Rofin-Sinar Technologies' CEO Discusses F2Q 2013 Results - Earnings Call Transcript

Rofin-Sinar Technologies Inc. (NASDAQ:RSTI)

F2Q 2013 Earnings Conference Call

May 2, 2013 11:00 ET

Executives

Günther Braun - Chief Executive Officer

Ingrid Mittelstädt - Chief Financial Officer

Analysts

Patrick Newton - Stifel

Mark Douglas - Longbow Research

Mark Miller - Noble Financial

Sean Laughlin - Piper Jaffray

Jiwan Lee - Sidoti & Company

Operator

Welcome to Rofin-Sinar’s Second Quarter 2013 Results Conference Call. Today’s call is hosted by Mr. Günther Braun, Chief Executive Officer, and Ms. Ingrid Mittelstädt, Chief Financial Officer. Following management’s comments, you will have the opportunity to ask questions. Please go ahead.

Günther Braun - Chief Executive Officer

Thank you. Good morning or good afternoon to everyone. I am here in Plymouth, Michigan, together with Ingrid, Ingrid Mittelstädt, our CFO. I hope you all got the press release containing our second quarter 2013 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.

Safe Harbor statement, our discussions may include predictions, estimates or other information that maybe considered forward-looking. While these 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 discussion, 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. The company disclaims any obligation to update any forward-looking statements.

Okay. Now, let’s start with our overview, the quarter was somewhat special this time. We had a reasonable good start. Our internal sales forecast for the quarter was more in the direction of $140 million than $130 million, but at the end of the day, the financial results came in at the lower end of our guidance. Reason for that is revenue recognition, and slip shipments into Q3. We experienced towards the end of the quarter some delays in shipments due to some application issues means customer has changed material and the application was much perfect, but also delays in revenue recognition for inventory at customer sites, we cannot play in one specific industry or customer, it was widespread which is pretty unusual.

Highlights this time was our macro business during the second quarter, we experienced significantly higher sales in our macro product lines mainly driven by the machine tool industry while our micro-marketing business declined as expected triggered by weaker sales to the electronics and semiconductor industries. On a geographical basis, North American and Asian order entry softened compared to the second quarter last year while European order entry reached its highest level since the third quarter of 2011. We expect a stable environment for laser material processing even when global business conditions are taken into consideration.

Now, let me continue with the standard review of our performance in the period, in the March 31, 2013. As you have seen from our press release, we have reached sales in the second quarter of $131.1 million, which is $1.7 million or 1% higher than in the comparable quarter of fiscal 2012, but approximately 8% lower compared to our first quarter fiscal year 2013. And as I already mentioned towards the end of the quarter, projected plan sales slipped into Q3, but also this revenue recognition for inventory was already at customer site.

Sales in our micro-marketing business mainly reflect the very solid solar business. Of course, the slow semi business reasonable I would say medical device business and electronics business in comparison to last year’s second quarter. Net sales decreased by 5% to $59.1 million or 45% of total sales. If you remember first quarter, this part was 54% of first quarter sales. Then sales in our macro business increased 9% comparing to the second quarter and reached $55.6 million. Macro business contributed 42% to quarterly sales and the major change came from the machine tool industry $4.3 million more and automotive business where we still maintained a solid share in volume business this year with one suppliers. Our component businesses increased 2% and reached $16.4 million representing 13% of quarterly sales, again a good quarter for laser diodes and fiber-related components.

Now coming to the breakdown of our quarterly laser sales by industry, automotive 10% versus 5% last year’s second quarter and again question mark is still Europe for the next quarters. Machine tool industry 42%, a big jump from the first quarter compared to 40% in the last year’s second quarter. Then semiconductor electronics 23% versus 21% in fiscal year 2012 and others reached 25% versus 34% in fiscal 2012.

During the second quarter we shipped a total of 1260 lasers versus 912 lasers which is approximately 38% more or 348 lasers compared to last year’s second quarter. We shipped 522 units versus 440 units of macro applications and we shipped 735 lasers versus 472 lasers for marking and micro applications.

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

Ingrid Mittelstädt - Chief Financial Officer

Thanks Günther. Good morning and good afternoon to everyone. As Günther already mentioned during the second quarter we achieved revenues of $131.1 million that represent an increase of 1.3% compared to the second quarter of fiscal year 2012. The impact of the strong U.S. dollar reduced our quarterly sales by approximately $1.2 million. Compared to the second quarter of last fiscal year the gross profit decreased from 37.7% to 35.7% of total sales in the reporting quarter mainly due to an unfavorable product mix and lower service and spare parts business. On a sequential basis, gross profits slightly increased 0.4% of total sales to 35.7%.

SG&A including intangibles, amortization for the quarter represented 20.2% of net sales in the second quarter of fiscal year 2013 compared to 20.8% in the corresponding prior year quarter. In absolute figures SG&A decreased by $0.5 million to $25.9 million for the quarter and the decrease in SG&A expenses is mainly a result of lower commissions and marketing expenses as well as a reduction in the allowance for doubtful accounts.

Research on development expenses for the second quarter amounted to $11.6 million or 8.9% of total revenues compared to $10.1 million or 7.8% of total sales in the comparable period of fiscal 2012. Quarter gross spending was $12 million versus 1$0.5 million in the prior year. The higher material costs and labor expenses incurred during the reporting quarter are mainly related to our fiber laser product portfolio, the development of Ultrashort Pulse lasers and some R&D activities for our components products.

Other income expense, the quarterly net other income amounted to $1.5 million compared to $0.5 million in the comparable period of last fiscal year and the increase in the other net income – in net other income mainly relates to higher net exchange gains that we were able realize during the quarter.

Our effective tax rate on income before income taxes and minority interest for the second quarter was 28.1% compared to 33.2% for the same period last fiscal year and this was due to the generation of taxable income mainly in countries with lower tax rate and the utilization of tax losses at one European subsidiary. Even with the low level of business and unfavorable product mix we are able to slightly improve our gross margin over Q1 and achieved net income of $7.4 million in the second quarter of fiscal year 2013 that resulted in diluted earnings per share of $0.26 based on 28.4 million weighted average shares outstanding.

Now, coming to the balance sheet the change in the U.S. dollar mainly against the euro comparing the exchange rates for March 31, 2013 versus September 30, 2012 resulted in a change of approximately 1%. Trade accounts receivables net amounted to $103.5 million and decreased $4.4 million compared to last fiscal year mainly due to lower level of business and the impact of currency exchange rate fluctuations. The days sales outstanding improved to 69 days compared to 73 days last fiscal year. During the first six months of the current fiscal year we have reduced our net inventory about $0.9 million mainly due to the impact of the exchange rate fluctuations, partially affect by the increase in inventories due to the postponements in shipments at the end of the quarter. Based on the cost of the goods sold figures, inventory turned approximately 1.8 times.

Total debt decreased by $8.3 million during the six months period and amounted to $14.2 million compared to $22.5 million as of September 30, 2012 mainly due to repayment of bank loans.

Now, I would like to give you some information related to our cash flow, cash and short-term investments increased by $9.7 million to $110.8 million during the six months period ended March 31, 2013. The impact of the exchange rates fluctuations decreased cash by $1.3 million. During the six months period the company generated $28.5 million from its operating activities. We used $12.7 million in investing activities mainly due to capital expenditures of $8.2 million and the net purchase of short-term investments amounting to $4.6 million. $9.7 million were used by the company in financing activities, mainly for purchase of non-controlling interests at two Chinese subsidiaries that amounted to $4.3 million. Net repayments of bank loans were $7.8 million and this was partially offset by issuance of common stock amounting to $2.4 million.

Now coming to our earnings guidance as a result of our current market judgment, the backlog situation in the global economic environment we want to give you the following guidance of the financial performance of the third quarter and the complete fiscal year 2013. We currently forecast revenues in the range of $132 million to $137 million, for the third quarter gross profit is expected to be around 36% of net sales. The period expenses including intangible amortization at approximately 28% of net sales. Income before income taxes and minority interest between 8% and 9% of net sales and the effective tax rate that depends mainly on the overall mix of the results in the different countries and the not deductible expenses for tax purposes to be in the range of 31% to 32%. Intangible amortization and fixed assets depreciation are estimated of approximately 3% of net sales.

And now coming to fiscal year 2013 based on the backlog and the project situation, we estimate our revenues in fiscal year 2013 still in the range of $550 million to $560 million. Gross profit is expected to be around 36% of net sales. The period expenses are approximately 27% of net sales and the income before income taxes and minority interest in the range of 9% to 10% of net sales. The effective tax rate is estimated in the range of 31% to 32% and the depreciation and amortization are estimated in the range of 2.5% to 3% of net sales. This guidance is only an estimate and again subject to all the risks of our Safe Harbor statement.

Thanks for listening and let me hand it back to Gunther.

Günther Braun - Chief Executive Officer

Thanks Ingrid. Let me update you on some other important developments as you have heard from Ingrid. We stick to our guidance issued last conference call sales for the fiscal years should be between $550 million and $560 million. Based on the solid order entry over the last quarters, the current business outlook of course is project based and counting on the historical (revenue) pattern of the fourth quarter as the strongest sales quarter in the fiscal year. Our backlog at end of March 2013 reached $149.2 million which is $7 million up on a sequential base, which is a solid base for Q3. For the third quarter the current backlog includes $61.3 million from Macro which is roughly $6 million up, $66 million from Micro and Marking which is roughly to same the last – end of last quarter and $29.9 million for components, another $1.2 million up.

On a geographical basis of course North American and Asian order entries softened compared to the second quarter of last year while the European order entry reached it’s highest levels since the third quarter of 2011 as I mentioned already. Quarterly order entry was $138.3 million, represents a solid and stable environment. In our opinion this is now the fifth quarter in a row with order entry above $135 million. Order entry by region and this is compared to last quarter in North America decreased 4%, Asia 6%, but Europe increase 7%, again compared to our first quarter in this fiscal year. North American order entry there is no specific industry to name for sure we had slow orders in military and defense. To Asian order numbers they decreased mainly due to slower bookings in the consumer electronics and semiconductor industry, but partially offset by increased bookings from the machine tool industry and as always after Chinese New Year order picked up, but of course in general forecasting from – or by customers remains poor in the region and we have basically to judge where it’s going.

European orders increased due to improved bookings in several countries to industries like the watch, electronics, automotive, medical device or just machine tool industries. A good portion of those order entry came in from companies who are strong in exporting their goods to other regions.

Now coming to the outlook by our main industries machine tool overall demand from machine tool industry stable especially Chinese OEMs for low and high power CO2 and fiber lasers is solid. Overall, pricing for fiber lasers is under pressure what I want to highlight this time is the low power CO2 laser offering and as you know which dominates the organic material processing. And here the success of our working team (in house), demand for those products is I would say just great. Our OEMs used these lasers for example for applications in mobile devices or textile industries and that’s a special greetings to our friends in UK and Poland. Automotive sub-suppliers increasing opportunities in plastic, welding, or welding and cutting to automotive, steel sub-suppliers in North America. We have recognized revenue on one project which was R&D laser system for a new drilling application for engine parts to the market, it was promising midterm potential I would say not just in Europe inquiries for R&D and production machines are coming in so there is a potential for the next quarters.

Semiconductors still affected of course by lower demand from the PC industry, but we believe at least for our numbers we crossed the valley, still on the slow side. And I think you have heard that market expects a recovery somehow in the summer time. Electronics industry current quarter some recovery orders expected means in this quarter Q3 project base is good, demand in customers of course with short lead time requirements, it’s for new device product introduction and this triggers this business. As you all know mobile device is getting more into the focus of course another trend is the shift of course of production capacity within the industry to new component manufacturer which should also improve the demand for lasers.

Solar industry again China still good for new project activity and from solar cell treatment potential projects for efficiency increase of crystal in solar cells are in the pipeline, so overall not too bad outlook, okay. Medical Device geared up its business in North America and Europe, Asia solid potential introduction of short pulse lasers to the industry laid the ground for future business and we have to capitalize on this. Then Military and Defense and I mentioned this industry already depends mainly on U.S. programs sales for the current quarter should be strong. We expect some orders this quarter, but annual outlook is likely to be below last year expectations given the U.S. budget front.

So, that was the outlook of our main industries. Now of course an update on our fiber laser activities where we still face one bottleneck and that’s the third party MBE reactor which we use at an institute. We currently have no excess due to unexpected maintenance work on the third party MBEs, which delays the restart or continuing of wafer production approximately until week 24. So and then you need to add an additional production cycle time of another six weeks until pumping modules are available. So, this situation is not comfortable, but we have to be patient because we have no alternative until our own reactor is ready for production. This means and I hate to say that that we still suffer and don’t have the benefit of that cost reduction yet, but of course it is mandatory that we work on other elements of cost reduction.

Our own MBE reactor is now ready to start after we have done test wafers for calibration for the MBE. As we always indicated this is now the starting point and we have to come up with several AP wafer growth campaigns until final good laser quality is reached and life time is tested. The advantage of having our own MBEs is that we only do one wafer architecture and don’t do different AP architectures in between. So finally, we are on the way. Besides that we have a new 6 kilowatts fiber laser under test, so we assembled 6 kilowatts prototype fiber laser with 200 watts pumping modules and the 1.5 kilowatts fiber laser modules from (indiscernible). The laser demonstrated good performance and we even moved this laser for a certain time in our lab for application test with good results. But of course we will not launch this product before we assure that pumping modules meets the life time expectations.

Then of course we realized sales with fiber laser-related product in the quarter of $16.9 million and 248 units. The order entry was 231 units and $17.3 million, if you compare to the fourth quarter and first quarter shipments the main reason for the slower number is not the high power if its less low power pulse fiber lasers so there we are working on new wins of customers for a broader allocation of production volumes. Another comments of course what we saw in the last months another average selling price erosion in the range of 6% to 7% within the market for fiber laser pricing high-power fiber laser pricing. The backlog for Q3 is still 323 units and close to $30 million and about 45% of the dollar backlog value this for high power fiber lasers. So and finally I would like to mention an exhibition highlight within this quarter the biannual laser show in Munich in two weeks where the optical industries will execute their latest product portfolios and of course you are all invited to visit us at our booth.

These were my comments. Again we expect the stable environment for laser material processing even when global business conditions are taking into consideration and under discussions. Outlook is not too bad in my opinion. As always thanks to the Rofin team for their contribution and now thanks for listening and we are prepared to answer your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Patrick Newton with Stifel. Please proceed with your question.

Patrick Newton - Stifel

Hi good morning, Günther and Ingrid I guess several questions. One, to start with a housekeeping is can I bug you for your spare parts revenue in the quarter? And also can I bug you for your Macro, Micro, Marking and components orders in the quarter?

Günther Braun

Good morning Pat, just one second Ingrid is looking.

Patrick Newton - Stifel

I guess while Ingrid is looking I will jump into my next one which is just on…

Ingrid Mittelstädt

I have it, I have it.

Patrick Newton - Stifel

You are fast, Ingrid.

Ingrid Mittelstädt

So, service and spare parts revenue was $35.8 million and the next question was order entries?

Patrick Newton - Stifel

Yes.

Ingrid Mittelstädt

Macro $62.1 million, Marking and Micro $58.5 million, and components $17.6 million.

Patrick Newton - Stifel

Thank you very much for that. And that’s a monster spare parts and from a percentage and even on an absolute basis is there – was there something material that happened in the quarter that drove that number high?

Günther Braun

You mean service and parts?

Patrick Newton - Stifel

35.8% of revenue I haven’t seen that.

Günther Braun

No, no, not 35%.

Ingrid Mittelstädt

No, no, it’s 27.3%

Günther Braun

27%, he said 35…

Patrick Newton - Stifel

That was million, okay…

Günther Braun

Million.

Patrick Newton - Stifel

That changes everything, alright. Günther I guess that revenue approaching the low end of your guidance in the quarter it actually seems quite good in the quarter, it actually seems quite good in the current environment. I’m just curious is at what point during the quarter did you see perhaps some weakening in the orders and it seems like the month of March was especially challenging according to some of your peers and other industry participants?

Günther Braun

No, I think from order pattern, it was pretty good with highest order entry in March. So, if you look really during the quarter order entry it was just a normal allocation and really good order entry in March and the highest if you allocate. Also on the sales side we had the biggest sales number in March, but some slipped. And this was the bad of course the bad message and for example I will give you one reason there was some multiple lasers and there were trails at the customer with – and the customer somehow the material which had to be treated has somewhat changed to specs. And then suddenly you have just the laser in a different way and that’s the reason why we could not ship those lasers to the customers and recognized revenue. So, it was not that the laser was bad, it was just the application condition was different.

Patrick Newton - Stifel

And the orders in the month of April generally track March?

Günther Braun

Typically, no I can’t comment on April so far, I have to say it’s – it was a good order entry. We can’t say this public here, but so far we are on track and we have not seen I would say from the order entry side the downturn.

Patrick Newton – Stifel

Okay.

Ingrid Mittelstädt

It was really timing of revenue recognition some Asian customers also the delayed the delivery or the shipment and so it was really timing in the last two weeks of the quarter.

Patrick Newton - Stifel

Perfect. And then I guess Günther with the reiteration of your annual guidance with results year-to-date and the Q3 guide at the midpoint you’re implying for 4Q revenue roughly at the midpoint about $147.5 million that’s about 10% growth quarter-over-quarter, it seems about seasonal. And I guess as you sit here today, what gives you confidence that seasonal is a reasonable expectation?

Günther Braun

Okay if you go back last year same happened by the way. So, we did $147 million I think in the fourth quarter. And I think we have roughly the same backlog situation. So and business trend, order entry if you compare last year, the first two quarters and this year the first two quarter was better in comparison to last year. And there were some projects out where we believe we can get some orders in – so that we can book and bill within the quarter, so that’s the basis of this assumption.

Patrick Newton - Stifel

Okay and then last one from me I have to get my fiber laser question in every quarter, but if you – thanks for the details on the MBE production. But I guess what I’m trying to get is could you help us understand, if we look at where you stand today with your own MBE production, could you kind of give us a step-by-step process until you have your own volume production opportunities. And then well on fiber lasers, did I hear correctly that ASPs in the industry were down 6% to 7% or was that in the month of March alone or was that in the third quarter?

Günther Braun

No, I would say this is fiscal year, not fiscal year 2013 since beginning of this year.

Patrick Newton - Stifel

Okay. And then one – on the MBE issue, I guess after you walk us through kind of the step-by-step Günther, Ingrid, if you could comment on as we roll through that how the gross margin profile should ramp over the next several quarters?

Ingrid Mittelstädt

Okay. So, you are seeing also some slightly improvements now and the problem we have now is that we don’t have the volumes with the new material. So, we will be introducing the new materials step-by-step. According to the volumes we are able to produce over the next quarter. And as I already said in prior calls, we expect really the impact in the next fiscal year. We are on track Günther can comment that in more detail immediately, but we are on track with our own MBE, so there we have no delays.

Patrick Newton - Stifel

And what is the – can you give us kind of the step-by-step of what on track means with your own MBE production, Günther?

Günther Braun

Means that it’s installed as we do the first 80 campaigns now that we analyze those wafers and see if it’s worth to treat them in the next step and then do lifetime test. And then at the same time after this not lifetime test, but during these steps, if there is something to or has to be something changed in the AP wafer structure, then the next AP run will go. So, this means now three weeks AP run analysis, another three weeks, the next AP run somehow and minimum what we believe or our expert believe, three runs minimum we have to do to get stable wafer architecture and get the best results. And then after that, when you have to wafer, you have to treat them, of course, you have to do simulation passivation and then you have to put this part into the production at dealers to manufacture pumping modules. So, that causes this timeline, and I would say the first wafers out of our own production, which are, I would say, close to production could be or we could have in the first quarter towards the end of the first quarter. If there is no major change, I would say in the AP, that’s what I see at the moment.

Patrick Newton - Stifel

Perfect, thank you for the detail.

Günther Braun

The challenge, by the way, the challenge on the third-party MBE use is that you have only excess for a certain time. And on this MBE, you don’t do always the same, because also the institute is doing their own structures and then you have to challenge with calibration. And the challenge now is that there is a maintenance requirement. That’s the reason why we cannot do our planned AP runs what we have had in our planning.

Patrick Newton - Stifel

Great, thank you for taking my questions.

Günther Braun

Thank you.

Operator

Our next question comes from the line of Mark Douglas with Longbow Research. Please proceed with your question.

Mark Douglas - Longbow Research

Good morning, Günther and Ingrid.

Günther Braun

Good morning.

Ingrid Mittelstädt

Good morning, Mark

Mark Douglas - Longbow Research

So, Günther, help me out of it, the institute is really there to help you develop your own wafer?

Günther Braun

No, no, the institute is a production MBE reactor where we do our own structure.

Mark Douglas - Longbow Research

Perfect. I thought you have purchased the wafers from another company, that’s not correct, I guess.

Günther Braun

You mean – what you mean with wafers from another company.

Mark Douglas - Longbow Research

I thought you purchased the wafers from an outside company.

Günther Braun

Yes, from a third-party, which we use in our current setup with the 135 modules, but these chip material was under lifetime test and so far does not give us the lifetime what we want. And simultaneously we have designed our own architecture, which was under test, and this test in the lifetime is better than the third-party delivery. And this architecture, we started to do at a third-party institute under MBE with our own people, where the MBE is now down and the same architecture we do already intemperate our own MBE now.

Mark Douglas - Longbow Research

Okay. So, the supplier of your lower power current diodes that architecture just doesn’t work, so you had to move to this institute in order to get…

Günther Braun

The price for the high architecture.

Mark Douglas - Longbow Research

Your custom architecture done.

Günther Braun

That’s right.

Mark Douglas - Longbow Research

I see. That’s helpful. Okay, thank you. And then so I assume then that your goal of shipping 300 high power fiber lasers in fiscal ‘13 is at the window?

Günther Braun

Most likely yes, the other things of course the pricing pressure, we have seen this erosions, does it make sense to push it, no but to take it we have I think defined some key customers where we want to be in and where we really push and go after and that’s our strategy at that moment.

Mark Douglas - Longbow Research

And they are currently using other fibre lasers?

Günther Braun

No those ones, not.

Mark Douglas - Longbow Research

Okay.

Günther Braun

That’s a good story.

Mark Douglas - Longbow Research

Okay, so this is not a trying to displace somebody else. And then can you give a relative idea of how much revenue slipped in the quarter?

Günther Braun

Ingrid.

Ingrid Mittelstädt

Yeah.

Günther Braun

Ingrid will do.

Ingrid Mittelstädt

Yeah, yeah it was approximately $5 million, $5 million to $6 million what we missed $5 million.

Mark Douglas - Longbow Research

Okay, so it’s fair to say that the current guidance for 3Q would be slightly below where you were in 2Q for those shipments, is that a good way to think about it?

Ingrid Mittelstädt

Yeah, on the other side I would say we are a bit more conservative. I don’t want to be at the lower end of the guidance again, so.

Mark Douglas - Longbow Research

It seems conservative in light of your backlog?

Ingrid Mittelstädt

Yeah, okay. But again as Gunther said, in Asia it’s difficult to predict and forecast exactly when you have the revenue recognition.

Mark Douglas - Longbow Research

Right, right.

Günther Braun

Yes Mark, as I said when we did our forecast around the world for this quarter we were more towards $140 million.

Mark Douglas - Longbow Research

Right.

Günther Braun

To the $130 million.

Mark Douglas - Longbow Research

Okay and then the final question I understand the sales missed and so your percentage of operating expenses to sales would naturally be higher, but still on an absolute basis of sales, it seems a little higher than what you were guiding is that the case and then just a little bit of what happened?

Ingrid Mittelstädt

Yeah, I think nothing unusual, it depends on the level of the revenue and then…

Mark Douglas - Longbow Research

Then dollars still seems a little higher than what I thought.

Ingrid Mittelstädt

Yeah, since we have of course this quarter the laser show that is a big event, so its additional selling expenses in the quarter, but nothing unusual.

Mark Douglas - Longbow Research

Okay, thank you.

Operator

Our next question comes from the line of Question Mark Miller with Noble Financial. Please proceed with your question.

Mark Miller - Noble Financial

Good morning, Gunther and Ingrid.

Günther Braun

Good morning.

Ingrid Mittelstädt

Good morning.

Mark Miller - Noble Financial

Just I was wondering about which you’ll say anyhow we have heard from several laser firms about expectations and I think you also voiced that for second half improvement. Are you seeing anything really from semiconductor in terms of quoting activity picking up where that would lead and lend some credence to the belief tht u semi-carbon market is going to be strong in the second half of the year?

Günther Braun

Just an indication, no name or customer application, but one of our customer would say three, four weeks ago or four, five weeks ago he is still wanted to push out some shipments into other quarters, so somehow indicating that his demand went down, but he came back now and even wants to have earlier shipments, so u somehow that is essentially moving. If this is a trend Mark, I can approve, but at least there we saw positive sign, and not just the positive sign, actual request.

Mark Miller - Noble Financial

Just from the year-over-year tides, it does look like the margins will come up somewhat with higher revenues in the next quarter of this year, but still if you look at 2011 and first three quarters of 2012 margins are still below that, can we get back to those margin levels, is this the impact of fiber lasers and the fact you are having to source some of your components there?

Ingrid Mittelstädt

Yes, yes of course this is the target and as we said in 2014, we expect to begin to see the results and the improvement in the margin.

Mark Miller - Noble Financial

A couple of firms getting back to semiconductors probably from Cirrus Logic and Utratech have indicated that uncertainty over Apple orders, quantity, and where they are going with their chip orders is impacting some of the chip manufacturers in terms of their guidance. And also development issues on new technology such as FinFETs, and in fact Ultratech had to significantly push out their orders, because of that, are you seeing any impact from concerns over, uncertainty over Apple or technology development – the pace of technology development are you hearing that from your semiconductor customers?

Günther Braun

Not really, but if you look in general, you move in a track, Foxconn, for example in Jincheng, and we all know they do a lot for Apple, when I see what they did in turnover in the calendar year 2012, which was in the range of $140 billion. And when I see their first quarter, the March quarter, where they did only $20 billion, which would indicate a run-rate up to $80 plus billion instead of $140 billion, there is something going on in this industry.

Mark Miller - Noble Financial

And then we talked a little about the pricing pressure in fiber. Is that across the board or is it low power, high power, is it in general, just give us a little more insight about the dynamics there?

Günther Braun

I think it’s across the board, but most are the biggest impact we have on the high power side, of course.

Mark Miller - Noble Financial

Thank you.

Günther Braun

Thank you, Mark.

Operator

Our next question comes from the line of Sean Laughlin with Piper Jaffray. Please proceed with your question.

Sean Laughlin - Piper Jaffray

Hi, good morning Günther and Ingrid. I wanted to just – I know you gave us some color on the pricing dynamics for fiber laser, 6% to 7% this year for at least year-to-date, can you give us an idea of what you are seeing in terms of kind of price declines for the remainder of calendar ‘13? Just to kind of give us a sense of what direction that’s headed and how you are dealing with that?

Günther Braun

You think about specific technologies or just in general?

Sean Laughlin - Piper Jaffray

Probably just in general, yeah.

Günther Braun

In general, yeah. I think in general, there is the usual price pressure all over the place. And I would say where the annual average reduction what we always claim that we see in the range is still the 3% and discontinues. So, each volume order or each order is not just taken into discussion, it’s also a price discussion, no doubt about it and everybody wants to pay less what they paid last year, that’s just a number. And the special situation is on the fiber laser technology of course.

Sean Laughlin - Piper Jaffray

And so in terms of fiber lasers, are those declining at a greater rate than that 3%, I guess and would you expect that to continue?

Günther Braun

I am the wrong address for this question if it’s continued. I don’t like it to continue by the way, but what we have seen so far the last four months is 6% to 7% on the fiber laser, which is of course difference to the average of the other technologies.

Sean Laughlin - Piper Jaffray

And if we could talk a little about sort of your auto end markets, I wanted to kind of come to that. You guys are starting to, I guess, see some traction there. What is your – where do you guys, geographically, see your best opportunities going forward? Is it the North America, the Europe, Asia?

Günther Braun

Okay, I would call it different. On the automotive guys, I think we don’t have the best offering for right treatment. And also we still miss this high power fiber laser for power train in certain applications. So, what we see is more first tier suppliers, sub-suppliers to the automotive industry, where also our business is currently, there are some applications which one, which I mentioned where we see a good potential. Of course, business we see more in North America and in Asia, I would say in Europe, I see just certain countries where there is a reasonable business, but the best opportunities are North America and in Asia.

Sean Laughlin - Piper Jaffray

Great. And one lastly I know you saw some order strength in Europe that you spoke about, can you walk us through again where exactly the end markets in terms of where that strength come from in terms of recent order trends?

Günther Braun

Surprisingly, and as I indicated this where companies in the countries who are successful in exporting, they are good. And so I have to even mention Spain, which has had a good order entry, I had to mention UK, I have to mention Belgium, Netherlands, so even France was good. So, all these countries were somehow where people put the question mark behind where I would say really even a little bit surprisingly good last quarter. We did not expect this good development.

Sean Laughlin - Piper Jaffray

Okay, thank you very much.

Günther Braun

Thank you.

Operator

Our next question comes from the line of Jiwan Lee with Sidoti & Company. Please proceed with your question.

Jiwan Lee - Sidoti & Company

Thank you. Most of my questions were answered, but just a couple of things. In terms of the machine tools, Günther, you highlighted that Asia was relatively strong. And what would be the expectations over the next couple of quarters from this market?

Günther Braun

On machine tool, you are talking?

Jiwan Lee - Sidoti & Company

Yes.

Günther Braun

So far I would say we see a stable environment, reasonable demand for CO2, high and low power CO2, and there is a big demand for low-power CO2 laser as I mentioned with organic material treatment, which we sell also to machine tool companies. And they incorporate those lasers in systems. But also for fiber laser out of Asia, in Europe, we are a little bit hesitant to push our fiber laser, because even more pricing pressure also in Asia, there is pricing pressure. So, we cannot put a red flag on it, its okay, I would say.

Jiwan Lee - Sidoti & Company

Okay, excellent. And then with these fiber lasers, I mean, a lot of your comments on the fiber lasers came out during this conference call, but the pricing pressure that you show, how does that change your revenue growth objectives for this year?

Günther Braun

You mean on the fiber laser?

Jiwan Lee - Sidoti & Company

Yes.

Günther Braun

Basically, it has not changed our revenue projections for this fiscal year, I think. And so far what we have seen the CO2 laser is supporting basically this lower fiber laser revenue. So, therefore, we should come out in the right way. And hopefully it helps us of course also somehow with the margin profile when we have more CO2 lasers.

Jiwan Lee - Sidoti & Company

And lastly from me, the substantial revenue rebound you are seeing in the fourth fiscal quarter, directionally could you point to a couple of end markets where you are expecting the type of growth?

Günther Braun

Again, Jiwan I did not get – Ingrid, did you get?

Ingrid Mittelstädt

Yeah, the higher revenue in the fourth quarter, I don’t think...

Günther Braun

Okay.

Ingrid Mittelstädt

That we have one industry that will rebound, of course, we expect that semi should come back in summer, but it’s also some projects in several different industries and the backlog, but of course in the second half of the year normally also consumer electronics contributes more than in this quarter.

Günther Braun

One thing is solar on the semiconductor side, there should be more business than what we have today, electronics, some projects what are going on, so there is something in the pipeline, let’s see if we can convert it into orders and sales.

Jiwan Lee - Sidoti & Company

Okay. And just one last thing, is there anything worthwhile to comment on the Asian automotive side over the next few quarters?

Günther Braun

In which direction you are looking?

Jiwan Lee - Sidoti & Company

Hopefully good.

Günther Braun

I think that the local companies will have more business when you look to what happened to Mercedes and luxury car manufacturer in China somehow I think this business has slowed down in a certain ways. So, let’s see but there are still investments planned also from foreign car manufacturer in China to increase capacity, production capacity. So, I would touch this as stable, minimum stable environment over the next quarters in China automotive.

Jiwan Lee - Sidoti & Company

Very good. That’s all from me. Thank you.

Günther Braun

Jiwan, thank you.

Operator

Okay, it appears there are no further questions at this time. I’d like to turn the floor back over for closing comments.

Günther Braun - Chief Executive Officer

Okay. Sorry that we missed or basically we are on the low end of our guidance it looks like that the next quarter based on our backlog of course should be better. And I hope that some of you we can see in Munich at the laser show. And we can show you our new products which we exhibit there. Besides that of course I wish you a great summer time and looking forward to talk to you in the first week I think of August. Thank you, take care, bye-bye.

Ingrid Mittelstädt - Chief Financial Officer

Bye-bye.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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