Key Technology, Inc. (KTEC)

Singular Research's Annual "Best of the Uncovereds" Conference Presentation

September 4, 2008 8:30 am ET

Executives

Joe Lambert – Director of Marketing, Singular Research

Robert Maltbie – Managing Director, Singular Research

David Camp – President and CEO

Jack Ehren – SVP and CFO

Analysts

Arby [ph] – RWA Fund [ph]

Presentation

Joe Lambert

My name is Joe Lambert with Singular Research. Welcome to our conference, the Best of the Uncovereds 2008. I would like to go over a few details before we start our presentation. We have an exciting day planed today, we have the whole day and we are excited that you are here to join us. I would like to mention that there are two audiences; there is the live audience here in the room and then there is also a webcast audience that is out there as well and again we are excited to be here in New York City at The Westin Times Square.

What you see on the screen right now is the schedule for today. For our webcast individuals you can see what’s going to contain. We are going to be opening remarks from now until about 8.30 and then we will start our first presentation with Key Technology and I’ll introduce them shortly.

We would not be able to have this conference today if it weren’t for the sponsors that we have and we would like to thank our sponsors Vandham Securities, (AFA) Advanced Financial Applications, Seeking Alpha and Divine Capital Markets and we would like to thank them.

I would like to mention that at the end of the day Vandham Securities has kindly sponsored the cocktail hours and we have a special announcement to make regarding that. Those people who shows up at the cocktail hour -- unfortunately webcast people you won’t be able to show up at the cocktail hour; but if those people show up we will have a special drawing at those people at the cocktail hour to be able to give a six month platinum subscription to Singular Research. That being the case I would like to thank our sponsors once again and throughout the day we will be talking about the various sponsors and what they do.

The first sponsor I would like to mention is Vandham Securities. They actually provide trading services for institutional money managers and we will talk about more of them in detail at the cocktail party there at that time. Advanced Financial Applications has built a continuous and enhanced the integrated work flow solutions IMPACT Pro, which appropriates AMS, DMA and light OMS functionality into one seamless application. This creates steam line work flow for the user saving both time and money; in fact pro also facilitates straight through processing from unlimited fixed compatible source of connection to unlimited fixed compatible destination. Currently impact growth support U.S. equities and options as well as major market of Europe, Asia and Canada; in fact pro incorporates true front-end and backend brokerage mutual compatibility.

The transcript of today’s broadcast is done by Seeking Alpha, so if you would like to actually go into their website and they have an extensive blog and they will transcribe all the presentations that you will be hearing today, another one of our sponsors. The other one is Divine Capital and they will actually have a presentation at noon during lunch hour. Okay, so those are some of the sponsor announcements. Once again thank you for joining us.

Before I introduce our managing directors and Founder Robert Maltbie I would like to tell you a little bit about Singular Research. We have the piece here of why Singular Research? Our sub-caption kind of describes very well what we do. We focus on research providing any kind of research on company that have little or no analyst coverage. When we talked about unbiased performance based research, what we are talking about here is, we don’t have any conflicts from investment banking, we don’t have conflicts from paid for research by companies. Our clients are money manager that subscribed to our service.

We look for companies and finding value in undiscovered or a very little or no analyst coverage. We have results that have been significant over time period, since our inception August of ’04. Our list is up 170% versus the Russell 2000, which is up 29% in that same time period.

One of our philosophies in our mission statement is to free up our analysts to pursue their best ideas and we think that when you do that and you have unbiased research, you don’t have anybody who is going to tell you what to do, you get results and these are the results. We are very proud of the track record and many research firms will not publish what their results are but we are very proud of ours and we actually do publish our results and track that on a regular basis.

The history of Singular Research is that it kind of came out like the idea that many of us who are involved as shareholders in it were very disappointed by the research that has been out or by Wall Street and we would find that once a very good report would come out and we though that we had a good idea. You’ll have to dig a lot deeper to find our that there was certain conflicts of why an analyst might be writing a report and so what we did is we said “is there a model that we can do in our business models to be able to have Singular Research, a company to provide research that doesn’t have those conflicts and our clients can have confidents that we are writing reports because we believe and have a conviction in a particular stock that we have a buy recommendation on.” We also have 80% of names on our buy recommendation list 20% our sort ideas as well.

We have an experienced staff of analyst. Over 10 years of experience on average for each analyst, so we are talking about senior analysts and we have a couple of them here today. At this point in time what I’d like to do is I’d like to introduce our Founding and Managing Director. Robert Murphy has been in the business for over 25 years of managing money and founded Singular Research in August of ‘04. He is a Charted Financial Analyst. He’s been featured on Blumberg, Barren. He’s been featured on Fox Business news. In fact today Robert Murphy is going to be on Fox and Blumberg, is that right Robert on both venues there. What I would like to do now is introduce Robert Murphy our Managing Director and CFA.

Robert Maltbie

Thanks Joe thank you very much. Thanks for leaving me three minutes to talk here. Thanks so much for coming and thank you for your support of the existing clients and we hope to thank you next year for your support.

So, we are still standing after four years and in this cold environment they told us subscription based research does not work, its got to be investment banking driven and we are here to testify that we are hanging in and we think business is good and there is a real place for a taller business model. Successful unbiased ideas driven by independence thinking, combining smart people with an opportunity and the right business model, performance based research and I think the results speak for themselves.

So we feel the model is really what’s important here and what’s working. A lot of what we do our stream, our processes we drawn from fewer clients and suggestions, we are always open the suggestions. I got an interesting call from a client, we haven’t heard from it for three years, we are doing a subscription and he said, how can you put that type of research out, that’s honorable? I said what are you are talking abut, I said we are looking for report, and sure enough in the report the analyst had reinitiating coverage of the used the old balance sheets that was on it so I said well we will Dick have you ever noticed this before and the good news is he said no, but we are responsive to any suggestions and that’s the way how we grow things here at Singular Research.

So our track record as Joe, mentioned again grow front about 170% versus our 45% we’ve also wants to be the most trusted independent source of performance base and research and we hope to achieve that on an ongoing basis. So, without further due we’ve got some great ideas, our top ideas from fabulous finance teacher presenting today and what we feel is great investment opportunity as well so everybody have a great conference as I look forward to meet each one of you, bye.

Joe Lambert

Bear with me for just one moment there as we reset to begin the other presentation. Tammy is our technical expertise at WebEx. Tammy I’m trying to get back to.

Tammy

To the conference viewer where the presentation is with.

Joe Lambert

Thanks correct.

Tammy

Okay, go ahead and hit escape.

Joe Lambert

Got it?

Tammy

Go ahead and click on the door.

Joe Lambert

Here we go, okay. I’m sorry for the technical difficulty here for one moment. Okay, at this point in time. Tammy what are you seeing on the screen?

Tammy

Lost support.

Joe Lambert

Okay, give me just a moment and I will get back to it. Our first company and presentation today is Key Technology and just to tell you a little about what’s Key Technologies does. They are buy recommendation by Singular Research. The company designs and manufacturer process automation system for food, pharmaceutical and nutraceutical industries.

We have a buy recommendation on the stock, our analyst has a price targeted $47. I might mention that our analyst will not pick up the stock unless they believe that the stock has a 30% of greater appreciation potential in the next six to 12 months. So a Key Technology, our presenters today are David Camp, President and CEO and Jack Ehren the Senior Vice President and CFO of Key Technologies.

First off with David, he is a worldwide as leader in designing and manufacturing process automation systems for food and pharmaceutical markets that’s Key Technology. He has over 25-years of Senior Management experience in global technology and high-tech manufacturing business.

David is a graduate of General Electrics Management Training Program and holds a PhD and MS degrees in Chemical Engineering from Massachusetts Institute of Technology, MIT sorry for the thong twister there. Jack Ehren is Senior Vice President and CFO of Key Technology’s he has over 20 years experience with public and private high tech manufacturing international companies where he has held several senior financial and operational officer roles. He holds MS degree in Finance and Accounting

Okay, with that I would like to turn it over to David Camp, Key Technology. Go ahead David.

David Camp

Thank you. Good morning to Joe, Robert and all of you who are participating in the conference. Next slide pleased, we are very pleased to be participating in this morning "Best of the Uncovereds" Conference and we hope that this brief interdiction will allow many of you to meet with Jack and myself sometime in the future.

Next slide please, this is just the typical Safe Harbor statements that are largest requires us to have in any of our presentations and I am not going to go though all the words, I’m sure may of you have seen this and understand exactly what it means.

Next slide please.

Joe Lambert

Bear with me for a moment its not advancing. Excuse us one second. Tammy, if I hit the recording button it kind of throws up the system here.

Tammy

So you are not able to click on the slide.

Joe Lambert

Thanks right, not advancing.

Tammy

You might try exiting the desktop share and then go back in.

Joe Lambert

Okay. Apologize, David and Jack will be right back technical difficulties here. Okay, David carryon.

David Camp

Need to be able to see that slid a little bit better please Joe.

Joe Lambert

Okay

David Camp

That’s fine, perfect. Key Technology was formed in 1948 by the Key brothers. We are now an international leader in the design and manufacturing of all process automation systems for food processing, pharmaceutical, nutraceutical and industrial market. Our leader position is really built on continues innovation and advance technology. We strive to develop solution that our marketplaces around the world require our need.

We have a very strong commitment to the customer care and global service. We provide global sales and service coverage and I’m going to share you a little more detail about that. We are not the cheapest or the lease expenses offering in the marketplace. We provide premium value for premium price segment of our customers and review this because of the services and the after market that we provide.

Can we go to the next slide please?

Joe Lambert

Now for some reason it is freezing up again. Okay just delayed a little bit.

David Camp

We had manufacturing site in the State of Washington, Oregon and in the Netherlands. Additionally, we have sales and services offices in Mexico, China and Australia and we have service teams located in all of the countries that are colored in yellow on this global map.

Next slide please. In this slide you could see the countries where we have over 20,000 installations of our equipment and that we continue to service at this time.

Next slide please. We have a very broad based of established customers and as you can see from the last slide it’s on a global scale. Some of our customers are names that you heard off and they view have seen in your grocery stores.

Customers like Del Monte, Ocean Spray, Ore-Ida, Sinica as well as many that you have not heard off. We have over 27,000 processes around the world, it would including many of the multinational and fortune five hundred that are in many of the different applications include providers that are very common to all of you. We have equipment installations currently in 73 countries and approximately half of our mix is international and half of is still sold to companies in the United States.

Next slide please. We provide a very broad market needs. Joe can you click on that upper

Joe Lambert

There you go.

David Camp

Okay, thank you. What you’re seeing here is the way that food processing and sorting has been done in the past, typical done by hand and as you may fully understand a lot of this is very expensive and also very hard to do because people really cannot provide the consistency that equipment can provide, can you click on the lower slide please, to the lower photograph.

Great, what you are seeing is our equipment in use in many different applications, in this particular application its French fries. What we do, is we improve safety and security for our customer’s product. I’m not sure, if you can really see this, that was just a sort of in French fries and now you have more of our processing equipment in another French fry application, we’ll go beyond French fries. We increased quality and consistency for our customer’s requirements. We’ve reduced operating costs through significant labor reductions.

We optimized processing yields, what you are seeing here and I’m not sure how well is coming into cost, its there is ease in an application at one of our customers. We significantly increased the profits controlled to maximize planning, what you are seeing here is he is keys going through one of our sorters and hopefully you will be able to see on the next frame where the actual sorting is occurring. It is actually about 0.4 second difference from the time when we do the inspections, where we actually do the sorting. This is the rejected pieces coming out of that sorter and the products that would not be going to the customers.

I believe this next slide is little bit slower that what I though it was going to be on your, this is a raisin application. There are raisins coming from a filed that would be, and here the good raisins coming out of the sorter and the next segment of the things that have been rejected from the same application.

This one I believe is potato chips another one of our application. As you can see we have a very wide variety of customers that use our equipment. What the potato chip manufacture will be doing is he would like to remove those potato chips that are over coked or may be have wrong the color to them, sometimes it may be even a shape issue. This is the rejection of the potato chip and these will be the good potato chips that the customer wants.

You might wonder where is all this. I mean this is all over the world, it’s people that are using potato chips or making potato chips on a very global bases. I believe this one is actually a little hard to see with its done, I believe this is a green bean applications and you can see the green beans coming and we are basically are taking the green beans and continuing to add value to them by removing those foreign objects or materials or the missed cuts that you really don’t want to have in the food that will be coming into your homes.

All of the equipments that you are seeing is that equipment that we are providing into the processes around the world, if you can go to the next slide please.

What is our strategy? We have a very large customer base. First, most important part of our strategy is to grow and protect that core business, because these processes depend on us to be able to manufacturer and to shift the quality products that they have.

We have a strategic industry focus. We are focused on four basic and very important industries. Fresh-cut this is things that have a base stamp, things like lettuce and spinage that come out of the fields, that go into that grosser stores and things like bagged salads. Potato which is French fries, potato chips those kinds of products. Processed foods and goods these are products that are green beans, corn many different application around the world including dehydrated products.

In pharmaceutical and nutraceutical are a new venture for us starting about three years ago its growing very rapidly into the pharmaceutical and nutraceutical small scale industry. We have a geographic market development, I’ll spend a little more time on that in just a second. Basically we are committed to certain developmental areas Eastern Europe, Latin America, Asia, Australia, Africa and the Middle East.

We look at our core areas as essentially being North America and Western Europe and so we are focusing on quite a bit of geographic market development and finally and very importantly, we’re investing over $8 million a year annually in research based on market driven technology roadmap. What we are doing this year is we are going to be introducing three to four new products this year we will probably be doing the same thing next year and we’ll use that to bring new solutions that improves the quality and the productivity of our customers. Finally, we will identify and acquire strategic growth opportunities in businesses. This doesn’t mean necessarily we will be acquiring the business, but we may be acquiring technologies that will allow us to grow our strategy.

So, if we could go to next slide please. Well this didn’t come out quite the way that we were expecting it was going to come out essentially what this was supposed to say, was that we have a develop marketplace, which shows that there is a served area between $200 million to $250 million and this is essentially U.S. and Western Europe and the total market is between 300 and 400.

The Eastern Europe was the developing area, Eastern Europe, Latin, Asia, Australia and Africa is still not served very well because most probably this is still very manual. You can see that this hand is much larger and if you look at the total world, we see that the total available market for the kind of products that we’re providing is very large, its between $1.5 billion and $2 billion and the total serviced by us and our competitors at this point time is between $350 million to $400 million. So, we believe that considerable growth available on our global basis for the type of products that we’re providing to the marketplace.

Next slide please, and if you click on the slide. Perfect, I think that should work. What you see in here is what we call automated inspection systems. We use the number of different technologies; we use CCD cameras, lasers, X-ray to basically look at the different characteristics of the products that we are inspecting and examining and they are moving the core materials dependence from.

This is a form of quality monitoring that is virtually impossible to do by hand. No human being can do the kind of visual inspection and product criteria inspection that we are doing at the speed that we are doing it in. We have very wide application not only, most of this your seen is food, but we also have applications in food, tobacco and plastics and we’re now over 2500 of these systems operating on a global basis. I’m trying to look right now and I believe that’s the, keep going I believe that’s continue to move or that may begin to the video there.

Okay, turn to the next slide please. We also convey materials. A very large portion of our businesses is about 35% to 38% of our business what we call process system, its one of our core technologies and it’s an area that we continue to excel closer to our competition. We use a number of a different motion technologies both vibratory and rotary motion to move products through the processing factories that our customers have.

We convey, we distribute, we transfer believe what you are looking at here is Dog Bone is an example. We align, we grade, we dewater, we clean, we dry, we have over 18,000 systems install and you can see that the very large variety of the equipment we provide to our processes. I believe this one popcorn just trying to give you an idea of some of the variety of that we actually we deal with and I’ll continue to let that roll. This is Apple sponsors, so we actually go to a very large variety of customers. This one is peanuts as I recall. You can see the different movement from one pieces of our processing equipment to another piece of processing equipment in one of our customer’s factory.

Aftermarket, if you look at the entire aftermarket business for us, we have replacement parts, which is about 15% plus or minus our total business. We have a very large aftermarket business, we have a call center that’s here to replace part for our customers because some of this equipment last very long-time though it is a large portion of business on annual basis. We actually do upgrade to our optical equipment and the first half of this year our revenues will be upgrades to some of the older optical equipment that is over $8 million.

We provide global repair services and services contracts. We have web based diagnostics, customer training and one of the things that our recent customer survey has found is that our global organization has a significant competitive advantage over the competitors that we do have. By the way, one of the things is very important is there are very few publicly traded companies they do what we do. We’re actually, one of the only one in the world that is publicly traded, the other competitors that we have are private companies mostly based in Europe.

If you could go to next slide, please. I did mention a while ago that we have new products. I think it’s important to talk about the new products that we’ve introduced in fiscal year 2008. Our customers said to us that they needed a high-capacity camera laser sorter; they would increase their productivity and lower their operating costs.

What we did this past year and actually this came out in early the spring, we developed a product that we called matter it meets the markets requirements for high-volume sorters in vegetables and the potato market. It is designed for safety, sanitation and serviceability and since this has been introduced in February of this year we now have eight of these at different customers for evaluation. So, we look at this the very successful introduction.

There is next slide, please. The way that we do a lot of what we do and this is somewhat of a cartoon, if you get click on this please it should continue to roll. What you’re seeing here under that yellow wail is a lighting system that provides lighting across the web and there is a camera above that that basically looks at both at this part and detect on a built. The light sends a signal to the camera and basically determines which part we want to keep. Sometimes you can see here removing the defect both either from a camera or a laser and the red line going back and forth the laser.

Essentially, what we do is we use both visual and laser systems to detect what’s good and what’s bad. The white bar a deflection system, it’s an air blast we have 256 values that remove the products that we don’t want in the desired product stream. This solution increases our customer productivity and quality and reduces manual labor, lower production cost and the combination of lasers and cameras add a censor to our portfolio assorting solutions that is that our customers had been responding to very well. So, we’re very pleased with this combination that has met the requirements of our customer base.

We’ll go to next slide please. This slide really shows quite a bit about what we do. This is, if you look on the very left-hand side, that’s a raisin with a stem and actually that stem is very hard to pick up by a camera, but what actually ends up happening is because that stem is harder and more dense than the raisins itself, we can train the lasers to look at that density as you can see in that middle slide, that would look like that the blue section on the middle slide, because we’re able to tune the lasers that way so, we’re able to remove even things such as stems from raisins from the product of our customer.

We’ll go to next slide, please. This past year, we also introduced a new what’s called Fluorescence-Sensing Laser that detects chlorophyll impression for the processed vegetables. Fresh and processed vegetables have many different types of procurements from bugs and sometimes even animals in the food unit now in the processed vegetables. These animals do not contain chlorophyll and it was necessary because of the needs for improving food quality, the prime ways to remove those things, those detects of foreign material that might contain pathogens or other material that could be hazards to human health and obviously many of these things are too small to be seen by the human eye. The Fluoro-laser allows us to detect chlorophyll and keep that product into process streams as the customer wants. If you go to the next slide, you can see some example there some screenshot.

On the left hand side there is a normal application of what a camera would see trying to look for some of these things and on the right side is the way it’s picked by the laser when its flouriest by the fluorescent laser and you can see how in this cases spinach is picked very green by the camera and you can see the other products that are not being picked up by the fluorescence. So, we are able to remove a host of different things, you can see feathers, crickets, wood, cardboards from the kind of things that you’d find in a typical agricultural field.

We’ll go to next slide, please. We also have a pharmaceutical line, an areas that we started three years ago and it’s growing very rapidly and receiving a great deal of market acceptance. This provides a lot of the same technology that we used in the agricultural areas, but now for the pharmaceutical and nutraceutical areas. We basically have an optical sorter for prescription and over-the-counter softgels and tablets. It detects and removes a lot of irregularities in size and shape for the softgels and very subtle color defects that essentially are required for the 21 CFR, 11 FDA requirements.

We have the first automatic diesel equipment that can be used that needs FDA certification for improving the product quality of pharmaceuticals and nutraceuticals products. It essentially replaces a traditional hand batch processing that lowest product costs and improves product quality. The OptyxSG/N can inspect up to a 1 million doses per hour. If we go to the next slide, the nutraceutical and pharmaceutical business started three years ago it was about $350,000 at that time and this year it’s going to approach $5 million business for us.

This is the new product that, we also introduce this year in the formation of softgels, we used mineral oil as a processing aid and up until now the mineral oil was actually removed by a very complicated end process. Earlier this year, we introduced the first and only continuous softgel polishing solution that removes the mineral oil from the softgels. This product has also seen very wide market acceptance and one of the reasons that we’re growing so rapidly this year in the pharmaceutical area is the customers are seeing this as a tremendous step forward in technology and improving the product quality of the softgel products. It requires no manual transfer from inspection to drying and basically fits slided inline with our SDN and STP products.

Could you go to next slide please, and with that I’m going to turn it over to Jack Ehren and he is going to talk about the financial results that we have recently.

Jack Ehren

Thank you, David. Key Technology’s fiscal year-ended September 30 and what I would like to do first is to review the annual result and highlight for fiscal year 2007. In 2007, our annual bookings were a $115 million, which was up 27.4% over 2006. Our revenues of $107.5 million were up 26.7% over 2006. In the year 2007, we generated $12.7 million in cash and as a result our stock price went from 12.78 at 9/30/2006 to over $30 by 9/30 of 2007.

For the annual fiscal year 2007, our net income was $7.4 million or 6.9% of sales and our return on equity was 16.2%. If you can look at the chart on the top right hand corner, you can see that the company over the last four, five years has been able to maintain consistent and sustainable growth from a bookings perspective.

Next slide. The highlights for the first nine months to fiscal year 2008, we had record nine months year-to-date bookings of $105 million, we’ve record nine months net sales of $93.9 million, in Q3 at an all-time quarterly record sales of $35.8 million. Our nine months year-to-date diluted earnings per share was $0.95. If you look at the chart on the lower right hand corner, you can see that we’ve had strong and increased gross margin. We’ve been very focus with regards to improving our internal processing as well as taking advantage of outsourcing where applicable.

Our market cap is approximately a $165 million based on a current stock price approximately $28. We have over $33 million in cash in a long-term debt on our financial statements. If you look at the chart on the upper right hand corner again you can see the sustainable growth both on the revenue and the booking and the backlog for the company look at the end of the third quarter with $42 million.

Next slide, as you can see from the balance sheet, we’re in a very strong financial position. Our current ratio includes current assets to $79 million compared to current liabilities of $31 million. As I mentioned previously, we have cash of over $33 million, we have no long-term debt on the books and again if you also look at the balance sheet in the assets our property, plant and equipment is only $6.2 million. So, our capital investment requirements continued sustainable growth is not significant and so this is not a capital intensive type of business continues to grow. So, as you can see from the balance sheet we’re very well positioned for continuing to grow the company by being able to take advantage of the fact that we got a significant amount of cash, no debt in a strong stock price.

Back to you David.

David Camp

In closing basically, what we’re going to do is we’re going to execute the strategy, the strategic industry strategy that we discussed earlier in the presentation to meet our customer building requirements. We’re going to leverage our technical expertise to deliver solutions to our global multi-processing industries. We’ll build on the broad base of the established customer relationship as we have to the last sixty years and we utilize our strong balance sheet and brand equity to presume new opportunities and with that we’ll open the floor up to questions.

Question-and-Answer Session

Joe Lambert

Just a moment and we’ll open also the lines for the WebEx here. Let me just un-mute the lines. Okay, at this time from the floor do you have any questions? Yes, go head and I’ll have to repeat the question.

Unidentified Analyst

(inaudible)

Joe Lambert

David could you hear that question at all?

David Camp

I believe the question that he was talking about was that there was a number of private players in our industry and the question was trying to determine the strength of us relative to those of our competitors; is that correct?

Unidentified Analyst

Yes.

David Camp

We are the largest player in this industry. We do have a number of private companies predominantly in Europe, mainly in North Western Europe. The largest competitor to us is between $40 million and $50 million of sales. There is a number of comparators that are between $30 million and $40 million; there is a number that is actually less that that, but when it comes done to the market place that we play in where the 800 pounds roll in the market place, we typically don’t go done and play in the price setting harsh potions of the market place. We tend to stay in the more premium arena. We fell like this is a better position for us because this is the type of after market and global service that we play in. I hope that answers your question.

Joe Lambert

Yes we have another question.

Arby – RWA Fund

Yes Mr. David my name is Arby [ph] with the RWA Fund [ph]. My question to you sir is, are you listed on any of the stock exchanges; if so which ones?

David Camp

We are listed on the NASDAQ and our trading symbol is KTEC.

Joe Lambert

The answer was they are listed on the NASDAQ, symbol KTEC.

Unidentified Analyst

I’m wondering if you identified any usage for the cash?

David Camp

Good question. I would say that we look at three different uses, one would be investing in new technologies that we currently do now have. These will be technologies that might me universities or even technologies that we might try to acquire from other companies. We have had in the last six to eight months several relatively deep dives, potential acquisition opportunities and at this point in time we’ve taken a pass. We do believe that we are entering a phase at this time that companies are becoming a little more realistic interns of there evaluation, so we will continue to pursue opportunities that may present itself to us in terms of acquisitions and of course there is always one of the things that we have discussed at our board level is that we may return some of this cash to our share holders in one way or the other, Jack do you want to comment on this?

Jack Ehren

Yes, we do go the acquisition route. There will defiantly be an acquisition that will be immediately accretive. So we won’t go into investing and speculative technologies or anything of that nature, but again it will be immediately accretive.

Joe Lambert

Thank you. Sorry I have to pass this back and forth. When we hit the live presentation, we won’t have to.

Unidentified Analyst

Hi there. Just a quick question about this year’s results, it looks like a relatively flat expectation and what’s probably been a pretty good economy and then I don’t know what you think about next year, but your line of forecast for Singular is for very strong growth and the bottom line next year, it might be much more difficult economy. Can you just talk a little bit about why the bottom one result was sort of flat this year and your expectation?

David Camp

When we came into this year one of the things that we tried very hard to do was to send a number of signals to our investors that we were making and positioning our plays so that we could continue to grow the business the way that we though that we could grow the business.

We’ve invested into a global ERP system that is very expensive, it’s going to cost us over $5 million, but the global ERP system that we are investing in was necessary for us to get the management information on a global basis to make sure that what we were investing in was giving us that return that we expected.

The second thing that we have the key to invest in this year and we think we sent a very clear signal that we were going to do that, was we needed to have new products coming our to the market at a fast and more reliable speed than had occurred in that past. We significantly increased the R&D from what we’ve been spending in the past and we are seeing those products coming our to the market place.

The new method that we produced, the floor (inaudible) that we produced and other new products that we actually came out with are new probably two weeks ago which was a multi channel laser. These are all new products that are either have been or going to be very well received in the market place and obviously we you make these kind of investments, you don’t get the return immediately but we certainly get the return as we are going forward in the peak. So we tried very hard to -- I don’t want to call a long year, but we used it for the building year to be able to prepare for faster growth in coming futures. Jack you want to comment?

Jack Ehren

We also had significant investment in our sales and marketing and in particular our pharmaceutical business as well as growing up our core businesses on a geographic basis.

David Camp

So to possibly follow up, one of the reasons that a number of analyst were looking at us as growing faster in the future is we knew we had to do some preparatory work this year that has helped us build capital and also expenses, but we believe that the money that we’ve invested will definitely give the returns to the investors as they expected.

Joe Lambert

Any other questions. We still have several other questions.

Unidentified Analyst

I have two questions on use of cash, sales and marketing. I was curious what you see going out to capture that market and R&D expenditures as a percent of sales going forward and see if I can get some leverage on the technology among the customers and lastly if you can throw in what will be your free cash flow growth, your expectations in that?

David Camp

Let me see. Let me try and handle this pressure. Do you have the free cash flow numbers Jack or anything we can discuss?

Jack Ehren

As we mentioned previously, our cash flow situation today is we’re sitting at $33 million and we do not disclose what we believe the cash flow will be at the end of the next quarter or in the future. Obviously cash is an area that we’re focused on and we continue to try to grow that, but we don’t disclose that.

David Camp

But the growth this year, even with expenditures we’ve made in R&D and sales and marketing has been about $6 million, even with the added investments that we’ve made, we’ve grown cash about $6 million. So even in, I’ll call it a building year, we’ve grown cash in the business, so I think this really tells you about the strength of the company.

We did have larger cash expenditures this year in sales and marketing; part of this was because we’ve expanded our sales and marketing umbrella to regions that we had not been in previously. We have new people that are providing sales coverage in Eastern Europe, the Middle East, in Africa, in Latin America, so there has been increased expense there.

You were asking about leverage in terms of R&D expenditures, we will most likely get some leverage in terms of the increased sales, relative to the R&D expenditures as you might expect, but we will continue to be a company that’ll invest a fairly large amount of money in R&D.

We believe that the way to meet the requirements of our industry is to go beyond just canvas and lasers. We believe there is a number of other technologies that we could move into that we are not into right now, that we’ll continue to make in pharmaceuticals better products and one that carry much less risk to our customers. So we are going beyond just typical light and lasers; we’re going into some other arenas that are frankly going to require some level of expenditure to get the employee to develop.

We added a brand new position this past year called the Chief Technology Officer and one of the things that he’s doing is he’s looking for those technologies that we would not be able to materialize within the next three years. So these are technologies that obviously would require some level of development, but then would be introduced in terms of the market, since the market is currently not seen.

Joe Lambert

Got another question?

Unidentified Analyst

You talked about this a little bit, but I was wondering if you could elaborate on what your expectations are for the demand side of your industry given that we maybe facing slow down and does it make sense to even break that down in Europe, Asia, North America?

David Camp

Okay. We use a number of tools to try and look at the demand side of our industry. We use a number of what we call opportunity tools that allow us to look anywhere from 12 to 18 months down stream and it basically gives us a view as to opportunities. These are those products or those opportunities that have not turned into orders yet and we have not seen a slowing in our market place. We continue to see robust growth going forward.

In terms of the geographic distribution, the areas that we believe are going to grow the strongest within our view are going to be places like Latin America and Eastern Europe. We think they are going to grow much, much faster than some of the other well established areas like North America and Europe. We do believe that there is growth both in North America and Europe, but it’s a much slower growth ; however, we are clearly seeing expanded growth in places like Latin America and the primary reason for that is they are becoming significant exporters of products to the rest of the world.

We also see considerable growth in Eastern Europe and they are taking a lot of their products and once again exporting, both potatoes and also processed wheat and bread. From an industry stand point, the areas that are growing the fastest for us are the fresh plant areas. The people that are doing the lettuce and spinach with the time based applications in the grocery market is growing extremely rapidly for us and the other area that is growing rapidly is our pharmaceutical business which is growing multiples that are over our growth rate. So we have two areas that are growing very fast relative to the other markets that we talk about. Jack, do you want to comment?

Jack Ehren

I think on the pharmaceutical side as David had mentioned previously, it’s approximately 3% of our business today and we continue to invest significantly in the research and development as well as the sales and marketing. We’re focused on the gel cap part of the pharmaceutical business today. There is probably 1500 mines that exist on the pharmaceutical business today. We’ve penetrated now 11; we’re the only FDA certified company to penetrate this market and so we think there is significant growth both in the gel caps, but also expanding on. So we continue to make significant investments both on the sales and the existing development side of the business.

David Camp

One of the things we probably should mention is there is no complication for what we’re doing in our pharmaceutical arena, except doing it by hand. The reason that we are getting this kind of growth which is unbelievable growth is this the business that was in the hundreds of thousands of dollars two years ago and this year it will be a significant part of our business. Basically if you’re not using the type of equipment that we have you’re essentially doing that process by hand. We are receiving quite a bit of market place acceptance in the pharmaceutical industry.

Joe Lambert

We’ll have time for one more question. Before I do that, if you look at the schedule you’ll see that there is a break out session where David Camp and Jack Ehren will actually -- at that point we’ll continue on into question and answers at that point in time.

For those on the webcast, I’ll just point it out to you, you can write this number down. It’s 800-346-2923; that’s 800-346-2923. The participant code is 735248 and that is on the schedule that you see there in the tenure when you check in. Again that number is 800-346-2923.

The break-out session will begin in approximately 13 minutes at this point and as soon as we stop the question-and-answers here in the main room, we will start out the break-out session with Jack and David immediately following this session and then at 09:30 we will begin with the presentation from GSP systems. So we have another question David and Jack and I’m going to walk this microphone over to you.

Unidentified Analyst

Yes, I have another question on your cash flow. If you had your wish of what you would like to spend it on, things like an acquisition is first, but what kind of cash flow do you really need on the balance sheet going forward to run your business, because you have about $5 or $6 of share in cash and if I’m a share holder looking for growth, either I’m getting growth or I’d like to get paid, then why are you wasting the acquisition there by putting that dividend on that also, so I’m just looking at what your thought process and how much cash do you actually use on the balance sheet if you grow the business and how many (inaudible) in China. That thing is like probably a big opportunity and so a lot of the impact is from over there.

Jack Ehren

With regards to the uses of cash, certainly as dividend and as I had mentioned previously, we continue to look at acquisitions, but it has to make good business sense for the company and for the share holders and it needs to be accretive, so we are not excited to work this company just for the sake of usage of cash. We’ll be very imperative and make sure that makes good business sense.

We continue to communicate very diligently with the board with regards to other opportunities and uses of cash including as you mentioned dividend, stock buy backs and those types of things. So those discussions continuously occur between David and myself and the Board and at this point we have nothing to say further with regards to that.

With regards to the extra cash, we need to be able to operate the business. If you look on the balance sheet, we have approximately $11 million of customer deposits, so of that liability that we’ve received that we had some process from our customers on, so that we build the inventory and those types of things and start building the product. In addition to that we’ve got working capital needs. To give you a quick overview, I feel uncomfortable to take cash down below $20 million, but that’s just a general guideline at this point.

Joe Lambert

Okay. At this point in time, we’ll take a very short break and we’ll restart again at 09:30, with the presentation from GSE systems. With that I would like to also mention the break-out session is right next door. We have a room set aside for the break-out session and please feel free if you wanted to ask more questions to David and Jack, that you could go into that room with the cell phone and we could take it from there.

With that I would like to thank Key Technologies David Camp and Jack Ehren for their time and a very excellent presentation. Gentlemen, thank you very much and again we’ll restart. Thank you for your time. Again we’ll restart at 09:30, in approximately nine minutes from now.

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