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Rofin-Sinar Technologies (NASDAQ:RSTI)

F3Q08 (Qtr End 6/30/08) Earnings Call

August 6, 2008 11:00 am ET

Executives

Gunther Braun - CEO

Ingrid Mittelstadt - CFO

Analysts

John Harmon - Needham and Company

Charles Murphy - Sidoti & Company

Mark Miller - Brean Murray, Carret & Company

Tobias Loskamp - Landsbanki Kepler

Ian Fleischer - Friedman, Billings, Ramsey & Company

Greg Halter - Great Lakes Review

Kerry Kelly - Ironworks Capital

Jenny Jones - Schroder

Operator

Welcome to Rofin-Sinar's 2008 third quarter results conference call. Today's call is hosted by Mr. Gunther Braun, Chief Executive Officer and Ms. Ingrid Mittelstadt, Chief Financial Officer. Following management's comments, you will have the opportunity to ask questions. Please go ahead.

Gunther Braun

Thank you. Good morning or good afternoon to everyone. I am here in Germany now [marking] headquarter together with Ingrid, our CFO. I hope you all got the press release containing our third quarter results. We will give you some comments about our business and performance and then we will open it up for questions.

Now before we start, I would like to make the usual statement about the information you are getting in this conference call.

Based on the fair disclosure regulations of the SEC, we will also include a summary of our own financial estimates for our next quarter and the 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 investigations and research and not to place undue reliance on our estimates.

Safe Harbor statement, our discussions may include predictions, estimates or other information that may considered forward-looking. 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 discussion 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.

Now, let's start with the nine months results.

In the last nine months, we shipped laser systems, including service parts and components for a total of $421 million, which results in an increase of 21% or $71.8 million from the comparable period of fiscal year 2007.

The difference in US dollar exchange rate increased sales by approximately 11% or $37.5 million, but this is part of our business and nothing unusual for a global company with significant sales in foreign countries.

Net income in the nine months period amounted to $43.8 million and represents an increase of 13% from the comparable period in fiscal 2007 and I think the nine-month net income profitability with 10% of sales is acceptable, given our second quarter results.

The nine-month sales allocation between macro, micro and marking, and components was 43% for macro. Micro and marking did 47% and 10% was for components.

The geographical split, Europe in the nine months, 52% versus 57% in the last year period; US North America, 24% versus 23%; and Asia, 24% versus 20% for the nine-month period.

The thriving geographical market behind our sales growth in the first nine months was the Asian market, which increased by approximately 46% to $100.2 million. Semiconductor and electronics industry were the main reason but also supported by still reasonable shipments for our lasers to the machine tool industry.

The European markets increased by approximately 11% to $220.2 million, supported mainly by the machine tool, automotive and solar cell industry, and in addition by our component products.

The North American business increased by 23% to $100.5 million due to the additional sales we got from our recent acquisition, which represents approximately 8% of the increase. The other 15%, half of it can be more or less attributed to the solar and semiconductor industry, and the other half is across the industries.

We are very happy with the results achieved in North America, of course given the overall economic climate in this region.

The breakdown of the nine months laser sales by industry is as follows. Automotive and subsuppliers, 11% versus 7% in '07; machine tools, 35% versus 37% in '07, and you see already it's a little bit slower; semiconductor, electronic, 26% versus 21%, up highlight of course solar cell business, but also semi and electronics wasn't too bad in the first nine months; others is 28% versus 35%, and you all know medical device, jewelry and flexible packaging are the main industries we serve there.

Now the third quarter results. As you have seen from our press release, we had a very strong quarter with a new record in sales of $149.7 million. We did not make the other $300,000 to get to $150 million, maybe next time. This is $28.3 million or 23% higher than in the comparable quarter in fiscal 2007.

The change of the dollar exchange rate mainly compared to the euro had the effect of increasing our sales by $10.9 million or 9%, and I think this is in line with some of our competitors which have also a similar global sales distribution. As a result, the organic growth rate for the third quarter was remarkable 14%.

Net income increased by $1.8 million to $16.1 million or approximately 11% of net sales. As a result of our share buyback program, net income in absolute numbers increased in the range of or by 13%. But if you look to EPS, this improved even by 20%, and this is due to lower interest income.

We achieved a new record high in sales in our micro/marking business. Net sales increased 24% over the comparable quarter to $71.3 million or 48% of total sales. The levels or the reason is mainly semiconductor, electronics, solar cell and even medical instruments business and these industries.

Macro sales increased by 15% to $60.3 million or 40% of total sales, mainly driven by the shipments for our CO2 laser to the machine tool industry, this higher output power and in addition increased business with the automotive industry.

Our component business increased by 56% to $18.1 million and represents 12% of total revenues and approximately half of the increase is attributed to our last acquisition.

Now, sales by geographic, by regions. Sales to Asian countries increased by 56% and were 26% of quarterly sales and reached $39 million. Our top three contributors this time were China, Taiwan and Japan.

North America with $39.8 million increased by 60% and represents 27% of quarterly sales, partially as a result of our recent Nufern acquisition, which is 14% of the increase. In addition, I would like to highlight the solar cell and component business.

Europe was responsible for 47% of the quarterly sales, comparing to 59% in last fiscal year's quarter. In absolute numbers, Europe was approximately at the same dollar level. And you see business is a bit slower and this is mainly in the machine tool industry.

And last but not least, our spare parts and service business increased by 17% and accounted for approximately 24% of net sales for the quarter.

Now coming to the breakdown of our quarterly laser sales by industry, automotive in the quarter 12% versus 9% last year; it's another nice, good quarter. Machine tool, 31% versus 38% in '07; it's on a reasonable level.

And I think we mentioned already that this industry will be a little bit slower, and you see now the effect. Semi and electronics, 31%, up from 23% in '07, and main growth drivers were, of course, number one, solar cell industry. We had a nice semiconductor business and of course a nice electronic business. And others were 26% versus 30% in '07, and again a good portion medical and jewelry.

During the third quarter, we shipped a total of 1038 lasers, approximately 11% more compared to last year's third quarter. 292 units were for macro application. This is 19% decrease in units.

But as I said already, average, we shipped more of this higher output power, so you don't see this in absolute figures. And 746 units, this a plus of 31% for marking and micro.

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

Ingrid Mittelstadt

Thanks Gunther. Good morning and good afternoon to everyone. As already mentioned, even under the difficult macroeconomic conditions, we were able to achieve the record higher sales of $149.7 million during the third quarter of fiscal year '08.

Total group gross profit for the quarter was 42% of net sales and slightly below the level of Q3 '07 with 42.6%. The slightly lower gross margin level was primarily a result of the following facts.

First, we had high volume orders with corresponding lower average prices in the micro business. Second, only 24% of total quarterly revenues were derived from service on spare parts, compared to 26% of total sales in the comparable quarter of fiscal year '07. Third, lower throughput of higher power CO2 lasers as a result of lower business to the machine tools industry, as already mentioned.

SG&A including intangible amortization for the third quarter '08 represented 19% of net sales, as compared to 19.1% of net sales in the same period of last fiscal year. In absolute figures, SG&A including intangibles amortization increased by $5.3 million to $28.5 million for the quarter.

The increase in SG&A expenses is mainly a result of the additional expenses and intangible amortization from our recent acquired subsidiary, Nufern, $0.3 million higher stock-based compensation expenses as well as additional selling and marketing activities in some regions and some specific industries.

Additionally, the weakening of the US dollar against foreign currencies had the effect of increasing SG&A expenses by $1 million. R&D expenses for the quarter amounted to $10.9 million or 7.3% of net sales, compared to $7.4 million or 6.1% of net sales during the third quarter 2007.

Quarter growth spending was $11 million, versus $8.1 million in the comparable quarter of last fiscal year. The higher level in R&D expenses is mainly due to our investments in fiber laser technology and the additional R&D expenses from our recent acquisitions as well as the very low level of R&D grants, only $0.1 million in this quarter compared to $0.7 million in the third quarter of last fiscal year. The fluctuation of the exchange rate increased R&D expenses by $0.3 million.

Income from operations of $23.5 million represented $15.7 million of total sales versus $21.2 million or 17.4% of net sales in Q3 '07. The currency translation had the effect of increasing the net income from operations by $2 million in the current quarter.

Other income expenses, net other income accounted for $0.7 million, compared to $1.8 million in the third quarter 2007. Net interest income accounted for $0.1 million in the third quarter '08, compared to $1.3 million in the third quarter '07, mainly to the completion of our shares buyback program.

The third quarter 2008 includes $0.3 million net exchange gains compared to $0.4 million in the corresponding quarter of last fiscal year.

Our effective tax rate on income before income taxes and minority interest for the third quarter of fiscal year 2008 was approximately 32.6%, compared to 36.3% in the comparable period last fiscal year. The lower effective tax rate is mainly due to changes in the German tax law but was already anticipated and is cast in prior quarters.

Even given the difficult macroeconomic conditions, we're proud to present net income for the third quarter of $16.1 million, and this is a result of our business strategy and our oversight of operating expenses.

This resulted in diluted earnings per share of $0.54 based on 29.9 million weighted average shares outstanding. The weakening of the US dollar against the major foreign currencies had the effect of increasing the net income by $0.7 million.

Now coming to the balance sheet, the weakness of the US dollar mainly against the euro comparing the exchange rates from June 30, '08 versus September 30, '07, amounted approximately to 10%.

Cash and short-term investments decreased by $116.6 million to $111.6 million, compared to last fiscal year, mainly due to the execution and completion of our shares buyback program.

So in this quarter, we completed the repurchase of our shares. We repurchased 2.8 million shares and we spent $120 million for this program.

The impact of the exchange rate fluctuation was to increase cash and short-term investments by approximately $8 million.

Accounts receivable net increased by $19.2 million to $122.8 million, mainly due to the record high revenues of the reporting quarter. Exchange rate fluctuations increased accounts receivable by $8.9 million.

Day sales outstanding of the nine-month period increased to approximately 80 days, compared to 78 days average in last fiscal year.

Net inventory increased by approximately $38.7 million to $174.5 million, mainly as a result of the high order entry, the additional inventory of the new acquired subsidiary and the high level of already delivered products that are waiting for the final acceptance of customers.

The fluctuation of the exchange rate increased the inventory stock by approximately $13.2 million. This high inventory stock should allow us to react faster to the demands of our clients and also includes pre-manufacturing for expected high volume orders.

Based on the nine months period cost of goods sold figures, inventory turned approximately 1.8 times.

Total debt increased by $25.9 million to $66.5 million in the balance sheet, mainly due to short-term financing of the shares buyback program. The fluctuation of the exchange rates increased total debt by $2.5 million. Stockholders' equity represents approximately 68% of total assets, compared to 72% of total assets as of September 30, 2007.

Now I would like to give you some information related to the cash flow. During the nine-month period ended June 30, '08, the company generated $6.9 million from its operating activities. The company also generated $51.4 million, primarily from the sale of short-term investments, offset by acquisitions of new business and capital expenditures amounting for $11.1 million.

The company used net cash of $92.7 million and financing activities mainly related to the share buyback, as already mentioned, $120 million and repayment of bank debt, partially offset by the new borrowings from banks and the issuance of new shares from the exercise of the stock options.

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 fourth quarter fiscal year 2008 and for the whole fiscal year 2008.

This guidance is only an estimate and again subject to all the risks of our Safe Harbor statement.

The fourth quarter, sales volume for the fourth quarter 2008 should be between $145 million and $150 million; gross profit in the range of 42% to 43% of net sales; period expenses including intangibles amortization in the range of 26% to 27% of net sales; income before income taxes and minority interest between 15% and 17% of net sales; and the effective tax rate, that depends mainly on the overall mix of the results in the different countries and the nondeductible expenses for tax purposes, should be in the range of 32% to 33%.

Non-cash items of our profit and loss statement, including intangibles, amortization and fixed asset depreciation are estimated in the range of 2% to 2.5% of net sales. For the fiscal year 2008, sales volume is expected between $565 million and $570 million, but at the high end of the range would result in a year-over-year increase of approximately 19%.

Gross profit of approximately 43% of net sales, period expenses of approximately 27% of net sales, income before income taxes of approximately 16% of net sales and the effective tax rate is estimated in the range of 33% to 34%.

Non-cash items, including the intangible amortization and the fixed assets depreciation, are estimated in the range of 2.5% to 3% of net sales. All these estimates depend on all the well-known risks and are subject to change.

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

Gunther Braun

Now let me give you some comments on the macroeconomic conditions we face and how we see the upcoming quarters. And as usual, I will start with what we call macro business.

As mentioned in our last conference call, high-power CO2 lasers for cutting applications to the machine tool industry were still on the reasonable level. New orders are coming in, of course, a little bit slower, Q3 improved slightly compared to Q2 '08.

One piece flow production is introduced in Hamburg, and over the next quarters we expect to see an improvement in manufacturing costs and inventory levels.

Most important regions are still Europe and Asia. The Asian business improved slightly, compared to our second quarter this fiscal year, but it is not comparable to last fiscal year's third quarter. That's about the macro business high-power CO2 lasers.

On our lower power CO2 lasers, 100 to 600 watts manufactured in the UK. The business is running on a nice level. Demand for our products is good, but we see a shift more toward us with higher power levels in the past and maybe also in the future.

Of course, the challenging part is the competition with US dollar priced products, but so far the colleagues handled that situation very well. So as I mentioned, machine tool currently will not be one of our growth drivers, but we have others.

Automotive and subsupplier business supported the third quarter '08, contributed very nicely with approximately 12% of laser sales. Main applications were marking and also welding applications. It's on a high level again, but you see automotive industry with all the discussions. Overall, there is still demand and there are investments going on from the automotive and subsupply industry.

Then one word on our fiber laser project, we continue to invest in our higher power fiber laser project. I think you noticed already our R&D spending this quarter. And I'm quite sure someone will ask then later in the Q&A section.

Now coming to the marking and micro business, semiconductor contributed nicely in the third quarter, but we expect for the next quarters the somewhat softening of that business. We had a new record in photovoltaic business last quarter, and prospects are very good that this part of our business is increasing.

As already mentioned, our strategy for this industry is to concentrate on being the laser supplier, either directly to the solar cell manufacturer or to the systems manufacturer for the production lines. It's a worldwide business. And we can capitalize on our global presence. And I'm still convinced that this will be a growth driver for our business.

Jewelry business is on a consistent level. Big increases are not expected due to reduced consumer spending. Smart cards business is moving along. No exceptional projects or orders are expected, but nothing negative.

Electronics industry business with consumer electronic industry compared to last year's third quarter and our second quarter this fiscal year increased good order and sales activity in Q3 and also Q4 is expected.

Medical instruments business is also moving along. Overall business was in line with our expectations and contributed reasonably well, so also no big change there and negative news. So we believe that our broad product portfolio for all different type of applications in the medical instruments business suits very well the demand of this industry.

And finally, our component business, you all know that this mainly consists of power supplies, fibers, beam delivery systems and laser diode. And this I want to highlight this time because approximately 12% of quarterly revenue were from components and largest contributor was our laser diode business. We expect that this business should further contribute to our sales growth.

So this is an update on our major industries. Now I am quite sure you expect that coming to China, we continue our way to start our own operations for laser diode assembling and production of low cost laser markers.

On the acquisition side, we took a next step, things are developing faster now and I'm confident that we can bring this to an end hopefully pretty soon. But I will not put anything in writing on the table.

Order entry, in the third quarter we achieved our second best quarterly order entry with $151.8 million. The orders for our macro products represent $58.3 million, a slight pickup from the second quarter level. And the orders for our micro and marking products represent $73.9 million, same level as in the second quarter, but also on a nice high level.

Our component order entry reached $19.6 million, which is also a new record and backlog end of June increased to $149.3 million, another new record high.

Now the split, 32% of the backlog is macro, 57% of the backlog is micro and marking and 12% of the backlog is component business. So it's a solid basis for the fourth quarter.

Now let me summarize our performance over the last period. I think we delivered under the current circumstances pretty good numbers, sales order entry and even bottom line. Our backlog even increased to a new record high, which is fundamental for our Q4 sales.

Gross margin levels decreased, mainly due to a higher portion of volume-based deliveries and less absorbed fixed costs in our CO2 laser production due to lower shipment levels.

SG&A came back to a lower level compared to the second quarter. And we have allocated more money to R&D last quarter, so this should last until we have reached certain goals in technology and product development.

We have changed our top line guidance for the fiscal year to a sales level of $565 million to $570 million, which is an increase of $20 million to our last earnings guidance three months ago.

Another new information for you is maybe the following, we have broadened our regional presence. In our fourth quarter, we have established a new Rofin sales and service office-company called RB Swiss, which should cover the multilingual country of Switzerland.

Now we are going into India, so we want to start also an office there that we hopefully gain some more market shares in this market. So you see we are going to broaden still our regional presence.

The markets and, I would say, all over the world continue to be challenging, but I still believe that with our current strategy and our worldwide setup, we can generate the business and deliver the numbers we have forecasted.

We continue to focus on our core competences within 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 your questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of John Harmon from Needham and Company. Please go ahead.

John Harmon - Needham and Company

Hi, good afternoon.

Gunther Braun

Good morning, John.

Ingrid Mittelstadt

Good morning, John.

John Harmon - Needham and Company

So a couple of questions please. First of all, I would like to hear your views whether the European economy, whether you are feeling or seeing signs of softness. And, if so, how that affects your business, I think you were talking about the machine tool business being a bit softer, is that how you traditionally see the effects of that?

Gunther Braun

No, I think that it's normal that the overall worldwide climate for machine tools or the business is a little bit slower, we said this also last conference call. Asian demand is a little bit slower. North America, we know that. But also now the European customers see a certain slower business of course, but they mainly export the machines.

So I would not attribute this exactly to the European business. They do a lot of export, so the reason is also in Asia and in North America for these guys and we have to face the situation in my opinion. You have seen already in our numbers percentages that European business as a percentage of sale is already a little bit lower.

We faced this by the way in 2006 if you remember. This was the first time where we were below the 50% mark, the sales to Europe. And now in the quarter, we also are close to that range. But, I think that's normal, and we don't fear this situation.

John Harmon - Needham and Company

Okay, thank you. And secondly, I was wondering if you could give us an update on your fiber laser strategy, probably not the strategy. It just seems like the company Nufern is making fantastic performance in fiber lasers. I believe they are now shipping a kilowatt fiber laser, which makes them, as far as I know one or two people on the planet that is doing that, whether it's still your intention to cross-pollinate that business with some of the other businesses you acquired?

Gunther Braun

Well, of course, that high power or multi-kilowatt fiber laser business is a target for us. The target is to have really reliable products tested enough, life time test and all this stuff. I know Nufern, they delivered already 1 kilowatt fiber lasers to the military industry. And that is great.

But on the other side, we are more conservative. We are more the industrial guys. We want to be sure that the product we deliver into the industry will work for a certain lifetime and that is where we are going. Before we ship anything, we want to test and be sure enough that everything works. But as you mentioned, I think the Nufern guys did a nice job there.

John Harmon - Needham and Company

And just finally, I know you gave guidance on, you are talking a challenging environment, but yet it is the high end of your guidance. You are looking for 19% growth, which is very good. It is still a bit early, but what does fiscal '09 feel at this point?

Gunther Braun

Fiscal '09 numbers we will give in the November quarter, but the difference between last year and this year is that last year fighting for orders was easier than in '08, clearly. So, the environment has changed.

I would say, all laser companies are more fighting, stronger fighting for orders, are desperate to get orders and then maybe pricing is a little bit different than, I would say, in the normal economy. And that's the change. As you said, I think we deliver, and our sales force and our management does a great job in getting orders, but it's not anymore as easy as it was one year ago.

John Harmon - Needham and Company

Great, that helped. Thank you very much.

Gunther Braun

Thank you.

Operator

Thank you. The next question comes from Charles Murphy from Sidoti & Company. Please go ahead.

Charles Murphy - Sidoti & Company

Good morning, guys.

Gunther Braun

Good morning, Mr. Murphy.

Ingrid Mittelstadt

Good morning.

Charles Murphy - Sidoti & Company

So I am sure micro and marking was in large part driven by solar. Could you talk a little bit about why the component sales showed such a sharp sequential improvement?

Gunther Braun

Your first sentence, we agree, solar, but, in components, clearly, we have a nice business in the laser diode business. This I highlighted. We gained some more customers. I think we expanded our regional presence. We invested a little bit in sales force in different countries and the dealers guys have excellent product. So if you add everything up, for me it is not a surprise that we delivered such numbers and I still believe that will continue, of course.

Charles Murphy - Sidoti & Company

Okay. Good to hear. Could you just talk a little bit about what we should think of the margin picture looking like? I mean typically, your micro, marking and component sales are a little bit higher margin than macro. And so, I am just wondering what we should expect, I know you gave the guidance for the fourth quarter, but just beyond that as well?

Gunther Braun

No, I think we want to be in line with what we said, what we guided.

Ingrid Mittelstadt

So 42% to 43% in the fourth quarter, we expect.

Gunther Braun

But of course, when you get volume purchase orders, then pricing is different. You are under price pressure. And I think our customers did pretty well, how they handled us. Then, of course, you cannot maintain the margins we had. But of course, on the other side, that is now something for us to think about, how to maybe reduce our manufacturing costs? What can we do with the product, technology-wise? So I am not pessimistic for '09.

I think we have enough plans in place how to streamline and hopefully lower manufacturing cost that we stick to our average profitability in the range of 43%. As I said, component business is increasing, should be a reasonable margin. If we come with the one piece flow in Hamburg to reduce manufacturing costs there, I think then we should be also in line in '09 and hopefully improve. Let's see.

Charles Murphy - Sidoti & Company

Okay. As far as medical devices, I think you made a comment that it was unchanged. I guess earlier in the call, you also said that it may be improving a little bit, what is it looking like there?

Gunther Braun

Demand is there. We had at the beginning of last year a very nice numbers. It is on a reasonable level. It is not increasing like the previous years, but will continue and there are enough projects going on. Therefore, I am not worrying about medical device in the next quarter.

Charles Murphy - Sidoti & Company

Okay. I take it by the sharp increase in semi and electronics as a percentage of sales, that you probably will never be breaking solar cell out by itself?

Gunther Braun

I don't know, Ingrid?

Ingrid Mittelstadt

I would not say, never, but we did not arrive to this level yet. Otherwise, we would have done it. So, it was not only solar cell. Also the other industries were very good, at a high level in this quarter.

Gunther Braun

We had a nice semi business, contrary to all the talk in the world last quarter. Also electronic business is nicely developing. There are enough projects going on, so we don't worry about that too.

Charles Murphy - Sidoti & Company

Okay.

Operator

Thank you. The next question comes from the line of Mark Miller from Brean Murray, Carret & Company. Please go ahead.

Mark Miller - Brean Murray, Carret & Company

I had a question about your share repurchases. I believe you said 2.8 million shares for $120 million, was that during the last three months or the last nine months?

Ingrid Mittelstadt

The whole amount of shares and the $120 million were spent over the last nine months, what we did is we completed the program in this quarter.

Mark Miller - Brean Murray, Carret & Company

Okay. And just about your margins. I am just wondering that they are a little bit lower than this quarter or at the low end of what you forecast, I think, last quarter. And it seems like the forecast for the remainder of '08 also appears to be at the low end of your forecast. Is that primarily, as you noted, that the high volume purchases as well as the little bit of softness in the CO2, high-powered CO2 market, is that why your margins are now appearing to be at the lower end of your guidance?

Gunther Braun

That's right. This was the main reason why it is a little bit at the lower end, compared to our second quarter. It's not too far off, if you compare last year's third quarter, but given the first and second quarter, yes.

Mark Miller - Brean Murray, Carret & Company

You also mentioned, you thought that the semi, you might see somewhat softening of the semi business over the next quarter or so, would that also tend to reduce your margins?

Gunther Braun

You see, our earnings guidance was, for the quarter, Ingrid, I think, 40.

Ingrid Mittelstadt

42% to 43%.

Gunther Braun

So, it's not lower than we performed in the third quarter and targeted of course to improve it a little bit. So, I would not say that this should change our average margin.

Mark Miller - Brean Murray, Carret & Company

Thank you.

Gunther Braun

Thank you.

Operator

Thank you. The next question comes from Tobias Loskamp from Landsbanki Kepler. Please go ahead.

Tobias Loskamp - Landsbanki Kepler

Yes, hello. Good afternoon or good morning. I have a couple of questions. The first one, maybe a follow-up on the share buyback program. Do you plan to cancel those shares or what plan were those?

Secondly, I wanted to come back to the CO2, high-powered CO2 laser business. Mr. Braun, I think you said that orders had been slightly better in Q3 than Q2, did I understand that correctly?

Gunther Braun

That's right. I immediately can't answer that. Q2, it was really the bottom quarter on this one. Q3, we have seen already a slight increase, but not at the same level than in the previous year.

Tobias Loskamp - Landsbanki Kepler

Okay. And maybe another question. Can you specify the revenue in China and have you seen any negative effects from the Olympic Games, that maybe production has stopped or imports have been more difficult or anything like that?

Ingrid Mittelstadt

So, coming back to the first question, the shares, we, yes, not canceled these shares or destroyed these shares, until now because we do not see a reason for that. So in the US, you are allowed to keep them. And you see that also in our 10-Q and our 10-K. This is an extra line in our balance sheet, as everybody knows, and these shares authorized so you could use that also in the future. So that is the situation now and that was decided together with the Board members when we decided to do the program.

Gunther Braun

Maybe the sales to China were close to $16 million; let me see, $15.7 million and a little bit above 10% of quarter sales. So a nice, nice number, improved by roughly $3 million compared to the second quarter and roughly in line with our first quarter ended December 31, '07, which was our record quarter to this. but you see, the other countries also contributed nicely.

Tobias Loskamp - Landsbanki Kepler

Okay, thanks. Maybe one follow-up. With regard to the R&D spending, would you expect that the current level of maybe close to $11 million, is that a good run rate for the next few quarters? R&D spending has strongly increased quarter-over-quarter in Q2, now it has increased again, what would you expect for Q4?

Gunther Braun

No, I would use roughly 7% of sales, what we allow is currently to spend for our R&D. Let's see how we develop, and the next quarters you should calculate with such a level.

Tobias Loskamp - Landsbanki Kepler

Okay, thanks.

Gunther Braun

Thank you.

Operator

Thank you. The next question comes from Ian Fleischer from Friedman, Billings, Ramsey & Company. Please go ahead.

Ian Fleischer - Friedman, Billings, Ramsey & Company

Hi, good afternoon, Gunther and Ingrid. Could you touch on the swing factors to your guidance with respect to your sales guidance for the fourth quarter? What is going to put you at the top end versus the low end? How are you thinking about that?

Gunther Braun

Ian, on the top end, I think if you take our backlog was $149 million and usually, there is not a lot of service and spare part business included and long-term or longer-term shipments, so, are not too many included, which means in the range of 85%, I would believe should be shippable in the fourth quarter plus the service and spare parts revenue, which should lead us to $150 million somehow. So I count more. And I encourage all Rofin guys, we want to go with $150 million and reach to $570 million. So that is clearly our target.

Ian Fleischer - Friedman, Billings, Ramsey & Company

Okay. And just touching on North America, you mentioned that that improved, is that solely in the solar industry or where are you seeing improvement there?

Gunther Braun

No, I think, overall. This I said even, if you remember the last conference calls, that I believe North America for Rofin in '08 will be even better than '07. And of course, one part is solar cell industry, the other part is our component business where we did pretty well. Overall, the general market, I have to say, what we get on orders is reasonably well.

We are not enthusiastic, but it is better than maybe somebody expected or that the people expected. That is across the industry. So, there are certain projects, which you are fighting for; that's welding projects. That marking business is reasonably well. So overall, we cannot blame North America under the current circumstances. I still believe what I said, that in '08, we will do even more than '07, even without our acquisition in North America.

Ian Fleischer - Friedman, Billings, Ramsey & Company

Okay. And my last question, if you could touch on the acquisition environment?

Gunther Braun

It is interesting that there are enough companies which are for sale, so smaller companies, start-up companies, you could invest every two weeks in the company. But we are conservative and it has to match our strategy. It should be somehow in the industrial environment, in the industrial industry. So I would say, overall, except what we said, I would not expect any acquisition in the next quarter, only or the next six months let's call it, until end of this year, only the Chinese we have tried to push.

Ian Fleischer - Friedman, Billings, Ramsey & Company

Okay. That is helpful. Thank you very much.

Gunther Braun

Thank you, Ian.

Operator

Thank you. The next question comes from Greg Halter from Great Lakes Review. Please go ahead.

Greg Halter - Great Lakes Review

Yes, good afternoon or good morning. In the last conference call, you had discussed some order delays that were above the normal range. Has that been cleared up going into or with the quarter completed and have you built up any additional figures for the current quarter that we are in currently?

Ingrid Mittelstadt

I would say, they were not delayed, they were already delivered to customers and we were waiting for final acceptance. Or the other situation is that you have some commercial conditions like FOB or SIP and so on. So for US GAAP purposes, you are not allowed to invoice them. We are waiting for a letters of credit that are delayed or we have some credit limits with our customers, so that is the reason.

Greg Halter - Great Lakes Review

Do you have a number?

Ingrid Mittelstadt

Yes. So this quarter, we are again at nearly $11 million.

Greg Halter - Great Lakes Review

Okay.

Gunther Braun

Always change nice number.

Ingrid Mittelstadt

Yes. It is again nearly the same high level as we had last quarter. There are not the same orders, so they are not delayed. We already realized this revenue, but again we have this high level of revenue waiting to be realized or recognized or invoiced.

Gunther Braun

Okay. So customer behavior has not improved in paying us a little bit fast.

Greg Halter - Great Lakes Review

So $11 million, they are obviously not the same orders, they are different orders. That is up from a normal of probably $5 million to $6 million, if you want to call it normal?

Gunther Braun

Yes, $5 million to $7 million, we said last time.

Ingrid Mittelstadt

What we had in the past.

Greg Halter - Great Lakes Review

Okay. I know you had some auction rate securities, but you had to reduce that quite a bit. I wonder what the status of those is currently?

Ingrid Mittelstadt

The status is the same as last quarter, so we only have $11 million invested in auction rate securities and we talked to our broker and we also talked to our auditors and we do not see there any risk to make an adjustment to the valuation of these auction rate securities.

Greg Halter - Great Lakes Review

Okay. And regarding the acquired Nufern, does that make money in the quarter or are they still losing money and what are your prospects for the next 12 months for that acquired entity?

Gunther Braun

Last quarter, Greg, I said in the third quarter they will be in the range of losing somehow $300,000.

Ingrid Mittelstadt

Yes, that is the numbers.

Gunther Braun

We are there, in that range.

Ingrid Mittelstadt

In the first quarter, the net loss after taxes is what we had returned.

Gunther Braun

It was reduced from the second quarter number, and that is the target going quarter-by-quarter to reduce this and it is not significant, given our total profit number, Rofin worldwide.

Greg Halter - Great Lakes Review

Right, okay. And I just wanted to make sure I have this number correct, cash flow from operations, I guess it was for the nine months, was that $6.9 million?

Gunther Braun

Yes, not $60.9 million, $6.9 million.

Greg Halter - Great Lakes Review

I wish it was $60.9 million.

Gunther Braun

Yes, that is right. That is a challenge here.

Greg Halter - Great Lakes Review

The reason is the higher receivables in inventory, I presume?

Ingrid Mittelstadt

Yes, and high payments of income taxes during this year. I think that I already explained that the last quarter, So in Germany, we finally could pay the taxes for a couple of prior years. In Germany, you normally have to wait until you get the right number or the final number from the tax authorities. So this year, we really paid the income taxes in Germany. Also this quarter, we had the prepayment for the fiscal year '08 at a high level. So you can see that if you analyze the balance sheet position.

Greg Halter - Great Lakes Review

Any idea on what that swing factor was in dollars for those taxes?

Ingrid Mittelstadt

Yes, I can give it to you.

Gunther Braun

I had somehow a number in mind of $40 million, but maybe I am wrong, Ingrid.

Ingrid Mittelstadt

No, income taxes payables, we paid $27.5 million in nine months.

Greg Halter - Great Lakes Review

Which is obviously much higher than the prior year's figure?

Ingrid Mittelstadt

Yes.

Greg Halter - Great Lakes Review

Okay. All right. So, the share repurchase is completed, and any chance of establishing an additional program or are you set at this point?

Gunther Braun

First, I want to see a good operating cash flow. Then if there is no bigger acquisition, I am quite sure we will discuss that. So give us another quarter or two quarters, and then we will see.

Greg Halter - Great Lakes Review

Okay. And one last one. In your guidance for the year, I think you had said a 16% figure for the income before tax. Is that as reported, which would include the second quarter numbers on the FX and the intangible amortization for Nufern?

Gunther Braun

Yes, of course.

Ingrid Mittelstadt

Yes.

Greg Halter - Great Lakes Review

Okay. All right. Just wanted to make sure. Thank you.

Gunther Braun

Thank you.

Operator

Thank you. The next question comes from [Kerry Kelly from Ironworks Capital]. Please go ahead.

Kerry Kelly - Ironworks Capital

Hi. Thanks for taking the question. Just a quick follow-up on the taxes, the cash taxes. Let me make sure I wrote that down, is that $27.5 million for the nine months this year?

Ingrid Mittelstadt

Yes.

Kerry Kelly - Ironworks Capital

Okay. And then how should I be thinking of cash taxes going forward? Should they be at least on an annual basis closely aligned with your provision?

Ingrid Mittelstadt

Normally, yes.

Kerry Kelly - Ironworks Capital

Okay, great. Thanks. And one quick last one. I think you mentioned expecting some improvements in inventory over the next few quarters. If you could possibly try to quantify that, or does that mean taking the turns up to a certain level? If you have any details behind that, it would be appreciated? Thanks.

Gunther Braun

Let's go historically. Usually somehow inventory was in the range up to 27% of annual sales, let's call it that way. Now, we are past this level. So the target is to get there, at least and there we should work for. Of course, Nufern, the acquisition contributed certain inventory.

Sales level is not where we want them to be, so that should be a next improvement in my opinion. And then, of course, if you see the $11 million which Ingrid said, which we have somehow on delayed acceptance invoicing, which we have still in inventory, that is a $5 million bigger amount.

Kerry Kelly - Ironworks Capital

Right.

Gunther Braun

That we usually have, so there is enough parts where we can improve and we have to improve.

Kerry Kelly - Ironworks Capital

Okay, great. Thank you.

Gunther Braun

Thank you.

Operator

(Operator Instructions). The next question comes from Jenny Jones from Schroder. Please go ahead.

Jenny Jones - Schroder

Hi, Gunther.

Gunther Braun

Hi, Jenny.

Jenny Jones - Schroder

I wanted to ask about the laser diodes. That is obviously a really competitive market, and yet you have had really very strong growth. Are you taking share or is it regional growth and you are able to penetrate better than your competitors? Or have there been lastly some acquisitions or mergers which have afforded you greater share and do you think that this can persist?

Gunther Braun

No, I think number one, guys have a pretty good quality. So the laser diodes are really last very long, good life time. Secondly, they expanded or we expanded our global regional presence. They focus also on Asia, especially on China. Of course, the overall market for end-pumped diode-pumped laser is increasing. I think he takes certain market shares.

On the other side, also in the military business he gets his order. So I am talking about the company called Dilas within our organization. So it is a combination of, I would say, more reasons, more arguments than just saying, okay, we take market share. So I think we have decided the right things. And we are moving ahead to, let me see, in '05 or '06. I think '05, we started in the US, in Tucson, the company Dilas, Inc.

Now we are going to China, what I said; we want to do some laser diode assembly in China. We have a salesperson in China. So if you put everything together, there is no reason why we should not deliver such numbers.

Jenny Jones - Schroder

Again, because I know there is a lot of competition even in Asia for them and so I think it is wonderful you have had this growth. I guess I have been surprised there, because I know there is competition there as well, but just from smaller companies?

Gunther Braun

That's right. As I said, quality is good, sales force is great and they have the right modules for the application. So it is not only standard, always standard. They also do some customized laser diodes assembly. So they listen to their customer. That is the other reason why, so it is not just selling standardized products.

Jenny Jones - Schroder

Okay. And probably not as I know you, but you have not ever divulged how much solar is as a percentage?

Gunther Braun

We still do not do it. I apologize for that.

Jenny Jones - Schroder

Do you foresee in the next year potentially revealing that number?

Gunther Braun

As we said, since automotive is in the range of 10% or close to 10%, in that range, and if we crossed this line, I think we are somehow forced to do it, obliged. But, I still hope that all the other businesses are improving also, and increasing.

Jenny Jones - Schroder

So you won't have to.

Gunther Braun

That is right.

Jenny Jones - Schroder

All right. Thank you very much.

Gunther Braun

Jenny, thank you. Bye.

Jenny Jones - Schroder

Bye.

Operator

Thank you. We have a follow-up question from Tobias Loskamp. Please go ahead.

Tobias Loskamp - Landsbanki Kepler

Yes, hello. Just one follow-up on your interest income. It has been quite low this quarter. Going forward, is it correct to expect that operating cash flow should improve? Also that you put more of your cash and cash equivalents, again, in short-term investments that yield more interest or what main affect you?

Ingrid Mittelstadt

Of course, we have the internal target of improving our operating cash flow. And then we will invest the money as in the past and see that in the following quarters, the interest income should be a bit higher again.

Gunther Braun

I do not expect too much net interest income, in the fourth quarter and in the first quarter. First, we have to improve really the cash flow, and that is one of the main targets now.

Tobias Loskamp - Landsbanki Kepler

The higher short-term debt that you are having right now, is that the main target to reduce it, or is it a level that you will stick with over the next quarters?

Ingrid Mittelstadt

I think we will try to reduce also that. This is the normal strategy at Rofin.

Tobias Loskamp - Landsbanki Kepler

All right.

Ingrid Mittelstadt

Again, there we will see and compare the interest rates and make a strategic decision on that.

Gunther Braun

Our debt Ingrid, what is the interest rate on our debt currently?

Ingrid Mittelstadt

This new debt was short-term and was in the US, so we are between 3% and 3.5%.

Tobias Loskamp - Landsbanki Kepler

What do you normally get on your short-term investments?

Ingrid Mittelstadt

It depends.

Gunther Braun

Depends, euro or dollar.

Ingrid Mittelstadt

Euro or US dollar, it depends where the…

Gunther Braun

I think on the dollar side, it is more than 2%, Ingrid, if I recall it right. Of course, on the Euro side, it is 3% plus or?

Ingrid Mittelstadt

Three, yes, between 3% and 4%.

Tobias Loskamp - Landsbanki Kepler

All right, okay. Perfect. All right thanks and have a good day.

Gunther Braun

Thanks.

Ingrid Mittelstadt

Thanks.

Operator

Thank you. We have a follow-up question from Greg Halter. Please go ahead.

Greg Halter - Great Lakes Review

Yes. Just I know you made a comment about capital spending for the quarter, I think, $11 million. Does that include the merger and acquisition payment as well?

Ingrid Mittelstadt

No, it was only CapEx.

Greg Halter - Great Lakes Review

Okay. So $11.1 million year-to-date, is that accurate?

Ingrid Mittelstadt

Yes, it is for the nine months. It is not for the quarter. Yes, the cash flow information is year-to-date.

Greg Halter - Great Lakes Review

Okay. And you would expect your CapEx probably to be around 15 million for the year, then?

Ingrid Mittelstadt

Yes, this is our estimation now with the exchange rate.

Greg Halter - Great Lakes Review

Okay.

Gunther Braun

Just to let you know, we moved from four buildings into one building in Guending. We changed the manufacturing philosophy in Hamburg. There, also we have certain movements from offices. We added one building in Starnberg, at the micro headquarters. We currently extend at Dilas the laser diode assembly manufacturing, where we add a building, we bought an apartment in Korea. So there are a lot of activities going on at this time.

Greg Halter - Great Lakes Review

Yes. It certainly sounds like it. Any early expectations for '09 on capital spending, will you still expect them around $15 million?

Ingrid Mittelstadt

Yes, they should be the same range.

Greg Halter - Great Lakes Review

Okay. Thank you.

Gunther Braun

Thank you.

Ingrid Mittelstadt

You are welcome.

Operator

Thank you. We have a follow-up question from Jenny Jones. Please go ahead.

Jenny Jones - Schroder

Okay. Going back to Nufern, in terms of capital intensity, as the rest of the business does not seem to be so much, are you making your own wafers, or are you buying then? Is Nufern buying their own, or is that the more capital-intensive business overall?

Gunther Braun

Of course, usually doing optic things like fibers, there you have to invest to have drawing towers, clean rooms and all this stuff. Nufern does not do in growing wafers. That is currently, what we do is we purchase them from third parties. Or, also in-house we acquired last year a company called M2K, and they are capable to do that. There, we have an agreement to use the equipment of the Fraunhofer Institute, so we do not have to invest millions to get a wafer fab.

Jenny Jones - Schroder

All right. That is good to hear. I think that was all. Thank you.

Gunther Braun

Thank you.

Operator

Thank you. We have no more questions. Please continue.

Gunther Braun

I think we delivered a very good quarter, Q3. We are working towards to deliver a nice fourth quarter and I think with 570 million, that is at least the target for the fiscal year. We deliver another record high. So have a great summer, and talk to you in the November time frame and hopefully, again, with nice and great numbers. Thank you again for listening. Have a great time. Bye.

Ingrid Mittelstadt

Thank you. Bye.

Operator

Thank you. This concludes the Rofin-Sinar's 2008 third quarter results conference call. Thank you for participating. You may now disconnect.

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