Key Technology, Inc. F3Q08 (Qtr End 06/30/08) Earnings Call Transcript

Key Technology, Inc. (KTEC)

F3Q08 Earnings Call

August 7, 2008 4:30 pm ET

Earnings Call

Cathy Burlingame – Investor Relations

David M. Camp Ph.D. – President & Chief Executive Officer

John J. Ehren – Senior Vice President & Chief Financial Officer

Edward A. Wagner – Senior Vice President – Global Operations

Analyst

Robert Damron – 21^st Century Equity Research

James Ricchiuti – Needham & Company

Martin L. Yokosawa – Oberweis Asset Management

Allyn Seymour – Columbia Management

Ephraim Fields – Clarus Capital Management, LLC

Brian G. Rafn – Morgan Dempsey Capital Management, LLC

Elliott [Blonde] – RBC Wealth Management

Presentation

Operator

Welcome to the Key Technology third quarter fiscal year 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Cathy Burlingame.

Cathy Burlingame

With me on the call today will be David Camp, President and Chief Executive Officer and Jack Ehren, Senior Vice President and Chief Financial Officer. Today’s call is being recorded and will be available for replay on the investor relations homepage of our website at www.Key.net.

Before we begin I’d like to remind you that comments made in today’s call may include forward-looking statements within the meaning of the federal securities laws. These statements about anticipated future results are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those we discuss today. These risks and uncertainties are explained in detail in today’s release and in the company’s Form 10K filed with the Securities and Exchange Commission in December 2007.

And now I’d like to turn the call over to David Camp, President and Chief Executive Officer for discussion of the company’s results.

David M. Camp Ph.D.

This has been another very good quarter for Key Technology, our seventh in a row and we are pleased at how well our strategy is being executed. At the completion of our third quarter we have realized several new all time company records. Our shipments of $35.8 million are an all time quarterly record. Our year-to-date net sales of $93.9 million are an all time record. Our year-to-date bookings of $105.1 million are an all time record and our year-to-date net earnings of $5.2 million are an all time record. Additionally, we are exiting the quarter with a record third quarter backlog of $42.2 million and our opportunity list continues to be encouraging for the near term.

We are also extremely pleased with results of our manufacturing operations in the third quarter. As the results clearly demonstrate we have increased profit margins with our record sales volumes and improved manufacturing efficiency and our gross profit margin in the third quarter reached 42%. As we discussed at our last conference call we received orders for multiple Manta installations, our product that was introduced just a few months ago. We’re very pleased to report that the installations are proceeding even better than planned and the feedback that we are receiving from our customers is very encouraging.

We had several objectives that we wanted to achieve with the Manta including improved sanitation, improved uptime, improved capacity and improved sensor capability. We’re hitting on all of these objectives and anticipate that Manta will be a successful sorter platform for our high volume customers.

Our operating expenses have increased primarily with increasing expenses in sale, R&D and our ERP project. There are several reasons for increasing sales expenses over our plan. However, the greatest increase is the result in a shift this year to more of our revenue coming from outside reps and more total sales expenses resulting from the increase of orders. Our increases in R&D are primarily the result of the need to meet requirements of getting new products to the marketplace to meet commitments with customers. We have several other new products that we expect to announce later this year and we will take to Pack Expo in Chicago in November.

Finally, we are deeply into the details of the ERP project and this project is being monitored and reviewed by senior management. We are confident that the new system will provide greater functionality and value to the business. Looking forward as we assess the remainder of 2008 we continue to anticipate that our quarterly operating expenses will be near current levels. With our record backlog and opportunity funnel we will have record revenues in this fiscal year.

As I mentioned earlier our R&D team has several products that we will be introducing soon. Our operations team has made significant improvements and we do not expect to be constrained by manufacturing capacity. Our sales team has continued to develop new orders and we are very excited about the growth potential in our international markets, Symetix and Fresh-Cut.

In summary, our strategy continues to be valid. As we have said previously, we will continue to support our customers worldwide with new and creative technologies, superior customer service and provide solutions to improve our customers’ product quality and yield while reducing their downtime and cost of operation. We are confident that we have the team in place to continue to execute this strategy and deliver value to our shareholders.

I will now turn the call over to Jack Ehren for a more detailed discussion of the financial results.

John J. Ehren

We are pleased to report our third quarter financial results. Key’s net sales for the quarter were $35.8 million, a new all time quarterly record and a 16% increase over the $31 million of net sales reported for the same period last year. Year-to-date net sales through the third quarter of fiscal 2008 were $93.9 million, also an all time record through three quarters and a 24% increase over the $75.8 million of net sales for the first nine months of the prior year.

Key’s orders for the quarter were $30.7 million compared to $33.6 million in the third quarter of the prior year. Year-to-date orders of $105 million is a new company record through three quarters and represents an 18% increase over the $89.2 million of orders reported for the first nine months of fiscal year 2007. Key ended the quarter with a backlog of $42.2 million. This represents a $5.5 million or 15% increase over the $36.7 million backlog at the same time last year. The backlog mix at the end of this quarter was 56% automated inspection systems including upgrades, 41% process systems and 3% parts and service compared to 55% automated inspection systems, 42% process systems and 3% parts and service at the same time last year.

This backlog positions the company well for sales in the fourth quarter of fiscal 2008. Net earnings for the third quarter were $3 million or $0.53 per diluted share. Total earnings for the same quarter last year were $2.9 million or $0.54 per diluted share. Net earnings for the first three quarters of fiscal 2008 were $5.2 million or $0.95 per diluted share. Year-to-date net earnings for the same period last year were $5.1 million or $0.95 per diluted share which included $750,000 gain or $0.14 per share from the same of the company’s Inspex joint venture.

As I previously mentioned, net sales for the third quarter increased 16% to $35.8 million compared to the $31 million of net sales reported in the third quarter of last year. Sales of automated inspection systems of $15.2 million increased $1.6 million or 12% over the corresponding quarter last year. Sales of process systems of $14.9 million were up $2.9 million or 24%. Parts and service sales were $5.7 million compared to $5.4 million in the prior year, an increase of 6%.

For the first nine months of fiscal year 2008 net sales of automated inspection systems were $37.4 million which represents a $5.8 million or 18% increase over the prior year. Year-to-date net sales of process systems were $41 million which represents an $11.1 million or 37% increase over the prior year. Year-to-date parts and service net sales were $15.5 million compared to $14.3 million in the prior year, an increase of 8%.

Gross profits for the third quarter of fiscal 2008 was $15 million compared to $12.5 million for the third quarter of fiscal 2007. As a percent of sales, gross profit margins for the quarter of 42% increased from the 40.2% margins reported in the same quarter a year ago. Gross profit for the first nine months of fiscal 2008 was $37.8 million compared to $29.5 million for the same period in fiscal 2007. As a percent of sales, year-to-date gross profit margins of 40.3% increased 1.3% from the 39% reported for the same period in the prior year. The 1.3% increase in margins in fiscal 2008 compared to fiscal 2007 resulted primarily from increased volumes and efficiencies in manufacturing operations.

Operating expenses of $10.9 million for the third quarter of fiscal 2008 were 30.5% of net sales compared with operating expenses of $8.3 million or 26.9% of net sales for the same quarter last year. Operating expenses of $31.2 million for the first nine months of fiscal 2008 were 33.2% of net sales compared to operating expenses of $23.8 million or 31.4% of net sales for the same period in fiscal 2007.

Third quarter and year-to-date operating expense increases over the corresponding periods in fiscal 2007 were a result of higher sales activity, increased research and development spending and additional general and administrative expenses including costs associated with the company’s new ERP system. Operating expenses in the fourth quarter of fiscal 2008 are anticipated to remain higher than the prior year to support the higher sales levels and the company’s investment in research and development as well as the new ERP system.

Our cash position continues to be strong. Our June 30, 2008 cash balance of $33.1 million was up $5.2 million from the $27.9 million reported at September 30, 2007. The cash balance at June 30, 2008 increased $7.3 million from the $25.8 million balance reported a year ago.

Thank you and I would like to turn the call back over to David.

David M. Camp Ph.D.

I would like to take this opportunity to introduce Ed Wagner who has joined Key in the last two weeks as the Senior Vice President of Global Operations. The announcement regarding Ed’s appointment was released about three weeks ago. We are asking Ed to focus on operational cost reductions, reducing the cycle time from order entry to quality product delivery to the customers and establishing operational metrics based on best-in-class comparisons as his first assignment.

And with that I’d like to give Ed an opportunity to introduce himself to you and if you care to say a few words, Ed, please go ahead.

Edward A. Wagner

It’s certainly a pleasure for me to attend this meeting this afternoon. Obviously, the opportunity that I have in the global operations role coming into Key at this point where the past nine quarters have been successfully successful that there’s great momentum in the company. And having been here all of 8.5 days now, what I’ve been particularly encouraged about is there’s a tremendous infrastructure already within the organization that’s driving for a lot of the lean manufacturing and the cost efficiencies that I hope to bring to bear in our global strategy.

There’s a great professional staff here and as you can tell from some of Jack’s numbers that the gross margin continues to creep up in the right direction that my mentality in running the operational side is to continue to focus on gross margins and improve the effectiveness of the overall organization. So for me personally I’m very excited to be here. We’re jumping in with both feet; we’re not waiting around and we really look forward to continuing these exciting movement in the positive directions. So once again, David, thank you and it’s a pleasure to be with Key.

David M. Camp Ph.D.

Thank you, Ed, and please stick around. These people on the phone may just ask you a question because there’s none of them that are shy here so if you would stay with us for a little while, I’d appreciate it.

Edward A. Wagner

Absolutely my pleasure.

David M. Camp Ph.D.

We will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Robert Damron – 21^st Century Equity Research.

Robert Damron – 21^st Century Equity Research

First, on the, I guess, the backlog versus the sales that were just reported this past quarter. It looks like the backlog is heavily weighted toward the automated inspection systems or more heavily weighted than what we saw in the third quarter sales. So should that translate further into higher gross margins as we look into Q4?

John J. Ehren

I would say with regards to Q4 for a year predictions I would use a margin net as consistent with what our year-to-date margins have done.

Robert Damron – 21^st Century Equity Research

The backlog on the year-over-year basis looks still very strong but just down slightly sequentially. Is there any seasonality that we should be aware of as we look into Q4?

David M. Camp Ph.D.

When we had such a large increase in orders in Q2, we obviously cannot predict when we’re going to get the orders and our sales team brought in very strong orders in Q2 and some of those we had originally thought were going to come in Q3. So with such a large amount of bookings that we ended up with I believe the number was $39 million of new bookings in Q2. We expected that there was going to be some fall off in Q3 because some of those orders we originally had thought were going to be in Q3.

The real question I think you’re asking is do we think we see a trend here and the answer is no. We fully expected that we were going to have some falloff after such a strong quarter going back into Q2 and I think we did everything we could to suggest that the backlog we had, which was $47 million in Q2, was not all going to ship in Q3 and which was the case and some of that is going to be shipping Q4 so we’re working that down. Actually, we tried I believe to make it clear we didn’t like to have it quite as big as it was when it was $47 million at the end of Q2 so at this point in time we’re pretty much tracking where we expected it to go and we don’t see a structural change in terms of new orders for the business.

Question, Rob?

Robert Damron – 21^st Century Equity Research

Yes, just one other question. You mentioned the sales commissions, outside sales reps was a higher percentage versus the direct employee. What was that percentage and then do you also anticipate that to continue moving higher?

John J. Ehren

First of all, we won’t disclose what those percentages are but we expect the future to be consistent with what we’ve experienced in this past quarter.

David M. Camp Ph.D.

Let me just go into that a little bit. One of the things that has gone in is we’ve continued to grow our business. We can’t always predict where the new orders or what areas the new order’s going to come from. As it turns out we’ve had significant growth particularly in Latin America which we have quite a few commission sales reps. We’ve had a lot of growth recently in Eastern and Southern Europe where we have some commissioned sales reps and we’ve had good growth in a couple various North America. So we have actually seen this year a shift towards more of the commissions coming from the outside reps and I have to go along with what Jack said, I think that the numbers we’re looking at right now we believe is pretty consistent with what we’ve just seen in the third quarter.

Operator

Your next question comes from James Ricchiuti – Needham & Company.

James Ricchiuti – Needham & Company

The quarter that you just put out, it’s a bit of deceleration in terms of revenue growth although still pretty healthy but I’m just wondering, in light of the overall economic environment, have you seen any slowing or customers that have maybe asked you to delay any shipments or anything along those lines?

David M. Camp Ph.D.

Let me address the second point first. We have had no requests, I wish John Boutsikaris here but we’ve had no requests that I’m aware of, of any requests to delay any of the shipments that we have had. In terms of what you actually saw, when you’re doing these types of press releases, Jim, there’s things that don’t show up in them. We actually had, we did $35.8 million which is a record sales quarter for us.

There were actually some things that were still on the table that we were not able to recognize for a number of reasons that are going to be recognized in the future. We [inaudible] and a number of other things that ended up occurring. Our finished goods went up at the end of the quarter. I wouldn’t take, I’ll call that slowing of the growth as an indicator at this point in time. It really had to do more with timing than anything else.

Jack, do you want to comment on that?

John J. Ehren

No, there were two significant orders at the end of the quarter that production had completed and that for various business reasons we did not ship and recognize the revenues associated with those.

James Ricchiuti – Needham & Company

And these are orders that you’ll ship and recognize revenues in the current quarter?

David M. Camp Ph.D.

They’ve already shipped and the revenue’s been recognize.

James Ricchiuti – Needham & Company

I wonder if you could give us a little color on how Symetix is going, what the demand is and if it’s possible if you can break that out from your revenues in the quarter?

David M. Camp Ph.D.

Jack.

John J. Ehren

Well, first of all on the revenue side we don’t disclose what those numbers are specifically but it’s still a small part of our business. You’re still in the 3% to 5% part of our business from a revenue perspective. The funnel and the opportunities continue to be very strong and we’re very optimistic and we continue to make significant investments from a research and development perspective because of our confidence in this business.

James Ricchiuti – Needham & Company

And in terms of your order intake for Symetix, is there anything unusual this quarter versus prior quarters? I’m just trying to get a sense as to how the product is being viewed right now in the market.

John J. Ehren

From an order standpoint there’s nothing significant. Again, the numbers from an order standpoint are again in that 3% to 5% of our business and it’s a scenario that we’re trying to focus on and grow.

James Ricchiuti – Needham & Company

Last question. I wonder if you could just maybe shed a little bit more light, help us a little more with how we should view your operating expense going forward. Wasn’t sure if your comments with respect to operating expense, if you’re suggesting that we won’t see a significant increase sequentially in your operating expense this quarter. Is that correct?

John J. Ehren

I would not say that you will not see an increase in the operating expenses in the next quarter. There’s several factors that we’re looking at but I would say you can see the current run rate in Q3 consistent and you may see some increase.

James Ricchiuti – Needham & Company

Dave, maybe you could help us as we think about the company over the next couple of years. As you’re building out this infrastructure, can you give us a sense with the infrastructure you’re putting in place what kind of revenue base that could support?

David M. Camp Ph.D.

Nice question. I’ve got to think about exactly how to try and answer that one. There’s several things that are going on. As you know, Jim, what we have done is we have built the R&D introduction rate that is much different than has ever occurred at Key in the past so one of the things we are trying to do is to have new and exciting and innovative products on a very frequent basis coming out to the marketplace. We have objectives and we are not there yet but we would like to see a very high percentage of our annual sales to be products that we have introduced within the last three years to the marketplace, without getting into those specific numbers.

So a lot of the products that we have now hopefully we are going to be able to come up with better, more creative, more productive and valuable products to our customers so part of the answer to your question is we believe that if weren’t, let me put it this way, we would not be spending the kind of money that we’re spending for R&D and coming out with these new products if we believed that we were going to have a GMP or anything close to a GMP growth for a business like ours.

We’re anticipating that we will continue to grow at multiples of GMP for a considerable period of time because frankly, with the amount of export business that we have with the lack of penetration that currently exists in the Fresh-Cut industry, with the lack of penetration that exists in the pharmaceutical area, with the opportunities that we see in places like Latin America, we believe that there is significant overall growth to the total business here at Key.

One of the reasons that we actually brought Ed in here was we wanted to have a global strategy for operations. We didn’t feel like we had one and as we see our business growing we want Ed really come back to us and say here’s how we can supply a global business. So without getting into a specific set of numbers, Jim, we believe that there’s a lot of legs left. We don’t believe that this is a slow growth business for some time in the future.

I’m trying really hard not to give you a number, obviously.

James Ricchiuti – Needham & Company

You’ve succeeded.

Operator

Your next question comes from Martin L. Yokosawa – Oberweis Asset Management.

Martin L. Yokosawa – Oberweis Asset Management

I’m just going to try to press a little further. In one of your earlier statements says you’ll have record revenues which means to me you’re going to beat the $108 million last year and you’re at $93 million right now. Was that comment just, say, “I’m going to go over $108 million,” or do you think you’re going to have sequential growth in a in the quarter?

David M. Camp Ph.D.

We will significantly beat the $108 million.

Martin L. Yokosawa – Oberweis Asset Management

Will you have sequential growth in the fourth quarter?

John J. Ehren

I’ll tell you this that a significant portion of the backlog at the end of the third quarter relates to product we expect to ship in the third quarter. In the fourth quarter, I’m sorry.

Martin L. Yokosawa – Oberweis Asset Management

Yes, that’s consistent with what you said before.

David M. Camp Ph.D.

I think that should tell you a lot.

Operator

Your next question is from Allyn Seymour – Columbia Management.

Allyn Seymour – Columbia Management

In Rick’s absence, I am filling in. Two questions, if I might. One is can you give us an update on your success or what you’re thinking about in the pharmaceutical side of things and the second question is since you opened it up for Ed, maybe Ed could talk about what he sees as the challenges related to the comments that David talked about in terms of not knowing exactly the mix of your business in terms of the operations and the manufacturing side of your business.

David M. Camp Ph.D.

Let me address the pharmaceutical piece. We’ve now been in the pharmaceutical business for the past three years. We clearly are seeing a traction being gained in this marketplace and we have had great success with new sales this year. About a month ago, six weeks ago, we made a commitment to go ahead to the next generation of products in Symetix with the intent of getting that next generation of products out in this next fiscal year and we would not have made that commitment unless we strong believe we were going to get superior returns from the expense associated with that.

So Symetix clearly is having an impact in the marketplace. Every time we have had discussions with the customers we know that we’re making the kind of progress and we’re making the closes that are necessary to grow the business but we also think we can see far enough out that we’ve got a very clear vision as to what it’s going to take to go to the next set of levels in this industry.

And let me just talk a little bit about that for a moment. When we first started getting into Symetix I would say we had a pretty low threshold in terms of where we though the business was going to grow. We weren’t exactly sure how big it was going to be. The team that is in Symetix right now has done an outstanding job of putting together a true, really superior product in terms of the strategy and we believe that the strategy they’re on is going to make them a significant part of Key’s business as we go forward.

Now you might say, “Well, how long is that going to take?” I think that in the next three to five years it’s going to be a very significant part of our business and very significant meaning certainly in excess of 10% without going into what those numbers are going to be but it will be a big part of our business as we look forward.

So with that I’ll turn it over to you, Ed.

Edward A. Wagner

Yes. Your question’s a well found question. Oftentimes when you start in a new company you see a lot of low hanging fruit. I wouldn’t say there’s a lot of low hanging fruit but I think there is an opportunity in this business to have a slight model shift and one of the areas that I’ve focused on a lot this week is trying to understand the mix of products relative to Shaker relative to Sorters and relative to the Symetix product line.

And one of the real opportunistic areas for cost reductions and manufacturing efficiencies is in the Sorter business and the Symetix side is that those products are based more on a common platform where you have a better opportunity for comparable control as opposed to a lot of custom work, which is more relative to the Shaker business.

Having said that I think that we also have some opportunities in the Shaker area which is highly customized to drive some standard products or some repetitive design manufacturing so I think that is probably going to be one of the biggest nuggets for us going forward. It gives us a real opportunity on the gross margin line to see some sequential improvements so I’m pretty dialed in on that as a main focus after eight days of being here of moving forward.

And that also lends itself very nicely to global manufacturing strategies that, as the company evolves and our opportunities present themselves, will give us those situations where we can even achieve better cost effective manufacturing opportunities.

Operator

Your next question is from Ephraim Fields – Clarus Capital Management, LLC.

Ephraim Fields – Clarus Capital Management, LLC

I just had a followup question about the ERP system. Can you give us a sense for how much you spent in last quarter on that system?

John J. Ehren

With regards to the ERP system, on a year-to-date basis there’s been $845,000 that has hit the P&L and an additional $1.2 million that has been capitalized. For the quarter we had $291,000 or close to $300,000 that hit the expense and about $625,000 that had been capitalized.

Ephraim Fields – Clarus Capital Management, LLC

I’m sorry. You said you had about $300,000 this quarter?

John J. Ehren

About $291,000 this quarter of expense and $625,000 of capitalized costs for the quarter and for the year it was $845,000 of expense and $1.2 million of capitalized cost.

Ephraim Fields – Clarus Capital Management, LLC

So as we’re all trying to look at to next year and trying to understand your cost structure better, is it safe to say that the $800,000 that you spent year-to-date as well as whatever you’re going to need to spend for Q4, you’re not going to be spending as much next quarter?

David M. Camp Ph.D.

That’s two questions. One was about next year and the second question is about next quarter.

John J. Ehren

Next quarter our spend rate on expenses will be fairly consistent. However, there will be certain aspects that we’re now getting into with the system that become capitalized. So there are certain areas that our company had individuals working on that were expense type related but as you start getting into certain capitalizable amounts as we progress through the system implementation you’ll see some of those costs being capitalized versus expensed.

David M. Camp Ph.D.

I think the question you’re going down, Ephraim, is do we believe that we’ll be able to see lesser expenses in ERP in 2009 to what we’ve experienced in 2008 and that is our plan. We know that it was an expensive pursuit and it is an expensive pursuit. It’s been very hard; the people have been worked extremely long and hard hours to make this thing happen but we do see an end to it so I appreciate your question very much.

Ephraim Fields – Clarus Capital Management, LLC

I’m not questioning the amount that you’re spending. If I could just –

John J. Ehren

I will add that once we go live with the system we start to amortize those capitalized costs.

Ephraim Fields – Clarus Capital Management, LLC

Right but things like that hit you about $0.03 this quarter and maybe as much as $0.09 on a year-to-date basis if my back-of-the-envelope math is correct and that seems like non-recurring expenses.

John J. Ehren

Well, we’ll continue to have expenses again over the next couple of quarters but then I said as once we go live, we’ll actually have to start amortizing all the capitalized cost.

Ephraim Fields – Clarus Capital Management, LLC

And final question just has to do with, I’m sorry, the question’s been answered.

Operator

Your next question is from Brian G. Rafn – Morgan Dempsey Capital Management, LLC.

Brian G. Rafn – Morgan Dempsey Capital Management, LLC

Question for you. You talked about developing more of your sales dollar content from new products over the last three years. Can you give me a sense of the cycle time from the standpoint of engineering design, prototyping and launching? If more and more new products become part of the sales revenue growth, can you give us a sense over the last couple years to what you’re looking at, how you’re going to compress some of that cycle time?

David M. Camp Ph.D.

Brian, we’ve done a lot in terms of reducing debt cycle time. The products that we’ve introduced this year and I don’t want to say that everything’s worked perfectly but we have been introducing products this year to the market with a cycle time of under a year’s time. The Manta product roughly had nine months. The Pulse Scrubber I believe it had about between six and nine months. The fluo laser that we introduced about a year ago was about a four or five month period.

One of the things that we have done as a business is we are getting products to the marketplace much faster than Key had done previously. The other piece to this is we have developed a technology roadmap for our four primary businesses and we’ve actually got that roadmap now going out three years. So what we have done is we’ve looked at what of those products that we intend to take to the marketplace in the next three year and what is the impact we believe that they’re going to have in that period of time. Our belief is that by doing this some of the products that we currently have, our Legacy products, we will be using product line management and taking them out of our existing profile and will be replacing them with new products that offer more productivity and value to our customers.

This focus and set of priorities is fairly new for Key and one of the things we’re trying to basically do is to use this methodology and use this set of processes to continue to pleasantly surprise our customers and our marketplace by the things that they really want to see. So it’s a clear strategy on our part to use technology and to use innovation as a way to continue to grow and to energize our marketplace.

Brian G. Rafn – Morgan Dempsey Capital Management, LLC

From the standpoint of the automated inspection of your processor segments, do you get a sense with your package food OEMs or agricultural customers that there’s more of an incremental demand from capacity expansion or is it just productivity and flow speeds and volume?

David M. Camp Ph.D.

Well, the easy answer for that is yes but there’s several things going on. The issue on product quality, in fact, we had a meeting on product quality the other day. The issue on our customer’s product quality continues to raise the bar in terms of what their expectations are that they’re delivering to their customers. So we are always finding that our customers are looking for a better way to deliver high quality products in a very short amount of time to their customers. So that is a big issue.

Shelf life is a big issue. If we can get high quality, good sorts to our customers in a very short amount of time in which they’re able to increase the amount of shelf life that they have with their products, that continues to be a big issue. The other thing is the issue on labor productivity. A lot of our customers can not find the labor anymore to do the work that they used to do by hand because the people have gone to, some of the people in Latin America have come to North America. The people in Eastern Europe have gone to Western Europe. The people in the middle of China have gone to Eastern China. There has been a big migration from these labor intensive industries to people that are doing other things.

So we find a lot of reasons as to why people continue to buy our products. Now the issue that you’re raising regarding capacity, does it happen? Absolutely. We do find that we are getting yardage in our Manta product because people are looking for higher capacity but the Manta also provides attribute that they didn’t have on other products, such as it’s easier to clean than some of the past products. It’s easier to maintain, it has better up time. So you get more capacity and you get better features as well. So there’s no question that we see that the Manta’s going to have a lot of legs and be a good product for us.

There’s a lot of reasons why we’re very enthusiastic about our marketplace and one of the reasons is frankly that there is many reasons why people buy from us. Customer service is a big issue; we’re the only competitor to provide the kind of the customer service that we do on a global basis. So the real answer to your question is we’re succeeding because we bring the entire portfolio to the marketplace.

Brian G. Rafn – Morgan Dempsey Capital Management, LLC

What are you guys seeing from the standpoint everybody’s commented on at various industries on materials inflation be it steel, aluminum, housings, rebar, whatever you guys use in your bending and welding operations for these machines. What are you guys seeing year-to-date:?

John J. Ehren

Well, with regards to stainless steel, you’ve got to take into account, you’ve got to remember there’s a difference between carbon steel and stainless steel and there’s several variations of stainless steel with different combinations of alloys. The particular variation of stainless steel that we use is heavily concentrated with nickel and chrome and nickel has been on a steady decline since the beginning of this calendar year. So right now we see a decline currently with regards to steel prices.

Brian G. Rafn – Morgan Dempsey Capital Management, LLC

On your export business, you guys certainly talk about Latin America. Is there any boost from the standpoint of exporting to Europe given the strength of the Euro?

David M. Camp Ph.D.

Well, we’ve been enjoying that for quite some time. There’s no question that a lot of our competitors are in Europe and the very weak dollar has helped us being able to export into Europe and we think that that’s actually worked to our advantage. So we do follow what our competitors are doing and we find that the weak dollar has really helped anybody that is a major exporter like we are from the United States. And it’s not just against the Euro but it really has helped us quite a bit into the European Union.

Operator

Your last question is from Elliott [Blonde] – RBC Wealth Management.

Elliott [Blonde] – RBC Wealth Management

On the employees, since we’re doing a fair amount of contract sales, what’s been the pace of hiring of new employees and how do we expect to end the year head count wise, both in sales and service and such?

David M. Camp Ph.D.

I don’t know if I’ve got that data here in front of me, Elliott, I’ll see if I can, I think that we, someone’s writing me a note right now. In terms of actual adds to the business in this fiscal year, we’ve added over 100 people but I don’t know the breakdown between the direct labor and the indirect labor. We’ve actually not had a lot of problems in terms of hiring. I guess the weakness in the overall U.S. economy has made it easier for us to hire but basically we had some concerns coming into this year, would we be able to add enough talent to the business and we really haven’t had a great deal of constraints in terms of doing that.

But in terms of what the overall numbers are, I’m going to have to look around. I think we’ve got about 560, 580 people. Is that about right? Okay, I just got advised it’s right at 600 people in the company now.

Elliott [Blonde] – RBC Wealth Management

Were there any areas of particular geographical strength and conversely, are you seeing anything on a little bit of the economic slowdown. They’re getting a little weaker than you anticipated?

David M. Camp Ph.D.

Well, let me try and handle that. We are very pleased at the growth rate of Latin America this year. It’s exceeded our plan; it exceeded our expectations. There’s a whole host of reasons as to why it’s working. We’ve just been very, very successful both in Mexico and the rest of South America. The area has really [inaudible] a lot of reasons. The sales team down there. We’ve got a tremendous applications person in Mexico but the revenue and the orders continue to come in from Latin America and exceed our plans.

We’re also continuing to have, last year was a softer year for us in Europe. We’ve had a significant growth in Europe this year over where it was a year ago. Just one second, somebody’s asking me something. So we’ve had real strong growth in Europe and also here in the U.S. and in Canada. The area that I would say we’re a little disappointed in is our business in China just has not developed at the rate which we were hoping it was going to develop.

China’s a tough nut; it really is. You’ve got to have the right products. You’ve got to demonstrate that you’re willing to compete hard. You’ve got to be consistent. It just has not developed at the rate which we were thinking it might. It doesn’t mean we’re giving up on it; we’re trying a few other things but if there’s an area that we’re a little more cautious on, the development in China is causing us some levels of concern.

Elliott [Blonde] – RBC Wealth Management

My last question is, this last question is the buyback still in order and is there any thoughts on use of cash?

David M. Camp Ph.D.

You must have been listening to our [inaudible] this morning. I would say that that’s an ongoing discussion and I don’t know if I can comment as to what decision has been made at this point in time.

Operator

There are no further questions in queue.

David M. Camp Ph.D.

Well, once again we believe our strategy’s working. We’re very pleased at the continued growth that we’ve got. I’d also like to comment that the team that we’ve got in place now really feels like it’s coming together. We’ve added some tremendous talent to the business in the last year and frankly I believe our positioning going forward is much firmer and we can see a great deal of opportunities in front of us. So I’m very enthusiastic; I know the team’s enthusiastic. I talked recently with Ed. I know Ed would not have joined us if he didn’t believe in the future of the business so I thank you all for the confidence that you’ve given to us and the support that you’ve shown us and we look forward to speaking to you in another quarter.

John J. Ehren

Thank you.

David M. Camp Ph.D.

Thank you all.

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