Key Technology's (KTEC) CEO Jack Ehren on Fiscal 2016 Q4 Results - Earnings Call Transcript

| About: Key Technology, (KTEC)

Key Technology, Inc. (NASDAQ:KTEC)

Q4 2016 Earnings Conference Call

November 17, 2015 05:00 PM ET

Executives

Cathy Burlingame – Director, IR

Jack Ehren – President and Chief Executive Officer

Jeff Siegal – Senior Vice President and Chief Financial Officer

Analysts

Jim Ricchiuti – Needham & Company

Operator

Good day, ladies and gentlemen. And welcome to the Key Technology Fiscal 2016 Fourth Quarter and Year End 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. Ms. Burlingame you may begin.

Cathy Burlingame

Thank you, Andrea. Good afternoon, and thank you for joining us for the Key Technology fiscal 2016 year end and fourth 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 tangible progress on the execution of our overall long-term strategy.

In the fourth-quarter and for fiscal 2016, we realized improved results in all areas of our business including orders, net sales, gross margin, and operating results. With orders in the fourth quarter of $36.5 million we achieved the largest fourth quarter orders level in our company's history. Orders in the fourth-quarter were extremely strong again in the EMEA region including several significant strategic wins most notably in the potato market.

Our fourth quarter gross margins of 32.6% demonstrated real improvement with higher margins in both our optical sorting and process system product lines compared to the same quarter a year ago. In addition, we realized favorable factory utilization during the fourth quarter and for the entire fiscal year. For fiscal 2016, our net sales were up 17% over the prior fiscal year.

And our annual bookings of 128.7 million was the second-largest bookings year in the history of our company. An important component of our overall strategic plan has been to significantly increase our market penetration in the EMEA region. For fiscal 2016 orders in euros in EMEA grew 26% over the prior record order level achieved in fiscal 2015.

Orders in euros have increased 66% over the last two fiscal years in the EMEA region. We believe we are continuing to demonstrate our increased ability to effectively serve this important EMEA market with differentiated and value-added solutions that address the unique needs and requirements of our customers in this region.

North America, our largest region also made significant order contributions in fiscal 2016 with orders in our main core markets up significantly over the prior-year order levels. Along with our strong bookings, our fourth quarter ending backlog of $40.4 million set a new company record as the largest backlog entering a new fiscal year. Up 32% over the prior year ending backlog. We continue to make significant market progress with our new VERYX platform. During fiscal 2016 we won orders for VERYX shoot and belt-fed systems into all three of our core markets of processed potatoes, processed fruit and vegetables, and nuts and dried fruits.

VERYX belt-fed orders received during the fourth-quarter included significant multiple system wins at several strategic potato processing customer sites in Europe. Our ongoing VERYX beta site testing as well as customer demonstrations in our customer innovation and solution centers in both North America and Europe have continued to be received very favourably by our customers in all our core markets.

We expect that these positive customer experiences will continue to drive VERYX orders throughout fiscal 2017. Subsequent to our 2016 fiscal year-end, we received another significant order from a major potato processor in Europe for both our VERYX solutions and our process systems.

Our global funnel of opportunities for the VERYX platform continues to grow steadily. We plan to continue releasing our VERYX platform for additional capacities and applications throughout fiscal 2017. We believe these future additional releases of the VERYX platform will position us to more aggressively pursue additional insertion points and applications in all geographic regions globally. The highly configurable modular VERYX design enables each system to be specifically tailored around the product characteristics and production objectives of each processor.

In addition, systems will be easily up gradable in the field with enhancing configurations of cameras, lasers, hyperspectral sensor technology and other functionalities as customer requirements evolve over time. Consistent with the implementation of our flexible global operations strategy, the VERYX platform has been effectively designed for manufacturability and serviceability.

VERYX systems are currently being manufactured in both our European and North American facilities. This along with our innovation and solution centers in both Europe and North America and our strong global technical expertise and industry experience enable Key to execute on our strategy to optimally partner with our global customer base by providing strategically located regional manufacturing sales and technical support.

In addition, during fiscal 2016, our deepening partnerships with our customers also enabled us to win multiple significant strategic orders for our integrated solutions business. These fully integrated projects include various combinations of VERYX and other key optical product offerings along with Key's engineering services and our industry-leading process systems.

These orders were primarily in the potato market both in Europe and North America. Some of these large integrated solution orders were received later in fiscal 2016 and will ship throughout the first three quarters of fiscal 2017. In fiscal 2016, our large integrated solution wins were integral in our process systems orders increasing to $56.6 million up 31% compared to the prior fiscal year.

We remain focused on continuing to build our strategic relationships and partnerships globally. We continue to see solid opportunities for all our core markets for our optical sorting and process systems going into fiscal 2017. In the fourth-quarter Key Technology opened our new customer innovation and solution center in Belgium. This cost-efficient state-of-the-art facility enables customers to participate in equipment demonstrations, application tests and training. It is designed to create a superior customer experience while showcasing Key’s digital sorting, conveying and processing solutions.

Our center of excellence in Belgium demonstrates our dedication to building strong relationships and partnerships with our European customers. It is a vital component of our strategy to continue strengthening our global presence and to bring new innovative solutions to our customers in this important region.

I am extremely proud of the ongoing dedication, passion, and most importantly the character of our employees worldwide. We are relentlessly driving continuous progress through all functional areas of our company. Our entire team is energized by our increasing momentum as we execute on our vision and our long-term strategy. Our successes with our new VERYX platform and our integrated solutions achieved through collaborative customer relationships globally are positioning Key well as we enter fiscal 2017.

We continue to be focused on our transformational journey to drive technology leadership and to continue to develop strong customer partnerships globally. We remain committed and focused on executing our long-term strategy and generating positive returns for our company and our shareholders.

Thank you and I will now turn the call over to Jeff for a summary of our financial results.

Jeff Siegal

Thank you, Jack. First I will discuss the fourth-quarter results for fiscal 2016. Fourth-quarter net sales were $30.5 million compared with $30.4 million reported in the same quarter a year ago. Sales of automated inspection systems in the fourth-quarter totaled $11.3 million compared with $10.1 million in the same period a year ago as 12% increase.

Fourth quarter net sales of process systems were $11.2 million compared with $12.5 million in 2015, an 11% decrease. Parts and service net sales were $8 million in the fourth quarter of 2016 as compared to $7.8 million in 2015.

Gross profit for the fourth quarter was $9.9 million compared with $8.4 million for the fourth quarter in fiscal 2015. Gross margins of 32.6% increased from the 27.6% reported for the same quarter a year ago.

Gross margins for the quarter ended September 30, 2016, were up compared to the same period in the prior year due primarily to a better mix of higher-margin products. Operating expenses of $8.8 million for the fourth-quarter were 29% of net sales compared with $10.2 million or 33.7% of net sales for the same quarter last year.

Operating expenses for the three-month period ended September 30, 2016, were impacted compared to the same period in the prior year primarily by lower sales and marketing expenses, lower R&D expenses and lower G&A expenses during the fourth-quarter. Sales and marketing expenses in the fourth-quarter have decreased as compared to the same period in the prior year due to a reduction in the expenses associated with the launch of VERYX and a significant trade show.

Net earnings for the fourth-quarter were $515,000, or $0.08 per diluted share, compared with a net loss of $1.5 million, or $0.24 per diluted share, in the same period last year.

I will now discuss our fourth-quarter 2016 orders and backlog. During the fourth quarter ended September 30, we recorded new orders of $36.5 million. Last year's fourth-quarter new orders totaled $30.6 million. Our backlog at the end of the fourth quarter was $40.4 million which is a record entering a new year. This compares with $30.7 million at the end of the fourth quarter last year.

A significant portion of our ending backlog will not shift until after the first quarter of fiscal 2017. The backlog mix at the end of the fourth quarter was 52% automated inspection systems, 44% process systems and 4% parts and service.

I will now review fiscal 2016, sales in fiscal 2016 increased $17 million or 17% to $120 million from $102.9 million in the prior year. Net sales of automated inspection systems were $38.6 million in fiscal 2016 as compared to $37.5 million in fiscal 2015, which represents a $1.1 million increase or 3%. Fiscal 2016 sales of process systems were $52.3 million compared with $37.8 million or a 39% increase. This increase was primarily across most process systems product lines.

Parts and service net sales in fiscal 2016 were $29.1 million as compared to $27.6 million in fiscal 2015. From a geographic perspective the increase in fiscal 2016 sales were primarily in Europe, North America, and Asia-Pacific region. Orders for fiscal 2016 were $128.7 million as compared to $114.8 million in the prior year. The increases were most significant in the potato market and to a lesser degree in the nuts and dried fruit market.

Gross profit increased to $36 million for fiscal 2016 compared to $28.8 million in fiscal 2015. Gross margins were 30% in fiscal 2016 compared to 28% in fiscal 2015. The increase in gross margin was due primarily to more effective factory utilization and lower warranty and customer support costs. Operating expenses of $36.2 million in fiscal 2016 were the same as in fiscal 2015. Within operating expenses in fiscal 2016, there were decreases due to lower sales and marketing expenses and amortization expense offset by higher research and development expenses.

Sales and marketing expenses were lower due to the cost reduction initiatives implemented in prior years and lower marketing expenses related to new product introductions. R&D expenses were higher due to the higher spending on new products and the cost of VERYX field testing in fiscal 2016.

The net loss in fiscal 2016 was $697,000 or $0.11 per diluted share compared to a net loss of $5 million or $0.80 per diluted share in fiscal 2015. Our balance sheet remains strong with working capital of approximately $36.1 million. Cash at the end of the year was $10.5 million compared with $7.7 million at September 30, 2015.

We expect to return the Company into profitability for fiscal 2017. Both net sales and gross margins are expected to increase moderately in the first-quarter of fiscal 2017 compared to the first quarter of fiscal 2016. Operating expenses for the first quarter of fiscal 2017 are anticipated to increase slightly as compared to the first quarter of fiscal 2016. Due to higher sales and marketing expenses related to the timing of two significant trade shows during the first quarter of fiscal 2017.

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] Our first question comes from the line of Jim Ricchiuti with Needham & Company. Your line is open.

Jim Ricchiuti

Hi thank you. Good afternoon. Couple of questions. It looks like your gross margins are at the highest level at a maybe in 2.5 years. I'm wondering how much of that was a function of better mix of revenues. It seems like you had a higher percentage of automated inspection. And process systems at least sequentially was down a bit. So maybe you could just talk to that and just give us a sense as to how we might see gross margins, seems like you are indicating you expect improvement over the balance of fiscal 2017, if I heard you correctly.

Jack Ehren

I guess a couple of things Jim I think it's a combination of several factors as we stated earlier we did see improvement both in our optical systems and in our process systems. The process systems side it’s improvements we have been driving with regards to the internal processes primarily, on the optical side it does relate to some extent on mix. But the VERYX platform has not had a significant impact yet on the revenues and earnings. We would expect it to have more of an impact as we proceed into 2017.

Jim Ricchiuti

Looking at the top line, I assumed – I thought you guys are suggesting that the revenues would be down modestly on a sequential basis. It looks like it was a little deeper decline, at least than I was expecting. So were there some things that slipped in the quarter I wonder if you could just talk a little bit about the top line performance.

Jeff Siegal

We had stated that we had expected it to be down moderately from the Q3 levels. And so actually top line was consistent with where our expectations were.

Jim Ricchiuti

Okay, and so mid-teen type decline is what you’re assuming.

Jeff Siegal

It was very reasonable compared to what we were expecting.

Jim Ricchiuti

And Jack are you at a point where you might want to share with us VERYX, how VERYX what perhaps percent of your bookings you're seeing from VERYX because it does seem like you are seeing some multiple orders and sounds like some meaningful ones. Can you maybe provide a little color as to what VERYX might represent of your bookings or backlog at this point?

Jack Ehren

For competitive reasons, we will not get into the number of units or what percentage of the backlog or the orders was VERYX. But as I said on the earnings side it was not a significant part of our revenues in fiscal 2016. But from an order standpoint, it continues to be an increasing portion of our AIS business and we would expect that to continue to increase but we will not give out specifics with regard to that.

Jim Ricchiuti

In the last call I think you talked about a multi million dollar order from a potato processor in Europe. I want to make sure I am clear. The orders that you are alluding to today are in addition to that. Is that correct? Or did that order that you…

Jack Ehren

Last time we did talk about a subsequent order that we received. Now it was part of the fourth quarter. But again this time I also talked about a subsequent order that we received after the fourth quarter so we do have several significant orders with multiple customer sites in the potato market.

Jim Ricchiuti

Okay thanks very much. Thanks for clarifying that.

Operator

[Operator Instructions] And I am not showing any further questions at this time, I would now like to turn the call back over to Jack Ehren for any further remarks.

Jack Ehren

I’d like to thank everybody for your participation in the call again today and your continued support and we look forward to talking with everybody again next quarter. Thank you.

Operator

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

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