VirtekVision International, Inc., (VRK) Q32008 Earnings Call December 14, 2007 10:00 AM ET
PeterMonsberger – V.P. Finance & CFO
RobertNally - Chairman
PatrickDitty – Private Investor
Welcome to the Virtek Vision International, Inc. fiscal 2008 third quarterfinancial results conference call. (Operator Instructions) I will now turn theconference over to Mr. Peter Monsberger, Vice President Finance and ChiefFinancial Officer. Please go ahead sir.
Thank you. Good morning everyone and thank you for joining us this morning.I am pleased that joining me on this call is our Chairman, Robert Nally, whowill join me in answering your questions following our call. We hope that youhave been able to review the third quarter news release that we issuedyesterday afternoon. We have also posted it and our MD&A on our website andhave filed our financial statements and MD&A with SEDAR. As usual we willjust cover some of the highlights of the detailed news release and the MD&Aso that I can keep my opening remarks brief and leave plenty of time fordiscussion with you when we open the call for your comments and questions.
As our comments will include statements of a forward-looking nature, I willnow provide you with the required standard disclaimer. Any forward-lookingstatements that we make today are based on current expectations that aresubject to significant risks and uncertainties, as our described in our newreleases and regulatory filings. These include but are not limited to theaffects of general economic conditions on our customers and markets that weserve, changes that may take place in our costs and expenditures, the resultsof our research and development programs and other factors discussed in detailin our news releases, management discussion analysis and other regulatoryfilings. Please refer to these. We assume no obligation to update the forward-lookingstatements or to update the reasons why actual results could differ from thosereflected in the forward-looking statements.
As you know, our third quarter tends to be the weakest of the year. However,this year as a result of demands in Europe for our Marking& Engraving systems and aerospace products, revenues were up 2% from lastyear’s third quarter. Obviously not all of the news in the quarter was good. Wecontinue to have to deal with the affects of the decline in capital goods andpurchases in our North American markets, notably the single-family housingconstruction industry in the United States,as well as the impact of the strengthened Canadian dollar against the U.S.dollar and the euro.
The quarter’s results were also affected by about $800,000 in reorganizationcosts mainly related to the severance costs in Germanyand Canada. Ofcourse, these measures mean that we should benefit from somewhat lower SG&Acosts in future periods. Also affecting the quarter was a decrease in the futuretax asset balance that we had to take under Canadian GAAP standards. Thisaccounted for $400,000 of the $522,000 income tax provision that we incurred inthis quarter compared with the very small recovery of taxes recorded in thelast year’s third quarter.
The swing in non-cash income tax accounting was a major contributor to ourreporting a loss from continued operations of $1 million or $0.03 per basisshare compared with the loss in last year’s quarter of $121,000 or zero centsper basis share.
In view of the weaknesses in some of our key markets in the housing andmanufacturing sectors the net loss from continuing operations is certainly notsatisfactory. We continue to focus in on our Marking & Engraving businessas offering the best growth opportunities over the long term. Although thesales in this business were flat in the quarter compared with a year ago, itwas encouraging that the European sales rose by $2.2 million. This was offsetby lower sales in North America. A year ago we had a strong boost in thisregion if you recall, under our contract with a large U.S.customer. We are also finding that the sale cycle in the U.S.has lengthened given the current environment.
Marking & Engraving’s gross margin fell to 35% from 44% in 2007 due to alarge lower margin contract in the Asia Pacific region along with lower NorthAmerican sales. Going forward we are focusing on moving into markets that offermore favorable margins. For example, our G series based solutions for themedical and coin manufacturing sectors offer improved margins than do standalone systems. We are also pleased with the progress we are making onintegrating the [foba] European and North American operations, now that we own100% of that business. We expect this to produce operational efficiencies as wereview procedures and continue to make changes.
For the Imaging & Templating segment, sales were up 5% as a result inincreased aerospace sales in European and North American markets. Further webenefited from expanding into European countries that do not observe the Augustholiday shutdown as others do. Offsetting the higher aerospace sales was thedecline in sales for the prefabrication construction markets in the United States. We do not expect that the Imaging& Templating revenue will significantly increase until there is animprovement in the markets in which we compete. Given the home constructionmarket remains poor; we do not expect a significant ramp-up in the next year to18 months. But we are expecting that aerospace sales will strengthen as Boeinglooks forward to launching the next generation 747 and other aircraft.
The gross margin in our Imaging & Templating segment increased to 62%from 50% a year earlier reflecting more favorable product mix and also lowerwarranty costs. Continuing operations exclude the performance of our former iLSbusiness unit. We completed the sale of those assets early in the quarter backon August 15th. Due to this sale the operational results are treatedas discontinued operations and are excluded from the results of continuingoperations. We received $6.2 million cash for the sale as well as a $1.2million non-interest bearing promissory note due no later than June 15th, 2008. Theproceeds from this promissory note will be held in escrow with one-half to bereleased in each of August 15th, 2008 and 2009. This sale resulted in a $3.9 million gain asreflected in our financial statement’s results for continued operations.
Included in the results for discontinued operations is net income of $3 millionin the third quarter of fiscal 2008 or $0.09 per basic share. A year ago, werecorded a net loss of $400,000 or $0.01 per basic share and diluted share. Proceedsfrom the sale and from the equity financing that we completed last February,contributed to an increase in our working capital to $15.5 million comparedwith $11.4 million at the end of our last fiscal year. This provides us withadditional funds to support our working capital requirements and growth plansas we move forward.
Looking ahead, our task is to ride out the economic turbulence as themarkets for some of our core products improve; we are well positioned tobenefit from this. At this time, we must be and are focused on continuing toreduce our costs through product innovation and operating efficiencies. OurR&D efforts in the coming year will be focused on hardware development forour Imaging & Templating products and on software development for ourMarking & Engraving products. Our efforts in this also should beinstrumental in our generating better financial performance in the future.
In summary with the rapid appreciation of the Canadian dollar during thequarter, increased sales volumes were offset by currency movement. In light ofthis our margins remained constant while our operating costs declined. Giventhe impact of the reorganization costs and the adjustments in the future taxasset, operationally the business continues to improve.
I would now like to turn the call over to Bob Nally for a few comments onthe changes in our executive management, Bob?
Thank you Peter and good morning everybody. As I think everybody knows bynow, we announced the appointment of the new President and CEO, Mr. StephenSorocky. We had gone through, at the Board level and Human Resources andCompensation Committee level, an exhaustive search or an extensive search foran executive to bring this company forward from this level to a much higherlevel and we went through – using Spencer Stewart as our executive search firm,we went through upwards of 40 resumes. We selected down to 15 [inaudible] togive serious consideration to and ended up short-listing and interviewing over5 candidates. All of them were very excellent candidates and we selected Steve.It was a difficult decision in terms of the quality of people who were thereand Steve came out as the person that we the Board, believed could bring usforward. Steve’s management style is very much one of a hands-on, well roundedmanager, if I can use the term, nuts and bolts of blocking and tackling. He isthe kind of manager that will put in the processes and systems that we need tohelp us grow to much larger sales and profitability than we’re at today.
Steve’s focus will be certainly on the fiscal 2009 plan and really workingthrough that with the management team and our strategic plan that we justcompleted in that regard. He certainly will be focused on the full operationsMarking & Engraving in Germanyand will spend time over there when he starts right away in January. He willbecome very familiar with that program. We also have some very important newtechnology development programs underway in the company and he will be focusedon those software-hardware projects that will help us introduce new productsand improve costs and performance of our products.
He will also focus on G&A matters to find ways to improve our G&Acosts. So all in all, I’d like to take a moment to thank Bob Sanders for wherehe brought us to at this point in the company. Our annual performance last yearwas a record in terms of sales and profitability and I want to thank Bob forthat. On a go-forward basis, I believe Steve is the person that can really takethis company now and build the basis for significant growth of profitability inthe coming years.
Thank you Bob and with that operator I’d like now to open the call forquestions and comments.
Your first question comes from Patrick Ditty of a private investor. Pleasego ahead.
Good morning gentlemen, you’re talking about the Imaging & Templating inNorth America, this is going down to the Asian market,how much of this business is related to Canadaand how much is related to the U.S.,like distribution? The Canadian market is not that bad in terms of housing, Iknow that the U.S.is but how much of your business is related to Canada?
Yes Patrick, good morning. First of all when I look at the housing marketand you have to look at the demographics between Canada and the U.S. marketplaceand the size differential, although we have a very robust housing market inCanada and we’re very happy about that because there are a lot of greatopportunities for us to continue in Canada, the U.S. market is such a magnitudein size compared to Canada it is definitely impacting us negatively.
I mean just generally speaking of on a geographic distribution of our sales,2% of our sales are in Canadathe rest are globally.
Okay I understand. One last point related to stock, I know that I’ve beenasking that question for quite awhile, that now that the stock is [inaudible]at around $0.40 - $0.50, are we going to see other [manager] buying the stocksin the future because I know that [inaudible] that the stock is very undervolume and there is no major buying from the manager. I think it will givesome, show some creditability in the future if there is something there notonly in the plan or the incentive of the compensation incentive in the future.I know it’s there, something that will be done. If there’s a lack of confidencein terms of the investors seeing that no one is buying even though they keepsaying that it’s pretty cheap.
Yes Patrick I understand your issue and I’ve had a number of shareholdersactually email me and their concern about the fact that there’s been a lack ofmanagement activity in this period now when the stock has been down quite low. Ihate to say it although it’s very true though is that as with management, thechallenge we have is that we tend to go under blackout periods from the pointof the end of a quarter through till we actually release financial information.There are other opportunities that we are continuously looking at that couldhave a material impact on the business and that precludes us from being activein the marketplace, even though the prices are quite favorable. On acompensation basis the executive team has always been compensated from thepoint of view of stock options that for all of us right now, are under waterand believe me it’s very important for us to improve the performance of thecompany.
I’ll just comment on that Patrick, I know there are, at the Board level,there are various Board members that would like to purchase stock. The problemwith the challenge we have is with the blackout period. It’s difficult as Peterhas said to get the time in which we are clear and free to purchase stock, butI can assure you, there definitely is interest at the Board level in doing so.
Okay thanks and so the blackout period is ending in two days if I’m right,so I don’t know. I know that the timeframe for buying is very small in thequarter for your guys because of the end of the quarter and the blackout periodending.
Patrick we’re constantly evaluating atthe Board level whenwe can and cannot trade as you can imagine, there’s alot of things going on within thebusiness and we have to seek advice from our Securities lawyer as to what wecan say and not saydepending on what’s going on what’s going on inthe business. Soit actually turns out,even apart from our very strict blackout periods ourselves and our own policiesdepending on what’s going on inthe business, itactually makes itquite difficult and frankly alittle bit frustrating for some people on theBoard who would like to purchase. SoI share your concerns. There’s frustration on this side too that we can’t buyas often as we’d like to.
Okay one last question, I know that the Canadian dollar has gone up to $1.10and going back down to around [inaudible] a fair level of $1.00 against theU.S., but are you, do we have like hedge plan for the coming years and if it’sgoing to level out by [inaudible] do you have any hedging plan for thatincrease in the Canadian dollar?
Yes, I mean the first thing that I’m quite happy about is although peopledon’t see it, by having an European operation, that has also helped us precludeourselves and hedge ourselves somewhat against the exposure to the U.S. economybecause with the dollar moving the way it has, had we remained strictly anImaging & Templating business that sells primarily in U.S. dollars it wouldhave been a very devastating period for us. Secondly we do have hedge contractsthat we do engage in and thirdly we also look at having an internationalbusiness hedging strategies that deal with each of the individual countriesthat we deal in.
Okay that’s good, that’s why I was a little bit surprised to say okay theCanadian was really strong and for the quarter and not too bad in terms of theimpact on the results, so that was a nice surprise.
Yes thank you but bear in mind it did have an impact on our revenues, it didbring our revenues down and that’s why I made the comment that althoughrevenues are flat year over year, there was a volume pick up in that.
Thank you guys.
Okay thank you Patrick.
Gentlemen we have no further questions at this time, please continue.
Thank you all for joining us this morning and your interest in Virtek andcontinued support. Again if anyone has any questions please feel free tocontact us. I know many of you have emailed me your concerns directly and pleasefeel free to continue to do that. With that Operator I’d like to now end thecall and wish everyone a happy holiday season.
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