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Gerber Scientific, Inc. (NYSE:GRB)

F2Q08 (Qtr End 10/31/07) Earnings Call

November 29, 2007 10:00 am ET

Executives

Marc Giles - President and CEO

John Krawczynski - President and CAO

Analysts

Casey Flavin - CJS Securities

Chuck Murphy - Sidoti and Company

Jed Dorsheimer - Canaccord Adams

Jim Ricchiuti - Needham& Company

Tim O'Toole - Delta Management

Operator

Good day, and welcome to Gerber Scientific, Inc's SecondQuarter Fiscal 2008 Earnings Release Conference Call. Today's conference isbeing recorded and broadcast over the internet.

I would like to remind everyone that some of today's remarksand the answers during the Q&A will include certain forward-lookingstatements as defined in the Federal Securities Laws. These include statementsregarding Gerber's expected financial condition, results of operations, cashflows and business operations and strategy as well as other planned events andexpectations.

For a discussion of important risks and uncertainties thatcould cause Gerber's actual results to differ from the results expressed orimplied in these forward-looking statements, you should read Gerber's annualreport on Form 10-K for the fiscal year ended April 30, 2007, which was filedwith the SEC on July 9, 2007.

These risks include, but are not limited to, delays in theCompany's new product development and commercialization, intense competition inmarkets for each of the Company's operating segments, rapid technologicaladvances, availability and cost of raw materials, volatility in foreigncurrency exchange rates and fluctuations in interest rates.

At this time, for opening remarksand introduction, I would like to turn the conference over to the Company'sPresident and Chief Executive Officer, Mr. Marc Giles. Mr. Giles, go ahead please.

Marc Giles

Thank you, operator. Goodmorning, everyone. Welcome to Gerber Scientific's fiscal year 2008 secondquarter conference call. Joining me on the call today is our Vice President andChief Accounting Officer, John Krawczynski.

I'm pleased to report a solidsecond quarter in line with our expectations. Consolidated second quarterrevenue of $161 million was up by 10.8% versus the second quarter a year ago,driven by strong growth again in Spandex, which was up 23%; the inclusion ofour recent acquisition, Data Technology; and the favorable translation effectof currency.

Our backlog declined slightly byabout $800,000 from the first quarter. Reported second quarter operating profitof $5.2 million equaled 3.2% of revenue, but unfortunately, included $1 millionon outside expenses associated with the work necessary to complete our adoptionof FIN 48 during the quarter. Net of this unusual expense, operating profitwould have been $6.2 million or 3.8% of sales. As reported, earnings per shareof $0.11 would have been $0.14 per share net of this expense.

Two new product milestones were achieved since our lastconference call. We introduced the new Solara ion,wide-format UV inkjet printer at the SGIA show in Orlando,Florida, in late October; and again at Viscom Italyin early November.

The ion is the first in a family or printers that employsour new patent-pending Cold Fire Cure technology and advanced ink chemistry todeliver unprecedented productivity as well as printability on the widest possiblearray of substrates, both rigid and flexible.

The ion was received enthusiastically at both venues. Infact, since SGIA, we have been taking preorders that currently total over 100systems and exceeding $6 million in value. We currently expect to begincommercial shipments during the fourth quarter of this fiscal year. We believethat the Solara ion offers a truly unique and winning proposition, and at thisstage, it seems that our customers do as well.

We further think that this particular new product couldsignificantly impact overall company performance. Once commercially available,we anticipate a sales potential of between 400 and 600 systems annualized orbetween $20 million and $30 million in systems revenue and significantlyimproved gross margins.

Also, just two weeks ago, Gerber Coburn introduced its newAdvanced Lens Processing System technology at the OLA show in Indianapolis. The ALP System combines the newhigh-precision DTL200 lens generator, which by the way won the award ofexcellence at the OLA show, with the new MAAT soft-tool polishing system toenable free-form lens processing.

Gerber Coburn's breakthrough in dry-cut modular approach tofree-form lens processing presents favorable economics, particularly to thesmall and mid-sized wholesale laboratories. This size of lab is common in Northand South America and the type we expect to develop rapidly in market such as China.We anticipate commercial shipments for this new system to begin late in thisfiscal year or early next fiscal year.

Overall, new product sales were strong in the quarter, up by33% versus the second quarter of last year and made up 17.2% of total equipmentrevenue. This growth is largely attributable to the strength of the new GT XLc7000cutter which has more than made up for the declining Solara UV2 volume which islowered by 55% or approximately a $1 million from the second quarter of lastyear.

Our business in Chinacontinued to do very well in the quarter with revenue up over 30% to $8.6million versus the second quarter a year ago, largely due to the strong GerberTechnology backlog of Chinaorders from the first quarter.

Gerber Technology order entry in China was up a more modest 5% inthe second quarter compared to the second quarter of last year, and year-to-date,it is up 30% when compared to the same period last year.

Our Chinarevenue includes a quite small but growing presence for Gerber Coburn.Year-to-date, Gerber Coburn sales in China at $640,000 are up over 75%versus a year ago, and we expect this trend to continue.

China isalso growing as a manufacturing export center for us, and this quarter weexported $2.3 million in equipment from our China supply chain compared to$400,000 in the second quarter a year ago.

The Data Technology acquisition continues to perform aheadof our plan, posting sales of $3.2 million for the second quarter andcontributing operating profit of $300,000. Backlog for this unit remainedunchanged at a record $3.3 million at quarter end.

Consolidated second quarter gross margin was up from lastyear by about a point, driven entirely by the relatively faster revenue growthof Spandex, which is 23% compares to our manufacturing businesses growth rateof 4%.

Gross margin for the manufacturing businesses actuallyimproved slightly versus last year despite the continued decline of the legacybusiness at Gerber Scientific Products and significantly lower Solara UV2volume.

Net inventory grew by $3.4 million in the quarter drivenchiefly by foreign exchange translation, but also as a result of inventorybuild to support new product launches, some Gerber Technology equipmentdeliveries pushed from the second quarter and early third quarter, and a slightslowdown of after-market sales at Gerber Coburn.

Let me talk just a moment about our market segments.

In the Apparel and Flexible Material segment, GerberTechnology's sales were up only modestly in the second quarter to $51.4million, or 5% higher than a year ago in the second quarter.

An operating profit of $6.4 million was up by 8.2% whencompared to second quarter of last year, largely driven by higher expenses,particularly in the sales and marketing area planned and budgeted for thisyear.

The global market overall for Gerber Technology appears tobe firm with robust growth in Europe, particularly Eastern Europe and strengthin China, offsettingweakness in Southwest Asia, particularly India,and to a lesser extent North America.

Looking ahead of the third quarter, we currently expectGerber Technology will show year-over-year revenue and profit improvement basedon its strong new product portfolio and strength in key growth markets, whilerecognizing the current uncertainty in the economic outlook for both the United States and Western Europe.

Reported sales in our Sign Making and Specialty Graphicssegment were up in the second quarter by 28% versus a year ago to $91.2million, driven by very strong growth in our Spandex business unit, includingthe effects of favorable currency translation, and by the acquisition of DataTechnology.

Operating profit in this segment in the second quarterdeclined by $200,000 or 6% in comparison to a year ago in the second quarter,from $3.3 million to $3.1 million due to continued declining profitability atGerber Scientific Products, where operating profit was lowered by 50% or$770,000. This was almost completely offset by significant improvement atSpandex, where operating profit was higher by $600,000 or up 34% compared tothe second quarter last year.

We anticipate the trends for both these businesses to holdthrough the third quarter. Spandex's primary markets look to remain strongupside of the normal seasonal softening for Q3. And we expect profitimprovement initiatives will continue to drive performance improvement in thisbusiness.

For Gerber Scientific Products, the negative drivers are thesame with declining legacy business performance and slowing Solara UV2 salescombined with the higher expenses associated with the Solara ion launch untilcommercial launch in the fourth quarter.

In the Ophthalmic Lens segment, revenue was lower for GerberCoburn in the second quarter by 9.3% when compared to a year ago to $18.5million as we experienced after-market sales softness particularly in the U.S.

However, our operating profit improved to $1.1 million from$400,000 in the second quarter of last year. This improvement in profitabilityprimarily results from significantly improved gross margins attributable to theintroduction of new products and other operating improvements.

Looking to the third quarter, we anticipate continuedsoftness in the market but expect Gerber Coburn to deliver continuedprofitability improvement year-over-year-year. Before I provide overall insightinto the third quarter, I will turn the call over to John Krawczynski, foradditional detail regarding the second quarter. John?

John Krawczynski

Thank you, Marc, and good morning, everyone. And now, I’dlike to provide some additional insight into the financial results we justreleased. Sales for the second quarter were $160.7 million, an increase of 4.6%in the prior quarter and 10.8% higher than a year ago. Changes in foreigncurrency exchange rates have the effect of increasing our revenue byapproximately $8.4 million in the quarter as compared with the same period tothe prior year.

For the first six months of thefiscal year, sales were $314.4 million, an increase of 11.3% over the first sixmonths of the fiscal year 2007. Favorable foreign currency translationincreased our revenue by approximately $14.6 million compared with the firstsix months of the prior year. The primary driver with significant increase inrevenue for both the quarter and first half of the year was a Spandex distributionbusiness. Excluding the benefit from favorable foreign currency translation, Spandexrecorded increased revenue of $6.3 million and $12.9 million for the secondquarter and first six months of fiscal 2008, respectively, as a result ofcontinued strong after-market sales across Europe and Australia.

Orders for the quarter were$159.9 million, a sequential improvement of 3.8% and 12.2% above last year'slevel. Through six months orders were $313.9 million, a year-over-year increaseof 11.1%. Backlog at the end of the second quarter was $48.8 million whichrepresented a $5.2 million increase from the same period of the prior year.

On a consolidated basis from ageographic perspective, North America contributed about 33% of our revenue inthe second quarter, Europe 48% and the rest ofthe world primarily the Asia Pacific region contributed about 19%.

From the end of the prior fiscalyear, there was a modest shift in our sales from North America to Europe, reflecting the strength of Spandex sales as wellas the favorable impact of foreign currency translation. The equipment revenuefor the quarter was $50.9 million an increase with 7% from both the firstquarter and the same quarter of the prior year. After-market revenue was $91.2 million,an increase of 13% in the same period of last year, and service revenue was$18.6 million, an increase of 12% from the last year's level. These increasescontinue to be fueled by the many new products we have bought to the market inthe last two years.

Our gross profit for the quarterwas $46.4 million or 28.9% of sales. Gross margin was 1.2 percentage pointslower than the same quarter of fiscal 2007 and 0.7 percentage points lower thanthe first quarter of this year. The primary cause of the reduction in grossmargin percentage from both period was a continued increase sales volume fromour Spandex distribution, which has significantly lower gross margincontribution that our manufacturing operation.

Research and developmentexpenditures for the quarter were $6.6 million, about $100,000 higher than thefirst quarter of fiscal '08 and $400,000 higher than the second quarter offiscal 2007. The increase was due to planned investments and R&D related tonew products, most specifically the recently Solara ion.

Selling, general andadministrative expenses for the quarter were $34.7 million which were on parwith Q1 and about 12% higher than a year ago. Although these cost have remainedconsistent as a percentage of sales, the year-over-year increase issubstantially due to higher exchange rates, the increase expenses for sales andmarketing related to new product launches, geographic and business expansion,as well as one-time charges during the second quarter for professional feesassociated with the company's adoption of FIN 48.

Our operating profit was $5.2million this was an increase of $800,000 in the first quarter and a reductionof $1.3 million in the second quarter of the prior year. Our lower operatingperformance as compared with the same period into the prior year was primarilya result of the previously discussed one-time charges associated with thecompany's adoption of FIN 48 of $1 million.

Increased investments in R&Dand sales and marketing related to launches of new products and increasedcommissions expenses associated with higher business volume. These impacts werepartially offset by the increased gross profit contribution from our higherrevenue.

Interest expense in the secondquarter was $1.1 million up $100,000 from both the first quarter and sameperiod in the prior year. Second quarter pre-tax revenues were $3.7 million oureffective tax rate for the quarter was 32.7% compared with 36.1% in the secondquarter of fiscal 2007.

The overall reduction from thecomparable period of last year was primarily attributable to a favorable shiftin profits during the quarter to lower foreign tax jurisdiction. As income forthe quarter was $2.5 million or $0.11 per diluted share. For the first half ofthe year, net income was $5.3 million or $0.23 per diluted share.

Now let me provide someadditional detail on our cash flows and balance sheet. At the end of thequarter, our cash balance was $14.4 million compared with $17.9 million at theend of Q1. During the quarter, we used about $8.4 million in cash, net ofcapital expenditures to support our operation. We expect to see significantlyimproved cash generation for the second half of the year

Our total debt grew modestly in the quarter to $48.5million. Our net debt balance, taking into account our cash on hand at the endof the quarter, was $34.2 million or about $8.8 million higher in the fiscalyearend. This increase is primarily a result of the additional term loanentered into under our credit facility related to the Data Technologyacquisition. Our net debt position is expected to decline in the second half ofthe year.

We are currently in process of negotiating a new $100million secured credit facility to replace our current asset-based facilitythat is expiring late in calendar year 2008. We expect this new facility toprovide more flexibility to the company and to close before the end of thethird quarter.

Customer receivables at the end of the second quarter were$106.9 million, relatively unchanged from our yearend of $106.4 million. OurDSO was 60 days, down 2 days from yearend, primarily due to a steadycollections process and overall higher sales volume.

Inventories at the end of the quarter were $77.4 million, anincrease of $12.1 million from yearend. Inventories have increased primarilyrelated to higher foreign exchange rate, certain customer service and geographicexpansion initiatives as well as the Data Technology acquisition.

We continue to focus on determining our optimum inventorylevels to balance both working capital investment and meeting customer serviceexpectations while we continue to grow our business. As a result of theincrease in inventories, our turns declined from 6.7 times at the end of fiscal2007 to 6 times in the second quarter of fiscal 2008.

Capital expenditures were $2.8 million in the quarter and$3.8 million for the first half of fiscal 2008. Current quarterly spending isprimarily related to the implementation of a Customer Relationship Managementsoftware tool, which is expected to improve the company's ability to capture,store and analyze customer information.

We continue to expect full year CapEx to be in the $6million to $9 million range. Depreciation and amortization was $2.4 million, up$300,000 from the same quarter of fiscal 2007.

Now, I will turn the call back to Marc to provide an updateon our expectations for our third quarter. Marc?

Marc Giles

Thanks, John. And now looking ahead to the third quarter, webelieve revenue should be in the $150 million to $155 million range, reflectingthe seasonal third quarter slowdown in the sign making and specialty graphicsbusiness.

With the Solara ion not expected to generate revenue untilthe fourth quarter, the Gerber Scientific products business unit performancedecline will continue to weigh on our consolidated gross margins, though weexpect margins to improve overall slightly from the second quarter and roughlyapproximate third quarter gross margins of last year.

We except SG&A expense to continue to be higher thanwhat otherwise is to be expected in the third quarter, driven by some severanceand restructuring related charges and by the planned investment in sales,marketing and research and development in support of our new products and othergrowth initiatives. As a result of these factors, third quarter earnings shouldbe in the range of $0.10 to $0.15 per share.

I'd like to make one final note. We were successful inhiring our new Senior Vice President of Operations during this past quarter.And I want to welcome Joe Mele to the team starting in January.

With his supply chain management experience at UnitedTechnologies and his years as a consultant, helping companies to implement leanmanufacturing processes, Joe brings a wealth of knowledge to Gerber. He willlead our company's charge to drive lean thinking throughout our supply chain.

Now, operator, I'd like to openthe meeting for questions.

Question-and-Answer Session

Operator

Thank you. (OperatorInstructions) We'll take our first question from Casey Flavin with CJSSecurities. Go ahead please.

Casey Flavin - CJS Securities

Good morning, Marc.

Marc Giles

Good morning, Casey.

Casey Flavin - CJS Securities

Can you just give us an update onthe new product flow for the remainder of the year and particularly the nextgeneration Solara printers, and then provide a little bit more color on whatthe market responses then to the products that you have launched so far?

Marc Giles

Yeah. I mean, of course, the twobig launches that we did in the last quarter, actually both within the lastthree-and-a-half weeks, were: one, the Solara ion UV wide-format printer; and thesecond was the Advanced Lens Processing System for Gerber Coburn. That was justabout may be just a week-and-a-half ago or so.

The other important new productfor us this year that has been quite successful for us and in fact is ourleading new product seller this year is Gerber Technology's XLc7000 cutter thatwe produced in China.So, we've been very, very pleased with the performance of that new product.

Before I get into the ion and theAdvanced Lens Processing System, as I mentioned earlier in the call, ourcontribution of new products as a percent of our total equipment salescontinues to improve, and we finished in the second quarter at just over 17% ofequipment sales coming from new product. So, overall, we're very pleased withthe progress of our new product performance.

Now, with regard to the Solara ion, as I mentioned, this isreally, we believe, a significant new product launch, not only for GerberScientific Products but will have we expect a significant impact in improvingthe overall performance of the company, and we are very excited by thereception it received at the SGIA show down in Orlando and the Viscom show inMilan more recently.

And as I mentioned, we've been taking orders for the machinepre-orders, because it's not commercially launched yet with scheduled shipdates. That now totaled well over a 100 systems. Just to put that in the frameof reference, it took us 10 months to get orders for 100 systems for the SolaraUV2, the ion predecessor. So the excitement has been palpable.

We expect that for the first full year after launch, wethink it's very, very reasonable to expect system sales of between the 400units to 600 units, which depending on system makeup and composition willdeliver about $20 million to $30 million of incremental new revenue in thatinitial 12 months and at substantially higher gross margins than GSP's or eventhe corporations consolidated gross margin today.

So the impact we expect will be quite dramatic and that'swhy this Solara ion has been focused of a lot of our internal attention duringthis past year, and we certainly welcome the customer reception.

With regard to Gerber Coburn's launch of its Free-FormCapable Advanced Lens Processing System, we are deeply excited about thisproduct. Now it does not have the market size or market pole of the ion, butit'll be an important highly profitable very high gross margin system additionfor the Gerber Coburn business who's been benefiting from new productintroductions over the past year and I think has increased its gross marginyear-over-year by almost 500 basis points in that business unit as a result. Sowe expect that trend to continue with the launch of this new advanced system.

System by the way, it was at the Optical LaboratoriesAssociation Exhibition in Indianapolis,it did win the association's award of Excellence for Servicing Equipment, soobviously the team and we are pretty proud of that.

Casey Flavin - CJSSecurities

Great, thanks Marc.

Marc Giles

Sure Casey.

Casey Flavin - CJSSecurities

I guess just a follow-up on the Solara printers, you'rementioning a sort of family of products. I believe you talked about sort of alower price point, higher volume product. Do you think that that has a samepotential revenue contribution in fiscal '09, depending on when you actuallylaunched the product?

Marc Giles

Well, this is the first of a family of products that weexpect to introduce over time and I don't have a timetable, but I prepared tolayout for you other than to say that over the next relatively near–term,additions will be making. It's been our goal to introduce a lower cost butstill high performance system to the marketplace that we'll start to targeteven wider range of market opportunity and that opportunity definitely stilldoes exist, and you should expect that that kind of product will be part ofthis family planning exercise, it will.

Casey Flavin - CJSSecurities

Okay. You touched on that backlog actually declined in thequarter from Q1. Is that primarily a function of the decline in Solara UV2orders, or are there other factors that are responsible for that?

Marc Giles

No. I would say it was more a blip. I mean it was about$800,000 spread between orders and shipments, so I think it was just the timingeffect there. I wouldn't attribute there anything more than that.

Casey Flavin - CJSSecurities

Okay. And can you comment on the process that you're making,or the progress that you are making to improve gross margins through variousinitiatives and what your expectations are going forward for the rest of theyear?

Marc Giles

Yeah. I mean I think that we are seeing slightly improvedgross margins in our equipment, in our manufacturing business units. This hasnot been at the pace that we have wanted. Some of the cost reductioninitiatives while we have been making important progress aren't accelerating atthe pace that we'd like to see or hope to see at this point. But I expect thatpace to increase, to improve over the next two quarters, and going into nextyear. I think that frankly not having our new operations leader on board justheld us back a little bit in that area this year.

So I'm very, very anxious to get him in here, and I know heis as well and we have pretty high expectations to help us accelerate our costreduction programs and lean initiatives.

As far as the biggest impact ongross margins in the near-term, as I said before, the predominant factor in ourplanning in the near-term is new products, and certainly the new Gerber CoburnALPS system will continue to expand that impact, and obviously the Solara ionat considerably higher gross margins and we'll have a extremely positive impacton that but that's not going to happen until the fourth quarter. So you won'tto see any impact from that this coming quarter.

And further, as Solara 2continues to ramp down in terms of it's contribution and margin contribution tothe business and that's impacting Gerber Scientific products negatively in thegross margins area until we get the ion launch, so we're feeling the weight ofthat. Biggest factor of course on what's happens with our gross margins on aconsolidated basis, is how fast does Spandex grow versus the rest of thebusiness.

Spandex has been doing fantasticin the marketplace growing 20% year-over-year for the last several quartersnow. But that's compared to considerably slower growth in our higher marginmanufacturing businesses so that artificially if you will swings theconsolidated gross margin downward.

Casey Flavin - CJS Securities

Okay, great. And then lastly,Marc, can you just touch on at what stage you are in the CFO search and anysort of additional details you can provide there, and then I'll hop back in thequeue?

Marc Giles

I continue to be optimistic Isaid I'm optimistic for each of last couple of quarters. But we haven't justfound the right pairing yet. But I continue to be optimistic that we will havesome, we looked at some great people and were aggressively out there trying tofind the right partner for this Company and for me. And I am optimistic that wewill get it done shortly.

Casey Flavin - CJS Securities

Great. Thanks.

Marc Giles

Thank you.

Operator

We'll take our next question fromChuck Murphy with Sidoti and Company. Go ahead please.

Chuck Murphy - Sidoti and Company

Good morning guys.

Marc Giles

Good morning, Chuck.

Chuck Murphy - Sidoti and Company

Well it certainly sounds like theion has gotten off to a big start.

Marc Giles

Yeah, yeah, that's correct.

Chuck Murphy - Sidoti and Company

I mean in two months it soundslike they have done what Solara 2 did in ten months, I mean is that correctthere?

John Krawczynski

Well almost, I mean it’s done inthree and a half weeks basically what we did in ten months of Solara 2 in termsof orders on the table.

Chuck Murphy - Sidoti and Company

And would you attribute that tothe product just being that much more superior or has the market moved moretowards UV or just general economic conditions favorable?

Marc Giles

No, I think the primary driver isthis is just it’s really a breakthrough product and its performancecharacteristics are substantially better than the UV2, but also in comparisonthan any other product out there for less than $150,000 is a product thatdelivers performance. You can’t find on any [surface], so I mean that’s whatreally driven the excitement in the marketplace. And we just had someremarkable press as a result of the innovations presented by this, by this newtechnology as well.

Chuck Murphy - Sidoti and Company

Okay and we too assume that youare kind of still holding on to the full year EPS guidance of $0.60 to $0.80?

Marc Giles

Yeah I think we are still in thatrange, we are holding on to that. We gave a pretty broad range purposelyupfront not knowing for sure when the ion would launch and other factors, butwe are still looking in that range.

Chuck Murphy - Sidoti and Company

So, I can see the way thoughyou’ll be expecting a pretty big fourth quarter once the ion comes?

Marc Giles

Absolutely.

Chuck Murphy - Sidoti and Company

Okay.

Marc Giles

Absolutely.

Chuck Murphy - Sidoti and Company

Okay and my other question, asfar as the tax rate goes it's been kind of tracking in the low 30s here now forthe last several quarters. I know before your guidance was more of the 35% to 38%range what are you seeing that would make it move to that higher range fromwhere it is right now?

Marc Giles

Nothing really right now, I thinkour experience -- right now we are assuming like a 35% when I gave theguidance. So we've had some beneficial swings, I am not anticipating anythingthat would drive it back over 35%. So, but, I think it's reasonable to assumethat 35 this year, but right now is the reason we're less.

Chuck Murphy - Sidoti and Company

Okay. And my final question here.I know you mentioned what the currency impact was in the top line, any ideawhat it was for the bottom line?

Marc Giles

No. I think, it's really very,very tiny.

Chuck Murphy - Sidoti and Company

Okay. That's all I had. Thanks.

Marc Giles

Sure.

Operator

We'll take our next question fromJed Dorsheimer with Canaccord Adams. Go ahead, please.

Jed Dorsheimer - Canaccord Adams

Hi Marc.

Marc Giles

Hi Jed.

Jed Dorsheimer - Canaccord Adams

Congratulations on the ion.

Marc Giles

Thank you.

Jed Dorsheimer - Canaccord Adams

Couple of questions on that oractually one question on that and then actually one on the financials. In termsof the throughput, could you just go over how that compares to, I guess otherto [McDermott] product in the marketplace?

Marc Giles

Yeah, I mean, in the bestcomparison its roughly three to four times faster than the comparable [McDermott]product and some little over 10 times faster than the UV2.

Jed Dorsheimer - Canaccord Adams

And then, looking at the ASP [McDermott]is about 120 to 150 much they change pricing, you're just doing a math, itlooks like about 60,000, so, am I looking at this correctly?

Marc Giles

Yes, our street price will be about roughly $80,000 is whatwe've announced. So that's the end-user prices about 80 that would be thecomparison of the [McDermott] price.

Jed Dorsheimer -Canaccord Adams

80 for yours and theirs still being 120 to 150.

Marc Giles

Yeah, comparable unit would be up in that range.

Jed Dorsheimer -Canaccord Adams

And yours is three to four times faster.

Marc Giles

Yes. Our unit is three to four times faster. And I don'twant to get too detailed, get all excited about this product line. Not only isit a faster performing unit, there are some other key factors here. One is itis a true flatbed printer. So the bed stays stable and the ink head does allthe movement on a gantry, which gives you much more accurate printing.

In addition, it’s also a true roll-to-roll. So, it can printon flexible materials as well just as professionally as it can do the rigidmaterial. And our new Cold Fire Cure system means that it can print on a hugevariety of sensitive materials, whether rigid or flexible, because it's a lowenergy. I mean our system runs at about 90 degrees C versus all the other UVsystem at about 1,200 degrees C. So you can imagine what those temperatures cando to sensitive like paper and related products substrates. So, it prints on amuch wider range of materials.

And then in addition to that, because it uses our new cationicink technology is that it can print on flexible materials to the point wherethey can do car wraps and banners as effectively as solvent printers can. Soyou've opened up the door to a whole new range of applications with thisprinting technology.

Jed Dorsheimer -Canaccord Adams

Sounds interesting. Congratulations on that. The otherquestion that I do have is just -- I may have missed it. Did you give bysegments the operating profits?

Marc Giles

I did.

Jed Dorsheimer -Canaccord Adams

And would mind repeating those? I'm sorry.

Marc Giles

Yes. Let me shuffle back through here, so I make sure that Ido this right. For our apparel and flexible materials segment, it was $6.4million.

Jed Dorsheimer -Canaccord Adams

Yes.

Marc Giles

And for our sign making and specialty graphics segment, thatwas $3.1 million.

Jed Dorsheimer -Canaccord Adams

Yes.

Marc Giles

And for Gerber Coburn, our Ophthalmic Lens segment,operating profit was $1.1 million.

Jed Dorsheimer -Canaccord Adams

Got you. So, basically one-third of your revenue is stilldriving two-thirds of your profitability, being the business over in China,the cutting technology?

Marc Giles

Yes, the Gerber Technology business unit. That's right.

Jed Dorsheimer -Canaccord Adams

My question is then, as we look at the $20 million to $30million from the new ion, the sign making, could you provide some color on whatthat will do in terms of the overall operating mix? Will this now be a 50-50 orhow will that change next?

Marc Giles

I haven't thought about it or discussed the math in thatformat. But suffice it to say that we will not be just a GerberTechnology-based company. This is gong to dramatically swing that balance ofprofit contribution the other way.

Jed Dorsheimer -Canaccord Adams

All right. Great. Thank you.

Marc Giles

Thank you.

Operator

(Operator Instructions)

We'll take our next question from Jim Ricchiutiwith Needham & Company. Go ahead please.

Jim Ricchiuti - Needham& Company

Hi. Good morning.

Marc Giles

Good morning.

Jim Ricchiuti - Needham& Company

Marc, I wonder if you'd comment on just how big amanufacturing challenge you see to ramping the ion in Q4?

Marc Giles

Yeah, Jim, I mean obviously we're on it now as a big projectand we've been on it. So I mean there is challenge to be able to ramp up, toexpect a demand levels in Q4. So there is that risk out there in terms of howfast we can get everything going.

But that being said because of the importance of theproject, we have contributed a substantial amount of our internal resources,not just the ones that Gerber Scientific Products but from across the company,really to focus on this launch process and getting our manufacturing processesup to speed to give us the best possible opportunity to meet or beat thatlaunch schedule and to equal our production expectations.

Jim Ricchiuti - Needham & Company

I mean it sounds like it's fairly radical design change fromexisting products. Is that true or basically building on some of the technologyyou've had and what I'm trying to gauge…?

Marc Giles

Yeah, sure. Jim, it's not in terms of VAT it's not radicaldeparture frankly from what we do. I mean, it's a true flatbed printer, as Isaid, which means that it has a stable bed unit or a table with a vacuum hold-downsystem to hold down the sub-tray and then a gantry that crosses the system witha head on it that supports ink.

And if you look at a Gerber Technology cutter, it is astable table with the vacuum hold-down system for apparel or other flexiblematerials with a gantry that goes across the cutting system that holds aheadthat instead of printing spinning ink moves the knife to cut the fabric.

Jim Ricchiuti - Needham& Company

Fair enough. I'm curious if youguys have done much work looking at the three orders that you've got onproducts. Are these new customers, I am curious about where the activity iscoming from?

Marc Giles

Yeah, well, in terms of a lot ofthe business that's both, existing and brand new customers, and brand newcustomers also in the sense of distribution outlets. So we've had a group ofdistributors that are generally known in the industry as wide-format resellers,that just focus on selling printing technologies generally into digital printshops that weren't interested in our products before because they just wantrelevance to their space of application, who have been knocking on our door andsigning up to take on this new product because of the potential it offers inthe market space. So we've had both in terms of end users and in terms ofexpanding our distribution channels, both contributing to the ramp up of thenew product.

Jim Ricchiuti - Needham& Company

Has Spandex got any of thepre-orders?

Marc Giles

Yeah, I mean, we just did thatone show in Italyand I think at that show took 20 some odd orders for 20 some odd units, just ofthat one show.

Jim Ricchiuti - Needham& Company

And just shifting gears a littlebit to gross margins, I don't know if you gave, did you guys give the Spandexrevenues by itself?

Marc Giles

Yes.

Jim Ricchiuti - Needham& Company

I'm sorry, I missed it. What wasit?

Marc Giles

I am sorry. Hold on a second. Letme…

Jim Ricchiuti - Needham& Company

And the question I have relatingto that is on the topic of gross margin, excluding Spandex, can you say youroverall margins were up at Spandex?

Marc Giles

Yeah, up slightly, but up.

Jim Ricchiuti - Needham& Company

Okay.

Marc Giles

Hold on just a second. The volumeof Spandex alone was -- hold on a second. Did you find it? $64.1 million. Thankyou, John.

Jim Ricchiuti - Needham& Company

Thank you. And then finalquestion, wondering how you guys are thinking about business in Chinaas it relates to just generally the balance of the year and the revenueexpectations. You are showing good growth there and I am just wondering howsustainable you see that?

Marc Giles

Yeah. I mean where we sit rightnow it seems sustainable and consistent with past performance on all our phasesin that 25% upwards of 30% year-over-year growth. So, right now, where we sitit looks that that case seems pretty sustainable.

Jim Ricchiuti - Needham& Company

Great. Thanks very much.

Marc Giles

Sure.

Operator

We'll take our next question fromTim Ostiole with Delta Management. Go ahead please.

Tim O'Toole - Delta Management

Yeah. Hi, Marc and congrats on agood quarter.

Marc Giles

Thank you very much

Tim O'Toole - Delta Management

Actually, I guess my questionsare around the new Solara also and actually just in terms of I guess if you'dlook at the trailing 12 months or so, what would the rough revenue run rate befor the Solara product that you are kind of replacing or some setting, makingobsolete in the sense.

Marc Giles

Yeah. I don't have the exactnumbers in front of me, but I'll give you a flavor. I think we in Q2, in termsof revenue we did under $1 million of business in Solara 2, probably well underthat and probably comparable, little bit better than Q1 if we go back to lastfully year total revenue was right around $7 million in fiscal year '07 give ortake a few dollars, so as you can see the ramp down is indeed occurring. Goahead.

Tim O'Toole - Delta Management

And what's kind of the run-rateat this point of the old fuel thermal stuff?

Marc Giles

Well, I get out of the numbers infront of me, but that also continues to decline in total is actually kind of aunique phenomena and we continue to sell quite a few thermal printers. So wedon't see a large degradation, maybe only a slight degradation year-over-yearon our thermal printers, but the consumables have decreased quite substantiallyin the 28% plus range and that's a very profitable after-market tale. So youcan see that while there are still application people still like the thermalprinters and there is a lot of interesting and unique applications it does asof total percentage of the output of printed materials, thermal continues toloose to inkjet.

Tim O'Toole - Delta Management

Right and so what is thequarterly run-rate roughly though, is it sort of the $1.2 million or --

Marc Giles

I would the hate the sake as Ithink I --

Tim O'Toole - Delta Management

You don't have in front of you,okay its fine. Well and then the other question is on --

Marc Giles

But it is significant, let me putit that ways, a significant piece of the business.

Tim O'Toole - Delta Management

On S2 and I have a kind of couple of years of data that youmaybe able to glean this out upon, S2, what is the kind of average per annumconsumables consumption in revenues per machine?

Marc Giles

Well, I'll give it to you on our expectations on the Solara ion.

Tim O'Toole - DeltaManagement

Okay.

Marc Giles

And generally on the Solara ion,we're expecting between $5,000 and $10,000 worth of in consumption per machineper year, in that general range.

Tim O'Toole - DeltaManagement

And how do the margins compare overall for that?

Marc Giles

They are comparable higher margins than obviously where weare at today.

Tim O'Toole - DeltaManagement

Okay. And then I guess the numbers that you're looking atfor the ion, are they per machine, per annum? Are they similar to higher orlower than S2?

Marc Giles

Say that last part again. The margins?

Tim O'Toole - DeltaManagement

No. The consumables revenue per machine.

Marc Giles

It's significantly higher just because of the --.

Tim O'Toole - DeltaManagement

The higher throughput?

Marc Giles

The performance, yeah.

Tim O'Toole - DeltaManagement

Yes. That's what I would think. So what you've actuallyrealized on the S2 per machine is probably $5,000 or less or something.

Marc Giles

That's probably right.

Tim O'Toole - DeltaManagement

And the average will vary obviously. Some guys will use ithard all the time. Some guys will use it no harder than they were using S2.They just like the performance better.

Marc Giles

That's right.

Tim O'Toole - DeltaManagement

When you first introduced the S2, what was the ASP or kindof two customer price point?

Marc Giles

The street price for the UV2 when we launched it was rightaround $60,000 to $65,000 per system, something like that.

Tim O'Toole - DeltaManagement

At the user?

Marc Giles

At end user, yes, street price.

Tim O'Toole - DeltaManagement

Okay. I got you. Okay. And so you priced it there because ofthe lower throughput to try to get it out there. And now, the higher throughputhere, you actually price better than anyone that could compete.

Marc Giles

Right.

Tim O'Toole - DeltaManagement

Let me see if there is anything else,okay, that's. Do you look at the market, now you dash it sounds like you arebroadening the market too as you roll this out in terms of some of theapplication people looking at that might not have concede you before.

But I guess, what I am curious about alsois, the kind of the old trends so far suggested a big launch. I just wonder ifthere's kind of an early adapter period where it goes to your projected numberof 400 to 600 a year.

And then, whether you would think, ifthat number comes down, whether it stabilizes at some number within that rangeover time or whether there is incremental penetration as to kind of the wordgets out and people maybe migrate towards that system?

MarcGiles

No, I mean, I think.

TimO'Toole - Delta Management

Too early to know, I know, but…

MarcGiles

Yeah, I know, it is kind of an early, but overallexpectations in the first 12 months would be that 400 to 600 and I would expectactually some upside beyond that as we go forward for a period of time.

TimO'Toole - Delta Management

Okay.

Marc Giles

So, I think, it will continue to build for at least thefirst couple of years.

TimO'Toole - Delta Management

Couple of years. Okay, great. Thanks very much, Marc.

Marc Giles

Sure.

Operator

We appear to have no further questions at this time, sir.

Marc Giles

Okay, thank you, operator. And thanks to all of you forjoining our conference call today. It's an exciting transition year for ourcompany as we get set to launch commercially the Solara ion in the fourthquarter. And obviously, we'll provide an update on our progress against thattarget as well as our other new product initiatives and the results of Q3, Ibelieve, right after we close. So, I look forward to talking to you there. Bye.

Operator

This concludes today's teleconference. Thank you for yourparticipation. And you may disconnect at any time.

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Source: Gerber Scientific F2Q08 (Qtr End 10/31/07) Earnings Call Transcript

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