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Rofin-Sinar Technologies Inc. (NASDAQ:RSTI)

F4Q08 (Qtr End 09/30/08) Earnings Call Transcript

November 6, 2008, 11:00 am ET

Executives

Gunther Braun – CEO

Ingrid Mittelstadt – CFO

Analysts

Antonio Antezano – Macquarie Equities

Charles Murphy – Sidoti & Company

John Harmon – Needham and Co.

Tobias Loskamp – Kepler Markets

Steven Kowel [ph] – BHS Bank [ph]

Greg Halter – Great Lakes Review

Operator

Welcome to Rofin-Sinar's 2008 fourth quarter results conference call. Today's call is hosted by Mr. Gunther Braun, Chief Executive Officer and Ms. Ingrid Mittelstadt, Chief Financial Officer. Following management's comments, you will have the opportunity to ask questions. Please go ahead.

Gunther Braun

Thank you and good morning or good afternoon to everyone. I am here in Plymouth in Michigan together with Ingrid, Ingrid Mittelstadt our CFO. I hope you all got the press release containing our fourth quarter and fiscal year ’08 results. We will give you some comments about our business and performance and then we will open it up for questions.

Now before we start, I would like to make the usual statement about the information you are getting in this conference call.

Based on the fair disclosure regulations of the SEC, we will also include a summary of our own financial estimates for our next quarter and the fiscal year 2009. This guidance is only an estimate and is of course subject to all the risks and uncertainties as summarized in our Safe Harbor statement which I will read to you shortly.

I would like to encourage you to perform your own market investigations and research and not to place undue reliance on our estimates.

Safe Harbor statement, our discussions may include predictions, estimates or other information that may be considered forward-looking. While forward-looking statements represent our best current judgments on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially.

Throughout our discussions we will attempt to discuss important factors relating to our business that may affect our predictions. You may also want to review our last 10-Q and 10-K filings for a more complete disclosure of financial risks.

Okay, then let's start with the normal way how we do our conference call. Let us start with the first 12 months results.

In the last 12 months, we shipped laser systems, including service parts and components for a total of $575.3 million, which results in an increase of 20% or $95.6 million compared to fiscal year 2007.

Organically, we have grown 11% of $50.6 million. The difference in US dollar exchange rate increased sales by approximately 9% or $45 million when compared with average change rate in fiscal year ’07. Later we will discuss the exchange rate fluctuations, which will heavily impact the earnings guidance for fiscal year ’09 and Ingrid will talk more about that.

Net income in the 12 month period amounted to a record $63.8 million and represents an increase of 16% from the comparable period in fiscal year 2007. 12-month net income profitability was 11 % of sales. I think is very good, given our second quarter results, and I am quite sure you remember.

The 12-month sales allocation between macro, micro and marking, and components was 41%, 49%, and 10%.

The geographical split between Europe, US, and Asia, Europe was 51% versus 55% last fiscal year; US North America was 25% versus 23% last year; and Asia 24% versus 22% last year.

And again the driving geographical market behind our sales growth in the 12-month period was the Asian market, which increased by approximately 32% to $138.8 million. Semiconductor and electronics industry were the main reason but also supported by still reasonable shipments for our lasers to the machine tool industry.

The European markets increased by approximately 12% to $294.5 million, supported early this year mainly by the machine tool industry, and over the last quarter of course, automotive and solar cell industry, and of course, in addition component business was nice too.

The North American business increased by 26% to $132 million due to the additional sales we got from our recent acquisition, which represents approximately 9% of the increase. The other 17%, I would say half, it can be more or less attributed to the solar and semiconductor industry, and the other half is across the industries.

And we are very happy with the results achieved in North America given the overall economic climate here.

Now the breakdown of the 12 months laser sales by industry which is as follows. Automotive sub-suppliers was a healthy 11% compared to 8% in 2Q '07; the machine tools reached 33%. It is down. Last year it was 36%. Semi and electronics, PV, photovoltaic 27% versus 23% in ‘07; and others were 29% versus 33% in ’07.

Now I would like to come to the fourth quarter results and as you have seen from our press release, we had a very strong quarter with a new record in sales with $154.3 million, which is $23.8 million or 18% higher than in the comparable quarter in fiscal year 2007.

The change in dollar exchange rate mainly compared with the Euro had the effect of increasing our sales by $7.6 million. So it is less than in the previous quarter or approximately 6%. I think this is in line with some of our competitors, which had similar global sales distribution. As a result, the organic growth rate for the fourth quarter was a remarkable 12%.

Now coming to net income increased by $3.6 million to $20 million or approximately 13% of net sales. Both numbers are new record levels for quarterly net income. As a result of our share buyback program, net income in absolute numbers increased approximately 22%, but EPS improved even by 33%. The main reason for that is lower interest income and therefore absolute numbers are a little lower.

We achieved a new record high in sales in our micro/marking business. Net sales increased 35% over the comparable quarter to $82.7 million or 54% of total sales. The strong sales to the electronic and solar cell industries and even (inaudible) nice sales levels to the semiconductor and also medical instruments industries.

Macro sales decreased by 4% to $56.8 million or 37% of total sales mainly due to lower sales for our CO2 lasers for cutting application to the machine tool industry, but last quarter offset again by increased sales levels to the automotive industry.

Our component business increased by 42% to $14.8 million and represents 10% of total revenues. Approximately 56% of the increase is attributed to our last acquisition.

Sales to Asian countries increased by 5% in the quarter and were 25% of quarterly sales and reached $38.5 million. Our top three contributors this time were number one China, then Taiwan, number three Japan.

Now coming to North America with $41.5 million, increased by 36% and represents 27% of quarterly sales, partially as a result of our recent Nufern acquisition, which represents 12% of the increase, 24% is organic and I would like to highlight again solar cell and component business.

Europe increased 17% and amounted to $74.3 million, which is 48% of quarterly sales, again below the 50% level what we usually have compared to 49% in last fiscal year and general comment, business is becoming a bit slower in mainly in the machine tool industry.

Now spare parts and service business increased by 9% and accounted for approximately 24% of net sales for the quarter.

The breakdown of our quarterly laser sales by industry is as follows, automotive 11% compared to 10% in the fourth quarter ‘07. Machine tool went down to 28% versus 35% in fourth quarter '07. Semi electronic PV 31% versus 26% in '07, and others 30% versus 29% in ’07.

During the fourth quarter, we shipped a total of 1142 lasers that is a new quarterly record high. It is approximately 9% more compared to last year's fourth quarter. 321 units were for macro applications. That is 24% less by the way compared to the fourth quarter last fiscal year, 821 units were for marking and micro applications. So that is a healthy increase of roughly 32% compared to last year.

Now let me hand it over to Ingrid who will further comment on the financials.

Ingrid Mittelstadt

Thanks Gunther. Good morning and good afternoon to everyone. As already mentioned by Gunther, even under the difficult macroeconomic conditions, we were able to achieve the record high sales of $154.3 million during the fourth quarter of '08.

Total group gross profit for the quarter was 42.6% of net sales compared to 43.2% in the fourth quarter of fiscal ‘07. The slightly lower gross margin level was primarily a result of the following facts.

Only 23.6% of total quarterly revenues were derived from service on spare parts, compared to 25.7% of total sales in Q4 '07. A bit lower productivity in the macro activities primarily due to lower manufacturing volume of high power laser for the machine tools industry, and third high volume order with corresponding lower average prices in the micro business.

SG&A expenses including intangible amortization for the fourth quarter '08 represented 16.7% of net sales, as compared to 17.9% of net sales in the same period of last fiscal year. In absolute figures, SG&A including intangibles amortization increased by $2.5 million to $25.8 million for the quarter.

The increase in SG&A expenses is mainly the result of the additional SG&A expenses from our last acquired subsidiary and additional selling and marketing activities especially in Asia.

Additionally, the weakening of the US dollar against foreign currencies had the effect of increasing SG&A expenses by $0.9 million. R&D expenses for the quarter amounted to $11.2 million or 7.3% of net sales, compared to $7.2 million or 5.5% of net sales during the fourth quarter 2007.

Quarter growth spending was $11.5 million, versus $7.9 million in the comparable quarter of last fiscal year and the higher level of R&D expenses is mainly due to our investments in fiber laser technology with additional R&D expenses from the recent acquisitions and as well lower level of R&D grants, only $0.3 million in this first quarter of ’08 compared to $0.7 million in the fourth quarter of fiscal ‘07. The fluctuation of the exchange rate increased R&D expenses by $0.7 million.

Income from operations of $28.7 million represents 18.6% of sales versus $25.9 million or 19.9% of net sales in Q4 2007.

Coming to other income, other expenses. Net other income of this quarter accounted for $2.9 million, compared to net other expenses of $0.3 million in the fourth quarter ‘07. Net interest income accounted for $1.4 million compared to the fourth quarter '07, mainly due to the shares buyback program and the utilization of our cash for these and as a result of the strengthening of the US dollar in the fourth quarter ’08 we included $3.2 million of net exchange gains compared to $1.9 million net exchange losses in the corresponding quarter of last fiscal year.

Our effective tax rate this quarter before minority interest and income taxes was approximately 36.6%, compared to 34.2% in Q4 ’07 as a result of expected dividend distributions in ’09 to the US. The quarter was affected by additional income tax expense of approximately $0.7 million.

Net income for the fourth quarter amounted to $20 million, which is the highest in the company’s history and resulted in the diluted earnings per share of $0.68 based on 29.3 million weighted average shares outstanding. The fluctuation of the exchange rate had the impact of increasing the net income by $0.6 million and again even under the weak macroeconomic conditions and with the additional costs related to the last acquisition we were able to achieve this rate of net income in the fourth quarter and the fiscal year.

Now coming to the balance sheet, the fluctuation of the US dollar mainly against other currencies, for example, the Euro comparing the exchange rates from September 30 '08 versus September 30 '07, amounted approximately to 1%.

Cash and short-term investments decreased by $111.7 million to $116.5 million, compared to last fiscal year, mainly due to the execution of our shares buyback program and the reclassification of our investments in auction rate securities have now disclosed under long-term investments.

The impact of the exchange rate fluctuations was to increase cash and short-term investments by approximately $0.7 million.

Accounts receivable net increased by $14.2 million to $117.9 million, mainly due to the record high revenues of the reporting quarter and the exchange rate fluctuations increased the accounts receivable by $0.4 million.

Day sales outstanding of fiscal year ’08 decreased to approximately 75 days compared to 78 days average last fiscal year.

Net inventory increased by approximately $17.5 million to $163.3 million, mainly as a result of the high order entry and additional inventory of the new acquired subsidiary and the fluctuation of the exchange rate increased the inventory stock by approximately $0.8 million.

Based on the 12-month period cost of goods sold inventory turned approximately 2.1 times.

Total debt increased by $26.1 million to $56.7 million in the balance sheet, mainly due to the financing of part of the shares buyback program. The fluctuation of the exchange rates increased total debt by $0.5 million. Stockholders' equity represents at the end of September ’08 69% of total assets compared to 72% of total assets as of September 30 ‘07.

I would like also to give you some information related to the cash flow. During fiscal year '08, the company generated $32 million from its operating activities. So that we can report a good fourth quarter with generation of $25 million cash coming from operating activities. The company generated $52.2 million from investing activities in fiscal year ‘08, primarily from the net sale of investments, $96.1 million offset by acquisitions of new business of $30.2 million and capital expenditures amounting for $14.5 million.

The company used net cash of $89.9 million in financing activities mainly related to the share buyback program and repayment of bank debt, partially offset by the new borrowings from banks.

Now coming to our earnings guidance, as a result of our current market judgment and backlog situation, we want to give you the following guidance of the financial performance of the first fiscal quarter 2009 and for the fiscal year 2009. This guidance is only an estimate and again subject to all the risks of our Safe Harbor statement.

As most of you already know, 65% to 70% of our revenues are generated in foreign currencies mainly the Euro and the recent strengthening on the US dollar mainly against the Euro will primarily have a main impact in our top results and reduce our consolidated revenues in 2009.

Based on the critical macroeconomic conditions and the uncertainties in some of our markets that make predictions more difficult, we are confident that our diversification will help us to achieve reasonable results in the next fiscal year.

For the first quarter ending December 31, 2008, the company currently forecast revenues to range from $120 million and $125 million; gross profit for the first quarter ’09 is expected to be in the range of 41% to 43% of net sales; period expenses including intangibles amortization in the range of 26% to 28% of net sales; income before income taxes and minority interest between 14% and 16% of net sales; and the effective tax rate of the third quarter ‘09 that depends mainly on the overall mix of the results in the different countries and the nondeductible expenses should range from 32% to 34%.

Non-cash items of our profit and loss statement, including the intangibles, amortization and the fixed asset depreciation are estimated in the range of 2% to 2.5% of net sales.

Now coming to our guidance for the fiscal year 2009, we currently expect our revenues in fiscal year 2009 to be in the range of $500 million to $520 million and this reduction in absolute numbers results from the impact of the strength of the US dollar mainly against the Euro. As already mentioned we are confident that based on the diversification of industries and regions we serve, we will able to hold the same volume of business as during fiscal year ’08.

Gross profit is expected in the range of 41% to 43% of net sales, period expenses in the range of 26% to 27% of net sales, income before income taxes and minority interest in the range of 15% to 16% of net sales and the effective tax rate is expected in the range of 33% to 34%.

Non-cash items of our profit and loss statements, include intangible amortization of fixed assets depreciation and is estimated in the range of 2.5% to 3% of net sales. All these estimates depend on all the well-known risks and are subject to change.

Thank you for listening. And let me hand it back to Gunther.

Gunther Braun

Thank you Ingrid. Before I start with my usual comments on the macroeconomic environment, I would like to point out that exchange rate fluctuation especially the past, looking over the last week will have a major impact on sales in fiscal year 2009 because approximately, Ingrid mentioned 70% of RSTI sales is denominated in foreign currencies and we have done a calculation for fiscal year 2008 using our expected dollar Euro exchange rate for fiscal year ‘09. The results for the sales number of approximately $520 million for ’08 and instead of $575 million. As Ingrid just mentioned that is our goal for fiscal year 2009.

So my message to you is that besides the expected current slowdown in the macroeconomic condition we are guiding basically a flat business for fiscal year 2009 and may impact through exchange rates when translating foreign currencies in US dollar.

Now let us move on with the macro economic conditions we face and how we see the upcoming quarters. And usually I start with what we call macro business.

As mentioned in our last conference call, high power CO2 lasers for cutting applications to the machine tool industry, orders are coming in slower but at a nice level and helped also in the fourth quarter ’08 contributed 11% of laser sales, but again this business is a worldwide business. We benefit from our global sales network but we still have the business in North America and Europe and so given the current reduction in production of all major automotive companies such supplies will have to adjust also the production capabilities and this should impact also our business.

Now coming to the marking and micro business, semiconductor contributed still nicely in the fourth quarter, but we will see in the next quarters a softening. So no big contributions are expected over the next quarters. We had a new record in shipments to the photovoltaic industry last quarter, and prospects are good that this part of our business should be able to grow further and be a major part of our marking and micro business. What we do not know yet if there is enough fresh money available for investments in solar cell laser production fabs?

I am quite sure you all know that and we mentioned it many times, our strategy for this industry is to concentrate on being the laser supplier, either directly to the solar cell manufacturer or to the systems manufacturer for the production lines. And the nice thing is it's a worldwide business and there we can also capitalize on our global presence.

Jewelry business was on a consistent level for all four quarters. Now we expect a slight decrease due to reduced consumer spending. Our smart card business improved in Q4 compared to the first three quarters and I think is moving along. No exceptional projects or orders are expected, but also no decrease in business is expected.

As mentioned in Q3 conference call, consumer electronic industry business increased. It was expected to increase and increased in Q4, was at a nice level with order and sales activity for the next quarter is expected to be less or a bit lower given reduced business of EMS companies.

Medical instrument business is also moving along. Overall business was in line with our expectations and contributed reasonably well. We believe still that our broad product portfolio for all these different type of applications suits very well the demand of this industry and I think it should contribute over the next quarters normal level what we have seen in fiscal year ’08.

And last but not least, our component business. These are products components around laser and laser system like power supplies, fibers, beam delivery systems and laser diodes. Approximately 10% of this quarter sales were derived from components and the largest contributor was approximately 50% with our laser diode business. And we expect that this business should further contribute to our sales growth since we serve many different kind of industries.

So this is an update on our major industries. Now coming to our regional presence again, China, you all saw the press release about our acquisition of NELC in Nanjing in China. The deal has not closed yet. There is – there is some legal paperwork to be filed and after approval by the relevant authorities we can close the deal. I hope that his will happen soon.

The two companies' skilled laser dioxide and NELC laser marking in Nanjing are progressing. I expect first sales in the second half of fiscal year ’09.

In addition we have also opened Rofin sales and service office in Beijing to be closer to our potential customers. So that is China.

And India, I am not sure if I mentioned this last time, we have started an office in Mumbai, India, to better cover this region. While you see we try also to expand our regional presence to get closer to our customers.

Now coming to order entry, in the fourth quarter we achieved a nice quarterly order entry with $148.5 million. The orders for our macro products represent $56.6 million as already mentioned with slower activities mainly the area of cutting applications. The orders for our micro and marking products represent $73.2 million. It is pretty consistent over the last 3 quarters but future business will be impacted what we believe by slower activities mainly in the semiconductor and also a little bit electronics business.

Our component order entry reached $18.7 million, which is the second highest quarterly order entry and backlog at the end of September was $143.4 million.

And the split of the backlog the statistics is 33% macro, 52% micro and marking and 15% components, which is a solid basis for the first quarter of course. However, we start a new fiscal year and backlog has to be reevaluated with the new exchange rates, which according to the calculation will reduce the backlog by approximately $11 million starting into fiscal year ’09.

Now let me summarize our performance over the last period. I think we delivered under the current circumstances Q4 and fiscal year ’08 great numbers in sales order entry and also the bottom line. Again second quarter was a little bit of a challenge.

Gross margin levels were pretty consistent with 43% and SG&A came back to a lower level compared to the previous quarter, and we have allocated more money to R&D last quarter. This should last until we have reached certain goals in technology and product.

I note that our top line guidance for the fiscal year 2009 with sales levels of $500 million to $520 million is not what you want to hear but due to the start into the new fiscal year and the recent fluctuation in the exchange rates, $520 million is the number what we believe is reachable. Any major downturn could further influence of course this number.

The markets all over the world continue to be challenging, but I still believe that with our current strategy and our worldwide setup, we can generate the business and deliver the numbers we have forecasted.

And I don’t want to end without talking about our upside potential in fiscal year ’09. First one, I am quite sure you will expect that our investment in China with NELC with the laser diode with the laser marking. So, in my opinion that is an upside potential. The other one is that we increased our regional presence in Switzerland, India, China.

The fiber laser introduction to the market without any major cannibalizing any existing product portfolio will be an upside potential and I believe also that we can get a larger business portion or we have a larger business engagement in military and defense. So there is not only downside also some upside potential for fiscal year ’09.

We continue to focus on our core competences within industrial laser material processing application. Our broad product portfolio and wide global and regional coverage should further support our business.

So thanks for listening. And now, we are prepared to answer your questions.

Question-and-Answer Session

Operator

(Operator instructions) Thank you. The first question comes from Antonio Antezano from Macquarie Equities. Please go ahead.

Antonio Antezano – Macquarie Equities

Good morning.

Gunther Braun

Good morning.

Ingrid Mittelstadt

Good morning.

Antonio Antezano – Macquarie Equities

I wanted first to discuss what will you see in terms of pricing that pricing environment for your macro and your micro products?

Gunther Braun

Okay, pricing in general when you have less business available in the market and you get some pricing pressure that is just normal. But I think on the other side that maybe now a positive for us with the strengthening of the US dollar. Our price lists get more attractive, more competitive. So, therefore I would see a certain balance overall and I would not project a big price decrease in our business.

Antonio Antezano – Macquarie Equities

All right. Now regarding your outlook for fiscal year ’09, I think, some of us a little earlier were cut off there was some technical issue in the call, but what was what you said regarding I guess, based on the revenue you are forecasting for next year, whether you can comment on macro versus marking and micro for fiscal year ’09?

Gunther Braun

But we expect of course is in the macro business. This business will be tougher because on the cutting application side, machine tool industry there we expect less orders clearly. Also we have seen from the automotive side some requests for delay in shipments or even cancellation because, you know, the automotive problems that the big guys, they shut down the plant longer. They have to come up with new models. So there is overall a certain delay. So, let us see how long this takes but currently we see that and I would expect that we will see that at least in the next quarter at least and then hopefully it is going to change. For macro, and then on the micro and marking side I believe that in micro we can maintain our business level what we have in ’08. I still believe that the number one contribution with be photovoltaic business. I also believe in ’09 that the electronic, the consumer electronic business will peak up but I don’t see it currently but when you go into ’09 this will have and I believe this will offset a weaker, clearly a weaker semiconductor business where I would believe at least the next quarter we will have lower business in this area in the semiconductor business. And then on marking, PV starting using marking lasers and then we have to go for more regional sales in these times and go more general purpose markings and there we should also maintain the levels we achieved in ’08.

Antonio Antezano – Macquarie Equities

Just one quick follow up if I may, it is regarding the fiber laser business, are you still on target for launching a commercial version of the high powered fiber laser in the near term?

Gunther Braun

We are on target I would say, target is to launch this in early 2009 and I am even more positive than last time.

Antonio Antezano – Macquarie Equities

Thank you.

Gunther Braun

Thank you Antonio.

Operator

Thank you. The next question comes from Charles Murphy from Sidoti & Company. Please go ahead.

Charles Murphy – Sidoti & Company

Good morning guys.

Gunther Braun

Good morning Chuck.

Ingrid Mittelstadt

Good morning Chuck.

Charles Murphy – Sidoti & Company

Could you repeat what the backlog mix was between micro and marking and components and macro?

Gunther Braun

Ingrid.

Ingrid Mittelstadt

Yes, the backlog at the end of September was $143.4 million and the split was 33% for the macro business and 52% for the micro and marking, and 15% for the components.

Charles Murphy – Sidoti & Company

Okay, all right. And was there anything in particular that helped to get SG&A down so sharply on a sequential basis?

Ingrid Mittelstadt

Well, part of that is the higher and more and lower amortization expenses related to the intangibles from the acquisition and part of that was also related a bit to the exchange rate if you compare it with the third quarter. And then I think you know, overall we tried to monitor SG&A expenses.

Charles Murphy – Sidoti & Company

Okay, and was there a specific reason why – it looked like components were particularly kind of weak in the quarter. I know micro marking was obviously very strong. What about components though?

Gunther Braun

I would not say weak in the quarter, I would say it was a normal quarter for us. I think if you compared to the third quarter it was $18 million, but now we are close to $15 million. It is also timing of certain bigger and larger shipments. I am not nervous about this business Chuck.

Charles Murphy – Sidoti & Company

Okay.

Gunther Braun

And you have seen the order entry level was on a nice level with $18.7 million.

Charles Murphy – Sidoti & Company

Okay, could you just talk a little bit about how you are factoring the currency swing into kind of your margin guidance. Obviously, it is going to have a big impact on the sales, what about operating profit?

Ingrid Mittelstadt

I will try to explain that. So the main impact will be on top line but we expect to be able to hold our normal margin. So, you see 41% to 43% gross margin. It is not the first time we have this as a guidance, because it will depend really on the product mix and as I mentioned maybe the guidance this time is a bit wider than the last quarter because of the uncertainties in the market and in the industry. But it will really depend on the product mix and the order that we can realize into revenue in the quarter.

Charles Murphy – Sidoti & Company

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

Gunther Braun

Thanks.

Operator

Thank you. The next question comes from John Harmon from Needham and Co. Please go ahead with your question.

John Harmon – Needham and Co.

Hi good morning and good afternoon.

Gunther Braun

Good morning John.

Ingrid Mittelstadt

Good morning John.

John Harmon – Needham and Co.

A couple of questions. First of all, you talked about some softness in the cutting laser business, would you attribute that to market weakness or could you possibly see anything (inaudible) to other technologies?

Gunther Braun

No. Sorry for that. But that is market weakness, but really it is volume and the amount of orders. Of course, you see some cutting system with fiber lasers because that is your question. And we have seen 3 companies two weeks ago showing a fiber laser cutting system. But today it is definitely not an efficient technology.

Ingrid Mittelstadt

So, it is not the main reason.

John Harmon – Needham and Co.

Okay, thank you. And you gave us the number to compute it, but I was wondering if you had handy an organic revenue growth figure that was purely organic, in other words excluding acquisitions for the quarter and or the year?

Gunther Braun

Okay. Sorry, we did not –

John Harmon – Needham and Co.

If not, you gave enough numbers to figure it about.

Gunther Braun

We were talking about the Nufern acquisition. But we can give you this later if you want and you can calculate.

John Harmon – Needham and Co.

Okay, thank you and I was wondering if given your guidance and at least the flat outlook excluding currency, whether you are going to slow spending or reduce expenses in any area. It doesn’t – I guess that is reflected in your gross margins on lower revenue but if you are doing anything specific?

Gunther Braun

Of course, we have to react on lower business volumes in certain locations and we tried always to have somehow or to be flexible also in headcount and so on. So, what has happened already and protection we slightly adjusted because we have also many temporary which we use. I think that has to be done simultaneously you know and we started already and if somebody leaves we don’t replace and we adjust that. So, that is moving in the normal way without big announcement that we cut people and all those kind of stuff.

John Harmon – Needham and Co.

Okay, and finally this is more than just a question. Because the call dropped during your entire remarks about your macro business, we heard hold music so we didn’t get to hear them at all and your comments about the trade shows and so on, could you repeat your comments on the macro business?

Gunther Braun

Maybe it is also for the benefit of everyone and it was during the macro?

John Harmon – Needham and Co.

Yes. The entire macro section dropped out.

Gunther Braun

Okay. So, I said, as I mentioned in last conference call that for higher powered tool for cutting application for the machine tool industry orders are coming in slower and we do not expect a faster turn. The demand is slow in Europe and in Asia but it is just one part of the world, but a positive comment on my side was that 2 weeks ago we are at the show, EuroBLECH show in Hanover. We exhibited our products and the positive thing was that we got the same number of leads compared to the last EuroBLECH show, which was really in a nice environment. So, I think that is not a negative sign. On the welding side, I said business is impacted mainly by automotive customers who are addressing delayed shipments and or cancellation of orders and then John that is not a question of technology. Those – these are existing orders and there we expect also a certain slowdown and then I talked about our lower power CO2 lasers manufactured in UK, where I said outlook is good. Demand for this product is good. We expect more orders with increased power levels. And the recent strengthening of the US dollar should help be more competitive because our pricing is more attractive because the major competitors are US dollar list price. And we believe that in general and that is for the low power business that we will have a 10% to 20% lower level this year, not for this business, but the macro in general. Automotive sub-supplier business I said was at a nice level and you saw that in the fourth quarter and the year with 11%. And the reason for that is that we have the worldwide business. So, we don’t sell only in North America or Europe we also sell in Asia but there given the current reduction in production of all major automotive companies with sub-supplier has to adjust also the production capabilities and this should impact also our business. This was the comment on the macro side.

John Harmon – Needham and Co.

Okay, I will check my notes again. That is it then. I will replace that. Thank you very much.

Gunther Braun

Okay, you are welcome.

Operator

Thank you. The next question comes from Tobias Loskamp from Kepler Markets. Please go ahead.

Tobias Loskamp – Kepler Markets

Yes. Hello. This is Tobias Loskamp from Kepler Capital Markets. Maybe a question on your guidance. Once clarification, so did I get it right that adjusting for currency effects you expect a flat business and said this would imply that you’re currently thinking about roughly a negative effect of currency on sales in the range of 11%. Is that correct?

Ingrid Mittelstadt

Yes. Okay.

Gunther Braun

(inaudible) what we did mainly again an explanation, we took our business fiscal year ‘08 with $575 million. They adjusted the exchange rate with the current and expected in fiscal year ’09 and the result was $520 million in turnover.

Tobias Loskamp – Kepler Markets

Great. So it means basically that the weakness you expect in semi in automotive and maybe also in general machine tool industry would basically should be roughly compensated by China by the recent expansion by fiber lasers by solar and by military and defense business.

Ingrid Mittelstadt

Yes.

Tobias Loskamp – Kepler Markets

Okay. One more question because I mean in the past you said mostly – most of the time that your bottom line I think that in absolute terms is not really affected by currency exchange rate. I was wondering if the guidance, you know the margin guidance isn’t it a little bit conservative.

Gunther Braun

It’s your judgment.

Ingrid Mittelstadt

But the rule should be the same. So the impact on that income should not be material.

Tobias Loskamp – Kepler Markets

And you also mean that, I mean, the impact on absolute net income, not on net income margins.

Ingrid Mittelstadt

Yes.

Tobias Loskamp – Kepler Markets

Okay. Then maybe a follow up on what you said on macro, just with the previous question. You expect that 10% to 20% to decrease including currency effects or excluding currency effects.

Gunther Braun

That is of course including currency effects. You have currency effects in markets less orders of course as to fiscal year ‘08.

Tobias Loskamp – Kepler Markets

Okay. And then maybe a short question on your acquisition in China. Can you share with us roughly what the company, would sales reduce maybe in last year or this year. If you have any (inaudible). It is break even or is it already profitable or what is – what is the status?

Ingrid Mittelstadt

Yes. I agree that with you. So we expect safe because you know in China fiscal year, calendar year roughly about $6 million U.S. dollars and of course they are generating net income and not losses.

Tobias Loskamp – Kepler Markets

Okay. That’s good. And then maybe two more questions. One question, so do you expect, I mean generally in Q4 also Q1 business with the consumer electronics and also with the semiconductor industry should maybe be weaker also seasonally. But can you then confirm that you would see an effect that is more than seasonal or (inaudible).

Gunther Braun

I think it’s more than seasonal. hen you look to Asia when you see that cutbacks, the layoffs of some EMS companies also certain project are little bit delayed. So it’s more than just normal seasonality.

Tobias Loskamp – Kepler Markets

Okay. And then lastly, maybe, on your because the (inaudible) casual statement I thought, working capital decreased quite nicely, but overall the cash position has not only improved more or less flat quarter-over-quarter. Can you say for us where the cash went basically.

Gunther Braun

Quarter over quarter.

Ingrid Mittelstadt

Quarter-over-quarter, no. This fourth quarter we generated $25 million U.S. from operations. That was the best quarter I would say. And maybe you see an impact in the balance sheet because we reclassified $11.5 million from short-term and long-term investments as agreed with our auditors.

Tobias Loskamp – Kepler Markets

What is the reason behind it.

Ingrid Mittelstadt

It is the auction rate securities and we would probably realize this liquidity in 12 – not in the period shorter than 12 months. We may not need to adjust the valuation. The investment is okay. We are getting the corresponding interest on this investment, but we would probably be able to realize liquidity at the end of calendar ‘09.

Tobias Loskamp – Kepler Markets

Is it a problem that the market for those alternate securities is not liquid at the moment.

Ingrid Mittelstadt

Of course. Here in the US.

Tobias Loskamp – Kepler Markets

Okay.

Gunther Braun

But we get interest rate. So it’s like a normal investment I would call it.

Tobias Loskamp – Kepler Markets

Okay. (inaudible). All right. Thank you.

Gunther Braun

Thank you.

Ingrid Mittelstadt

Thank you.

Operator

Thank you. The next question comes from Steven Kowel [ph] from BHS Bank [ph]. Please go ahead.

Steven Kowel – BHS Bank

Hello. My questions have already been answered. So thanks a lot.

Gunther Braun

Okay.

Ingrid Mittelstadt

Good afternoon.

Steven Kowel – BHS Bank

Good afternoon to you guys.

Gunther Braun

Thanks.

Steven Kowel – BHS Bank

Thanks.

Operator

Thank you. We have a follow up question from Antonio Antezano. Please go ahead.

Antonio Antezano – Macquarie Equities

Thank you. I was just wondering regarding uses of cash, share buybacks, your stock has pulled back a lot recently and also in terms of acquisition activity going forward.

Gunther Braun

Given the current market environment, I think I would not go immediately for share buyback program. I think it’s prudent to have some cash in the balance sheet and not to depend too much from bank. Sorry for that. So, therefore let’s see how our business develops over the next time and of course having cash in the balance sheet, it’s good for potential acquisitions and there is always something else, I am talking about (inaudible). So it’s not a complete thing what we could say, okay next month or so on we complete something, but that’s normal that in the industry there are always talks, there are always opportunities for complimentary products to acquire or regionalize. We are active, but what we deliver we cannot talk about or we don’t know.

Antonio Antezano – Macquarie Equities

Thank you.

Gunther Braun

Thank you.

Operator

Thank you the next question comes from Greg Halter from Great Lakes Review. Please go ahead.

Greg Halter – Great Lakes Review

Hello guys. Thanks for taking my questions.

Gunther Braun

Good morning Greg.

Greg Halter – Great Lakes Review

Good morning. Do you have the – your employee count at the end of the year by chance?

Ingrid Mittelstadt

It was 1775.

Greg Halter – Great Lakes Review

Okay. And I don’t know if anyone asked, but was Nufern profitable in the quarter. And if not when would you expect it to become profitable.

Gunther Braun

I think it was not far away from break even.

Ingrid Mittelstadt

No it was not far away. So they are improving and you know –

Greg Halter – Great Lakes Review

So, a couple of $100000 may be loss.

Ingrid Mittelstadt

Yes.

Greg Halter – Great Lakes Review

Okay. And in China, I don’t know if you commented about the dollar sales you had there either for the quarter or for the year, and what kind of growth you’ve seen.

Gunther Braun

In China overall?

Greg Halter – Great Lakes Review

Yes.

Ingrid Mittelstadt

11%.

Gunther Braun

Let me see if we have the number. I think it was more than $60 million in China.

Ingrid Mittelstadt

In China we did nearly 11% of total revenue. I’ll give you the number. So over the year it was approximately $63 million.

Greg Halter – Great Lakes Review

Okay great.

Ingrid Mittelstadt

And in the quarter nearly $18 million.

Greg Halter – Great Lakes Review

18 in the quarter and what kind of growth is that on a year-over-year basis?

Gunther Braun

I think last year we did $43 or$ 44 million, Ingrid [ph].

Ingrid Mittelstadt

Yes.

Greg Halter – Great Lakes Review

Okay.

Gunther Braun

And you can do it 50% in that range.

Greg Halter – Great Lakes Review

I can calculate. No problem.

Gunther Braun

I think so.

Greg Halter – Great Lakes Review

What kind of spending on capital side projects did you do for the full fiscal year of ‘08 and what would you expect for ’09?

Ingrid Mittelstadt

We invested in CapEx $14.5 million. Our expectations were $15 million and for ‘09 we expect, while we are doing this fiscal year, you know, we improved our manufacturing capacity in some of the subsidiaries especially in Germany. We improved the efficiency in some areas. For example, in the marking business or headquarter we moved from four buildings into one building. Outstanding is more capacity in the component business, but dealers in Germany this is not already finished. So from next year I would say we expect $14 or $15 million again.

Greg Halter – Great Lakes Review

Okay great. And I – did I hear you correct to say your year-to-date for fiscal ‘08 cash flow from operations was right around $32 million.

Ingrid Mittelstadt

Yes. That’s right.

Greg Halter – Great Lakes Review

So that gave you $25 for the fourth quarter.

Ingrid Mittelstadt

Right.

Greg Halter – Great Lakes Review

Okay. Which is a huge increase from the fourth quarter but year-over-year it is a big decrease I presume due to prior receivables and inventory?

Ingrid Mittelstadt

Yes, but also over the year I explained some quarters ago, yes, we paid income taxes on an amount of $28 million.

Greg Halter – Great Lakes Review

Okay. All right. Thank you very much.

Ingrid Mittelstadt

You are welcome.

Gunther Braun

Thanks Greg.

Operator

Thank you we have a follow up question from Tobias Loskamp. Please go ahead.

Tobias Loskamp – Kepler Markets

Hello. It’s me again. I’m a little bit thinking about basically how your margins, maybe margins at a level maybe – forget about it. I just wanted to know. Do you expect the product mix basically to be worsening or in the coming quarter given that the high power lasers demand is coming down here.

Gunther Braun

I don’t think so. That’s not. I think when we give guidance we try to be conservative or just – and I think we are in the range. If you look to last 50 years, the first two quarters were pretty nice in the 43% to 44% range and in the third quarter we went down 42%, third quarter between 42%, 43% and average 43%. So compared to last year, we were also at 43%. That’s the main level, but of course when you – it depends now how many orders we get, do we have to adjust those things in production you have, I’m quite sure a little bit higher cost. So I think it’s prudent to be more conservative in the outlook at the moment. Hopefully, we can deliver better numbers.

Tobias Loskamp – Kepler Markets

Okay. Then maybe a question on, can you split up the foreign – can you tell us what the foreign exchange gain you had, I mean in Q2 you had a foreign exchange loss and now you must have had a gain, what size was it.

Ingrid Mittelstadt

In Q4 we have $3.2 million net exchange gains.

Tobias Loskamp – Kepler Markets

$3.2 million.

Ingrid Mittelstadt

$3.2 million.

Tobias Loskamp – Kepler Markets

And so interest income was –

Ingrid Mittelstadt

Nearly zero. Nearly zero.

Tobias Loskamp – Kepler Markets

That is a easy number. And okay. That is it. Okay, thanks.

Ingrid Mittelstadt

Thank you.

Operator

(Operator instructions) Thank you Mr. Gunther Braun. We have no further questions at this time. Please continue.

Gunther Braun

Okay. Thanks to everyone for listening. I think we had a great fiscal year ’08, very nice fourth quarter ’08. What we face now of course is a challenging time. The exchange rate influence our top line heavily in fiscal year ‘09. We will fight. We will see what we can deliver. As I have said we have also upside potential in my opinion for fiscal year ‘09, but we are in the normal environment and we face all the normal challenges, which all companies are facing. So I hope we deliver a good first quarter, have a reasonable start in fiscal year ‘09, and I hope you will participate in our first quarter conference call in February next year. And again thanks for listening. Okay, goodbye.

Operator

Thank you. This concludes the Rofin-Sinar’s 2008 fourth quarter results conference call. Thank you for participating. You may now disconnect.

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