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ROFIN-SINAR Technologies Inc. (NASDAQ:RSTI)

F2Q08 Earnings Call

April 30, 2008 11:00 am ET

Executives

Gunther Braun - President, Chief Executive Officer and Director

Ingrid Mittelstadt - Chief Financial Officer, Executive Vice President-Finance and Administration, Treasurer

Analysts

Antonio Antezano - Bear Stearns

Eggert Kuls - M.M. Warburg & Co.

John Harmon - Needham & Co.

Charles Murphy - Sidoti & Company

[Greg Holter – Great Lakes Review]

Ian Fleischer – Friedman, Billings & Ramsey Co.

Grant Hopkins - Ferris, Baker, Watts

[Ralph James – Ratio Asset Management]

Operator

Welcome to the ROFIN-SINAR’s 2008 second quarter results conference call. Today’s call is hosted by Gunther Braun, Chief Executive Officer and Ingrid Mittelstadt, Chief Financial Officer. (Operator Instructions)

Gunther Braun

I’m here in Plymouth in Michigan, together with Ingrid Mittelstadt, our CFO. I hope you all got the press release containing our second quarter results. We will give you some comments about our business and performance and then we will open it up for questions. Now before the start, I would like to make the usual statement about the information you are getting in this conference call.

Based on the fair disclosure regulation of the SEC, we will also include a summary of our own financial estimates for our next quarter and fiscal year 2008. This guidance is only an estimate and is, of course, subject to all the risks and uncertainties as summarized in our Safe Harbor statement, which I will read to you shortly. I would like to encourage you to perform your own market investigation and research and not to place undue reliance on our estimates.

Safe Harbor statements, our discussion may include prediction, estimate or other information that may be considered forward-looking. While these forward-looking statements represent our best current judgments on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. Throughout our discussions we will attempt to discuss important factors relating to our business that may affect our predictions. You may also want to review our last 10-Q and 10-K filings for a more complete disclosure of financial risks.

I know you saw the press release and this quarter was not as satisfying on the bottom line results as we hoped. So I would start to the usual comments and then later on, we will discuss what happened and the impact of the bottom line results. So now let me start to comment on the six months results.

In the last six months, we shipped lasers and systems, including service parts and components for a total of $271.3 million, which results in an increase of 19% or $43.5 million from the comparable period of fiscal year 2007. The difference in the U.S dollar exchange rate increased sales by 12% or $26.6 million and this is part of our business and nothing unusual for a multinational company with a higher percentage of sales in foreign countries.

Net income in the six months period amounted to $27.7 million or 10% of sales, which represents an increase of 13% from the comparable period in fiscal 2007 and was negatively impacted what you have seen already in the press release, by approximately $600,000 net loss contribution and the $2.7 million intangible amortization from the recent acquisition.

In addition, the revaluation of certain foreign currency balance sheet items at March 31, 2008 resulted in the unrealized exchange losses of $3.7 million, which is unusually high and I think Ingrid will explain this later on. So if the dollar is continue to strengthen as it currently happens, we can benefit and deliver unrealized exchange gains in Q3 to offset Q2 exchange losses. And, as I’ve said, Ingrid will provide you later detailed information what our Q2 earnings would have been.

The six-month sales allocation between macro, micro and marking and component was 45% from macro, micro and marking made 46% and components made 9%. The geographical split was Europe 55% versus 56% last year, USA North America 22% versus 25% last year and Asia 23% versus 19% last year.

So, the driving geographical market behind our sales growth in the first six months of the Asian markets again, which increased by approximately 41% to $61.3 million. This is mainly due to still strong shipments for our lasers to the machine tool industry and nice consumer electronic business, as I said six months. The European market increased by 17%, to $149.3 million and the demand from the semiconductor industry, solar cell industry and machine tool industry supported this number.

And last but not least, the North American business increased by 6% to $60.7 million, but this was mainly due of course to the additional sales we got from our recent acquisitions. The overall economic climate in North America has still not improved, which I’m sure you all are familiar with. And of course, I mentioned already the currency impact which impacted positively the numbers in Europe and Asia.

Now the breakdown of the six months laser sales by industry which is as follows: automotive business 11% versus 7% last year; machine tool 37% versus 36% last year; semiconductor electronics, including solar cell, 23% versus 16% last year; and others was 29% versus 41% in the last year six months period.

So, now let’s start with the second quarter. We had a nice quarter with a new record in terms of sales, with $136.6 million, which is $20.5 million or 18% higher than in the comparable quarter in fiscal 2007, but our quarterly net income was $10.8 million, was below our expectation and our standard performance.

Since our Nufern acquisition was not included in our guidance for this quarter, this topic is part of the explanation of our lower results. Net income was negatively impacted by $600,000 from operations and $2.7 million in intangible amortization of which $2.5 million will not occur in future. Additionally, the weakening of the U.S. dollar especially at the end of the quarter added unrealized exchange losses to the P&L and again, Ingrid will have a more detailed discussion later on.

The change of the dollar exchange rate mainly compared to the Euro had the effect of increasing our sales by $15.5 million or 13% in the second quarter. We achieved again strong sales in our micro and marking business. Net sales increased 12% of over the comparable quarter to $62.3 million or 46% of total sales.

Macro sales increased even stronger by 19% to $59.7 million or 44% of total sales, driven mainly by the shipments for our CO2 lasers to the machine tool industry, and our component sales increased by remarkable 46% to $14.6 million and we present 11% of total revenue. And I have to say, 22% is organic growth and the remaining percentage is, of course, from the Nufern acquisition.

Sales to our Asian countries for the second quarter increased by $6 million to $28.3 million and represented 21% of quarterly sales. Main contributors this time were China again is $12.6 million. Taiwan is $4.7 million and Japan, $3 million. And just a reminder, Asian Q1 quarter sales were $4.7 million higher, which shows us a result of softening in the economy in Asia.

North America contributed with 24% of quarterly sales and is 26% higher compared to last year’s second quarter, but this is a result of our recent Nufern acquisition. In addition, we have higher component business, but let’s face it, U.S economy and U.S business is not satisfying.

Europe was responsible for 55% of the quarterly sales compared to the 56% in last fiscal year’s second quarter and this is a new quarterly high in European business, mainly supported by a nice volume to the machine tool industry, again it’s the solar cell industry. The other reason for growth is increased sales in our component business. Additional, of course, the currency supported us with a higher number.

Our spare parts and service business increased by 18% and accounted for again 27% of net sales for the quarter. The component business, its laser diode, power supplies, fiber optics and fibers, increased by 47% and contributed 11% to quarterly sales.

Now coming to the breakdown of our quarterly lasers sales by industry, automotive, and you remember in the first quarter it was 12%, now in the second quarter it’s 9% of lasers sales versus 6% last fiscal year’s second quarter. Machine tools 38% versus 37% in 2007, and semi-electronics was 21% versus 19% in 2007, and others is 42% versus 38% in 2007.

During the second quarter, we shipped a total of 899 lasers. This is approximately 11% less in terms of units compared to last year’s second quarter. 320 units were for macro application and 552 units for marking and micro applications. And I think there is still the trend for a high output power of the lasers, what we shipped and in our systems portion that’s the reason why we have lower sales in terms of units.

And now let me hand it over to Ingrid, who will further comment on the financials.

Ingrid Mittelstadt

This quarter was materially affected by the unusually high weakening of the U.S dollar, mainly against the Euro that represented a fluctuation of 7.5% comparing the corresponding exchange rates of December 31, 2007 and March 31, 2008, as well as the end of January closed acquisition of Nufern.

Excluding the one-time high amortization of intangibles related to the recent acquisition that amounted for $2.7 million, Nufern’s quarterly losses from operations of $0.6 million and the extraordinary high unrealized exchange losses of $3.7 million, the net income for the second quarter ‘08, would have been $17.8 million or $0.58 per diluted share compared to $13.1 or $0.41 per diluted share for the second quarter of fiscal year ‘07.

Now coming to the business, I am proud to report that during the second quarter ‘08, we were able to achieve gross profit margins of 44.4% of net sales, compared to 42.4% in the comparable quarter of fiscal year ‘07. The main reasons for this high gross profit were as follows.

First, we had $4.7 million higher revenues related to the component business that represented an increase of approximately 46%, compared to the second quarter ‘07. Second, we had a more favorable product mix with a higher portion of sales to the semiconductor and electronics industries. Third, we had a higher average prices in the marking and micro business due to higher quantity of systems delivered during the quarter. And fourth, we had better production efficiencies achieved primarily in the manufacturing of high-power CO2 laser.

SG&A for the second quarter 2008 represented 20.2% of net sales, as compared to 18.6% of net sales in the same period last year. In absolute figures, SG&A increased by $6 million to $27.6 million this quarter and the increase in SG&A expenses is mainly a result of the additional SG&A expenses from our last acquired subsidiaries. This means Corelase, EST and Nufern that were consolidated this quarter, but not included in the second quarter ‘07.

Additionally, the weakening of the U.S dollar against foreign currencies had the affect of increasing SG&A expenses by $3.7 million. Intangible amortization accounted for $3.7 million in the second quarter ‘08, compared to $1 million in the second quarter ‘07 and the increase in amortization expense is related to the recent acquisition of Nufern and is not expected to stay at this high level the following quarter.

R&D expenses for the second quarter ‘08 amounted to $10.2 million or 7.4% of net sales compared to $7.1 million or 6.1% of net sales in the comparable period of last fiscal year. Quarter gross spending was $10.5 million versus $7.6 million in the second quarter of fiscal year ‘07. The increase is mainly resulting from the additional R&D expenses generated by the recently acquired companies and are related to the development of fiber lasers.

The fluctuation of the exchange rates increased R&D expenses by $1.9 million. The income from operations of $19.2 million represented 14.1% of sales versus $19.6 million or 16.9% of net sales in Q1 2007. And the currency translation had nearly no impact on net income from operations.

Other income expenses, net other expenses accounted for $2.4 million compared to $1.4 million net income in the second quarter 2007. Net interest income decreased by $0.1 million to $1.2 million in the second quarter ‘08 compared to the second quarter ‘07.

Additionally, as a consequence of the weakening of the U.S dollar especially at the end of March, the revaluation of some balance sheet items at quarter end resulted in unrealized exchange losses of $3.7 million compared to $0.3 million during the second quarter ‘07.

And maybe, I can include here a comment, so if we would take the exchange rate from today and we would revaluate these items in the balance sheet, we would record unrealized exchange gains of approximately $0.9 million. So you see this was really related to the closing of the financial figures at the end of the quarter and are related to unrealized exchange losses.

Our effective tax rate on income before income taxes and minority interest for the second quarter was approximately 35.3% compared to 36.7% for the same period of last fiscal year. The lower affective income tax rate is mainly due to changes in the German tax law, partially offset by permanent differences related to the recent acquisitions.

Net income for the second quarter that was materially affected by the fluctuation in the exchange rate of the U.S dollar mainly against the Euro, amounted to $10.8 million and resulted in diluted earnings per share of $0.35 based on 31.5 million weighted average shares outstanding.

The weakening of the U.S dollar against the major foreign currencies had the affect of decreasing the net income by approximately $0.3 million. Excluding the impact of the January 24, 2008 closed acquisition of Nufern with $2.7 million amortization expenses and the losses from operations of $0.6 million, the net income for the second quarter would have been, in our guidance even including the extraordinary high level of unrealized losses related to the weakening of the U.S dollar.

Now, coming to the balance sheet, the weakening of the U.S dollar mainly against the Euro, comparing the exchange rates from March 31, 2008 and September 30, 2007 was approximately 10%. Mainly as a result of the implementation of the share buyback program and the recent acquisition of Nufern, the company reduced its cash in short-term investments by $101 million. The impact of the fluctuation of the exchange rate was to increase cash in short-term investments by approximately $10 million.

Accounts receivable net increased by $4.8 million to $108.5 million, mainly due to the impact of the exchange rate fluctuation that accounted for $8 million, but were partially offset by the reduction of accounts receivables at several occasions, even at this record level of revenues and the first consolidation of the recent acquired company.

The days sales outstanding improved and decreased from 78 days averaged last fiscal year to approximately 73 days for the six-month period. Net income increased by approximately $36.3 million to $172.1 million, mainly as a result of the record high order entry, the additional inventory of the new acquired subsidiaries and the high level of already delivered products that are waiting for the final acceptance of the customer.

The impact of the fluctuation of the exchange rates was to increase inventory by approximately $13.4 million. Based on the six-month period of cost of goods sold, inventory turned approximately 1.8 times. The recent acquisitions generated goodwill of $12.1 million. Total debt decreased approximately $4.1 million to $36.5 million in the balance sheet and the long-term debt represents now $6.9 million. Stockholders’ equity stayed consistent at 72% of total assets.

Now, I would like to give you some information related to the cash flow. During the six months ended March 31, 2008 the company generated $7.7 million from its operating activities, mainly due to the increase in inventories and a payment done for income taxes in Europe for approximately $21.8 million, that was partially offset by a decrease in accounts receivable and increase in accounts payable.

The company generated $59.1 million primarily from the sale of short-term investments, offset by the acquisition of new business and capital expenditures. The company used net cash of $82 million approximately in financing activities, mainly related to the share buyback program and repayments of bank debts that was partially offset by the issuance of new shares from the exercise of stock options.

And now coming to our earnings guidance, as a result of our current market judgment and backlog situation, we want to give you the following guidance of the financial performance of the third fiscal quarter ‘08 and for the whole fiscal year ‘08. This guidance is only an estimate and again subject to all the risks of our Safe Harbor statement.

Let me then give you first the numbers for the third quarter. Sales volume for the third quarter ‘08 should be between $135 and $140 million USD; gross profit in a range of 43% to 44% of net sales; period expenses including intangible amortization in a range of 27% to 28% of net sales; income before income taxes and minority interest between 16% and 18% of net sales.

The effective tax rate that depends mainly on the overall mix of results in the different countries and the non-deductible expenses for tax purposes should be in a range from 32% to 33%. And the non-cash items of our profit and loss statement including the amortization of intangibles and the depreciation of fixed assets are estimated between 2% and 2.5% of net sales.

So the guidance for the fiscal year ‘08 is as follows. Sales volume between $540 and $550 million, and based on the experience of the first six months of the current fiscal year, we expect no gross profit in the range of 43% to 44% of net sales. Period expenses in the range of 27% to 28% of net sales and under the assumptions that the U.S dollar exchange rates stays somehow stable, we estimate that income before income taxes and minority interest for fiscal year ‘08 in the range of 16% to 18% of net sales.

The effective tax rate is estimated between 32% and 33% and the non-cash items in the range of 2% to 2.5% of net sales. All these estimates again depend on all the well-known risks and are subject to change, and this guidance is only our best estimate and subject to all risks of our Safe Harbor statement.

Thanks for listening and let me hand it back to Gunther.

Gunther Braun

Let me comment first on our forecast. Given the backlog at March 31 is approximately $147 million and the solid recurring revenue from service and spare parts, we should be able to reach our goals. And you may have realized that we have lowered our guidance a little bit for income before income taxes to reflect that I would call it one-time intangible amortization. So it’s now in the range of 16% to 18% for the fiscal year and before we had it for 17% to 19%. So you see it’s not that big change.

Now let me give you some comments on the macro-economic conditions we faced and how we see the next quarters and usually start with the macro business. As mentioned in our last conference call, high-power CO2 lasers for cutting applications to the machine tool industry were still on a reasonably high level, but new orders are coming in a little bit slower but so for nothing to worry about,

Change in the production philosophy in handled in delays in delivery to certain customers are also one of the primary reason for the inventory increase that Ingrid mentioned. Most important regions were our Europe and Asia and I assume it’s the largest single market and now just this laser type should be Asia, China.

Our low-power CO2 lasers, 100 to 600 watts manufactured in the UK run also on a nice level. Demand for our products is good, of course, the challenging part here is the competition, this U.S dollar prices, but so far the colleagues handled that situation very well. For both businesses you see a somewhat slowdown in the current order but nothing dramatically.

Automotive and sub-supplier business normalized in the second quarter ‘08. It was now approximately 9% of laser sales and usually we guide 7% to 9% and it is approximately $3.2 million higher compared to last fiscal years quarter. We believe that the remaining quarter should be on the same level, which was in the range what I said, 7% to 9% of quarterly laser sales. Main application this quarter were of course remote-welding application and also some marking application.

One word on our fiber laser project, that’s a part of our macro and I think you have seen the R&D spending, so we continue to invest in our high-power fiber laser project and somehow of the increase, certain dollar of amounts are allocated to this project.

Now coming to the marking and micro business, semiconductor and photovoltaic business was and is currently very nice. Semiconductor business can possibly a little bit soften but this we see more in Asia, so there are some slow activities. So far we cannot support this or see that in Europe or India. The opportunity in TV of course, TV business is outstanding.

And the solar cell industry, as predicted already, worldwide business is moving along. Lasers are used in silicon and sensor productions for different applications like isolation, etch-dilution and scribing. Investment activities in this industry from new plants is containing on a high level.

As already mentioned, our strategy for this industry is really to concentrate on being the laser supplier, either directly to the solar cell manufacturers or to the systems manufacturer for the production line. It’s a worldwide business and we can capitalize on our global presence.

Jewelry business is on a consistent levels, big increases are not expected due to reduced consumer spending, mainly in the U.S and in the U.S it’s approximately 30% below average. But still other countries support that it stays on a consistent level. Smart card business is also moving along, but there are no exceptional projects or orders expected, so again, just standard normal business.

Electronic industry, lasers to the consumer electronic industry in our second quarter were a bit slower than in the first quarter this fiscal year, but we are not nervous about it. There are someone major projects which should result in good order entry in Q3, so that some how a nice highlight I would say.

And finally, medical instruments business is another area where we have seen nice growth rates over time, over years besides the slowdown in stent cutting business. For us, especially in the U.S, the overall business was in line with our expectations and contributed reasonably well. So well, we believe that again our broad product portfolio for all different type of application suits the very volatile demand of this industry.

This is an update on our major industries and I will say now some comments on Nufern. So Ingrid talked already about the impact on the financials this quarter but let me summarize again what Nufern does. Nufern is one of the leading independent supplier of specialty fiber, active or passive fibers that has developed a 200-watt CW fiber laser which they began to market and in the 10 and 20-watt power range. They worked and are working on the pulsed fiber laser, and of course amplifier business is part of Nufern’s business.

So under ROFIN, Nufern will be still an independent specialty fiber and fiber-related supplier supporting all customers, which values Nufern’s technology. Main industry focus will be on military and defense industry, but of course also OEM fiber laser suppliers and fibers to everyone who considers Nufern fibers as the best choice. Clearly we were looking for technology and we believe we got it. So, now it’s our challenge to put all the bits and pieces together, what we so far acquired to come up with fiber lasers in future.

Now a comment on China, in the last conference call, I talked already about our Chinese strategy, no big changes. We continue to invest in our own operations. I think you remember, its assembly of laser diodes and manufacturing of laser markers addressing the Chinese market. So maybe a number for you, we did our own market research for the Chinese market and came up with around 7000 laser marker units shipped in 2007.

So, put this in relation, this in overall worldwide market disclosed by the Optoelectronics Report for material processing of roughly 49,000 lasers in world markets, so it’s quite a nice number and a nice opportunity. On the acquisition side, we see a slight delay due to some management changes on Chinese side that we are patiently moving along step-by-step. I hope this gives you some clarity where we are in China.

Now order entry in the second quarter, order entry was $143.9 million. The orders for our macro products represent $55.7 million and the orders for our micro and marking products represent $73.7 million. The remaining order entry is for our component business. Our backlog end of March increased to $147.1 million. So, that’s a very solid basis for the third quarter. 34% of that is what we call macro business and 55% is micro and marking, and the component business represents 11%.

So let me summarize our performance over the last period. I think we’ve delivered under the current circumstances pretty reasonable top-line numbers. Our backlog even increased to a new record high, which is fundamental for our Q3 sales. Gross margin is on a high level, which demonstrates solid operational execution. We had allocated more money to R&D last quarter, so this should last until we have reached certain goals in technology and products.

We got caught by an unusual 7.5% weakening of the U.S dollar comparing December 31 and March 31, which resulted in unrealized exchange losses of $3.7 million and I think it’s normal that there is always a certain fluctuation in the range of the $1 million plus or minus, but $3.7 is clearly too high.

But given the trend of the last days, the U.S dollar strengthened. It’s more likely than not that you can recover certain amounts and benefit in the current quarter. Quarterly intangible amortization will be reduced by approximately $2.5 million in the current and coming quarters. We have not changed on top line guidance for the fiscal year. The only change was in income before income taxes and minority change interest to reflect the high intangible amortization. And I said this already, we changed it by 1%.

The market especially in North America is more challenging. We will see what it does to the other regions, but I still believe that with our current strategy and our worldwide product, we can generate the business and deliver the numbers we have forecasted.

We continue to focus on our core competencies within the industrial laser material processing application. Our broad product portfolio and wide global and regional coverage will further support our future growth.

So, thanks for listening and now we are prepared to answer all your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Antonio Antezano - Bear Stearns.

Antonio Antezano - Bear Stearns

I wanted to do just a clarification of what Ingrid said about excluding these unusual items, she took all $0.48 or $0.58?

Ingrid Mittelstadt

$0.58, Antonio, $0.58.

Antonio Antezano - Bear Stearns

So could you take us back to how you just came up with the $0.58?

Ingrid Mittelstadt

So we have the high amortization of intangibles related to the Nufern acquisition with $2.7 million. Then we have the Nufern’s quarterly growth is in operations with $0.6 million and additionally the unrealized exchange losses of $3.7 million. And so at the end, if we exclude these three items we would arrive to $17.8 million or $0.58 per diluted share.

Antonio Antezano - Bear Stearns

So these are after-tax or before-tax amount?

Ingrid Mittelstadt

After-tax.

Antonio Antezano - Bear Stearns

And then I wanted to ask you on the macro business on your outlook, you talk about a slowdown there but when we look at by geography, China is supposed to be a big offset. So I wanted to see if you could give us small color in terms of how the macro business is doing by region?

Gunther Braun

By region, what we see is a little bit of slowdown also from China, Chinese business saw order entry was not at that high level than we have it in our first quarter that fiscal year. But it’s still on a reasonable level. So I would say currently in the second quarter order entry was maybe 15% lower in that range for that lasers.

Maybe it was also a third reason for that, that we had some bonus schedules, discount schedules which last until the end of the calendar year. And so we got some more orders in our first quarter and they take the lasers in the second quarter.

But what we see overall level a little bit slower but orders are coming in, so maybe it changed a little bit. But I am a little bit more cautious. Also in Europe it’s somehow a little bit slower, but not as the same as in Asia and I think North America is just the normal what it was and also in the last year, so there is no big change.

And I think you have seen it also in the order entry, where I said macro business order entry, we had $55.7 million in order entry. In the second quarter and in last year’s second quarter it was $67 million and also approximately in the first quarter, it was in that range.

Antonio Antezano - Bear Stearns

On the fiber laser business, I remember you mentioned that you were expecting maybe having some commercial pressure of a high-power fiber laser at the end of this year. Is that still holds or would come more in 2009?

Gunther Braun

The guys are still working on that. Of course there are one or the other challenges, and there are plans in place for the better site testing also timing wise. So if everything, all the bits and pieces work together then we should be in line. So I think I can give you a better answer in next quarter conference call.

Operator

Your next question comes from Eggert Kuls - M.M. Warburg & Co.

Eggert Kuls - M.M. Warburg & Co.

Regarding your share buyback program, have you done something in the second quarter? Regarding the operating losses of a newly acquired company of $0.6 million in the second quarter, can you give us some color, what do you expect for the quarters to come and how much phase volume this company has generated in the second quarter?

Ingrid Mittelstadt

In the second quarter, we had no activities in the buyback program. At the end of the first quarter, we had some high liabilities there to pay. The last shares, we bought at the end of December and now this quarter we concentrated more on the acquisitions and that was the reason, why we had no activity. Then coming to Nufern sales, the company had revenues, we consolidated let me say that this way, $2.4 million phase were included in our quarterly numbers.

Gunther Braun

So, somehow we targeted that Nufern should be in the range of breakeven until the end of this fiscal year, of course.

Eggert Kuls - M.M. Warburg & Co.

Does that mean or would you expect further operating losses in the second half or when you say you expect breakeven for the whole period, does that mean that?

Gunther Braun

We expect increased sales, of course, in our third quarter contributed by Nufern and increasing quarter-by-quarter. And then hopefully getting at least in the first quarter at a breakeven business.

Operator

Your next question comes from John Harmon - Needham & Co.

John Harmon - Needham & Co.

But I was wondering if you could talk about again on the sequential decrease on macro orders and what sector or geography those are from?

Gunther Braun

The sequential decrease, it’s I would say all over the world. Its not one country where we have a big decrease. It’s from the Asian customer there is a certain slowdown as I mentioned already and also in the European business and everything started somehow from North America, of course. But I think we are on a level, which should be stable in my opinion. I don’t expect to further decrease, which should support our business in the next quarters in my opinion.

John Harmon - Needham & Co.

In terms of your end markets, were any end markets particularly weak in terms of macro orders?

Gunther Braun

Yes. If you look to our first quarter, we had higher sales through the automotive industry. But it’s aligned with what we said always, now it’s in the range of 7% to 9%, second quarter it was 9% of quarterly sales. I think what we don’t see is this growth rate what we experienced last year. So I see the macro business currently on the stable level and don’t expect a further decrease, John.

John Harmon - Needham & Co.

I am just curious when you had your last quarter conference call, why your guidance did do not include Nufern, you started the books on the business?

Ingrid Mittelstadt

I’d tell you that the situation what we had at our conference call at the end of January and so we signed the contract at January 24. And at this time it’s normal that the companies do not have the audited figures from last fiscal year, they have the calendar year or fiscal year. So the audited figures were not there and there you will also have a period, it was 60 days to prepare a closing balance and so on. So that was the reason why we did not include it, because we were very quick at this acquisition in the whole process, so we closed the whole deal at the end of January.

John Harmon - Needham & Co.

I don’t believe you gave a revenue breakdown between the laser service and components. So can you repeat that please? A laser service, you didn’t give us components?

Gunther Braun

I said we stayed on the usual 27% number.

Ingrid Mittelstadt

For service and spare parts, John.

Gunther Braun

And on component business for the quarter, we did in the range of 11%.

Operator

Your next question comes from Charles Murphy - Sidoti & Company.

Charles Murphy - Sidoti & Company

Just wanted to double-check here, as far as your guidance for earnings before taxes and minority interest, I am assuming that includes the unusual charges you incurred in the second fiscal quarter.

Gunther Braun

Clearly, yes, if we talk about the fiscal year.

Charles Murphy - Sidoti & Company

So is it reasonable to assume that excluding those factors, which aren’t going to be recurring in the third and fourth quarter that you probably wouldn’t have changed your guidance much if any?

Gunther Braun

Possibly, the impact here is clearly, I would say the intangible amortization, which is a $2.5 million onetime and unusual exchange losses, because over time, it never happened from one date to the other date the dollar weakened at 7.5%.

So may be just to give you a clue, if there would be $30 million in the country where the local currency is a different currency and that exchange rates changes by $0.10 in these three months, then you have immediate impact by $3 million, unrealized exchange loss. Usually in the past it was somehow in the range of $1 million.

So it could be a gain, it could be somehow a loss and with our business model usually we can compensate that. But now it’s a little bit too high and it was an unusual situation. If you look to the U.S dollar today, at least this morning there is already a strengthening going on and if you would do that calculation today and the balance sheet today, you would see a different number clearly.

Charles Murphy - Sidoti & Company

So, is there any reason to think that if you look out to fiscal 2009, why you couldn’t do closer to that 17% to 19%?

Gunther Braun

I think that’s still the target to improve over time and I think this quarter is somewhat a special situation.

Charles Murphy - Sidoti & Company

Could you just go over, I know you talked about that R&D being related to the fiber laser stuff. SG&A was a bit higher than normal as a percentage of sales, was there something special sequentially that changed? And what do you expect the run rate to be for SG&A as a percentage of sales?

Ingrid Mittelstadt

Yes. I’m looking at the explanation, the main impact was of course exchange rates again. So apart from that, the translation of the SG&A expenses done in other currencies, or foreign currencies and not in the U.S. And then, of course, we had increased SG&A if you compare to last fiscal year because we have for the first time included the SG&A expenses of Nufern, EST and Corelase, if you compare second quarter.

Charles Murphy - Sidoti & Company

So would you assume that over the next few quarters it will get closer to the norm of high 17%, 18% range?

Ingrid Mittelstadt

I don’t expect really 17%. I think we had 18% in the past. But again Chuck as Gunther already said, for example, the new acquired company will be breakeven, hopefully by the end of the year. So when you acquire a company you get all these additional expenses and then you get the breakeven when you have the right amount of revenue also part of that.

Charles Murphy - Sidoti & Company

SG&A, you didn’t expect it to stay around 20% longer term?

Gunther Braun

It should not the case in my opinion.

Operator

And the next question comes from [Greg Holter – Great Lakes Review].

[Greg Holter – Great Lakes Review]

Your equity it was up about $37 million on a sequential basis and the net income was up about or was about $11 million for the quarter. What explanation is there if that is just all currency?

Ingrid Mittelstadt

Again our net equity stayed at 72% of total assets. And of course we have an important part included there is the accumulated translation assessment and with this jump in the exchange rate we had an effective increase in disposition in equity. So if you reevaluate for example fixed assets, you get then the increase of an equity.

[Greg Holter – Great Lakes Review]

So mostly net income as well as the foreign exchange?

Ingrid Mittelstadt

Are you comparing now with September?

[Greg Holter – Great Lakes Review]

No. I thought at December 31 equity was about $400 million, now it’s about $437 million.

Gunther Braun

There is also approximately I think $5 million in the range for stock option exercise but included we got some cash there. And of course if you take the profit it should be at $10.8 but we are at $18 million and the other $18 million, Ingrid?

Ingrid Mittelstadt

Is this translation adjustment.

[Greg Holter – Great Lakes Review]

On your cash and investment portfolio, I believe you have or hopefully had some auction rate securities. I just wondered if you could comment to where you stand there currently.

Ingrid Mittelstadt

At the end of September we had nearly $110 million in auction rate securities and we implemented the share buyback program, so we really realize this investment, use the liquidity and reduce up to nearly $36 million at the end of December and you would see that in the 10-Q, now I think we are at $10, $11 million.

Because we also realized part of that during this quarter and we had a couple of auctions that failed in February, but we have no valuation problems there, we do not need now the money for the auctions also confirmed that we have no valuation problems and it’s only $10 million and it’s investing and we get also the confirmation from the bank that we will realize that in future.

[Greg Holter – Great Lakes Review]

On your balance sheet of the $127 million that you show as cash, cash equivalents in short-term investments at March 31, 2008. Did you have to move any of that $10 or $11 million in auction rate to long-term investments?

Ingrid Mittelstadt

No, no, it’s all there because, as I said we have these movements, we have no problems until February and as I said only $10 million, so it should not be a problem to realize that in the short-term period in 12 months.

[Greg Holter – Great Lakes Review]

You have made some comments, I think, Ingrid and probably Gunther, on the inventory side of things being higher than you had expected, due to some delays in shipments?

Ingrid Mittelstadt

We have some delays in shipments in the macro business and we had also some already done shipments or deliveries to customers with some systems, where we were expecting or waiting for the final acceptance of the customers. These are some times delivery terms that we have and then we realize the revenue when we get these final acceptance of the customers after they do their own test at their facilities. And the amount of inventory that already were delivered to customers were higher as the normal average that we have.

[Greg Holter – Great Lakes Review]

And can you quantify what that amount was either in terms of the sales figure or the higher inventory?

Gunther Braun

Maybe to give you a clue of what’s the normal rate because we deal with this every quarter and the typical range is in the $5 to $7 million range and Ingrid, last quarter we had?

Ingrid Mittelstadt

It was between $11 and $12 million.

Gunther Braun

So we are somehow $5 million higher.

[Greg Holter – Great Lakes Review]

And have those indeed been either shipped and/or accepted as we sit here in April 30?

Ingrid Mittelstadt

I think a part of that, yes.

Gunther Braun

Of course and then of course Greg, it is all the question if you have an order with letter of credit and the customer does not issue the letter of credit then you don’t ship.

Operator

Your next question comes from Ian Fleischer - Friedman Billings & Ramsey Co.

Ian Fleischer - Friedman Billings & Ramsey Co.

On your balance sheet you have around $120 million in cash, can you talk about your options with respect to investing that cash going forward, maybe comment on the acquisitions and possible future share repurchases?

Gunther Braun

On the $120 million, of course, we feel probably need for our operations and we still have left in the range of $40 million, and correct me, Ingrid, for our share repurchasing program and maybe it’s the right time to execute here and go ahead under the circumstances now. And then it’s a normal investment, so don’t put the money in high-risk papers or whatever, basically in no risk papers at a reasonable interest rate and that’s it.

Ian Fleischer - Friedman Billings & Ramsey Co.

And can you comment maybe on the semi electronics end market for you particularly in Europe?

Gunther Braun

Semi electronics including solar side, on semi what we see, over in North America and in Europe it’s somehow still the level we experienced in the last quarter, and you remember last fiscal year semi was weaker. So we improved overtime and it’s reasonable, what we’ve seen and see so for in Asia, Taiwan and so on, a little bit slower activity is quoted. So that’s what we see and what we experienced.

On the electronics side, consumer electronic main business is China, of course and there we see good quoting activities and I would expect reasonable nice orders this quarter out of this industry. So nothing to blame on this side and last but not least solar side, North America quoting activity, and Europe and Asia quoting activity, maybe a little bit slower in Asia. I have to say still good Europe and U.S., electronic consumer enough activity is going on. So I don’t see a pull back there.

Ian Fleischer - Friedman Billings & Ramsey Co.

And the solar side is still doing well. Is that how I should understand it?

Gunther Braun

It’s doing very well.

Operator

Your next question comes from Grant Hopkins - Ferris, Baker, Watts.

Grant Hopkins - Ferris, Baker, Watts

Gunther, could you just review what you said about the run rate for intangible amortization? I’m not sure if you said it will be $2.5 million less or what?

Gunther Braun

That’s right. That’s what I said. In the $2.7 million roughly, Ingrid, $200,000 we’ll save for a certain time.

Ingrid Mittelstadt

$200, maybe $250 we’ll save and the remaining was really one-time.

Operator

Your next question comes from [Ralph James – Ratio Asset Management].

[Ralph James – Ratio Asset Management]

You said that the company Nufern contributed the revenue of $2.4 million for the quarter. Is that correct? And that was for two months or for three months?

Ingrid Mittelstadt

Yes.

[Ralph James – Ratio Asset Management]

And, so it means that if I take the reported revenue I take the $15.5 million ForEx contribution off and I take the $2.4 off. It means the underlying revenue growth in the quarter was only about 2%? Is that right?

Gunther Braun

It should be not wrong, yes.

[Ralph James – Ratio Asset Management]

Can you do a similar calculation for the orders because you reported, I think an order growth of about 14%, I think you said 143.9, I think the order in the same period last year was $126 and if I make a similar contribution of ForEx and the acquired business then I, it almost means I would be at negative order development. Is that also correct?

Gunther Braun

I am not so sure, I have no information on foreign currency calculation.

[Ralph James – Ratio Asset Management]

It’s the difference between the sales is about $20 million and that’s ForEx and consolidation and the numbers are not dramatically different so there should be a broadly comparable impact on orders.

Gunther Braun

You’re talking about six months now if you are talking about.

[Ralph James – Ratio Asset Management]

No, no. Just for the orders presumably, the order inflow for Nufern was included for two months, presumably?

Gunther Braun

They have ordered inflow from Nufern was in the range of Ingrid, four point something.

Ingrid Mittelstadt

$4.9, because when you acquire a company you include for the first time the whole backlog, so it’s higher.

[Ralph James – Ratio Asset Management]

So that’s means there was a meaningful underlying decline in constant currencies and orders actually, I didn’t fully understand where it comes from. Clearly the U.S. is weak but are you seeing declines only in the U.S. on orders or are you already seeing declines in other parts of the world?

Gunther Braun

We never really decline in the U.S. It’s somehow in the same level than last quarter. On order entry overall, I think if you should take out the $4.9 million we are in close to $138, $139 million and I think if I go back here to the paper I see in order entry related translation adjustment as $10 million.

Ingrid Mittelstadt

For six months, in the quarter, I tell you we only had $2 million. So the problem is you cannot take the relation from the impact of the exchange rate in the sales in the same relation to the orders.

[Ralph James – Ratio Asset Management]

So it’s of the order in contribution of $4.9 was for six months or for the second quarter it was $4.9?

Gunther Braun

It was in the second quarter.

Ingrid Mittelstadt

It was in the second quarter, but it was because you included the acquired company for the first time.

[Ralph James – Ratio Asset Management]

Well I am just trying to see what the underlying orders development is and I don’t know if you’ve got the number there. If I just take constant currency order development in second quarter that was up, down, flat, excluding acquisition, just underlying constant currency?

Gunther Braun

So second quarter last fiscal year was $125 million, $126 million. Now it’s $144 million, roughly taking out of $5 million we are at $138 and what I get here from this analysis, it’s roughly a $10 million adjustment. So it’s slightly above the same what we did in second quarter in 2007.

[Ralph James – Ratio Asset Management]

It’s flat at 1%.. And then on your guidance, again if you can just clarify that and what dollar rate is your guidance?

Ingrid Mittelstadt

The guidance as I said is we expect that the U.S. dollar stays stable.

[Ralph James – Ratio Asset Management]

At around the current level?

Gunther Braun

That’s right. Seven times a year.

[Ralph James – Ratio Asset Management]

Did you leave the revenue guidance unchanged?

Ingrid Mittelstadt

Yes. Because we have our own estimation of the impact of the exchange rate over the whole fiscal year already included.

[Ralph James – Ratio Asset Management]

But presumably you didn’t calculate the guidance three months ago at the dollar rate of 155?

Ingrid Mittelstadt

You now, when you are talking about revenues or income statement positions you use an average exchange for the whole year. It’s not a closing and had the tick at the end of the quarter. So that’s the reason why it impacted balance sheet positions more than income.

[Ralph James – Ratio Asset Management]

Well I just want to know in your own budget which dollar rate you use for them to get to that number you use 155.

Gunther Braun

Yes, 155 to calculate it.

[Ralph James – Ratio Asset Management]

I don’t know what number you use but just so we can understand how that guidance would be impacted if the dollar rate does change materially from now?

Ingrid Mittelstadt

We take it in the other way. So 0.67 something 673.

[Ralph James – Ratio Asset Management]

So, at about 1.50 Euro, so the guidance is at $1.2. And then what is the full year contribution you expect from Nufern that is included in that?

Gunther Braun

This we said already last conference call, we expect in the range of $10 million.

Operator

You have a follow-up question from Antonio Antezano - Bear Stearns.

Antonio Antezano - Bear Stearns

What you said about getting to $0.58 before these three amounts that you provided us that was after tax right, $2.7, $0.6 and $3.7. That was after tax because if I do that after tax I get to the $0.58, but if it’s before tax I get a much lower number.

Ingrid Mittelstadt

No. The problem is of course you can have a bit different estimation but you have some items that are permanent differences for tax purposes.

Antonio Antezano - Bear Stearns

So these numbers, $2.7, $0.6, $3.7, not necessarily are subject to that tax rate then?

Ingrid Mittelstadt

For example, the amortization, it’s our guess. I cannot make exactly the calculation but it would be $0.58, may be $0.56, $0.57. But it would be higher than.

Operator

You have a follow-up question from Charles Murphy - Sidoti & Company.

Charles Murphy - Sidoti & Company

You say that the semi has already slowed for you or it’s looking like its going to slow?

Gunther Braun

It’s looking like it’s a little bit more quiet in Asia, especially in Taiwan.

Charles Murphy - Sidoti & Company

I know you mentioned before some of the factors that led to the higher gross margin and just wondering how you’re able to achieve these improvements, given that, maybe the product mix isn’t as favorable as it could be.

Gunther Braun

I think it’s stable as it is. We have reasonable orders, sorry in CO2 lasers for the machine tool industry. While we have a different production while we improve our cost structure so that we gain a little bit. We had high volume for our marking and micro business, so there we expect to improve.

And also on the component side, a part is of course Nufern on the gross profit side and then still on the bottom line side it should improve and it will improve over time. So it’s not unusual and you have seen already this second quarter where the gross profit margin was. So somehow 43%, 44% should be with the given backlog and the product mix, clearly possible.

Operator

You have a follow-up question from Ian Fleischer - Friedman, Billings & Ramsey.

Ian Fleischer - Friedman Billings & Ramsey Co.

What was the U.S. dollar/Euro exchange rate, for purposes of your unrealized exchange loss, what was the number you used there for that $3.7 million?

Ingrid Mittelstadt

Well, when we closed the balance sheet you need to use the closing rate and this was 06325 to valuate the balance sheet position versus at the end of December, 06801. So this gives you the difference or the fluctuation of 7.5% in the quarter.

Operator

At this time there are no further questions.

Gunther Braun

Thanks for listening. I think we are not clearly happy with the results we have delivered, but clearly there is no big changes in our operational execution, you have seen gross profit margin is in line with our expectation and forecast, I am quite sure also on operating level in the forward coming quarters will be in line at least what we guide and I am confident that we meet our guidance over the last six months in this fiscal year.

If you should take the numbers, I think the top line growth of course supported by the exchange rate is reasonable and nice and we will deliver also the bottom line results which are required or are expected. So again I hope next quarter conference call will be somehow more pleasant for us and I wish you all the best over the next month and hopefully talking to you again in the August conference call. Thanks again, bye.

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