Rofin-Sinar Technologies' (RSTI) CEO Thomas Merk on Q1 2016 Results - Earnings Call Transcript

Rofin-Sinar Technologies, Inc. (NASDAQ:RSTI)

Q1 2016 Earnings Conference Call

February 4, 2016 11:00 AM ET

Executives

Thomas Merk - President and Chief Executive Officer

Ingrid Mittelstädt - Chief Financial Officer and Executive Vice President

Analysts

Joe Wittine - Longbow Research LLC.

Patrick Newton - Stifel Nicolaus

Mark Miller - The Benchmark Company

Operator

Welcome to the ROFIN-SINAR Technologies First Quarter and Fiscal Year 2016 Financial Results Conference Call. Today’s call is hosted by Mr. Thomas Merk, President and 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.

Thomas Merk

Thank you very much. Good morning or good afternoon to everyone I’m here in Plymouth, Michigan together with Ingrid Mittelstädt, our CFO. I hope you all received the press release containing our first quarter 2016 results. We will give you some comments about our business and performance, and then we will open it up for your questions.

Now before we start, I would like to make the usual statements about the information you are getting in this conference call, Safe Harbor statement. Our discussion may include predictions, estimates or other information that may be 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, let’s get started. In the first quarter, we made significant progress executing on our strategy to generate shareholder value. We continued to implement efficiency and consolidation initiatives and achieved key R&D milestones that will support long-term growth in sales and margins.

We expect to face the headwinds from uncertainties that the Chinese economy similar to what has been recorded by other companies already. However, we believe, we’re well positioned for the future and we’re encouraged by our solid bookings activity in the first week of this current second quarter.

Let me review some of the highlights of the first quarter. Quarterly earnings per share increased to $0.23 at the upper end of our guidance range, excluding non-recurring costs mainly related to the current proxy contest, earnings per share would have been above our guidance range at $0.25. Quarterly sales were broadly in line with last year on a constant currency basis and they’re negatively impacted by the timing of revenue recognition for one order.

We continue to reduce manufacturing costs for our fast growing high-power fiber laser product and we have a clear path to achieve a reduction of 15% to 20% by the end of the fiscal year. We also made significant progress with our efficiency program, which we commenced on fiscal year 2015, and expect to realize $5 million of operating cost reductions in fiscal year 2016.

We completed the merger between our two German sites; m2k and Dilas and also took steps to align our work cost and other resources as growth opportunities and market’s demand. We’re preparing further actions to streamline our processes globally and continue to evaluate additional opportunities to reduce operating costs.

As I mentioned at the start of this call, we also advanced the number of key R&D initiatives. We’re continuing to see the result of our investment in R&D, which will drive long-term growth and value creation. We successfully tested our new 2.5 kilowatt fiber laser that only uses one single fiber laser module, and we’re on track to commercially launch this laser in 2016.

We believe that we will be the first-to-market this promising product, which will enable us to offer 5 kilowatt laser based on just two combined modules. We believe this will enhance our competitive position and we already have had constructive discussions with a number of OEMs.

We also achieved a major milestone in developing our ultrashort pulse laser by qualifying our femtosecond laser, which can now be used in our proprietary filament cutting process. This patented process technology opens up additional applications, because it enables our customer to cut very sensitive materials like sapphire and special glass materials with the highest edge quality.

We’re excited about the future of our company. We continue to enhance our cost structure and introduce new products that will further differentiate us from the competition, drive market share gains, and support our long-term growth.

I will now hand over to Ingrid, who will comment on our financials. Afterwards, I will return with small details on our operations and markets, as well as a discussion of our outlook.

Ingrid Mittelstädt

Thanks, Thomas. Good morning and good afternoon to everyone. Let me walk you through the performance of our business segment. Compared to the first quarter of fiscal year 2015, sales in our marking and micro business decreased $9.9 million, or 17% to $47.7 million, mainly as a result of lower business in the machine tool, electronics, photovoltaic, and automotive industries.

Micro marking business contributed 43% of total quarterly sales. The sales in our macro business decreased by 5% compared to the first quarter of last fiscal year and reached $45.3 million. Macro business contributed 40% to quarterly sales. The decrease is mainly due to lower service and spare parts business.

The product mix for high-power fiber laser shifted as already mentioned from CO2 towards more units of high-power fiber lasers. In Q1 2015, the allocation was approximately 60% CO2 and 40% fiber. In Q1 2016, the allocation was 47% CO2 and 53% fiber.

Our component business increased 14% to $19.5 million, and contributed 17% of quarterly sales. The strongest contributors this quarter were the fiber portfolio of Nufern, the laser diode business from Dilas, and the optical component product portfolio from Optoskand.

The breakdown of our quarterly laser sales by industry was as follows. Automotives accounted for 15% of total sales compared to 16% in Q1 2015; machine tools represented 37% of laser related sales slightly above 36% last fiscal year. Machine tools had a solid and stable macro business.

semiconductor and electronics was 16% of sales compared to 19% in 2015, where we had the strong business with the consumer electronics and the photovoltaic industry. We expect an improvement in the semiconductor business after Chinese New Year.

Other industries were 32% of sales compared to 29% in the first quarter of 2015, solid contribution from the flexible package and solid medical device business.

During the first quarter we shift a total of 1,111 lasers compared to 1,130 lasers in the first quarter of 2015. Of those, 510 units were for macro applications compared to 453 in the first quarter last fiscal year, and 601 units were shipped for marking and micro applications this quarter compared to 677 units in the comparable period last fiscal year.

Let me now turn to the income statement. We are pleased to report very strong results for the first quarter of fiscal year 2016, in terms of earnings. We were able to achieve this income as a top level of our guidance despite low business levels and negative timing of revenue recognition of one order in Asia, and some non-recurring expenses mainly related to the proxy contest.

Gross margin increased from 35% to 36% comparing the first quarter’s of fiscal year 2015 and fiscal year 2016. During the quarter, we benefited from the improvements we were able to achieve in the manufacturing costs, mainly of our high-power fiber lasers, which helped to offset the unfavorable product mix with lower revenues for micro and marking applications, as well as lower service and spare parts.

The quarter was affected again by significant exchange rate fluctuations of the currencies in our key markets. For example, between Q1 2015 and Q1 2016, the U.S. dollar strengthened approximately 14% against the euro, and between 4% and 5% against the Japanese Yen, the British pound, or the Chinese renminbi.

Since the U.S. dollar strengthened against the currencies of our key markets in Q1 of fiscal year 2015, we expect that after Q2 fiscal year 2016, foreign exchange will have a minimal effect or at least no material effect on our year-over-year comparison.

Foreign exchange rate fluctuations decreased our quarterly revenues by approximately $8.5 million and the gross profit by approximately $1.5 million. SG&A, including intangible amortization represented 21% of net sales in the first quarter of the current fiscal year compared to 20.3% in the corresponding prior year quarter.

In absolute figure, SG&A decreased by $1.3 million to $23.6 million for the quarter, mainly due to the impact of the exchange rate fluctuations of $1.7 million, lower labor costs and lower depreciation, partially offset by non-recurring expenses of approximately $0.7 million mainly related to the proxy contest.

R&D expenses decreased by $1.9 million to $8.7 million, representing 7.7% and 8.7% of total sales in the first quarter of fiscal year 2016 and fiscal year 2015, respectively. Quarter growth spending was $8.9 million in the reporting quarter, compared to $10.7 million in Q1 2015. The decrease is mainly a result of lower salaries and wages, lower leasing and rental expenses and lower depreciation costs, and the impact of exchange rate fluctuations of $0.9 million.

Our effective tax rate for the first quarter decreased to 23.6%, compared to 26.6% for the same period last fiscal year, mainly as a result of the reinvestment of the legislation regarding R&D tax credits in the U.S.

During the quarter, we were able to improve our net profit with controlled operating expenses and reduce manufacturing costs for our main products, generating earnings per share of $0.23 based on $28.5 million weighted average shares outstanding in Q1 2016.

We achieved these results despite low absorption of fixed costs in manufacturing, unfavorable product mix in additional non-recurring expenses, mainly related to the proxy contest. This represents an increase of 5% year-over-year. The impact of the non-recurring expenses was to reduce our earnings per share by $0.02.

Now, coming to the balance sheet. Trade accounts receivable decreased in the first quarter of fiscal year 2016 by $12.4 million, mainly due to lower sales in the last weeks of the quarter, as a result of Christmas holidays and lower sales with our Asian customers. The impact of exchange rate fluctuations on accounts receivable was a decrease of approximately $1.5 million. The day sales outstanding was 68 days compared to 67 days last fiscal year.

Net inventory increased by approximately $0.2 million to $181.2 million during the first quarter. Inventory decreased by $3.5 million, due to the impact of exchange rate fluctuations, but we also said an increase on $3.7 million. As a result of timing of revenue recognition and some projects with the leverage in Q2 2016, we have the higher stock at the end of the first quarter. Based on the cost of goods sold figures, inventory turns approximately 1.6 times.

Now, I would like to give you some information related to the cash flow. Cash and short-term investments increased by $1.4 million to $177 million during the first quarter of fiscal year 2016, and the impact of exchange rate fluctuations was a decrease in cash by $2.6 million.

During the first quarter, the company used $0.8 million for its operating activities. This is mainly a result of timing issues in our working capital positions, due to Christmas time, $0.7 million were provided from investing activities, capital spending for the quarter was $3.5 million. $8.4 million were provided by the company in financing activities, mainly due to the insurance of common stock of $8 million.

Now, coming to our earnings guidance, the second quarter and the fiscal year 2016 guidance takes into account expected unfavorable impact of the other exchange rate, resulting from the continuing strengthening of the US dollars against several currencies. The majority of any such impact affects the sales level with net income being affected to a lesser degree due to our natural hedging.

As a result of the backlog situation, our current market judgments and the global economic environment, especially the uncertainty in China who want to give you the following guidance for our expected financial performance in the second quarter of fiscal 2016. For the second quarter ending March 31, 2016, the company expects sales to grow sequentially from the first quarter in the range of $115 million to $121 million.

We estimate gross profit for the second quarter in the range of 35% to 36% of net sales and period expenses, including intangible amortization in the range of 28% to 29% of net sales. The effective tax rate is estimated to be in the range of 27% to 28%, intangible amortization and fixed assets depreciation are estimated between 3% and 3.5% of net sales.

And for the fiscal year ending September 30, 2016, the company is updating its sales guidance to reflect existing order entry, including the mentioned de-bookings and economic uncertainty in China. This updated guidance does not reflect any material change in the operating assumptions underlying the company’s earlier guidance for its fiscal year or its projected net income as a percentage of sales.

The company now expects sales to range between $495 million to $525 million and continues to expect net income profitability at the midpoint of the sales range to be around 8% of net sales. This guidance is only an estimate and again subject to older risk of our Safe Harbor statement.

Thanks for listening. And let me hand it back to Thomas.

Thomas Merk

Thank you, Ingrid. Now, let me give you some more details on our operations and markets in Q1, starting with a geographical overview. We again want to remind you that our geographical split shows our direct sales to each region. We estimate that due to sales of our integrators and our OEMs, our sales breakdown for Asia and the sales of our Africa’s exposure to Asia, which longer-term is expected to be a high growth market.

As in the fourth quarter, North America showed a robust and stable business, the sales increasing to $28.7 million from $27.1 million in Q1 2015. North America sales contributed 25.5% of total sales in Q1, medical device, power train applications, and automotive and processing of organic material with CO2 lasers supported this strong momentum.

Asia declined by 12.6% to $34.1 million, representing 30.3% of our business. Within Asia, China and Japan declined while the sales of our Singapore business increased. China itself accounts for 18.2% of our net sales. Order entry in China was lower, but it’s showing stronger performance so far in the second quarter.

Europe declined by a 11.7% to $49.7 million. On a constant currency basis, our European sales would have been broadly in line with the prior year. In total, the business in Europe is stable for our – for all our three end products. I’m happy to say that Switzerland is showing improved order entry after difficult year based on the currency fluctuations.

Now, let me update you on our main product groups with some R&D remarks and background. Unit base of our high-power fiber lasers continue to be strong and increased by 36% year-over-year. As already mentioned, we expect to launch our new 2.5 kilowatt fiber laser module in 2016, and reduced manufacturing costs by 15% to 20% by the end of the fiscal year.

In addition to tailing effect from increased unit volume, we expect to lower manufacturing costs through increased power levels on our pump modules. We expect to launch these new pump modules before the end of Q3 fiscal year 2016 already.

Our total CO2 business was largely constant. Phase of our high-power CO2 laser declined year-over-year, representing 9% of total sales. So let me give you a remark here. Why do we disclose this number? We want to give you a feeling that even if high-power CO2 business would decline slightly on that this effect is not really materially for the company.

ROFIN has successfully shifted the technology and the technology transitions to both high-power fiber laser already. Our low power CO2 had a very positive start to the fiscal year, and the number of units increased by approximately 20%. As our short pulse laser showed a strong increase in order entry, mainly this filament cutting of brittle material, as well as marking applications by sales declined by 10% in the first quarter. We’re confident in the outlook for this business, particularly as we qualified our femto laser or filament cutting into one this year.

The order entry for the first quarter declined to $96.9 million. The decrease in order entry was the result of adverse currency movement, which had a negative $18 million impact, hence the bookings in anticipation of cancellations by two Chinese customers, which had a negative impact of approximately $12 million.

European orders declined by 4.4%, but with the constant exchange rate, Europe would have significantly increased. North American orders declined by 9%, and Asian orders declined by approximately 20% via through the de-bookings. We are very encouraged by our solid order entry in the first week of Q2, including by the way our Asian region.

Turning to the outlook for Q2 fiscal year 2016 versus Q2 fiscal year 2015. In macro, we expect a stable CO2 business with increasing low power business and slightly declining high-power. For high-power fiber business, we see the positive momentum to continue. I hope that we’ll be able to report about new OEMs we could convince with our new powerful modules already in the next earnings call.

In micro, we see a stable business in medical and packaging and TV to further interest core glass cutting. In marking, we expect to see a stable or even improving business based on positive impact of the semi-markets of medical device and the top market, as well as on a stable European demand. We expect also our component business to be stable. M&D will increase based on order entry we achieved in Q1 2016 and in January 2016.

Our general outlook and strategies. Overall for our company, we expect sequential growth in sales in the second quarter. As always, our quarterly guidance is based on backlog and lead time of orders. The main challenge currently facing companies with exposure to Asia is the uncertainty, of course, in the Chinese economy. However, we’re encouraged by our discussions with our Asian customers and OEMs.

In addition to that, we believe the semicon market will increase after Chinese New Year, which is currently. We’re pleased with the momentum in our bookings activity at the start of Q2. This activity in January already much stronger than in the first month of Q1, both in Asia and globally.

We also had a solid backlog of $128.7 million supporting our growth. We continue to execute on our efficiency and consolidation program started in early 2015 to drive cost reduction and increased gross margin. In addition, we will be presenting new product development at two upcoming trade shows; the MD&M in Anaheim, and Photonics West; that we believe will further enhance our competitive position upon the commercial launch.

Overall, we see significant opportunity to win market share, expand our margin, and increase long-term shareholder value. We are really excited about the future, and as always, we want to thank ROFIN team for their contributions, performance, and achievements, especially in this recent quarter.

Thank you all for listening. And now, we are prepared to answer your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from the line of Joe Wittine with Longbow Research. Please go ahead with your question.

Joe Wittine

Thank you. Good morning.

Thomas Merk

Good morning, Joe.

Ingrid Mittelstädt

Good morning, Joe.

Joe Wittine

On the orders cancel in China, I guess, you shouldn’t be surprising given the headlines. Can you tell us which market vertical the cancellations were in? And I’m curious if you have – you’ve lost these competitively, or if your customers is simply pulling back their investment plan?

Thomas Merk

Yes, Joe, that’s an important question. It was the last month. It was – the customer is not realizing this project, and the bigger one was solar, and the other one was, Ingrid, help me what’s that?

Ingrid Mittelstädt

Machine tools.

Thomas Merk

Machine tools, machine tools, yes.

Joe Wittine

Okay.

Thomas Merk

So given to the competition and in the last case, we even expect may be a new order in the next quarter.

Joe Wittine

Okay. So this is maybe – is it fair to say this is specific to the solar market right now and therefore…?

Thomas Merk

The first I would say is specific to solar market and to the Chinese situation there.

Joe Wittine

Yes, because I think we’re curious. I know you saw a rebound in the first part of the second quarter here. But I’m curious how you’re comfortable that you cut the 2016 guidance enough, given plenty of concerns over industrial overcapacity in China, and in that new credit concerns, et cetera. So is a fair summary here that this is pretty isolated to solar you’re pointing, you’re not seeing orders pushed out in automotive, industrial, et cetera?

Thomas Merk

We don’t see push out, no, not all. As we already told, we see a strong order entry model in January compared to the first month in the Q1. And in terms of photovoltaic, this cancellation was causing from solar cells, we do see a positive momentum still on the crystalline solar cells with a PERC application. There we also have backlog and we see business in this fiscal year. We already had also in Q1 sales and order entries in this market. So I would not see photovoltaic, in general, I would see photovoltaic positive in China in this fiscal years too.

Joe Wittine

Okay, that’s helpful. On the 2.5 kilowatt modules during discussions to sell the product, are these new to ROFIN customers, or they more of the existing customer base that will be mixing us through higher technology products?

Thomas Merk

Yes, that’s a good question. Of the 2.5 kilowatt, I think, we have a very competitive tool going down the road. Especially, if you think and know that in the cutting market, we have 2.5 or even 5 kilowatt is a very important power level. So we expect that this new product is very – is perfectly tailored for the high power customer and for the bigger OEMs in the cutting business.

Of course, we have been in touch with most of them already, that’s not been touched quite a lot of them and not yet our customers. And I think we have a new chance, and we are often discussion with some of them.

Joe Wittine

Okay, thanks. Then finally for me about – from our corporate governance perspective, because both sides appear to be digging in. Your middle ground offer what’s rejected. But talk about your strategy, I mean, in fact, there will be a need to go and meet with shareholders this quarter, this specifically pinch your case and what is the timing for a shareholder meeting?

Thomas Merk

We will disclose the timing for the shareholder meeting within the next days shortly that we have – send our preliminary proxy and we expect to send the final proxy, as of that when we get feedback from the SEC, and then we will also disclose, of course, I expect it to be in March. But we will disclose this within the next days. Yes, I think we will visit one of the other shareholders now before the Annual Meeting will be – and, yes, looking forward to that, and we will discuss with them the situation.

Joe Wittine

Thanks, Thomas. Bye [ph] for now.

Thomas Merk

Thanks, Joe, for calling.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Patrick Newton with Stifel. Please go ahead with your questions.

Patrick Newton

Hey, good morning, Thomas and Ingrid. Thank you for taking my questions.

Ingrid Mittelstädt

Good morning, Patrick.

Patrick Newton

Actually first, I guess, a couple of housekeeping questions, one is make it sure spare parts as a percentage of revenue and then make it sure on backlog and orders by macro components and then micro market?

Ingrid Mittelstädt

Yes, service and spare parts was 28.9% of our business, and order entry, Pat, is –our business is macro $37.7 million, marking micro $39 million, and components $20.2 million.

Patrick Newton

Great. And then the backlog?

Ingrid Mittelstädt

Yes, macro $51.9 million, marking micro $59.3 million, and components $17.5 million.

Patrick Newton

Great. And this is a clarification question on your time – in the press release you’ve stated that company continue to expect net income profitability as a midpoint of sales to be about 8% of net sales. I’m trying to see how this, obviously had a 8% as a continuation relative to your prior guidance, if I take the prior midpoint of revenue of $535 million and earnings of $1.88 seem to imply that prior net margin was significantly higher than 8%?

Ingrid Mittelstädt

I think that last time, we said at the midpoint of the guidance, we will also be in that area, at least, and this is still the target. So if we have pleasant top line, we need to work a bit harder in the – on the costs side.

Patrick Newton

Okay, maybe I’ll take that one offline. And then I guess on the fiber laser, the manufacturing cost coming down 15% to 20% according to the fiscal year. Should we think about this is beating your margin profile, or do you anticipate that the savings will be used to reduce the cost of the solutions better compete you’re your market leader?

Thomas Merk

I think that’s a very clear situation at the constant situation. We have a clear market leader here, who is basically touching the market price. And we, of course, try to reduce our manufacturing costs by our strong R&D efforts we are putting in the year to mainly drive our margin. Of course, yes, currently, you also have to be a bit more flexible in the – on the pricing side. But I hope that the 15% to 20% to be on the day side and we should be able to increase margins there.

Patrick Newton

Okay. And kind of sticking to the fiber line of question. Can you help us understand what your average power was through high-power fiber laser sales in a quarter? And then given the advent of your tool should have Q1 module, how should we think about that shipping over the next several quarters?

Thomas Merk

I don’t have exactly the number of the average power. I expected it close – to be close to 2 kilowatts. But we see a momentum, of course, for the cutting machine also in Asia that they also trend to higher power levels. And, of course, this will help our 2.5 kilowatt module, what we expect to launch in this year that we have a very competitive and powerful tool for this market. As I said, I see in the 2.5 and also in the 5 kilowatt power level, I see a real market for the classical cutting machine companies of the big ones.

Patrick Newton

Okay. And then I guess on your production, previously you talked about ramping volume through this year. Can you help us understand the number of units of high-power lasers you can produce currently. I mean, how we should think about your production capabilities has been either the fiscal year or the calendar year?

Thomas Merk

So, of course, we had a look and we expect that this business will give us some nice growth. Ingrid, we had in the last year, how many high-power fiber lasers?

Ingrid Mittelstädt

Around about 340, 345 high-power fiber lasers to-date.

Thomas Merk

Yes. So for this year, of course, we plan a nice growth on top of this number, and now we are now currently in a range that we can do 15 to 25 lasers a week. But we should be able to increase that further by introducing a shift module in areas, where we have the bottleneck in the production and supporting of the key components. So we are on track on that, and of course, we would like to go to a four-digit number within the next years, that’s still our goals.

Patrick Newton

Wonderful. And then just last question from me is on China. First, on the de-booking, I assume the solar one is on energy, which we previously talk about, could you confirm that? And then also, if that say, you had received some prepayments for that order. I’m curious how those prepayments are being accounted for? And then just one more I’m trying to…

Thomas Merk

You’re correct that the customer by the way.

Ingrid Mittelstädt

And, of course, all the effects related to the project or deliveries where we had already paid the down payment. They are in place and we have delivered and now the customer, of course, cancelled the last two sets and that’s the reason why we…

Thomas Merk

We do expect to cancel.

Ingrid Mittelstädt

Yes. And so the down payments are, of course, switched to the projects that they will finish.

Thomas Merk

So, Patrick, we do not want to – we have NDAs in place here. We cannot disclose too much, but you’re correct about the customer. And yes, I think, we will find a good solution that – with this customer.

Patrick Newton

Okay. And then just last one on the guidance you talked about, it seems the key talking point is Chinese confident is during your or like visibilities during the annual guidance coming out. So if we think about the midpoint come down $25 million, is that entirely due to China, or are there any other major impacts that are embedded in that?

Thomas Merk

Yes, I’m careful with my answer, because there are also other regions exporting into China, and so I would say it’s mainly Asia related. We do see a very stable situation in Europe, we also see stable situation in the United States. As we said, for example, we have Southeast Asia. In our Singapore territory, we have a very good business in Q1.

But I think what I heard is Japan is a bit impacted by the softening of China. But I do not expect too much there. So we have a very good and stable business with medical device there as I exactly expect our continued business on the product machines for the Crystalline Solar industry. So I wouldn’t expect to that situation and also now what we can say for the order entry in January we had nice order out of China.

Ingrid Mittelstädt

But I have to say we needed to adjust, because Q1 and Q2 will be lower than our estimated numbers there. So we will see we are good positive for Q3 and Q4, as you have seen the numbers for Q1 and Q2, so that’s the reason why we are adjusting the top line.

Patrick Newton

Great. Thank you for taking my questions.

Thomas Merk

Thanks, Patrick.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Mark Miller with The Benchmark Company. Please go ahead with your questions.

Mark Miller

Good morning or good afternoon. I was just wondering, could you possibly breakout fiber laser sales and orders in the December quarter?

Thomas Merk

Mark, I don’t think we do that. I’ll try checking, sorry for that.

Mark Miller

Yes – list that I guess year ago you provided that...

Ingrid Mittelstädt

Fiber laser orders $18.2 million for complete fiber lasers of course also including low and mid power where you know that part of largest project related and we see sales was approximately $22 million.

Mark Miller

Okay and then I believe you said that high-power lasers, the fiber laser sales were up 36% year-over-year. Is that correct?

Thomas Merk

Yes.

Ingrid Mittelstädt

Unit wise.

Mark Miller

Unit wise, okay.

Ingrid Mittelstädt

But how we see it, because we have to ramp our production.

Mark Miller

All of has been a strength recently, do you see that been stable in the next couple of quarters, the auto business?

Thomas Merk

Auto business what’s pretty stable, it was a very small decline what we had, but we do see fleets coming in, so there is not real signal about a softening of the automotive market, yes.

Mark Miller

Have you noticed by the prime player, any change in their strategy in terms of pricing in the fiber laser market in terms of competitor situation, any changes there?

Thomas Merk

No we have not. We are of course mainly on the high-power market there and we’re also focusing on the higher power level. I could expect that on the lower power due to Asian competition that there is a special pressure. As I said we are focusing 2 kilowatt, 3 kilowatt and even more of the new module of course.

Mark Miller

And then finally maybe you can provide us, but in terms of the internal production and use of internally produced diodes in your lasers, that still continue to ramp higher percentages?

Thomas Merk

A little bit, but we have the different strategy here. This is by the way the main part of our cost reduction project for the high-power fiber laser. We are currently here is our main goal to get the power level off of the pump modules. And this is the primary goal primarily goal and I expect that this goal give us about 50% of the expected cost reduction potential by these chips, and adjust these pump module, and whether we take the internal or the external, it depends on the efficiency and this is priority number 2 or 3, priority number one is to get the power level up of our pump modules and we will drive that also with our external supplier.

Mark Miller

Thank you.

Thomas Merk

You’re welcome.

Operator

Thank you. [Operator Instructions] We have a follow-up question from Joe Wittine with Longbow Research. Please proceed with your questions.

Joe Wittine - Longbow Research

Hi, thanks very much an operating expenses, Ingrid like you said I think it’s a cost related to the proxy contest were $1.7 million is that right?

Ingrid Mittelstädt

$1.7 million – $0.7 million.

Joe Wittine

$0.7 million, so even if it does…

Thomas Merk

Mainly, mainly.

Ingrid Mittelstädt

And this is mainly for the proxy contest so there are non-recurring expenses of $0.7 million in the SG&A expenses and the main part of that relates to the proxy contest.

Joe Wittine

Okay. So $700,000, the question that is on the split of operating expenses even adjusting for these onetime costs that are in SG&A. You’re cutting R&D much more than SG&A. So help us interpret that, and you’re not starving R&D I mean this currency plain impact, there is R&D more than SG&A?

Thomas Merk

Not at all before Ingrid comes to the number R&D is never linear over the year. And it is very important and it’s the faith of our business and mainly of our future to have a very good R&D and you can be sure that this is the clear strategy from the Company.

Ingrid Mittelstädt

Yes, I would say, it depends on the project and normally it depends on the material expenses, my colleagues have all these project and this is very difficult to plans and the second information that is important is we had longer crystalline shutdowns at some facilities in order to use in an efficient way, our facility that was also part of the reason that our colleagues also took more vocation than especially in Europe for the Christmas time.

Joe Wittine

Okay, that’s helpful. And finally for me, I don’t think there was any share buyback this quarter, which I suppose shareholders won’t mind, giving the guide down. Is there anything to prevent you from unleashing, the buyback here in the current quarter?

Ingrid Mittelstädt

Well that regulation says that we are not allowed to have share buybacks, if we have material non-public information and in this first quarter there were some discussions – among other things and so the Company was not feeling really comfortable repurchasing shares in this quarter, but we expect to be shares during the second quarter as permitted and, yes.

Joe Wittine

Very helpful, thank you.

Ingrid Mittelstädt

This is not really reflects the change in our view.

Thomas Merk

Thanks, Joe.

Operator

Thank you. [Operator Instructions] We have a follow-up question from Patrick Newton with Stifel. Please go ahead with your question.

Patrick Newton

Yes, just a few clarifications. Ingrid, could you provide a FX adjustment or R&D?

Ingrid Mittelstädt

Yes, I did. Just a second, I think it was 1.9, but let me check; $0.9 million, yes.

Patrick Newton

Perfect, and then on the fiber related units being up 36% year-over-year that all fiber or with that high-power units?

Ingrid Mittelstädt

High-power.

Patrick Newton

Great and then exiting last, you said that high-power represented more than 50% of total fiber power sales, I’d assume that still through in the December quarter, can you confirm that?

Ingrid Mittelstädt

It is approximately 50% that the other as I said depending on the project we have for micro and marking. But we can confirm that in the backlog we have materially more high-power fiber laser unit orders than for the other.

Patrick Newton

Okay. And then on the orders, on the gain side, forecasting increase that looks slightly above seasonal in the back half of the year, I mean some order pressure in December quarter. I think one of the key things that you have is in ultrashort pulse that you talked previously that should ramp in the back half that probably gives you some confidence on the revenue side. I’m curious if you could help us understand the size of this business that I think just give me a commentary I would assume that this a seven digit or larger type of weigh?

Thomas Merk

Yes of course and again this is our second growth area, the ultrashort pulse business. There are some easy and good predictable markets behind. This is a medical device business for example, because this business is normally a very constant business that we are marking and cutting application in our ultrashort pulse business and it becomes more difficult, but this is of course also the big potential if it goes into the electronics area until consumer electronic area.

There we have, as we I think mentioned in the Q4 earning call, we now has six or seven first customers in our testing business and working with the big OEMs on cutting of material, mainly it’s glass, mainly it’s the typical gorilla glass, hardened cover glasses. I expect some orders in this year. I expect the bigger orders, the volume in 2017.

And in addition to the consumer electronic and this is also very interesting. We do see the automotive market becoming interesting for their displays, and mirrors, and window business. And we found also all that we’re well suited for the thicker glass material which has the low 1 millimeter thickness, which is normally used in the electronic market, but we can even go higher into 2 or 3 millimeter for these additional applications. And, yes, you’re correct with the – for the seven-digit, so it’s a good seven-digit number I expect.

Patrick Newton

Great. Thank you.

Thomas Merk

You’re welcome.

Operator

Thank you. And next we have a follow-up question from Mark Miller with The Benchmark Company. Please proceed with your questions.

Mark Miller

Just looking at your shipments, there was significantly larger drop in your markings and micro unit shipments. And I’m just wondering, where that was concentrated in sequentially?

Thomas Merk

Yes, our micro and marking business is normally project driven. And what we had in the Q1, it is quite normal is that Q1 quarter is the lower business for the micro and marking. Main markets are consumer electronic and consumer electronic request their shipment normally in Q3, Q4.

In addition to that, the semiconductor business was pretty low, where we sat and where we expect them and get also firm commitment from our customers that there will be significant better orders after Chinese New Year means, we expect already now in the second quarter a better order entry on that.

Mark Miller

Just finally, the mobile display industry shifting – shift into older device, since you were talking about glass cutting applications. Does that represent some sort of a threat for you in the long-term, as we shift to older devices, or is there an opportunity there for you?

Thomas Merk

Of course, if it is all that, it can be that the cover glass or the cover will be done by a polymer, and then it requires a different technology. Nevertheless, as I said, I expect for the consumer electronic industry buy some applications where you have to cut brittle materials. This is already now the case and during the last two years. So, for example, now some patterns and some materials are out of silicon even if the – this label be an OLED display, you will have quite a lot of these components included.

In addition, as I just told to Patrick, we do see other markets like the automotive market. And, of course, down the road they’re on the longer view. They’re also silicon based brittle materials, what we’re addressing also in our R&D. And I hope that we were able to tell you more about this, of course, this would be a real ground-breaking technology. But I hope that I can tell you more about that within the next two quarters.

Mark Miller

Thank you.

Thomas Merk

You’re welcome.

Operator

Thank you. We would now like to turn the call back to management.

Thomas Merk

Thank you very much. And, of course, well, I want to thank you all for listening and your interest in ROFIN-SINAR. I think you could hear that we’re well positioned, of course, now we have a little headwind like all other players out of Asia, but we’re well prepared with our projects we have in our R&D pipeline. If there should be any more questions left on the topics we walk you through, please get in touch with us. And, of course, I look forward to joining you all in May for our Q2 earnings call. All the best till then. Bye-bye.

Ingrid Mittelstädt

Thank you. Bye.

Operator

Thank you. This does conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.

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