Perceptron's (PRCP) CEO Jeffrey Armstrong on Q4 2014 Results - Earnings Call Transcript

Aug.21.14 | About: Perceptron, Inc. (PRCP)

Perceptron, Inc. (NASDAQ:PRCP)

Q4 2014 Earnings Conference Call

August 21, 2014 10:00 a.m. ET

Executives

Jeffrey Armstrong – President and Chief Executive Officer

Keith Marchiando – VP and Chief Financial Officer

Sylvia Smith – VP, Controller and Chief Accounting Officer

Mark Hoefing – Chief Operating Officer

Analysts

Les Sulewski - Sidoti & Company

Mark Jordan - Noble Financial

Richard Eastman – Robert W. Baird

George Melas – MKH Management

Dennis Scannell – Rutabaga Capital

Operator

Good morning, ladies and gentlemen, and welcome to the Perceptron Fourth Quarter and Full Year 2014 Conference Call and Webcast. Please note that this call is recorded. I will now direct the call to Jeff Armstrong. Go ahead, Mr. Armstrong.

Jeffrey Armstrong

Thank you, Joe. Good morning, everyone, and thank you for joining us. With me here today are Keith Marchiando, our Chief Financial Officer; Sylvia Smith, our Chief Accounting Officer; and Mark Hoefing, our Chief Operating Officer.

Our press release outlining the results for the fourth quarter and full year of our fiscal year 2014 was distributed yesterday. If you’ve not yet seen the release, it is available on our website, perceptron.com or you can call our offices at 734-414-6100 and we will get one to you.

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 fourth quarter of fiscal year 2014.

As you saw in the press release, our 2014 results reflected strength in several key areas that show that we are on the right trajectory to achieve our longer term objectives. 2014 was a year of significant transition for Perceptron and to a large extent our fiscal results reflect that. Keith will offer some additional insights on that in a moment but I want to cover some of the highlights and give perspective on our new strategic plans.

As you may recall, I was brought on board by the board in November of 2013 to develop a plan to grow the company, diversify the business and increase shareholder value. As we shared with our investors several months ago, that new plan emphasizes four key elements; continue to expand profitability in our core markets, pursuing prudent diversification, extending our technological leadership and maintaining fiscal discipline to ensure strong profitability.

Let me give an update on where we stand on in each of these. First, we know that we have the opportunity to expand further in our core markets. In the automotive space, we continue to add new customers and field new solutions to intensify business with existing customers. This has been the primary driver for the recording bookings and strong backlog we reported. Highlights of this effort are continued strong acceptance of our products in Asia with record bookings and record revenues in Asia, including in China and India. This growth also provides greater geographic diversification beyond our traditional North American and European base. Despite the challenge to the European economy, we were able to expand our successes in Europe and delivered record new bookings for the year in that region.

During the fourth quarter, we were very pleased to regain a major North American automotive customer, with several new orders for Perceptron technology to replace a competitor’s systems that has not met their expectations over time. Further, we continued to see growth in our global relationship with a major Japanese OEM, adding a second United Kingdom plant order and several other new opportunities we’re pursuing, including one in Japan. Looking forward, we see several other opportunities in Japan with OEMs, and local integration partners to deliver solutions for local Japanese and regional customers.

As you may be aware, our installed in-line measurement systems are tailored for each customer’s needs, including installation and commissioning activities at a customer’s plants. Conversely, our 3D scanning solutions require little to no adaptation or installation and therefore offers very healthy gross margins. Specific, a significant focus of our new strategy is to re-invigorate our 3D scanning sales by improving our channels to market and by developing new products targeting unmet customer needs, which leads directly to our plans to diversify our customer base. This will take longer, particularly for our installed systems largely because the sales cycle for installations is usually measured in months and years and not weeks. But early efforts have begun to pay off and we just booked a sizable order with a large new European customer who designs and builds agricultural equipment. Importantly, we expect 3D scanning solutions sales will be delivered to a much more diverse customer base and should also enable cross selling opportunities.

Our commitment to extend our technological leadership remains strong and one area of emphasis and our new plan is to align our research and development spending on efforts to target that adjacents and transformational opportunities. These new investments will start to provide benefits over the next 12 months as we introduce several new products that leverage our Helix technology into in-line, offline and 3Dscaling opportunities.

We also are beginning to leverage several technology-driven competitive advantage to gain market share, enter new markets and create new opportunities. For example for Perceptron as a world leader in the very technically challenging area of robotic metrology, where our sensors and software enable automated robot inspection and assembly. We continued to refine our existing solutions in Robotic Metrology expanding our strategic relationships with key business partners and plan to offer new products in this space to continue to enable customers to manufacture with better quality and lower cost to a greater automation.

Finally, we are focused on fiscal discipline that supports profitability. We recently kicked off a significant project for us to implement a global enterprise resource planning system to replace three existing regional systems that require significant manual processing to consolidate and analyze information. When that new system comes online near the end of fiscal year 2015, we expect positive impacts to the business from tools to help us improve productivity as well as speed our ability to access and analyze critical business data.

Keith, that covers my introductory to markets. Let me turn it over to you for some details on the financials.

Keith Marchiando

Thank you, Jeff and good morning to everybody, Jeff has given us some excellent overview of the strategy that we are pursuing to create value for shareholders. I’ve been on board as CFO now for six months and I continue to be impressed by the people and the technology at Perceptron. I see exciting potential in the strategy and I’m looking forward to sharing the outcomes of our teams’ efforts with investors in the coming quarters.

But as Jeff noted, 2014 was the year of significant transition for the company, with our fourth quarter and full year numbers responding in some different ways to those changes that are underway. I want to give you some different color on both periods and let’s start with the fourth quarter. As I mentioned before on calls, if I fail to be specific in any point, all the amounts we are talking about are going to be in U.S dollars. Any references to years will be to our fiscal years which end in June and discussions of metrics like operating income and earnings per share will only be for continuing operations.

Compared to the prior year, revenues for the fourth quarter of 2014 were down $3.3 million. We had previously noted that the fourth quarter of last year was a record sales year for Perceptron and that our sales in the fourth quarter of 2014 would not reach that level. The difference year over year is attributable to lower revenues of $3.4 million in our automotive automated systems products and a further reduction of sales of $340,000 in our technology components products. Changes in currency increased sales by about $390,000.

Gross margin in the fourth quarter of 2014 dropped 5.4 percentage points from the same quarter in 2013 on an unfavorable product mix and higher personnel expenses, which were largely a function of global salary increases that went into effect in early April.

SG&A expenses were essentially flat versus the fourth quarter of 2013. Added costs for executive personnel changes and fees associated with Sarbanes Oxley compliance were fully offset by cost reductions in other areas of SG&A.

We experienced a slight reduction in R&D spending in the quarter of about $230,000 versus the same quarter in 2013. The resultant operating income for the fourth quarter of 2014 was $1.4 million, a $2.3 million reduction from the same quarter a year earlier.

Our tax rate in this quarter was 38% and our diluted share cap of roughly 9.3 million shares yielded fully diluted earnings per share of $0.10.

In addition to the operating income reduction discussed earlier, the difference in EPS versus the same quarter last year reflected the lower tax rate of 15% in the year ago quarter as well as a onetime gain a year ago on redemption of the investment in that period.

Now I want to take a few minutes and talk about our results for the fourth of 2014 versus the third quarter of 2014. Notably, sales in the fourth quarter of this year were essentially comparable to sales in the third quarter that ended in March of 2014.

Let me spend a few minutes on this since the comparable revenue amount did not result in a comparable profitability. Although sales were flat, we sold roughly $300,000 more automated systems products and $300,000 less technology components products in the fourth quarter versus the third quarter. But gross profit was off $738,000 than the prior quarter. That reflected the mix effects of the change in sales mentioned earlier and additional mix of products within the product groups, as well as some increases in personnel across in the fourth quarter that I also mentioned earlier.

Higher personnel costs also affected our R&D and SG&A spending in the fourth quarter versus the third quarter of this year, along with incremental increases for Sarbanes Oxley compliance. The result was a total quarter over quarter increase in R&D and SG&A spending of about $451,000. All of this combined resulted in the lowering of operating income $1.2 million. Combined with the increase in the effective tax rate from the third quarter rate of 11% to the fourth quarters 38%, resulted in a $0.16 lower EPS value.

Now let’s move on and talk about the full year results. Sales for fiscal 2014 were down from our record year in 2013 by 2.1% or about $1.3 million. This drop was driven by a volume reduction of $2.3 million seen across both of our product lines. The volume reduction was partially offset by positive movements in foreign currencies in the amount of $1.1 million.

Gross margin for the full year 2014 was $3.3 million lower than the prior year, resulting in a gross profit percentage that was lower by 4.5 percentage points. The main driver of the reduction in gross margin was the change from the atypically higher margin mix of products sold in 2013 to what we think is a more typical level in 2014. Another item having a negative effect on 2014 gross profit was again the year over year increase in personnel costs.

In 2014, sales and marketing and general administrative costs increased about $744,000 versus the prior year. The major contributors for the increased costs were higher personnel related expenses, some costs associated with recruiting and transition of our executive personnel changes, and increased fees supporting our Sarbanes Oxley compliance efforts. The new Sarbanes Oxley activity that I mentioned a few times and the related fees had not been required in 2013 as at that time Perceptron was designated under SEC rules as a smaller reporting company.

R&D spending year-over-year was reduced by about $100,000 as some increases in personnel costs in this area were more than offset by efficiencies in other areas such as lower materials and third party services expenses. Net- net, the resultant operating income for the full year ended up $3.9 million lower than in 2013.

Our full year effective 2014 tax rate of 19% was unchanged from full year 2013. Bottom line earnings per share for 2014 were $0.26 per diluted share, $0.45 lower than the company’s EPS from continuing operations in 2013. Higher share count represented $0.02 of the total reduction. $0.12 was due to the aforementioned onetime gain on the redemption of the investments and the balance of $0.31 was due to the drop in operating income. As you know, near the end of fiscal year, we issued a $0.15 dividend per share or a total distribution of $1.4 million.

Cash and short term investments remained historically high for the company at $33.9 million and we continue to operate debt free.

Finally, let me turn the analysis to bookings and backlog. As Jeff mentioned and we mentioned in the press release, our bookings for 2014 fiscal year of $68.5 million were a record level for Perceptron and represented a 12% increase in bookings over the prior year, which was also a very strong bookings year for us. We achieved increases in every region and regional records were set for full year bookings in Asia and in Europe. And without getting into details, we continued to see bookings for our Helix technology products significantly outpacing our growing sales for those products, which is strong evidence of continued growth for that technology.

With the strong bookings at the end of June 2014, Perceptron is sitting on a backlog of $39.3 million. This is the highest backlog that the company has seen at the end of a fiscal year and is only slightly less than our overall record of $40.3 million that we achieved at the end of December 2013 our second fiscal order of 2014. Our backlog and strong bookings offer momentum that will carry us into a growth in sales in 2015.

This concludes my prepared comments and I’ll turn it back over to Jeff for his closing comments. Jeff?

Jeffrey Armstrong

Thanks Keith. Before we open for questions, let me reiterate. Fiscal 2014 was a year of great positive changes at Perceptron, changes that are just beginning to provide positive significant value to our business results. Over the longer term, our plan is designed to grow revenues, control costs, improve profitability and increase shareholder value. We expect each element of the plan to provide solid contribution over the next several years. In the near term, based on the nearly 30% increase in our backlog, continued high order win rate, we’re forecasting strong organic revenue growth for 2015. The potential exists the new products could further strengthen that. We strongly believe that higher revenue will drive improvements in our profitability in 2015 over the levels we’re reporting for 2014.

Operator, please open the call for questions.

Question-and-Answer Session

Operator

Certainly, (Operator instructions). We’ll take our first question from Les Sulewski with Sidoti & Company.

Les Sulewski - Sidoti & Company

Good morning. Thank you for taking my questions. Just looking through your press release, you mentioned several customers delayed systems installations. Can you quantify the dollar figure on that, what was pushed into next or to this quarter, first quarter 2015?

Jeffrey Armstrong

Let me try and put -- obviously this is an issue that we have, and this goes back to the commissioning activities associated with our installations. As you’ve followed our story for quite a while now, you’ve got a handle on this that we can have all of the installation activities and we’re waiting for final sign off on milestone based on when the plants -- say the plant is up and running and the full line is ready to go. If you look at our deferred revenue, it is improved revenue line is a 26% increase in 2014 over 2013 to $7.2 million range. I think we can’t quantify exactly the volume of the milestones that are waiting buy off, but that is indicative of the amount of revenue increase that is tied up with those activities or sell offs and was deferred.

Les Sulewski – Sidoti & Company

Okay, that’s helpful. And then Jeff, moving onto -- you mentioned some new customers coming in and kind of regional layout, specifically focusing on the automotive side. Can you give us a little bit more color perhaps scope of potential size from each customer and margin profiles? You mentioned there is some growth in Japanese OEM coming aboard, regaining a major American supplier. So if you could just kind of give us a little background on each region, what you’re seeing from each customer gross and then growth profile on that.

Jeffrey Armstrong

Okay. Obviously for North America, this has been traditionally where the company started, better strength for us. Several years ago the big three U.S automakers we’ve had all three of those as customers historically and we had lost Chrysler several years ago to a competitor. This past year -- just recently in Q4 we were able to win them back and that is significant in two perspectives. One is it shows our equipment and our reputation and our level of support is much stronger than what the competitor was able to offer and led to them to choose to start to replace those systems across all of their plants. That is a very positive thing. Additionally since Chrysler is a part of now Fiat, that gives us additional opportunities and insight with Fiat as well. North America, we’re feeling comfortable with our position there and our continued strength in our relationships with our customers in those key accounts.

Europe we continue to have significant strength there. Obviously you know the European economy has been challenging over the past several years. And there was some concern that we would have the ability to continue to grow that. We don’t obviously consider we can continue to grow Europe forever, but the team there has done a great job with customer satisfaction, very demanding customers and continue to grow that business and we foresee that as continuing to be strong for us. I was recently travelling with our managing director in Asia, in Japan and several customers in China and the feedback I got from the Japanese OEMs as well as from the Chinese JV OEMs was very positive on our equipment and our level of support. We have continued to see our investments in Asia and China specifically continue to pay off and continued growth in that region.

I think that Japan certainly is an area we have not traditionally had strength with the OEMs. I think that is starting to change now with two planned orders from one major Japanese OEM and certainly a strong interest by another significant Japanese OEM to use our products more broadly. I think that’s very positive. I would say in the automotive space for gross margins, this goes back to a key point I covered in my discussion, which is for the automotive segment a 45% gross margin is a pretty good gross margin and is indicative I think of the technology and the skills we bring to bear versus being a commoditized product.

That being said, a piece of that is the installation activities and the labor associated with that, which is why we don’t see especially in the machine vision space the gross margins that other people in this space see because they don’t have those installation activities and design activities associated with this. As we start migrating more to 3D products where we -- the product we design once, we put it in a box and ship it at the end of the quarter, we should see very accretive gross margins to the upside. For any automotive business I would anticipate that we would be in the range of about 45% gross margin and anything for our 3D scanning products would be north of that. I think I answered all your questions.

Les Sulewski – Sidoti & Company

Yeah. No, that’s very, very helpful. Thank you, Jeff. Maybe I’ll give you a bit of a break Keith, if you could help me out with some of the expense related issues specifically in fourth quarter. And I understand you mentioned the increased headcount. Maybe you can give a number to that and 2014 being a transition year. But just want to understand, if most of the costs associated with some of those increases you talked about were bulked in the fourth quarter of 2014, can we expect a little bit of better efficiencies moving forward? And perhaps you could guide us towards a run rate whether a dollar figure or percentage of revenue and OpEx moving forward that would be helpful.

Keith Marchiando

Okay. Let’s talk a little bit about the expenses. One of the items that I did mention is that we did effectively a global salary action that went in place in April 1 of this calendar year. So that would have been for the fourth quarter of our fiscal year. And that was in the neighborhood of sort of 2% to 4% across the board depending on geography. I think you can get an idea of what that amount would be based on a quarter. The second one is the cost associated with Sarbanes Oxley and general auditing costs as well. The Sarbanes Oxley stuff as I mentioned is new this year for us. There are a couple hundred thousand dollars of incremental cost associated with that in the fourth quarter. And there will be a little bit more of that that trickles in in the first quarter of the year. Under the accounting rules you expense your auditing costs and your testing costs when they happen. You don’t get to accrue them across the period. They do come in chunky unfortunately. We expect to see a little bit more of that happening in first quarter and then that will go away. We expect to be more efficient in that process as we get to next year, but they are certainly based on the longer history of the company now that we are and these remain Sarbanes Oxley compliant. There’s going to be a little bit of a structural addition, probably in the $100,000 range that we just have to find offsets for elsewhere.

And Jeff mentioned our ERP system will help us to get more efficient in the back office and hopefully that will end up being a wash. The personnel changes, I think we’ve mentioned those a couple of times. We’ve as you know -- let’s talk year over year on those. Jeff was added in late calendar year. I was added in early calendar year, this year. And there were some transition expenses with the former CEO. Those are now done. We don’t expect to see anything further for myself or Jeff or the transitional expenses going into 2015. There’s a chunk there that’s -- recruiting costs are generally for executives and those should go away by next year, the percent.

Les Sulewski – Sidoti & Company

Okay. In terms of perhaps a percentage of revenue maybe 2015 somewhere closer to what we had in 2015 or 2014 something similar, maybe little bit higher on SG&A.

Keith Marchiando

A little bit higher, but not significantly higher. Again higher for some of the personnel costs that we related to salary changes. And again maybe some offsets for the expenses associated with the C3 changes. But again we are in the process of implementing a ERP system. Some of that will be expense and some of that will be capitalized. I think on a year over year basis may be up slightly but not significantly.

Les Sulewski – Sidoti & Company

Okay. That is helpful. Just one more thing too is, were there some shares repurchased in the fourth quarter and if so what are the thresholds on that?

Keith Marchiando

There were none.

Les Sulewski – Sidoti & Company

Okay. I thought I just saw a slight decrease in share count or a quarter over quarter.

Keith Marchiando

No, nothing that we are aware of.

Jeffrey Armstrong

No. I think there was an increase in share count quarter over quarter.

Les Sulewski – Sidoti & Company

Okay. I’ll have to circle back my numbers. All right, that will do it for me. Thank you so much for the color.

Operator

(Operator Instructions) We’ll move along to Mark Jordan with Noble Financial.

Mark Jordan - Noble Financial

Good morning, gentlemen. Jeff you mentioned the growing opportunity in Japan. Could you give an overview as to what are the current technologies many of the Japanese manufacturers are using and what is the wedge that you’ve been successful in using to get into those first couple of plans that you talked about?

Jeffrey Armstrong

Sure, yeah. Good morning, Mark. I would say that the Japanese in particular tend to more than potentially the rest of us like to use their own local ecosystem of suppliers because it’s just convenient and easy and we all tend to do it. I think what has been a big help for us is that internal benchmarking in the automotive industry I believe my perception is that the Japanese look hard at what the Germans and Europeans are doing. And since we have the strength in the European market, I think that is one of the key benchmarking things that they are looking at for quality and cost to say how are they be able to do this. I think that has been the entre point for us. I think that also as they start to see this, our technology and our software is a lot more capable than what they are able to get locally because of the limitations on those regional suppliers.

We’ve also had recently two local integrator companies of very good reputation approach us to start working together. We see this as being a big enabler, as a force multiplier for us for support, which is critical of the Japanese market. The concern with them, customers has been how are you going to be able to support me with a relatively small force here in Japan? So we see this as a force multiplier on the support and more importantly I think on the sales side because then they will be indigenous hunters and gatherers to go find opportunities. And these two specific integrators that approached us came to us with specific opportunities. I hope that answers your question.

Mark Jordan - Noble Financial

Yeah. You’ve mentioned the strong backlog you have. What are the typical lead times from when you get an order to when you’re able to realize revenue? And then secondly, how do you track that opportunity? Because I would imagine on the front side, it’s obviously a corporate buy. As you move down towards implementation it’s more of whoever is managing the construction or the integration process is really controlling the timing. Could you talk a little bit about what you have in place to monitor the process from sort of the reception through final integration and billing?

Jeffrey Armstrong

Yeah, absolutely. The ability for us, the timing for us to consume backlogging and convert to revenue on our automotive business, our in-line business is roughly in the order of 6 to 15 months depending on the scope of the project, whether it’s relatively simple or it’s a complex project that involves a lot of lead time and planning with the customer. On our 3D scanning products, as you can imagine, this is a very quick short cycle on that, but that is not obviously yet a significant portion of our business. The orders that we get are traditionally from plants and very few of them are from corporate level activities. So this is why for us we have great customer insight to the automotive segment where things are going because we have a direct feedback, not only from the corporate relationships, but also from the individuals plants.

So our ability then once we get the order is just to straight purchase order with line items and deliverables and milestones that we have worked out with the plant ahead of time as to when we’re going to do the installation activities. We just go through project management activities on each of these respective programs and then work our way through on the schedule tentatively working with the customer to find out when the line builder is ready, when the construction activities are ready, when they are ready for our equipment to be landed and then we can start doing assembly and commissioning of our gear.

Mark Jordan - Noble Financial

Typically when that installation occurs, is the plant down or is it -- which would be obviously something that would be managed as quickly as possible or is it sometimes integrated into a functional plant?

Jeffrey Armstrong

It’s a mix of both. A good example might be if we are – if they’re are going into a model change, they’ll have the line completely down. For example with Ford and the F150, they are doing the entire line build and construction in an offsite location and running test bodies down the line. This is typical with most manufacturers when trying to set up a new line in an offsite location, build it and ship it in. In that case we are able to do some integration activities, essentially the whole system set up and run offsite and then drop it in the plant when the construction of the plant is ready and the floor is clear. And it runs the complete gambit from sensor adds or cell adds in-line and/or potentially for offline cells that we can do while the full production line is running. It’s a mixed answer, Mark.

Operator

We’ll take our next question from Richard Eastman with Robert W. Baird. Please go ahead, sir.

Richard Eastman – Robert W. Baird

Hi Jeff. Good morning. Just a couple of questions. Can you provide any added color on this Chrysler win, just recapturing that business. You had kind of suggested that this business rolls out presumably over time and this is -- this would be replacing a competitor’s test systems. And so how does something like that actually roll out? Is this like five to eight years based on model changeovers or what would be the pacing and potential size of a win like that?

Jeffrey Armstrong

Good morning, Rick. Let me turn this over to Mark Hoefing who has a good insight of this and can answer this more credibly that I can.

Mark Hoefing

Morning Rich. When we work with the automotive manufacturers, most of our orders come from new model programs where they are changing something on the vehicle. We do get flow business after we get systems in for spares and repairs and consulting and training, those types of things. But the bulk of the dollars are driven by new model programs. What we expect whenever we capture a new customer or regain a customer is that we’ll start to compete for the orders typically against competitors. But if we get into a preferred situation and get on the inside of their planning groups and get inside information about the scope and size and timing, that gives us an advantage to win those projects against the competition. So get inside of a new customer or regain a customer we’ll basically participate as they roll out new products, as they roll out changes to their vehicles.

Jeffrey Armstrong

Let me just put some more --- a little ladder than that. The other thing that’s important here is this gives us an opportunity then to try and become their global standard for metrology. If we can then perform successfully on these first couple of orders, our intention is to essentially roll across all of their plants and all of their lines and grow this back to a significant portion of our business that has historically had been in the 90s for example.

Richard Eastman – Robert W. Baird

Okay. But to be specific, you have displaced that customer. This isn’t as though we won an opportunity to bid that work. We will be displacing that customer as these new programs roll out.

Jeffrey Armstrong

The competitor in this case was -- it was a regional competitor, North American type of a competitor that we don’t see globally. For whatever reason that I don’t know the history on it, we had had significant success historically with this customer and fell out of favor five to 10 years ago. so the important point though I guess on the book of business is we continue to see record revenue and growth in our business despite the loss of that customer five to 10 years ago. For us this will all be additive on top if we are successful in satisfying this customer which we have the capability and every intention of doing so we can roll up every single one of their plants and start becoming their brand’s standard.

Richard Eastman – Robert W. Baird

Okay. And then just maybe a follow up question on this Ag manufacturer win in Europe, what -- is this a similar business? Is this automated assembly production line oriented? And also is this Helix product or?

Jeffrey Armstrong

It’s a good question. Let me turn this over to Mark.

Mark Hoefing

It is very similar to the automotive business. It’s automated production at lower line rates, but it’s basically measuring a complex assembled welded together cap for tractors. Similar business to the automotive business.

Jeffrey Armstrong

And you know if this is order with the Helix order?

Mark Hoefing

I believe it was Helix, but I’m not positive on that.

Jeffrey Armstrong

With quick confidence. we think it was a Helix order, but we haven’t -- we don’t know for sure.

Operator

And at this time we have no further questions. I’d like to turn the call back over to Mr. Jeff Armstrong for any closing or additional remarks. We do have another question if you would like to take it?

Jeffrey Armstrong

Yeah, please.

Operator

Our next question comes from George Melas with MKH Management.

George Melas – MKH Management

Thank you very much for taking my question just under the wire here, Can you talk a little bit more about the diversification that is in your strategic plan? And maybe you could start by telling us the various products that you have that are outside of automated systems, maybe roughly what percentage of revenue that is and maybe the various products that you are focusing on there?

Keith Marchiando

Good morning George. Absolutely. Diversification right now, the percentage of our revenue is roughly 10% that is none inline type of business. So the diversification strategy is a multi-prong approach. Our inline business specifically in the automotive space has play across several industries. For example we’ve talked about the past inquiries that we were working on for white goods for building refrigerators, washing machines, that type of production line atmosphere. Heavy equipment, especially vehicle operative and a good example of this is our pursuit diversification with the agricultural builder, specialty vehicles, off road vehicles, all those types of production that are similar that would give us diversification outside of the automotive per se. There’s also opportunities in offline sales and we take a robot and we put a sensor in our software on it and setup as a standby cell.

It is not in the production line, but it is near production or can be as a standalone cell. That has a lot of play outside of an inline production space for machine shops, tier 1, tier 2 suppliers to take a part over, doing inspection, either handled or robot loaded for inspection, to do component validation to design. And then finally on our 3D standing products, we continue some of the best products technically in the market. We are focusing our R&D efforts this year to deliver several new products in this space. That will give us almost by definition diversification because it goes to a much broader audience of users in various industries who have desire for a handheld or a small robot based scanning product. For either 3D scanning for 3printing and or capturing what a product is compared to a design that you may not have and you want to recreate that for replication for archiving purposes. That answer your question, George?

George Melas – MKH Management

Yes it does very much so. Thank you very much.

Jeffrey Armstrong

Okay, Joe, thank you. I think is there one more call?

Operator

We do have one more question. And our next question comes from Dennis Scannell with Rutabaga Capital.

Dennis Scannell – Rutabaga Capital

Good morning guys. Jeff you talked about fiscal 2015 having a strong organic sales growth. I was wondering if you might be able to put some parameters around that. Are we thinking plus 5% to 10% is it, plus 10% to 15%? Just looking for a little bit of a range in terms of what we should expect.

Jeffrey Armstrong

No, absolutely, I think during our investor day I tried to show where our portfolios are going and where we have the potential to go in. What we have said is because of the strong continued adoption of our equipment and our aggressive approaches with our account teams to grow new customer s and intensify with existing customers in the automotive space, the IE test global survey for automotive shows about a 4% CAGR across the board with the financial period that we are looking at. I tend to believe that our results are showing in forward leading indicator that we have the ability to significantly exceed us. And our 3D scanning products, that market space like (inaudible) shows it’s growing in about an 8% to 11% CAGR. And we want our target to be in that. As we can increase that mix of products and that ratio as it grows the overall business we will tend to see a higher CAGR. So specifically for 2015 I think if you look at a 30% increase in our backlog the win rate we are getting I tend to think that we have a very good perspective that we will have significant organic growth in our space if it’s in the ranges that we just discussed.

Dennis Scannell – Rutabaga Capital

Okay, thanks and then going forward would you expect, I guess I was a little uncertain about what you were saying about forward looking gross margins that automated systems settle out around 45%, 3D is higher. So as we look at the business going forward as you grow, is at mid-40s a good gross margin to be using or is that being too aggressive?

Keith Marchiando

I think – I’ve said this in the past which for me is a benchmark that we’ve established for the business is for the near term, to use that 45% as a good measuring stick for ourselves and for yourself. I think as we continue to evolve the business and can drive more of our 3D scanning products, you will tend to see as that percentage of our revenue grows, you will tend to see that pushing that gross margin up across the board. And then obviously as we continue to control our costs, drop more and more to the bottom line.

Analyst

Right, absolutely. So we’ve got some increases in operating expenses, but that should be pretty leveragable going forward. And then – so we’ve won back Chrysler which is exciting. Do we do much business now with Fiat or is that kind of new greenfield opportunity for us in Europe?

Jeffrey Armstrong

Mark, go ahead please.

Mark Hoefing

We have done business for the last three to five years with Fiat. We see a lot of competition on the program. So we certainly aren’t their only supplier. We work with them globally. We’re hoping that we can use any wins anywhere in the world to leverage a stronger position with them.

Jeffrey Armstrong

One of the things to put color on that is that in Japan specifically, obviously when we start to get these initial wins, my meetings with midlevel management in these large automotive companies is to try and show them the value of using our systems as their de facto global standard and then try at that point to establish global pricing agreements such that we don’t have to do hand to hand combat at every single plant around the globe. We now have the corporate stamp of approval and pricing so that if a plant manager wants to go off and do this, they know exactly what they’re supposed to do. They know the standards and they know the pricing. So that is our strategy to make our life as simple as possible and secure wins in the future. So with Fiat we try to do something.

Operator

And at this time we have no further questions. I’d like to turn the call back over to Mr. Jeff Armstrong for any additional or closing remarks.

Jeffrey Armstrong

Okay. Thank you, Joe. Thank you all for joining us today and over the next coming months we’ll be looking to continually update the shareholders and investors on our plans. We look forward to those conversations. Thanks very much.

Operator

That concludes today’s conference. We thank you for your participation.

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