Key Technology's (KTEC) CEO Jack Ehren on Q3 2016 Results - Earnings Call Transcript

| About: Key Technology, (KTEC)

Key Technology, Inc. (NASDAQ:KTEC)

Q3 2016 Results Earnings Conference Call

July 28, 2016, 05:00 PM ET

Executives

Cathy Burlingame - Director, IR

Jack Ehren - President and CEO

Jeffrey Siegal - SVP and CFO

Analysts

Lewis Moser - Mafax Investors

Rick D'Auteuil - Columbia

Operator

Good day, ladies and gentlemen. And welcome to the Key Technology Fiscal 2016 Third 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 turn the conference over to Cathy Burlingame. You may begin.

Cathy Burlingame

Thank you, Shane. Good afternoon, and thank you for joining us for the Key Technology fiscal 2016 third 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 provisions 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 company's annual report on Form 10-K filed with the Securities and Exchange Commission in December of 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

Thank you, Cathy. Good afternoon. I am pleased to announce that this past quarter, we have continued to make real progress on the execution of our overall long-term strategy as well as achieving a strong financial performance.

I am deeply proud of the ongoing dedication and passion and most importantly, the character of all our employees worldwide as we unite in driving change throughout all functional areas of our company. Our entire team is energized and encouraged by our important progress in striving together to fully execute on our vision and long-term strategy.

In the third quarter, we realized one of the highest quarterly sales levels in our company history at $36.2 million. Net sales for the first nine months of fiscal 2016 were up 24% over the same period in the prior fiscal year. And our net earnings for the third quarter of $0.16 per share was our highest quarterly net earnings since fiscal year 2013.

Our strong beginning backlog and our solid bookings for the quarter enabled us to achieve higher sales and favorable factory utilization and resulted in gross margins remaining consistent at just under 30%, despite an extremely high mix of process systems sales in the quarter.

In addition we effectively controlled our overall operating expenses in the third quarter even with the increased sales activity.

As just noted, our global orders in the third quarter were again strong, most significantly in North America. Orders in this region in the third quarter, included a large seven-figure order received from a major potato processor. This order is scheduled to ship in our first and second quarters of fiscal 2017.

Our backlog at the end of the third quarter remains strong even after the high sales recorded in the third quarter. Orders for the first nine months of fiscal 2016 included strong contributions from both the North America and EMEA regions. European orders in euros continue to exceed the prior year's record order levels for this region. And North American year-to-date orders in our main core markets are significantly higher than our prior year orders.

We remain focused on continuing to build our strategic relationships and partnerships globally. We continue to see solid opportunities for the last quarter of fiscal 2016 and into fiscal 2017, most significantly in the processed potato and processed fruit and vegetable markets in North America and EMEA region.

In addition we believe our new VERYX platform will position us to pursue new opportunity in other geographic regions as well. We continue to make important and encouraging progress on the further development of our VERYX platform. We have started shipping our first VERYX production units for selected applications.

Overall global customer feedback from our new installations and our ongoing global beta test sites continues to be very positive. We have now started to accept VERYX orders in all our core markets and we plan to continue releasing our VERYX platform by sizes and applications throughout fiscal 2016 and beyond.

Subsequent to the end of the third quarter, we received a significant multimillion dollar order for our new integrated VERYX belt fed optical sorting solutions. This order is for expansions at several plant locations of a major European potato processor. Shipments of this order are expected to begin in our first quarter of fiscal 2017.

Looking ahead, we expect VERYX orders to continue to increase for the fourth quarter of fiscal year 2016 and throughout fiscal year 2017 with a more significant positive impact on revenues and earnings expected to be realized in fiscal year 2017 and beyond.

Consistent with the implementation of our flexible global operations strategy, VERYX systems are being manufactured both in our European and North American facilities. This along with our integrated solution centers in both Europe and the United States, enable us to execute on our strategy to optimally partner with our global customer base by providing strategically located regional manufacturing, sales, and technical support.

In our third quarter, we also announced that Robert Averick has joined the Key Technology Board of Directors. Mr. Averick provides investment management services through his employer, Kokino LLC, representing Key's largest shareholder.

Mr. Averick has been a long-term investor in Key Technology and we're very pleased to have his industry and financial knowledge and expertise represented on our Board of Directors.

We continue to be focused and relentless in our transformational journey to reshape our culture, to drive technology leadership, and to continue developing customer relationships and partnerships globally.

We remain energized and determined as we execute on our long-term strategy and we're fully committed to generating positive returns for the company and for our shareholders.

I will now turn the call over to Jeff for a discussion of our third quarter financial results.

Jeffrey Siegal

Thank you, Jack. I will now discuss the third quarter results for fiscal 2016. Third quarter net sales increased $5.4 million or 18% to $36.2 million compared with $30.8 million reported in the same quarter a year ago quarter.

Third quarter net sales of process systems were $18.6 million compared with $10.1 million in 2015, an 83% increase. The increases in process systems sales was anticipated due to the higher beginning backlog as we entered the quarter.

Sales of automated inspection system in the third quarter totaled $10 million compared with $13.1 million in the same period a year ago, a 24% decrease. The decrease in automated inspection system sales was due primarily to the timing of shipments.

From a geographic perspective, all geographies increased as compared to the same quarter in the previous. The most significant increases were in both North America and EMEA. From a market perspective, the largest growth was in potatoes. Parts and service net sales were $7.7 million versus $7.6 million in the same period a year ago, a 1% increase.

Gross profit for the third quarter was $10.7 million compared with $9.2 million for the third quarter of fiscal 2015. As a percent of sales, margins of 29.4% decreased slightly from the 30% reported for the same quarter a year ago.

Gross margins for the quarter ended June 30th, 2016, were adversely affected by unfavorable product mix. Process system sales were 51% of the total sales in Q3. Process systems generally have a lower gross margins as compared to automated inspection system sales.

Operating expenses of $8.9 million for the third quarter were 24.5% of net sales compared with $8.6 million or 28% of net sales for the same quarter last year. Operating expenses for the three-month period ended June 30th, 2016, were impacted compared with the same period in the prior year by higher spending on research and development efforts and the cost of continued field testing, both associated with the VERYX platform.

The net earnings for the third quarter were $1 million, or $0.16 per diluted share compared with net earnings of approximately $300,000 or $0.05 per diluted share in the same period last year.

I will now discuss our third quarter 2016 orders and backlog. For the third quarter ended June 30th, we recorded new orders of $32 million. Last year's third quarter new orders totaled $28.5 million. Our backlog at the end of the third quarter was $33.9 million. This compares with $29.9 million at the end of the third quarter last year. The increase in orders was primarily in North America.

Orders were up most significantly in the processed potato market. The backlog mix at the end of the third quarter was 48% automated inspection systems, 46% process systems, and 6% parts and service.

For the nine months ended June 30th, 2016, net sales increased $17 million or 24% to $89.5 million as compared to $72.2 million for the same period in the prior year. The net loss for the first nine months of fiscal 2016 was $0.19 per diluted share as compared to a net loss of $0.55 per diluted share in the first nine months of 2015.

As disclosed in previous quarters, the results for the first nine months of fiscal 2016 were negatively impacted by approximately $700,000 of restructuring charges included in G&A expenses during the first quarter of fiscal 2016.

Cash at the end of the quarter was $4.8 million compared with $7.7 million at September 30th, 2015.

Looking forward, we expect net sales for the fourth quarter of fiscal 2016 to decrease moderately as compared to the net sales recorded in the third quarter of fiscal 2016. Gross margins are expected to be fairly consistent in the fourth quarter of fiscal 2016 as compared to the third quarter of fiscal 2016. Operating expenses for the fourth quarter of fiscal 2016 are anticipated to be relatively flat as compared to third 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

Thank you. [Operator Instructions]

And our first question comes in the line of Lewis Moser of Mafax. Your line is now open.

Lewis Moser

Yeah. Could you just review that second quarter revenue again?

Jeffrey Siegal

You mean the third quarter numbers?

Lewis Moser

Yeah, I'm sorry. The quarter that's coming up.

Jeffrey Siegal

The fourth quarter, fiscal fourth quarter. In the fourth quarter, we expect sales would be down moderately as compared to the second quarter. Gross margins and operating expenses relatively stable as compared to the second quarter.

Lewis Moser

You don't give projections and specific to per share?

Jeffrey Siegal

No, we do not. We just provide guidance with respect to sales, grow margins, and operating expenses.

Lewis Moser

Okay. Is there any seasonality to the business?

Jeffrey Siegal

Usually our first quarter which again is November through December, we have a fiscal year end September. Our first quarter tends to be a lighter quarter which is the last quarter of the calendar year. And third quarter and fourth quarter tend to be our stronger quarters.

Lewis Moser

Okay. Thanks very much.

Operator

Thank you. And our next question comes from the line of Rick D'Auteuil. Your line is now open.

Rick D'Auteuil

Good afternoon. Better quarter guys. Thanks. Just wanted to go on record. I think in answering that last question, you guys said that the fourth quarter would be down compared to Q2. You meant to say as you originally said, Q3, I just--

Jeffrey Siegal

That is correct Rick.

Rick D'Auteuil

I just -- let's just hope people don't get confused. And then my question relates to the your larger shareholder who you said now has representation on the Board. I belief they had recently gone active, can you talk about what agenda they have at this point?

Jack Ehren

No, I don't think there would be anything specific to -- for us to say with regards to that other than that Rob has been a long-term investor in the company and has a strong understanding of our business and industry and we believe it's very favorable for the company and for investors that he has joined the Board of Directors.

Rick D'Auteuil

Is he aware of the prior acquisition inquiries that have been made to the company? I don't -- he is not one that I've contacted regarding -- at least one that was made three years ago, or year and a half ago. But as any Board member, would he be brought over the wall on those kind of things?

Jack Ehren

Certainly, there would not be any information that would be withheld from Rob now as a Board member, but I'm not aware of this specific situation that you're referring.

Rick D'Auteuil

You're not aware of it or he is not aware of it?

Jack Ehren

I'm not aware of the specific situation that you're referring to Rick.

Rick D'Auteuil

That's the capital -- it’s the one that you and I have talked about capital [ph]. Most recent ones I was aware of and I know there were others in the past. I just -- I want to make sure that we don't -- that kind of opportunities go by the wayside [ph] like we have in the past. But hopefully as a large shareholders and somebody that's acquired quite a bit of stock at higher levels that shareholder returns first and foremost on his agenda. That's all I have. Thanks.

Jack Ehren

Thank you.

Operator

Thank you. [Operator Instructions]

Jack Ehren

Given that there are no further questions, I'd like to thank everyone again for your interest and support in Key Technology and we look forward to talking with you again next quarter. Thank you.

Operator

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

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