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Perceptron, Inc. (NASDAQ:PRCP)

F2Q2014 Earnings Conference Call

February 13, 2014 10:00 AM ET

Executives

Jeffrey M. Armstrong – President and Chief Executive Officer

Sylvia Smith – Vice President and Acting Chief Financial Officer

Mark S. Hoefing – Senior Vice President

Analysts

Les Sulewski – Sidoti & Company, LLC

Marco A. Rodriguez – Stonegate Securities, Inc.

Kris Tuttle – SoundView Technology Group

Operator

Good morning, ladies and gentlemen, and welcome to the Perceptron Second Quarter Results for 2014 Conference Call. Please note that this call is being recorded and that there will be a digital rebroadcast for this call available beginning at 2 PM today.

I would now direct the call to Jeff Armstrong, President and Chief Executive Officer of Perceptron. Go ahead Mr. Armstrong.

Jeffrey M. Armstrong

Good morning and thank you for joining us. With me here today are Sylvia Smith, our acting Chief Financial Officer; Mark Hoefing, our Chief Operating Officer; Heribert Viehweber, our Vice President, Operations and Quality. Copy of our press release outlining the results for the second quarter of our fiscal year 2014 was distributed through Marketwire yesterday. If you do not have access to it, please call Sylvia after this conference call at 734-414-4816 and she will provide you with a copy.

In accordance with SEC rules, we want to inform you that a number of the matters we discuss today may constitute forward-looking statements as defined by SEC regulations, including those concerning the company’s future results and the company’s product development efforts among others. Actual results may differ materially from those we discuss today and involve a number of uncertainties that are detailed in the press release announcing the operating results for the second quarter of 2014.

As I am sure most of you are aware, I joined Perceptron on November 4, 2013. My first 90 days were very busy as I learned the business and the organization while meeting with customers, shareholders and the broader investment community. I am very glad to report the simulation process is going very well. The business and the organization are very strong and the strategic opportunities before are so plentiful.

As you likely read in the press release, we’ve completed a rigorous search process and we will have our new Chief Financial Officer starting next Monday. Keith Marchiando has a very strong financial management background and a wealth of relevant experience will help us to continue improve core businesses as well as enable our strategic objectives.

In addition, we have appointed Mark Hoefing as our Chief Operating Officer to focus on driving operational excellence and helping to mange our growing international operations that currently provide over 60% of our revenue.

Our first half results were mixed with first half revenue and operating income low, largely due to previously announced six month project installation delay in the second half of the year. At the same, we continue to see strong bookings and resulting growth in our backlog to record levels.

In the automotive space, we continue to see broad acceptance of our products with strong win rates, accolades for the Corvette program and even a photograph in the yesterday’s Wall Street Journal that included our sensors on the Porsche Leipzig Production Line.

A major focus for us is to drive organic and strategic growth in order to broaden our industry diversity while expanding our customer and revenue base. While very early in the process, I'm encouraged that there are several good opportunities we began to work on.

Sylvia, will now give you an overview of our second quarter and year-to-date results.

Sylvia Smith

Thanks Jeff and good morning everyone. Speaking first to summarize our full year outlook, our fiscal year 2014 quarterly sales pattern and the results we are forecasting for the year are expected to be similar to the pattern we experienced in fiscal 2013.

In fiscal 2013, sales during the first half of the year were low, followed by very strong sales in the second half of the year. This year we have seen similar results with low sales during the first half of our fiscal year, and based on customer shipment schedules we expect very strong sales in the next two quarters. For the full fiscal year, we expect total sales will be in the range of the level of sales we reported in fiscal 2013. We also expect that the gross margin for this 2014 fiscal year will increase to historical annual level and that the full fiscal year will be profitable.

Moving to the second quarter, our second quarter results were primarily impacted by three things. One is the lower sales level in the current quarter when compared to the second quarter of fiscal 2013. Two, is the higher expenses in the current quarter related to personal cost that represent both year-over-year normal salary increases and additional staffing primarily in China and Europe. Finally, we had higher recruiting cost in the current quarters related to the recent changes in the company’s executive officers.

As the release indicated, our sales were approximately 5% below the second quarter of last year and reflected lower sales in the Americas and Asia which were partially offset by higher sales in Europe. The stronger euro in fiscal 2014 increased sales by approximately $280,000. Bookings in the quarter were approximately $17 million or 40% higher than the $12.1 million booked in the second quarter last year.

We had substantially higher booking in both the Americas and Asia with the increase primarily for the companies automated systems product. Bookings in Europe decreased $600,000 or 10% from the high level of bookings they had in the second quarter a year ago. The stronger euro this quarter mitigated approximately $420,000 of the bookings decrease in Europe.

Our backlog on December 31, 2013 was a record $40.4 million exceeding our previous record backlog set just last quarter by $4.5 million. This quarter’s backlog was $10.7 million or 36% higher than the backlog we had a year ago and reflected higher levels in all geographic regions with Asia and Europe showing the largest increases.

Gross profit was $5 million or 39.7% in the current quarter and was comparable to the $5.2 million or 39.3% achieved a year ago. The mix of revenue this quarter reflected lower material cost as a percentage of revenue when compared to the second quarter of fiscal 2013. Personally offsetting the lower material costs were higher cost related to additional personnel and year-over-year salary increases.

SG&A expenses increased by approximately 4% over the second quarter last year and reflected higher executive recruiting expenses. Normal year-over-year cost increases for salary and salary related cost also contributed to the increase.

Engineering, research and development expenses were $1.6 million and increased approximately $49,000 or 3% over the second quarter last year. The increase was primarily due to higher salary and salary related costs that were partially offset by lower engineering materials compared to fiscal 2013.

The company had an operating loss of $264,000 compared to operating income of $150,000 in the second quarter of fiscal 2013, which reflected the lower sales level and the higher cost in the current quadrant.

Turning to our year-to-date results, for year-to-date results were primarily impacted by two things. First, the current six months had higher costs related to personnel that represented both year-over-year normal salary increases and additional staffing to places primarily in China and Europe. The second item impacting the comparison between the two periods was that fiscal 2013 had a high level of final buy-off revenue on completed projects that primarily occurred in the first quarter of fiscal 2013.

This resulted in a higher gross margin in the fiscal 2013 six months period when compared to almost the same level of sales in the current six months period. For anyone new to Perceptron buy-off revenue occurred when we have a final sign off from our customer on a completed project. This typically occurs after the majority of the work has been performed in prior periods.

Sales for the six months of fiscal 2014, decreased $486,000 or 1.9% from the sales level achieved in the same period a year ago. Increased sales in Europe were offset by lower sales in the Americas and Asia. The stronger euro this year share had the affect of the increasing sales by approximately $530,000. Our year-to-date bookings increased by $10.1 million or 40.7% to $34.9 million this year compared to $24.8 million in the six months period a year ago.

The increase occurred in all geographic regions and was primarily from higher automated system orders. Of the $2.2 million increase in our European bookings, the stronger euro this year contributed approximately $850,000. Gross profit for the six months period was $9.3 million or 37.2% of sales as compared to $10.8 million or 42.5% of sales in the first half of fiscal 2013. As mentioned previously it is not unusual for us to see variation in our gross margin percentage from period to period.

Operating expenses were up year-to-date for the same reasons that I mentioned for the second quarter. The company had an operating loss of $1.1 million compared to operating income of $827,000 in the first six months of fiscal 2013. Impacting the comparison for the six months period was the high gross margin achieved in fiscal 2013 related to buy-off revenue versus the higher personnel related cost in the current fiscal six month period.

Our balance sheet remains strong, cash and short-term investments were $34 million at December 31, 2013 which is an increase of $7.3 million from our June 30, 2013 fiscal year end. The company has no debt and shareholders’ equity was $6.70 per diluted share.

Jeff, back to you.

Jeffrey M. Armstrong

Thank you, Sylvia. As we anticipated our first half result were mixed, with very strong bookings and lower than desired revenue. That was the challenge entering the second half of the year behind in sales and operating income was currently plain deliveries and insulations as well as the large backlog, we are driving to show modest growth in full year sales compared to 2013 and be solidly profitable for fiscal 2014.

We continue to push our growth opportunities forward and the addition of a very strong CFO will help us analyze and manage the business for the benefit of our shareholders.

With that, let me open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Les Sulewski from Sidoti & Company.

Les Sulewski – Sidoti & Company, LLC

Good morning, all.

Jeffrey M. Armstrong

Good morning, Les

Les Sulewski – Sidoti & Company, LLC

Mark and Jeff, what kind of traction are you seeing now in the Indian and Chinese OEMs? I noticed the increase in bookings and overall increases there. What are you seeing in that market?

Jeffrey M. Armstrong

To date in India, our orders have been from foreign companies and using the relationships we have in North America primarily. We’ve been seeing an increased level of interest from some domestic Indian manufacturers and we’re talking with them about several projects, but we haven’t gotten any hard orders yet in India from domestics.

In China, we’re also seeing an increase in the domestic interests and we have received their orders there over the years although they’ve been to work by the European based OEMs or European based joint ventures or North American based joint ventures. But we are continuing to see increased interest and increased coding activity on those domestics. That answered your question?

Les Sulewski – Sidoti & Company, LLC

Yes. Thank you. And then, with the new management team, is there any shift in strategy to tackle non-automotive markets?

Jeffrey M. Armstrong

Absolutely. The things that we have had in the pipeline working for a while, they’ve been percolating that represent organic growth opportunities that give us clear direction into other industries, and a good example of that would be our relationship with Tier 1 supplier to the automotive industry. We have some significant sales to those Tier 1 suppliers already. We’re putting in place a detailed capture plan to get more of those sales, because it’s a clear adjacency for us. The second piece of that is, since those Tier 1 suppliers already participate to a large extent outside the automotive industry once we can establish and expand on those relationships, it will give us diversification and there are other organic and non-organic opportunities that we are reviewing.

Les Sulewski – Sidoti & Company, LLC

Excellent. Thank you. And then one more. I understand you added to the headcount and inflation adjusted salary increases, but any areas outside of that to bring down operating expenses down?

Jeffrey M. Armstrong

No, I bet here little over 90 days and one of the things that I clearly want out of the new CFO. He comes with a very strong pedigree of business financial analysis. That will be one of the first things I would like him to start looking at as to try and look for compelling opportunities or easy opportunities for reducing cost. And if we don’t find anything significant there, then clearly as we start to grow the business bottom line, hold those costs flat or slight increases to drop as much of it to the bottom line as possible.

Les Sulewski – Sidoti & Company, LLC

Excellent. Thank you so much.

Jeffrey M. Armstrong

Good, thank you Les.

Operator

We’ll go next to Marco Rodriquez from Stonegate Securities.

Marco A. Rodriguez – Stonegate Securities, Inc.

Good morning, guys. Thank you taking my questions.

Jeffrey M. Armstrong

Good morning, Marco.

Marco A. Rodriguez – Stonegate Securities, Inc.

Just wondering based on the remarks, it didn’t sound like Q2 finished as you expected, can you talk a little about what transpired in the quarter that may have cause that sentiment?

Jeffrey M. Armstrong

Well, I don’t think it was unanticipated by us and I apologize if we came across with that way. When we talked about our first quarter results, we had known at that point that we had six month delay in a major project installation because a customer just physically wasn’t ready to put the line in and accept our equipment. So we anticipated first half results revenue would be low, if not I think the words I use in and you can understand that it was not desirable. I prefer to go into the second half of the year flushed with revenue NOI and bookings to make it any easier glide path.

But that being said those installations are on track. They are well scheduled. We haven’t staffed and ready to execute and we don’t have any indications from the customers of any further delays on that project. So it was not desired, but anticipated that we would have first half revenue being low.

Marco A. Rodriguez – Stonegate Securities, Inc.

Okay. And then just I guess some clarification here and I apologize for kind of parsing words here, but the prepared remarks in your commentary on guidance for fiscal 2014 on the sale side, where you are saying that revenue should be in the same range as fiscal 2013, prior guidance was fiscal 2014 should see growth over fiscal 2013, is that seems like it somewhat changes, am I reading to that correctly or no?

Jeffrey M. Armstrong

I think our plan or our desire was in anticipation that we would see year-over-year growth. The concern we have is that based on where we ended up the first half of the year and the large amount of work we have in the second half of the year being able to mail that growth.

We have a lot of activity lined up, revenue wise, installation wise, and we have a large backlog that we could work on. So, we anticipate the full year sales being inline with where we are at for 2013 but I can assure to you that we’re going to be driving to exceed that.

Marco A. Rodriguez – Stonegate Securities, Inc.

Got it and how should we be thinking about the results for the second half obviously you’ve stated that it will be higher than the first half, but from a quarterly basis, do you expect it to ramp-up significantly in Q4, do you expect kind of an even distribution?

Jeffrey M. Armstrong

The way right now our installations appear to be laying out, it is not a complete hockey stick, it is – but as we’re looking at it right now planning wise, fairly well balanced between Q3 and Q4 is the way we foresee it.

Marco A. Rodriguez – Stonegate Securities, Inc.

Got it, and last quick question, I’ll jump back in the queue. You’d recently announced 45 Helix system to be delivered to a premium German auto manufacturer. Are you expecting any of that revenue to be recognized here in Q3 or how should we be thinking about the revenue recognition from that win?

Jeffrey M. Armstrong

We will be having some of that consumed and worked off in both Q3 and Q4.

Marco A. Rodriguez – Stonegate Securities, Inc.

Okay. And some of that will breath into fiscal 2015?

Mark S. Hoefing

Yes.

Marco A. Rodriguez – Stonegate Securities, Inc.

Got it. All right, thanks a lot guys.

Jeffrey M. Armstrong

Thank you very much, Marco.

Operator

(Operator Instructions) We’ll go next to Kris Tuttle from SoundView Research.

Kris Tuttle – SoundView Technology Group

Hi, there thanks for taking my question. I apologize, I am new to the story. But I have a couple high level questions. One of them is, could you just – what is the main fundamental reasons for the business being flat year-over-year just to make sure that my next couple of questions are appropriate?

Jeffrey M. Armstrong

My belief is that the main driver is, we had a very significant order for us delayed that was planned for Q1 and Q2 of our fiscal year. The OEM delayed that installation and I’m not sure of the specific reasons why the delays, they weren’t ready. But they put up a hold on completing those activities. So, that’s being pushed Q1, Q2 revenue, into Q3 and Q4 and the potential risk of that some of those activities going into the year depending on the pace of the installation.

So, we had anticipated and you look at our prior results seen pretty reasonable growth year-over-year. Our growing backlog to us in the bookings and the acceptance we’ve seen in industry to us indicates that we would have continued growth on the sales side, but I think that was the main driver for this year being potentially flat year-over-year.

Kris Tuttle – SoundView Technology Group

Okay, got it. And then I know that you’ve talked about expanding the business into additional sectors outside of automotive. If you go out two years, I’m not looking for guidance here, but a rough concept. What percentage of your top line, do you think in a couple of years would be potentially from outside the automotive segment?

Jeffrey M. Armstrong

Right now, we are approximately in rough numbers, 10% non-automotive. My anticipation would be that we would in two to three years, may be 20% to 30% diversified, if I can accelerate that that would be my desire. But practically and pragmatically, I think that's a reasonable expectation for our team at this point.

Kris Tuttle – SoundView Technology Group

Okay, thank you. And last question from me is, towards I can tell, I mean the Company is very well positioned in terms of the laser-based, 3D inspection. So, I think that the Company is being very strong in the sort of inspection segment. My question is, another part of 3D laser scanning is important in, I guess what I would call, the fab replication and design and that industry where somewhat of a challenge to get accurate representations into modeling tools that can then be used for downstream manufacturing, I think in flavor. Is that part of the market our long-term direction or is it something that still separate that it would be unlikely that you would focus on that?

Jeffrey M. Armstrong

My belief is that those manufacturers and I think if you go and you pull up the presentation we provided, it’s on our webpage at the Noble conference in January gives a good overview. If you haven’t already looked at that of what our business is. I think where we have value is for any manufacturer who has complex assemblies that have relatively expensive scrap and rework cost.

So my answer is I think we have clear play for a large number of manufacturers that we have not pursued in the past. Obviously, each of those manufacturers have to make the decision for the investments that make sense for them, but we clearly believe that between the robot guidance solutions we have that reduce labor content and increased accuracy, as well as the measurement tools we provide, increased quality, find defects earlier in the manufacturing cycle and reduced rework of reduce scrap. Mark, do you want to add.

Mark S. Hoefing

Let me add a couple of comments, if you look at our ScanWorks products, we do participate in the design side or reverse engineering side in a small way at least. We have see that other technologies are being used in a much broader scale and we’re looking at how we can apply our technologies, some of the technologies that we developed over last few years and expand our presence in that market. Our focus has been on the core business, the automotive business as we gotten our Helix product rolled out. But now that we’ve gotten that base secure, we can look at how we can expand into other uses of the technology. One of them is on the design and the other thing reverse engineering in addition to inspection which has been our primary focus.

Kris Tuttle – SoundView Technology Group

Okay, great Thanks very much for taking my questions.

Jeffrey M. Armstrong

Thank you, Chris.

Operator

This does conclude the question-and-answer portion of today’s call. I will now turn the call over to Mr. Armstrong.

Jeffrey M. Armstrong

Great, thank you very much. Thanks to all of you for joining us today. Over the coming months, we will continue to update our shareholders, investors on our plans and we look forward to those conservations. Thank you very much.

Operator

This does conclude today’s conference call. Thank you for your participant. You may now disconnect.

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