Delphax Technologies F4Q07 (Qtr End 9/30/07) Earnings Call Transcript

Delphax Technologies, Inc. (DLPX)

F4Q07 Earnings Call

December 17, 2007 11:30 am ET

Executives

Gregory S. Furness - Chief Financial Officer, Vice President - Finance

Dieter P. Schilling - President, Chief Executive Officer, Director

Analysts

Doug Ruth - Delfax Financial Services

Clinton Morrison - Feltl & Company

Presentation

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Delphax fourth quarter earnings conference call. (Operator Instructions)

The company has asked me to share with you the following statement regarding the content of this conference call. Certain statements made during this conference call concerning the company’s or management’s expectations about future results or events constitute forward-looking statements under the Securities Exchange Act of 1934. Such statements are necessarily subject to risks and uncertainties that could cause actual results to vary materially from stated expectations. Additional information concerning these factors that could cause actual results to differ materially from the company’s current expectations is contained in the company’s periodic filings with the Securities and Exchange Commission.

I would now like to turn the conference over to Mr. Greg Furness, Chief Financial Officer of Delphax Technologies. Please go ahead, sir.

Gregory S. Furness

Thank you. Good morning. It’s a pleasure to welcome you to the fourth quarter conference call for fiscal 2007 for Delphax Technologies. Thank you for participating. My name is Greg Furness, CFO for Delphax. With me today is Dieter Schilling, President and CEO.

During our call today, we would like to discuss with you the financial results of our recent quarter and some highlights that also occurred during the quarter. After we have completed our prepared remarks, we will allow sufficient time to answer any questions that you have this morning.

As we announced earlier this morning, Delphax once again had significantly improved results as compared with last year for the fourth quarter and for the full 2007 fiscal year, achieving an operating profit for the fourth consecutive quarter.

We’ll spend our time reviewing the quarter’s events and how we did against the objectives we laid out earlier in the year to bring stronger financial performance to Delphax.

Turning to the numbers, net sales for the fourth quarter of fiscal 2007 totaled $10.9 million compared with $11.8 million for the fourth quarter of fiscal 2006. For the fourth quarter of fiscal 2007, the company reported a net loss of $401,000, or $0.06 per share, compared with a net loss of $5.7 million, or $0.89 per share for the fourth quarter of fiscal 2006.

For all of fiscal 2007, net sales were $44.6 million, compared with $48.7 million for the same period last year. The net loss for fiscal 2007 was $788,000, or $0.12 per share, compared with a net loss for fiscal 2006 of $9.6 million, or $1.51 per share.

Net sales from maintenance, spares, and supplies were $10.3 million for the fourth quarter of fiscal 2007, down from $11.2 million for the same period of fiscal 2006. For fiscal 2007, maintenance, spares, and supplies revenues totaled $42.3 million versus $43.5 million for fiscal 2006.

Fiscal 2007 fourth quarter equipment sales totaled $617,000. This compares with $538,000 for the fourth quarter of fiscal 2006 and $366,000 for the previous third quarter of fiscal 2007. Equipment sales for all of fiscal 2007 totaled $2.3 million versus $5.2 million recorded last year.

Gross margin for the fiscal 2007 fourth quarter totaled $2.8 million compared with $861,000 for the fourth quarter of fiscal 2006. The gross margin rate for the fiscal 2007 fourth quarter was 26% compared with 7% for the same period last year. For fiscal 2007, gross margin totaled $12.8 million, compared with $11.4 million for fiscal 2006. The gross margin rate for fiscal 2007 was 29% compared with 23% for fiscal 2006.

Operating expenses for the fourth quarter of fiscal 2007 were $2.8 million, down from the $6 million recorded for the same period in fiscal 2006. For fiscal 2007, operating expenses were down from $19.2 million last year in fiscal 2006 to $12.1 million this year in fiscal 2007.

Operating income for the fiscal 2007 fourth quarter came in at $14,000 compared with an operating loss of $5.1 million for the fourth quarter in fiscal 2006. For fiscal 2007, operating income totaled $621,000, compared with an operating loss of $7.8 million for fiscal 2006.

Net interest expense for the fourth quarter of fiscal 2007 amounted to $410,000 compared with $342,000 recorded for the same period of fiscal 2006. For fiscal 2007, net interest expense totaled $1.5 million compared with $1.3 million for fiscal 2006.

We also incurred $150,000 of additional non-cash expense in the fourth quarter of fiscal 2007 related to the pay-up of our 2004 subordinated note with [Tait] Capital. The $150,000 represents the un-amortized balance that remained of the original issue discount that was recorded at the debt issuance date.

For the quarter, the foreign currency exchange gain of $131,000 in the fiscal 2007 fourth quarter compared with a loss of $39,000 in the prior quarter. For fiscal 2007, we had a gain of $219,000, compared with a loss of $323,000 for fiscal 2006.

We are reporting a net loss for the fourth quarter -- I’m sorry, reporting a net gain -- let me try that again. We are reporting a loss for the whole of 2007 of $401,000, or $0.06 per share, compared with a net loss of $5.7 million, or $0.89 per share for the fourth quarter of fiscal 2006.

The net loss for fiscal 2007 was $788,000 or $0.12 per share compared with a net loss of $9.6 million, or $1.51 per share for fiscal 2006.

As we move to the balance sheet, working capital as of the end of the year, September 30, 2007, stands at $16 million compared with $13.6 million last year, September 30, 2006, and only $6.7 million as of June 30, 2007. The significant improvement in working capital from June 30, 2007 to September 30, 2007, is due to the reclassification of both our senior credit facility and subordinated debt from short-term to long-term.

During the fourth quarter, we announced a five year, $7 million financing with an affiliate of Whitebox Advisors. After paying off an existing subordinated promissory note of $3 million, we netted $4 million in cash to be used primarily for general working capital. In addition, we also closed on new senior credit facilities totaling $13.7 million with Wells Fargo Business Credit and Wells Fargo Financial Corporation Canada. These new facilities have a four-year term and consist of secured revolving credit facilities of up to $13 million, subject to availability under a borrowing base of accounts receivable and inventory, as well as a secured term loan of $653,000.

Accounts receivable increased by $879,000 from September 30, 2006 to year-end September 30, 2007. Inventory declined by $2.2 million since September 30, 2006, which is due primarily to lower inventory purchases and the sale of finished goods inventory that was not replenished. Consistent with our reduced inventory purchases during the quarter, accounts payable and accrued expenses have decreased over $3 million since the end of the last fiscal year. In addition to lower accounts payable due to lower inventory purchases, accrued compensation continued to decline due to payment of severance related to the fiscal 2006 restructuring. If one factors out the effect of the severance payments on fiscal 2007 cash flows, we would have achieved over $600,000 in positive cash flow from operations for the year.

Lastly, as we previously announced, we received a staff deficiency letter from NASDAQ in October 2007, indicating that the minimum bid price of our common stock had fallen below $1 per share for 30 consecutive business days and that we were therefore not in compliance with NASDAQ rules. According to the letter, the company has 180 days, or until April 28, 2008, to regain compliance.

Delphax can regain compliance with a minimum bid price rule if the bid price of its common stock closes at $1 or higher for a minimum of 10 consecutive business days before that date. Although NASDAQ may in its discretion require Delphax to maintain the bid price of at least $1 per share for a period in excess of 10 consecutive business days but generally no more than 20 consecutive business days before determining that Delphax has demonstrated the ability to maintain long-term compliance.

We believe that improved business performance over the coming weeks and months will lead to an improved stock price. As Dieter will discuss in more detail, with the completion of long-term financing arrangements and the increased investments in new sales staff, we believe we now have the necessary recovery resources in place, all the things we need to regain our sales momentum.

As we work to improve our financial performance and with it our stock price, we’ll also be exploring other potential steps that may be available to us to regain compliance with the NASDAQ listing requirements. As a publicly traded company, we believe our listing on the NASDAQ capital market is important and we plan to work hard to maintain it.

I would now like to turn the call over to Dieter.

Dieter P. Schilling

Thanks, Greg. Good morning, everyone. Welcome and thank you for taking the time to join us on our call today. In our fourth quarter conference call a year ago, our report was dominated by a litany of things that went wrong in fiscal 2006 and there was much that went wrong. As you are well aware, we are not where we want to be yet and plan to be in our recovery but our report this time is dominated by things that went right and there was much that went right in fiscal 2007.

Last year we summed up our performance in one word -- unacceptable. This year, we have three words -- restructuring, restaffing, refinancing. The restructuring of our business made possible for us to return to Delphax an operating profitability in fiscal ’07. Our financial performance stabilized and we announced the first phase of our financing agreement. We were able to attract experienced sales professionals to staff and strengthen our North American sales team and finally, late in the fiscal year we completed our refinancing, providing the capital resources necessary to fuel our pursuit of profitable growth for Delphax and at the same time, providing our prospective customers with clear evidence of our financial viability.

The sales staffing and refinancing took longer than expected but we think we now have all the necessary recovery resources in place -- all the things we said we needed to regain our sales momentum. That’s the test we are looking squarely in the eye right now.

We had hoped to reach this point more quickly but we were pleased to be able to head into the new fiscal year hitting on all cylinders. As I stressed in our annual meeting last March, the timeframe for regaining sales momentum is necessarily uncertain but there is nothing uncertain about the direction or the intensity of our sales efforts today.

I can report that we have made measurable progress in terms of activity among qualified prospects -- emphasis on qualified -- and in terms of the deals that we are exploring.

As mentioned in today’s press release, we are pleased to report the shipment of a CR series press after year-end to a new customer in the United Kingdom. This system is now in service in a new line of business being developed by this customer, an established commercial printer. The transaction will be eligible for revenue recognition in the fourth quarter of fiscal 2008.

We continue to make the necessary technical and organizational progress required during fiscal 2007. At the same time we are cutting expenses, strengthening our sales force, and nailing down long-term financing in fiscal 2007, we successfully introduced an across-the-board increase in the speed and productivity of our entire CR line.

Last month, we demonstrated the industry-leading speed of our top-of-the-line CR2200 at MBO Innovation Days, a focus trade show in New Jersey highlighting the newest advances in digital printing. The show drew well from the spectrum of printers for whom the CR series makes terrific economic sense. We teamed with Muller Martini and several other industry leaders to demonstrate an in-line perfect bound book production system offering unprecedented speed and productivity. Attendees were able to see for the first time sustained digital production of 500 feet per minute, nearly 2,200 pages every 60 seconds.

We believe there is an emerging market for a completed end-to-end book production solution, paper in and book out. That’s what we are hearing from our prospective customers. That’s what we demonstrated at MBO Innovation Days and we are pleased so far with the leads that have resulted.

We went into this trade show knowing that we could once again back the eye-opening performance of a flagship product with a healthy balance sheet and with a statement of operations that would show a favorable swing in bottom line performance of nearly $9 million.

Except we couldn’t tell anyone about those results back in November. Today’s announcement is the first disclosure of our strengthened balance sheet and operating results. We are confident this disclosure will help us in the marketplace.

As I mentioned in previous calls, last year’s performance stumble and the resulting delay in new financing combined to create uncertainties about Delphax's financial viability, both among prospective employees and among prospective customers. Those uncertainties should be behind us now.

The CR series is the product line that has taken us into the broader commercial printing market. It’s our focus and our future but the senior member of our roll-fed, cut-sheet product partnership, the Imaggia, continues its exemplary performance in the field, generating solid service-related revenues in a non-stop demonstration of just how productive electron beam technology can be. In fact, the Imaggia has reached a production milestone that is clearly in the mind-boggling range so remarkable, we think, that we are presenting special awards to two companies that have bee primarily responsible for it.

Our records show that Imaggia printing systems have produced 10 billion feet of output in the relatively short time since this product line was introduced. That translates into 120 billion checks, over 11.3 million miles of checks placed end-to-end. The space shuttle, just to put it in perspective, traveling at 17,000 miles an hour would need 27 days to travel that distance, equal to 24 round trips to the moon. Stacked one on top of each other, 120 billion checks would reach a height of 40 million feet, or over 7,500 miles high, equal to 32,000 Empire State Buildings.

We’re proud of the capability and reliability demonstrated by this high-volume, high-quality production, most of it coming in just the past five years and also of our relationship with the two companies who have been our chief partners in reaching it. We are honoring both companies this month with commemorative plaques. First, to Harland Clarke, our largest Imaggia customer with 70 Imaggia units installed since 2001; and secondly, to Davis & Henderson, the leading supplier of personalized checks in Canada, a major Imaggia customer since 1998.

While check printing is now just one of the market segments we serve and seek to serve instead of the only one, it remains a solid part of our revenue foundation.

You may have read last week’s story in the Wall Street Journal on the latest federal reserve study that reported electronic payments have been growing in the United States at 12% a year while check writing has been declining 6%. This is, of course, one of the trends that led Delphax to develop a strategy to diversify our product offering and our market potential.

But even in the face of rapid growth in electronic payment, the paper check market remains formidable and competitive. The Wall Street Journal story omitted one key line from the Federal Reserve’s report and that was with around 33 billion checks written 2006, the report said, we expect checks to be around for some time.

Service related revenues from our installed Imaggia digital print systems are a significant part of our financial bridge across our current turnaround effort and into the broader opportunities we have identified and are pursuing in the commercial printing marketplace.

Our CR series presses have proven themselves in a variety of demanding applications, performance that has been rewarded with repeat purchases by existing customers, those who know what these systems can do best.

With the completion of our financing arrangements and our increased investment in our sales staffing, we believe we will begin to see a further positive turn in our equipment sales with those segments of the market where we can demonstrate clear-cut advantages in productivity.

At this point, Greg and I would like to open up the call for any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Doug Ruth with [Delfax] Financial Services. Please go ahead.

Doug Ruth - Delfax Financial Services

I want to congratulate you. The report was better than we had hoped. It shows a real progress for the fiscal year. Could you quantify for us what the number of qualified prospects -- is there a way to say how many potential we had, both from say a year ago or six months ago?

Dieter P. Schilling

I’ll take a shot at that, Doug. If I gave you a number, you might actually be disappointed because it’s the -- it’s the quality of the prospects that we are dealing with now as compared to the quantity. We feel our efforts with the sales people that we have on board now and with the systems that we’ve put in place and we’re talking much more to the right value type prospects than we were in the past. In other words, what we are trying to find are the people who can take the best and the most competitive advantage from our technology in terms of productivity, cost advantages, -- everything from paper substrate white and paper width -- all of those advantages together, we are targeting those people.

So in fact, the actual number of prospects is almost irrelevant now. It’s the quality of the prospects that personally that I’m more excited about, is that we’re talking to the right people. We’ve lined up those people that can benefit the most from our technology so our closing ratio should be higher, our ability to bring home the deal I think is much more heightened than it was say a year, year-and-a-half ago.

Doug Ruth - Delfax Financial Services

Okay, that’s fair enough. Are the prospects coming from any one market segment?

Dieter P. Schilling

I would say predominantly again, playing to our strength, we’re talking more into the publishing side of the business, more that way. Dabbling perhaps less in the transactional, less in the direct mail side at this point, but more of our prospects are in the print-on-demand, publishing side.

Doug Ruth - Delfax Financial Services

And are they international or are they U.S.-based?

Dieter P. Schilling

It’s a combination, Doug. It’s a combination across the board.

Doug Ruth - Delfax Financial Services

Okay, and what else can you tell us about the customer that you made the sale to?

Dieter P. Schilling

Well --

Doug Ruth - Delfax Financial Services

Is that a new customer?

Dieter P. Schilling

It’s a new customer for us, right, but it’s an existing, established commercial printer. They have a pretty unique place in the commercial printing market. They’ve leveraged that. They are very successful -- high premium, high quality products, and they want to use that leverage to get into print-on-demand book publishing, which they have a head start because they have network contacts in the industry and they are using their existing commercial printing expertise and background to give them a leg up in print-on-demand book publishing.

So they are not a terrifically large company but we are excited about their business model and the ownership and management of the company, we think they are doing things right and they will be successful using CR technology.

Doug Ruth - Delfax Financial Services

Okay. Is there anything new with RR Donnelly and the company’s relationship with them?

Dieter P. Schilling

We continue to support them. They continue using the machine. I would say the relationship is exactly where we want it to be. They are getting the productivity, the turnaround that they need from the machine and things continue to go forward. Nothing else is new, I wouldn’t say.

Doug Ruth - Delfax Financial Services

Okay. And what about the sales staff? Is the sales staff at the right level now? Do we need more people, fewer people -- what can you tell us about that?

Dieter P. Schilling

Well, we are always looking for candidates that can bring us the edge that may have experience in a unique part of the market maybe we’re not brushing up against right now. So we are always looking for new candidates that can bring us something.

But we are very cognizant -- I’m very cognizant that we need to show success with the force that we have in place right now. We have to demonstrate progress. I’m not inclined to want to just keep adding bodies without being able to measure some level of success.

So I am satisfied. I think George is satisfied with where we are at but if we get somebody that turns our head or somebody that perhaps might not have been interested in working with us at Delphax in the past when we didn’t have the financing lined up and we didn’t have the balance sheet that we have today, maybe we’ve taken a look at them right now.

But right now, the plan and strategy is to get the most out of the resources that we are comfortable with, that we have put in place, that we’ve invested in, and that are out there on the ground right now.

Doug Ruth - Delfax Financial Services

Okay. Thank you and good luck to you in fiscal 2008.

Operator

Thank you. Our next question is with Clint Morrison with Feltl & Company. Please go ahead.

Clinton Morrison - Feltl & Company

The CR machine that you just placed, kind of curious; is it typical that it is going to be six, nine months between placement and revenue and why is the acceptance period so long there?

Gregory S. Furness

No, it’s not typical for us in terms of revenue recognition. It’s generally much closer to the shipment date. This one, just because of the unique payments structure that we have set up with this customer, it can’t be recognized until the fourth quarter. But that is not what we expect to be happening as we go through the course of fiscal 2008.

Clinton Morrison - Feltl & Company

And how many CR machines are out in the field and looking forward, are we still selling Imaggia? Is that a real opportunity or are we really just focused on CR going forward? I’m kind of curious as to what the mix might look like.

Dieter P. Schilling

We’ve placed thereabouts 20 CRs at the moment. The CR is our effort to diversify, as you know, what’s happening with the check market. Check usage is declining. It is our flagship product in our effort to diversify but by no means are we withdrawing support or not advancing our sales of Imaggia systems. I mean, we have around the world different applications that are not checks but are close to checks in a lot of ways where the Imaggia makes a lot of sense and we also believe we have some terrific opportunities in the larger check use countries in the world, including the United States, where there might be some capacity or there might be some re-equipping where the Imaggia would be suited for the existing check level that’s out there.

Clinton Morrison - Feltl & Company

Okay, so we are anticipating to see some more Imaggia sales in the next 12 months?

Dieter P. Schilling

Well, it’s certainly not a product that we put on the shelf as collecting dust. We are promoting it and we are talking to prospects about it. At this time, I can’t tell you whether we’ll be successful in those efforts but we certainly have it out in front.

Clinton Morrison - Feltl & Company

Okay. Very good. Thank you.

Operator

(Operator Instructions) Gentlemen, there are no further questions at this time. Please continue with any closing remarks you may have.

Dieter P. Schilling

If there are no further questions, we’d like to thank everybody for taking the time to join our call today. Please feel free to contact either one of us, Greg or myself, if you have additional questions or comments and we look forward to speaking with you when we report first quarter results next year. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this concludes the Delphax fourth quarter earnings conference call. If you would like to listen to a replay of today’s conference call, please dial 303-590-3000, or 800-405-2236, with access code 11104023 followed by the pound sign. We thank you for your participation today and at this time, you may disconnect.

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