Key Technology, Inc. F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

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

You mentioned profitability with that customer base or that segment’s profitability is down. Isn’t this an answer to an expense issue and it also addresses product quality? David CampWell, that is exactly the way we are positioning it and we address that issue all the time, but one of the things is, as I am sure you understand, when you are talking with anybody at this point in time and the uncertainty we have, there is expense budget and there is capital budget and sometimes what you have is the companies have an expense budget, but they have almost nothing in the capital budget. So, one of the things that Jack was talking about is being a little being more creative in terms of how you are making offerings so that we can tap into those expense budgets and not have to deal with the capital barrier. But the point you are raising is right on, in fact you may have seen recently there have been a lot of issues where people had recalled drugs because they mismade them or had the wrong size, and that plays into it as well.Rick D’Auteuil – Columbia ManagementI think there is CJS and we are very familiar with that issue.Operator

(Operator Instructions) Our next question comes from Charles Glovsky with Independence InvestmentCharles Glovsky – Independence InvestmentYou said for the rest of 2009, you were looking at a slight reduction in new opportunities for the first time. Did I get that right?David CampWhat we have is, as part of our process here in salesforce.com, we look at new opportunities, and we have been looking at this now going back to about the middle of 2006 and that new opportunities list has continued to grow almost every single month, and we’ve seen a slight reduction in the new opportunities in the way we look at it in the last 2 months, and I don’t know if that is a trend, I don’t know how much that is going to affect us for the rest of the year. We not only look at new opportunities, but Jack and I sit in order meetings as well and we look at what is going on directly from the sales people; so yes, we have some concerns to be honest, that they were seeing a downtrend or too much if that is the trend in new opportunities, but we also are watching the orders carefully, so I can’t give you what that means in terms of revenues or orders for the year but since we talked about it in the past, we felt like we needed to continue to discuss this, that we have seen a downward trend in the new opportunities.Charles Glovsky – Independence InvestmentWell, I am just square with you. You said that October was weak but that November and December were better and December was the largest in company history of orders?John J. EhrenThat is of orders. What David is talking about is, we are looking at our funnel on an ongoing basis, which remains very strong and we are very, very cautiously optimistic on that yet what he is saying is the new opportunities of potential orders that we become aware of in any given month, we have seen a slight downward trend in the last couple of months, but we have not lost orders or seen the potential items that are in the final bill way.Charles Glovsky – Independence InvestmentNew opportunities, is that more in Europe than in North America? Is it pharmaceutical, can you localize that at all?John J. EhrenI have to be honest with you. I have not gone into that data and become that granular with it yet, but that it is something that I should be doing.OperatorOur next question with come from Mark Sinskey with 21st Century Equity.Mark Sinskey – 21st Century Equity ResearchAs I recall you sell some products into the chicken processing industries. Isn’t that correct?David CampA small amount, yes.Mark Sinskey – 21st Century Equity Research I was just wondering if there is any impact from some of the chicken processing problems lately, or it is not meaningful?David CampWe do not sell, to my knowledge and I am looking around, I do not even know and once again I wish John were here. I do not know if we ever sold a sorter in chicken processing. I know what we tend to sell in chicken processing is a number of moving equipment. We also do some things that remove some of the smaller parts. It is a very minor piece of our business.Mark Sinskey – 21st Century Equity Research I was wondering if you could provide some color on this new contract you just announced with the vegetable processor. Any color on the buying motivation of the customer would be helpful. Is it more efficiency-related, labor savings, or productivity based?David CampIt is almost all productivity based. We were very successful with this particular customer this past summer with an installation in which, I think it is safe to say, they were very happy with the installation and the results they got. We started in a discussion some months ago with them regarding this agreement that we have, and we just completed it a few days before the announcement, so this really is an opportunity for this customer to significantly improve the efficiency and the productivity in their operation.Mark Sinskey – 21st Century Equity ResearchAnd is that customers industry doing especially well or sort of average?David CampI don’t know that I can really speak to how well they are doing at this point in time. I may have some of that information, but I really don’t want to add too much on any kind of distinction about who they are, because they have asked us to keep it quiet.Mark Sinskey – 21st Century Equity ResearchIn terms of China, any food processing other than tobacco? Are you making any inroads there? I understand there has sort of been an ongoing struggle to gain fraction there? Have you seen any positives there?David CampThe new products that we are going to be taking into China are not there yet, so we are still making our current offering, and we’ve got a small amount of new business there but I think the real impact has not taken effect yet.Mark Sinskey – 21st Century Equity ResearchOkay, and then just a last question, with the headquarters and land purchase, the refinancing, had you previously been leasing the headquarter office building?David CampThat is correct. The transaction enabled us to lock in a very, very effective rate for 15 years at 4.27% and reduced our cash outflow by well over $300,000 on an annual basis, so it was the right business decision for our company.Mark Sinskey – 21st Century Equity ResearchWhat is the expected lease expense savings going forward then?David CampCertainly you have depreciation associated with the building, and that way it gets a little bit complicated. A portion of the building gets allocated to land which is not depreciated, but the actual lease expense was between $70,000 to $75,000 on a monthly basis previously. OperatorNext we will hear from (inaudible) with Royal Bank of CanadaUnidentified Analyst The ERP system, and I am understanding that Q2 will be the last quarter of expenses and will be a go on that in Q3?David CampNo, that was certainly not what we intended to communicate. We will continue to make expenses on that for certainly some time. I don’t know exactly how it is going to go, but we will be going live in the next quarter, but there are going to be continued expenses for some time.We are basically going live, Elliot, with what we call phase 1 which is our headquarter facility in Walla Walla, our operations in Oregon and our operations in the Netherlands. The next phase are additional enhancements and the other subsidiaries that we have such as in Mexico and Singapore and other remote locations in China and that obviously is a significantly lower expense but we still will have expenses going on past go-live, but we do expect to go live in the third quarter, but if the question you are asking is will our quarterly expenses start going down? The answer is yes.Unidentified Analyst

On the new contract, can you talk about any delivery date nearby or is that not available yet?David CampWhat we are actually working on is we are doing the engineering for this equipment and some of this is quite complicated so obviously what we have is an agreement of the contract and we have not got firm delivery dates yet because the engineering is ongoing.Unidentified Analyst

On the tax bracket, is this a one-time deal with this write-off, or what are we going forward with for tax rate?David CampThis one time, the new law was enacted, so the 160,000 really was for 2008, retroactive, but you may weren’t here to record it, but certainly the law is in effect for 2009 as well.Unidentified Analyst

Is the stock buyback still together and what is it for, how many shares?David CampThe total amount, I believe the number we told you that we would purchase, was 671,250 shares. The amount that was authorized was $750,000, so we still are authorized to acquire back 78,750 more shares. We will make those decisions depending on a lot of circumstances but obviously we felt like that we had accomplished what we wanted to accomplish in this initial buy back and we will have a discussion. Jack and I will talk with other people on the board and decide what we want to do, going forward. Operator(Operator Instructions). We will now take a followup from Ernie Ursaner.Ernie Ursaner – CJS SecuritiesDavid, are you saying your customers are asking you or deciding if you can finance them in some of their capital purchases or what is your view towards that?David CampAbsolutely. We are getting a lot of people asking a lot of questions about different financial arrangements. It is all over the map Ernie, and we are getting quite a few in Europe. We also get some here in the US, and one of the things you are finding is that some of the financial companies here are also making it much harder for our customers to get the kind of financing that they used to get. So we are seeing some delays because they now have to go to different ways to get financing. David CampThat said, Ernie, we are not a financing institution and we do not intend to be and there may be some situations where we can leverage the strength of our balance sheet where it makes good strategic sense, but you know, we certainly are not going to go out and start being a bank.Ernie Ursaner – CJS Securities

I am not looking about detailed books, but I recall you had changed your sales force from a distributor to direct, am I correct on that and if so what sort of an impact are you seeing from that change?David CampThat is not a correct statement. We have a mix of both direct sales force and an outside rep sales force, and what I think you may be referring to is, in the first quarter, we ended up in a situation that more of our sales in the first quarter came from our direct sales force than from our rep sales force, which it could reverse anytime. It is just one of the things that happened in the first quarter.Ernie Ursaner – CJS SecuritiesFor most companies $100,000 does not matter to EPS, but in your case it does. What sort of actions can you take given your view of revenue to reduce SG&A and what sort of magnitude might we look at as a percent of sales?David CampWe certainly look at this on an ongoing basis. We communicate very closely with the board, and we are not into position at this point to talk about things that additional things we may do at this point, but it is something that is a significant focus for.Let me put this way. I am not going to get into the specifics, but there are multiple items that we are considering that Jack and I have on the table and as we see things developing, we are going to take the actions that we believe continues to make the company a strong business and we will take those actions that we think are appropriate because frankly we believe very strongly in shareholder value.Ernie Ursaner – CJS SecuritiesNow my final question relates to a little bit better understanding of your revenue use here for the upcoming year and I appreciate it is highly uncertain, but we are already a quarter into the year, and the question I have is, given the new product flows you have particularly in pharmaceutical, how could we think of the breakdown between your core business and pharmaceutical in terms of revenue growth. I am assuming that if you are going to have any growth at all in pharma that your core business will be down a fair amount this year. Is that the right way to think of this?David CampI would say a fair way to look at it is not a significant change from where the mix has been to date.Ernie Ursaner – CJS SecuritiesSo despite your new product foray in healthcare, you don’t expect it to grow as a percent of your business, why is that?David CampWell, we believe that there is significant potential right now with what we are seeing, and the pharmaceutical business is real significant caution as far as implementing the changes. So, we are being somewhat cautious ourselves. That said, we believe we have got a significant funnel and that there are significant opportunities, but we continue to put high focus on it.

Operator

There are no further questions in the queue at this time.

David CampSo we would like to thank you all for joining us for the first quarter conference call and certainly appreciate the questions that we got and the continued interest in Key Technology. We look forward to, I am sure, many phone calls that we are going to be getting and look forward to meeting most of you in the near future.

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