Key Technology's (KTEC) CEO Jack Ehren on FQ1 2016 Results - Earnings Call Transcript

| About: Key Technology, (KTEC)

Key Technology, Inc. (NASDAQ:KTEC)

Q1 2016 Earnings Conference Call

January 28, 2016 05:00 PM ET

Executives

Cathy Burlingame - IR

Jack Ehren - President and Chief Executive Officer

Jeff Siegal - Senior Vice President and Chief Financial Officer

Analysts

Beth Lily - GAMCO Investments

Operator

Good day, ladies and gentleman. And welcome to the Key Technology Fiscal 2016 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].

I would now like to introduce your host for today’s conference, Ms. Cathy Burlingame. Ma’am you may begin.

Cathy Burlingame

Thank you, Chanel. Good afternoon and thank you joining us for the Key Technology fiscal 2016 first quarter conference call. Hosting the call today will be Jack Ehren, President and Chief Executive Officer, and Jeff Siegal, Senior Vice President and Chief Financial Officer. Today’s call is being recorded and will be available for replay on the Investor Relations’ homepage of our website at www.key.net.

Before we begin, I would like to remind you that comments made in today’s call may include forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations or beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These and other cautionary statements are listed in today’s release. For a more detailed discussion, please refer to the company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission in December 2015.

And now, I’d like to turn the call over to Jack Ehren, President and Chief Executive Officer, for a discussion of the company’s results.

Jack Ehren

Good afternoon. As I have stated before, for the last few years, we’ve been focused and committed to transforming and positioning Key for sustainable long-term growth and profitability and to create long-term shareholder value.

Our strategy for generating long-term value has included provided innovative industry-leading solutions that can be effectively leveraged across existing and new applications, expanding in our core markets in North America and EMEIA, penetrating high potential adjacent and geographic markets, capitalizing on strategic partnerships, leveraging extensive customer research and market analysis and implementing enhanced operational efficiencies.

Regarding our strategic objective of providing innovative industry-leading solutions, we remain positive and confident that Veryx, our new digital sorting platform will set a new standard for digital sorting and provide true differentiated value to our customers globally.

We believe Veryx will enable us to effectively penetrate new and existing insertion points in our core markets and high-potential adjacencies in all geographies with its unique value-add capabilities including sustained all-sided surface inspection, multi-sensor pixel fusion, intelligent automation and intuitive user experience.

Since the introduction of Veryx in late September, we have started building the funnel of opportunities for this platform. We received initial Veryx orders in our first fiscal quarter in certain core market applications. And we expect to start shipping these orders in our third fiscal quarter.

We expect Veryx orders to increase throughout fiscal year 2016 and into fiscal year 2017 with a more significant positive impact on revenues expected to be realized in fiscal year 2017. We are executing on our schedule of phased releases for the Veryx platform but applications and sizes, throughout 2016 and beyond.

We are continuing to field-test and finalize application-specific solutions in both North America and Europe with continued positive customer responses and support globally.

In our first fiscal quarter, orders were solid with major contributions again from our EMEIA region as well as a significant increase in orders in North America compared to recent past quarters. Important strategic deals were won in both these regions most significantly in the potato segment.

An important part of our overall strategy has been to grow in the EMEIA region. In fiscal years 2014 and ‘15, we achieved two consecutive years of record orders in euros in this region with orders in fiscal year 2015 exceeding the prior year orders by 32%.

In the first quarter of fiscal year 2016, our EMEIA orders in euros were again strong significantly exceeding the orders received in the first quarter of fiscal year ‘15. We continue to be positive regarding our opportunities and our ability to win with customers in this region. Our commitment to providing differentiated value to these customers with new innovative solutions that effectively address their specific operational challenges and requirements, and enable them to drive up overall yields and profitability is critical for our continued success in the EMEIA region.

Given the solid bookings in the first quarter, the backlog at the end of our first quarter increased to 37 million, approximately 30% higher than the backlog at the end of the first quarter a year ago. Entering our second fiscal quarter, we are positive regarding our overall global funnel of opportunities, most significantly in North America and EMEIA with large potential deals in both regions.

Business opportunities in EMEIA continue to be strong and we’re optimistic that North American orders in fiscal year 2016 will increase over the unusually low order levels experienced in North America in fiscal year 2014 and ‘15.

As previously disclosed, our operating results in the first fiscal quarter included $680,000 of restructuring charges, all of which were recorded in general and administrative expenses. Excluding these restructuring charges, all operating expenses were in alignment with expense levels recorded in the same quarter a year ago and down sequentially from the prior quarter.

We continue to focus heavily on ways to improve our operational efficiencies and to control cost, well at the same time striving to position Key for long-term success.

As we passionately and relentlessly continue on our transformational journey to reshape our culture, our approach to technology leadership our customer relationships globally, and our overall ways of doing business, we continue to believe we are making long-term decisions that will positively impact profitability and shareholder returns in the future.

I will now turn the call over to Jeff for an overview of our financial results.

Jeff Siegal

Thank you, Jack. I will now discuss the first quarter results for fiscal 2016. First quarter net sales were $24.8 million compared with $20.1 million reported in the same quarter a year ago. Sales of automated inspection systems in the first quarter totaled $7.8 million, compared with $6.4 million in the same period a year ago, a 22% increase.

First quarter net sales of processed system were $10.7 million compared with $7.9 million in 2015, a 35% increase. The increases in automated inspection and process systems net sales were primarily due to increases in the processed potato and other food markets.

From a geographic standpoint, net sales increased in North America, Europe and Asia Pacific offset by a decrease in net sales in Latin America. Parts and service net sales were $6.3 million versus $5.8 million in the same period a year ago, a 9% increase.

Gross profit for the first quarter was $7 million compared with $5.5 million for the first quarter of 2015. As a percent of sales, margins of 28.1% increase from the 27.3% reported for the same quarter a year ago. Gross margins for the quarter ended December 31, 2015 were higher than a year ago due to more efficient factory utilization. However, our gross margins were again challenged due to our product mix consisting of low volume, of our higher margin automated inspection system products.

Operating expenses of $9.4 million for the first quarter were 37.8% of net sales compared with $8.7 million or 43.3% of net sales for the same quarter last year. Included in operating expenses, were $680,000 of restructuring charges. Excluding these restructuring charges, our operating expenses were in alignment with expense levels recorded in the same quarter a year ago.

The income tax benefit realized in the first quarter of fiscal 2015 included an additional benefit of approximately $106,000 due to the retroactive renewal of the research and experimentation tax credit. The net loss for the first quarter was $1.7 million or $0.27 per fully diluted share compared with a net loss of $1.8 million or $0.29 per share in the same period last year.

I will now discuss our first quarter 2015 orders and backlog. For the first quarter ended December 31, we recorded new orders of $31 million. Last year’s first quarter new orders totaled $30.5 million. Our backlog at the end of the first quarter was $37 million, this compares with $28.7 million at the end of the first quarter last year. Orders were up primarily in the potato and the other food markets partially offset by a decrease in the tobacco market. The backlog mix at the end of the first quarter was 46% automated inspection systems, 49% processed systems, and 5% parts and service.

Looking forward, net sales for the second quarter of fiscal 2016 are expected to increase moderately as compared to the net sales reported in the first quarter of fiscal 2016. Gross margin are expected to improve in the second quarter of fiscal 2016 as compared to the first quarter of fiscal 2016.

Operating expenses for the second quarter of fiscal 2016 will be adversely affected by approximately $600,000 related to increased research and development expenditures associated with incremental consulting, contract services and personnel cost related to new product development. Operating expenses are anticipated to be relatively flat as compared to the first quarter of fiscal 2016.

I will now turn the call back over to Jack.

Jack Ehren

Thank you, Jeff. We will now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from Beth Lily of GAMCO Investments. Your line is now open. Please go ahead.

Beth Lily

Good afternoon, Jack and Jeff.

Jack Ehren

Hi Beth.

Beth Lily

So, I wanted to just spend a minute and talk about two things. One is, can you talk about the, in the second quarter you talked about $600,000 additional expense to the R&D and what else?

Jack Ehren

That was the main added expense in the second quarter.

Beth Lily

Okay.

Jack Ehren

But we also said that we expected operating expenses to be consistent with the first quarter because we won’t be incurring the restructuring charge that we had in the first quarter.

Beth Lily

Yes, okay, okay. And so, the $600,000 has to do with what kind of R&D Jack?

Jack Ehren

It’s primarily associated with continued development efforts with regards to our Veryx platform to help ensure that we’re able to effectively release the Veryx application with sizes within our established timeline.

Beth Lily

Okay.

Jack Ehren

So, each application has got very unique recipes that help ensure that we have consistency across product lines and across plans for our customers and minimize the amount of operator interaction. And each of those has unique recipes that, requires software capabilities to be built. And what we’re doing is increasing our cost to help ensure we hit the timelines and releases of the different application.

Beth Lily

Okay. What were your revenues in the second quarter last year?

Jack Ehren

They were actually $21.6 million.

Beth Lily

Okay. So, you said that revenues are going to be basically comparable with a year ago in this upcoming second quarter, is that correct?

Jeff Siegal

No, we said revenues would increase from the levels in Q1 of this year.

Beth Lily

Okay. So, we’re going to see revenues above $24 million then in this second quarter coming right?

Jeff Siegal

That is correct, yes.

Jack Ehren

Yes, we said revenues would increase moderately over the first quarter.

Beth Lily

Okay, moderately, excuse me. Okay, so, all right, so revenues are going to increase moderately and you’re going to have the same level of operating expenses. What do you anticipate gross margins to be? Do you think you can expand gross margins beyond 28%?

Jack Ehren

We said we expected margins to increase in the second quarter.

Beth Lily

All right. So, do you - have you modeled to be profitable then for the second quarter?

Jack Ehren

It’s not something that we have disclosed at this point. All we’ve talked about are the three numbers that we provided.

Beth Lily

Yes, but I’m saying, so if we’ve got revenues and let’s call it up modestly, let’s say that revenues are $25 million and you can expand gross margins above 28% and maybe even say we get to 29%. And operating expenses are going to be comparable. You should be profitable?

Jack Ehren

I think, we’d still be - still will be challenged to be profitable in the second quarter.

Beth Lily

Okay, okay. And then, what about then as you go forward for the rest of the year, are you, I think last call you talked about being profitable for the entire year, and is that still your goal?

Jack Ehren

Well, I think that the first quarter restructuring charges and the additional R&D that we’ve talked about for the second quarter definitely added pressure on our full year profitability. However, given our expected order volumes and our growing backlog, we believe it remains possible for us to achieve profitability for the year.

Beth Lily

Okay, all right. And then, I just wanted to ask one other question and that is, I think you talked about in your formal comments about the North American EMEA outlook is good. So, what does that mean? Are you - do you have the sense that companies are willing to place orders and spend money and capital or what’s the tone in the tenure of the customer base?

Jack Ehren

Yes, so I think we’ve seen a strong spending in the EMEIA region for over a year now. And we continue to see that in our core segments for the foreseeable future. In ‘14 and ‘15 were unusually low years in our core markets, and it had a lot to do with the 2013 being a record year from an order standpoint in North America and it took time for those customers to absorb those capital investments. And what we’re seeing in ‘16 is an upward trend from where we were in ‘14 and ‘15. It won’t get back to the levels, that was at in ‘13 but we’re definitely seeing an upward trend and an increase in spending in our core markets.

Beth Lily

Yes, okay. So, potatoes, and your core market being potatoes?

Jack Ehren

Core markets being potatoes, processed fruit and vegetable, and nuts and dry-fruit.

Beth Lily

Yes, okay. Good, all right. Those are all the questions I had.

Jack Ehren

Thank you.

Operator

Thank you. [Operator Instructions]. And I’m showing no further questions at this time. I would now like to turn the call over to Jack Ehren from closing remarks.

Jack Ehren

So, I would just like to say thank you to all of you for again joining the call and your continued support. And again, you have our commitment to driving Key with the vision that we’ve described. And returning Key back to profitability and creating shareholder value. Thank you very much. We look forward to talking to you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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