volume on a monthly basis, and for the first time, we’ve seen a slight reduction in new future opportunities. While it’s difficult to conclude whether or not this is a trend, the change in direction will be closely monitored. There are two areas that I want to comment on, Symetix and China. Symetix has grown rapidly for the last three years, and entering 2009, our expectations had been strong. Our new orders for Symetix in the first quarter did not materialize as expected largely due to delays in capital approvals. To date, no Symetix projects have been cancelled, and we remain confident that another year of growth will be achieved. We’ve also taken a hard look at our China business, and our analysis is that we have new products that will meet the market needs in tobacco and food in 2009. We’ve decided to continue our strategic investment in the China market, and we will monitor the results very closely and frequently.Our assessment for 2009 is that the fiscal year revenues will be similar to or lower than the total revenue we had in 2008. Our analysis is that we have had some short-term uncertainty which our company will be stronger coming out of this period than we were previously and in a better competitive position. Finally beginning in November 2008 through January 14, 2009, we repurchased 671,250 shares of our common stock for slightly under $10 million. The average price for the repurchase was $14.85 per share.With that I’ll turn it over Jack Ehren for a discussion regarding our financial results.Jack EhrenFollowing are results for our fiscal year 2009 first quarter. Orders for the first quarter were $22.9 million, a 35% decrease from the $35 million of orders reported for the same period last year. Net sales for the first quarter were $27.4 million which were down $1.6 million or 5% from the $28.9 million reported in the same quarter a year ago. We ended the quarter with a backlog of $29.3 million, which represents a $7.5 million or 20% decrease from the $36.8 million backlog at the same time last year. The backlog mix at the end of the first quarter was 67%, automated inspection system including upgrades, 31% process systems, and 2% parts and service, compared to 48% automated inspection systems, 51% process systems, and 1% parts and service at the same time last year.Net earnings for the first quarter were $569,000 or $0.11 per diluted share. Total net earnings for the same period last year were $1.1 million or $0.20 per diluted share. Net earnings for the first quarter of fiscal 2009 were favourably affected by $160,000 reduction in tax expense due to changes in tax law to retroactively renew the research and development tax credit that was enacted during the quarter. As mentioned, net sales for the first quarter decreased 5% to $27.4 million compared to the first quarter of last year. Sales of automated inspection systems of $12.8 million increased $1.1 million or 10% over the corresponding quarter last year. Sales of process systems of $9.9 million were down $3 million or 23%. Parts and service sales of $4.7 million increased $309,000 or 7% over the prior year first quarter.Gross profit for the first quarter was $11.3 compared to $11.5 million for the first quarter of fiscal 2008. As a percentage of sales, margins of 41.3% increased from 39.6% reported for the same quarter a year ago. The 1.7% improvement from the prior year resulted primarily from a more favorable mix of higher margin automated inspection systems and a reduction in material costs.Operating expenses of $10.5 million for the first quarter were 38.4% of sales compared with spending of $10.2 million or 35.2% of sales for the same quarter last year. The $300,000 increase in expanses from the prior was a result of higher research and development project spending and additional general and administrative expenses partially offset by lower sales and marketing expenses. The company continues to invest in research and development to continue to expand capabilities and provide new and initiative solutions for our customers. The general and administrative expense increased over the first quarter of prior year as a result of higher costs associated with the new ERP system, increases in staffing driven by the company’s growth over the last year, and costs associated with organizational changes. Sales and marketing expenses during the first quarter of fiscal 2009 were down compared to the prior first quarter as a result of lower commissions, related to lower revenues and a lower percentage of sales generated by outside representative and a reduction in expenses. Other expense for the first quarter of fiscal 2009 was $212,000 compared to other income of $307,000 for the same period in fiscal 2008. This change related to lower interest income and foreign exchange losses in the first quarter of fiscal 2009 compared to foreign exchange gains in the first quarter of fiscal 2008.Our cash balance at the end of the quarter was $20.9 million, down $15.4 million from September 30, 2008. During the first quarter, the company used $8.4 million of cash to repurchase approximately 590,000 shares of common stock under the previously announced stock repurchase program. The company also invested $8.1 million of capital investments which was offset by $6.4 million in proceeds from the new mortgage on our Walla Walla headquarters facility. Approximately $5.4 million in cash was used in operation during the quarter due largely to reductions in customer deposits and other changes in working capital. Subsequent to December 31, 2008, the company repurchased an additional 80,818 shares for $1.6 million under its stock repurchase program. As of January 26, 2009, the company’s common shares outstanding were 4,994,317 compared to 5,629,566 common shares outstanding at September 30, 2008. As David mentioned, under the current economic conditions, we believe our revenue for fiscal 2009 will be similar to or lower than our revenue recorded in fiscal 2008. For the second quarter of fiscal of 2009, we expect revenues to be consistent with the first quarter of fiscal 2009. The gross margin percentage in the second quarter is not expected to be as high as the gross margin percentage recorded in the first quarter. With that, I will turn it back over to David.David CampIn these times, Jack and I promise to continue to keep the commitments that we’ve made to our investors and recognize that we will have to make decisions in the future that we were not making in our operating plan that we put together last summer. No small portion of these commitments is keeping the communication channels open. In the last 12 months, we have had over 150 meetings with investors or potential investors, not including phone calls, and this will continue. We will now take questions.Operator(Operator Instructions). Our first question comes from Arnie Ursaner with CJS Securities.Arnie Ursaner – CJS SecuritiesI would like to have you try to focus on maybe the change you are seeing in your underlying business. I know on the last conference call your talked about a trade show where you had very strong acceptance of your products, lots of inquiries, lots of people targeting some of the newer products you had, and yet your guidance for the rest of this year seems decidedly more conservative than a month or two ago. Tell us what you are seeing in the field as your sales people are out there and perhaps give us a little more color on the changes you have seen and your thoughts on what’s causing it.David CampWe continue to see a pretty strong market and a pretty healthy market in Canada and North America. What we have seen, and I think we gave some indication a month or so ago, is that we saw quite a bit of weakness in Europe, and we continue to see that the markets in Europe are getting even weaker, so no question we are being very aggressive in that part of the market place, but there is a great deal of weakness in Europe. The other thing we have recognized in the last month is that our pharmaceutical business slowing down more than we thought it was going to slow down. A lot of these are based on capital budgets, and you’ve seen as well we have that a lot of pharmaceutical companies are reducing employment, they are cutting back on their capital plans, and so we had a pretty aggressive plan for this year. It was backed up by quite a bit of analysis, and right now we are seeing that that plan is probably not going to be met the way we are looking it at it. Jack, do you want to comment.Jack EhrenNo. That’s pretty well said.Arnie Ursaner – CJS SecuritiesCould you quantify how much Europe was down let’s say year over year?David CampWe certainly have that information, but we did not disclose that. From an order standpoint and the revenue standpoint we definitely were down in all geographical regions for the first quarter.Arnie Ursaner – CJS SecuritiesYou spent a great deal of time and effort developing new products. Where they not well received or are you getting indications people are deferring orders?David CampRegarding the new products, we just got back from a trade show that was in Portland, and the new products that we introduced in Chicago and also in Portland are continuing to receive a very positive reception, both the Strong-Arm that we just introduced and also the online training program are getting a lot of very positive responses from our customers. The point I guess I need to make though is what we are seeing is nothing is being cancelled. It’s just a question of delay, and I think what’s happened in this period is people are having to push any type of capital projects further and further up in an organization to get it approved. With that said, Jack and I continue to monitor our business model and look at other ways that we can complete transactions without just doing a capital sale, and we will continue to look at other things that may allow us to develop revenue, but I can tell you that right now we’re seeing nothing that is suggesting that we are losing business or that we are losing share. It’s just the delays and caution. Arnie Ursaner – CJS SecuritiesWhat was your end of quarter share count please?David CampI have the current share count, but I don’t have the end of quarter.Jack EhrenThe fully diluted shares Arnie were 5,371,000.Arnie Ursaner – CJS SecuritiesThat was the average. What is the current count?Jack EhrenThe current count at the end of the quarter was 5,071,000.OperatorThe next question comes from Matt Burg with CJS Securities.Matt Burg – CJS SecuritiesCould you break out what was in other income? I know you mentioned there was a foreign currency impact, but could you break out the impact as well as interest income and expense?David CampBasically Matt, we had a negative impact on foreign exchange in the quarter of about $300,000 that related primarily to transactions and receivable balances in both Peso as well as British Pound. Those are two currencies we do not take forward contracts out on. The Peso is extremely expensive to take forward contract out and we do take forward contracts to mitigate the impact on the Euro, which has been effective for us but the majority of the foreign exchange related to the Peso and British Pound transaction.Matt Burg – CJS SecuritiesYou mentioned that you did not expect gross margins to be as high in the second quarter as it was in the first quarter. How should we think about it going forward? Is it going to be related to increases in input costs?David CampThere are a lot of factors. Mix was extremely strong this quarter, but there are several factors and certainly the first quarter was higher than what we had been experiencing, and so we do expect the margin to be lower in the second quarter. David CampMatt, your interest income question by the way, interest income dropped approximately $100,000 and interest income was about $133,000.OperatorYour next question will come from Jim Ricchiuti with Needham & Company.Jim Ricchiuti – Needham & CompanyI wondered if you could comment a little bit about the pickup you saw in orders in the month of December. Seasonally that tends to be a weaker month, doesn’t it in that part of the quarter, and I wonder how you would characterize the orders thus far in January?David CampWe did not know who was going to ask the question, but we certainly predicted that was going to be a question today, Jim. I have to believe and I do not want to say that I have done entire analysis. It is too bad that John Boutsikaris is not here, but the orders we got in December were significantly more than we have ever received in the month of December, so I think when we saw you back in New York in early January, we indicated everybody was on the sidelines in October. The orders increased significantly in November, and then they increased significantly again in December which was very encouraging to us, and we really don’t want to get into a situation that we are reporting orders on a monthly basis, but I can tell you typically January is a weak month, and we are cautiously optimistic that going forward based on where we are and we are almost through the month of January and I would say we are still cautiously optimistic.James Ricchiuti – Needham & CompanyThe order flow that you saw coming in those bookings, did they tend to reflect the strength you are seeing in North America in the food business, or did you see any other areas of activity?David CampThe areas that continue to be very strong are the North American food business. We had been disappointed at the new business from pharmaceutical. Really, I think that they are all recoiling from a shock of their own lack of profitability and the cutback that they are having to make in pharmaceutical. We still believe that there is business that is coming, but the first quarter did not look like we thought it was going to look. Europe continues to really struggle; in fact, everything, it is not just us, but all of our competition in Europe seems to be tremendously struggling right now.James Ricchiuti – Needham & CompanyDo you see any pickup in pricing pressure given the competitive market in Europe? Are you seeing customers looking for price concessions? Are you seeing competitors maybe willing to do things more on price than maybe previously?David CampI would say on the process systems, Jim, we are very effective with our pricing because we are doing applications that typically other people are not capable of doing or don’t want to do. On the automated inspections systems, we are certainly are able to hold our margins where we want them. The pressure, I think, is more on customers coming and asking for more unique financing arrangements and those types of things, and as we stated previously, where it makes good business sense, we may do certain arrangements, but we will not put the company’s financial situation at risk.James Ricchiuti – Needham & CompanyJust on the new products, the pharmaceutical product, it sounds like you expect to be introducing it soon and I wonder how you would characterize what you think the reception could be to that, whether it is going to be a contributor this fiscal year meaningfully? Finally, on the products for China, what is the timeline on that?David CampThe product that we are introducing at the show on March 17 and 19 in New York City is really the first time that there has been a product developed specifically for the pharma/neutra market the way they were doing it. I believe we are going to get a very positive response and we are actually going to do some teasers where we’ll have some customers come out here before we take it to the show. So, my expectation is that it will play into our revenue towards the end of this year. Regarding China, actually, we are going to continue to watch that very closely. We got some orders in Q1 that were tobacco related and some orders that were food related in China, but I can tell you that we are continuing to analyze this and the market there is still soft. It is not turning into the growth market that we were hoping it would be. James Ricchiuti – Needham & CompanyBut you have new products for that market towards the back half of this year, David, or is it next year?David CampNo, it should be towards the back half of this year.OperatorYour next question will come from Rick Tortell with Columbia Management.Rick D’Auteuil – Columbia ManagementIf the market has figured out that you are coming out with a new and better neutraceutical product or system, then could that be affecting your current orders or have you already communicated that to the customer base and they would be waiting on that machine anyway?David CampWe have talked a lot about that, Rick, and there is probably some of that in specific areas that our current offering does not fit. As you and I have talked in the past, what we are doing right now is this machine fits in a 30-inch wide 6-foot room and it does not require water to operate. So, I don’t think that the business that we are looking for in terms of this year is delaying specifically for this new machine. However, we were expecting that there is new business we are going to get because it meets some of the requirement that our current offering doesn’t meet. Rick D’Auteuil – Columbia ManagementI guess I am little confused having heard the attributes of the new machine, I am not sure why I would not wait the two months and get all of those feature upgrades. David CampThere might some of that Rick, but I am certainly not hearing it, but I am not going to argue with you that that is not a factor. Rick D’Auteuil – Columbia Management
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