Perceptron Q2 Earnings Call Highlights Cost Cuts and Growth Strategies

5/25/2021 PRCP - Earnings call Q2 2020
https://docoh.com/transcript/887226/2020Q2/PRCP 1/7
PRCP Perceptron / 11 Feb 20 / 2020 Q2 Earnings call transcript
Bill Roeschlein – Interim CFO
Jay Freeland – Chairman and Interim CEO
Gregory Palm – Craig-Hallum
Chris Van Horn – B Riley FBR
Operator Greetings and welcome to the Perceptron's Fiscal Second Quarter 2020 Conference Call. At this time all participants are in
a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions].
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Bill Roeschlein, Interim Chief Financial Officer. Thank you, sir, you may
begin.
Bill Roeschlein Thank you, Michelle. Good morning and welcome to Perceptron's fiscal second quarter 2020 results conference call.
Leading the call today are our Chairman and Interim CEO, Jay Freeland; and I'm Bill Roeschlein, the Company's Interim
CFO.
We issued a press release after the market closed yesterday, detailing our fiscal second quarter results. Within this
release, we provided a reconciliation of non-GAAP measures that may be discussed in this call. I would like to remind you
that the management's commentary and responses to today's questions in the call may include forward-looking statements
which by their nature are uncertain and outside of the Company's control.
Although these forward-looking statements are based on management's current expectations and beliefs, actual results
may differ materially.
For a discussion of some of the factors that could cause actual results to differ, please refer to the risk factors section of
our latest annual and quarterly filings with the SEC.
Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during
our call in the press release issued today. Unless otherwise noted, comments are in US dollars, and references to years
will be for fiscal years, which ends on June 30th.
Today's call will begin with remarks from Jay Freeland. At the conclusion of our prepared remarks, we will open the line for
questions.
With that I'll turn the call over to Jay.
Jay Freeland Thank you, Bill. And welcome to those joining us today.
The second quarter can best be described as a reset for the company. We announced the major leadership transition. We
reevaluated our strategic priorities.
And given the near term realities of the business we lowered our full year financial guidance. Since becoming the
Company's Interim CEO in November, my focus has been on ensuring we have the right people, systems and processes in
place to position Perceptron for profitable growth over the long-term.
At its core Perceptron remains a highly respected global metrology brand, one with significant untapped potential.
Obviously, what's most critical now is execution.
Our performance last quarter was not as strong as many of us would have liked, sales were down, gross margin was down
and earnings per share were down. On top of that orders were meaningfully lower than plan.
The timing of those customer orders was not as expected during the quarter, which is frustrating for everyone inside of
Perceptron. We saw multiple orders push into Q3 and Q4 with some potentially delayed into Q1 of fiscal 2021.
On the positive side, these were delays and not competitive losses or program cancellations.
As a result, the pipeline for Q3 and Q4 is deep and customer feedback remains positive.
In light of the company's performance, I felt it appropriate to create some breathing room by focusing on our cost structure,
which in turn, will yield greater efficiency in the way we operate. Yesterday we announced a 10% reduction in our global
workforce.
While some of the reduction comes from planned attrition, the larger portion comes from a true reduction in force. The
annualized savings from this reduction is expected to be approximately $2.7 million per year.

Each of our primary locations were affected, as were most of our departments. My goal was to streamline the organization
down to the most critical roles necessary for program execution in both operations as well as R&D, while removing any
unnecessary costs from support related positions.
Most importantly, as we prepare to resume profitable growth in subsequent quarters, we will substantially reshape how we
operate, positioning us to meaningful leverage on every incremental sales dollar we achieve. There will no longer be a
direct correlation between sales growth and headcount growth.
Looking ahead to fiscal Q3, we continue to examine the best long-term strategic options for the company. Every option for
Perceptron remains on the table.
As we continue that review, I'd like to emphasize the five most critical strategic priorities we're executing on in the near
term.
The first is to stabilize the company's financial performance. I am focused on structuring Perceptron for maximum
efficiency, while still enabling sales growth, technical innovation, and efficient cost management. No one at Perceptron is
pleased by our orders performance in the second quarter.
While we believe that demand for our products is beginning to accelerate, there remains some heavy lifting to be done in
order to close on those transactions.
As mentioned in my earlier commentary, the 10% reduction in the global workforce was the first of several necessary steps
taken to reposition the company for growth.
The second strategic priority is to enhance our core technology portfolio.
As we executed on the reduction, we consider the most critical programs to drive our business and refined our efforts to
focus on those that we believe will generate the most potential benefit in the near term.
Our development timelines remain aggressive, yet achievable.
Our programs will address the most important needs from our customers, while also reducing the cost to deliver. This
combination should ensure that we maintain our product leadership position, while simultaneously improving our gross
margins, and giving us greater flexibility if competitive situations warranted.
The third priority is to extend our market leading position within the automotive vertical.
While there is a clear need for Perceptron to expand beyond the automotive sector, we still need to do a better job
capturing all opportunities within our most important market.
We will do this by reaching a broader array of manufacturing operations at the OEM level and digging into the tier 1 and
tier 2 supply chain. The good news is that our team knows the automotive market extremely well.
So our ability to be agile in the space and broaden our presence is very high.
The fourth critical area focus is to diversify our revenue base into additional growth markets: Most notably heavy industry,
construction and aerospace. Perceptron has succeeded for a long time by focusing on the automotive sector, which
represents at least 30% of the annual addressable opportunity.
However, these verticals represent very attractive growth markets and have the need for technology that Perceptron
already provides. Addressing them will require a redesigned focus and approach including a more specialized sales force,
so our impact there will be longer in the making.
However, the benefit of broadening the revenue base and lessening our exposure to any one industry will provide
meaningful benefits of Perceptron in the long term. The fifth and final strategic priority for the company is to select visionary
long-term leadership.
Obviously, Bill and I are both interim leaders.
We are treating our time in the roles and how we execute the vision for the company as if we will be in them forever.
However, the company is searching for permanent leaders who will drive Perceptron aggressively and ensure the long
term growth and value creation the company and our shareholders deserve.
Working closely with the rest of the board, we are confident that we will identify and retain the right leaders for the job.
We're navigating out of what we believe is the bottom end of a couple slower quarters for Perceptron.
However, we are excited by the steps we've taken to strengthen the company and prepare it for the next phase of growth
in the markets we already serve together with those where we intend to build a market presence. I'm grateful to the entire
Perceptron team for the dedication to the company's success and look forward to visiting with our investors in the coming

months.
I will now turn the call over to Bill for a more detailed review of our second quarter results.
Bill Roeschlein Thank you. With Jay having shared his thoughts on our recent performance, together with his vision for the strategic
opportunities that lay ahead for Perceptron, will now discuss our financial results during the fiscal second quarter.
As Jay referenced, our senior leadership team recently enacted a series of cost reduction activities designed to enhance
the go forward profitability of the company.
While top-line growth remains a significant area of focus for a team over the near term, the announced cost reductions are
immediately accretive for business, positioning us to compete more effectively on a global scale.
For fiscal 2020, we anticipate realizing $500,000 of savings related to the cost reductions, net of restructuring costs.
For the full year fiscal 2021, we anticipate annualized cost savings of approximately $2.7 million.
Total sales in the fiscal second quarter were $19.1 million, up $1.3 million or 7.2% sequentially from the previous quarter
and down $2.5 million or 11.6% from Q2 of the prior year. On a sequential basis by geography, sales in Europe and the
Americas increased $1.3 million and $700,000 respectively, and declined $800,000 in Asia.
On a year-over-year basis, the majority of the $2.5 million sales decline came from Asia, which experienced a $1.9 million
decline year over year due mainly to lingering trade related issues with China. The period over period FX impact amounted
to approximately $300,000 of the decline in sales for the second quarter of fiscal 2020.
For fiscal year 2020, we expect sales to be between $70 million and $75 million.
Total bookings in the fiscal second quarter were $14.4 million down $2.8 million or 16.3% sequentially from the previous
quarter and down $6.1 million or 29.8% from Q2 of the prior year. On a sequential basis by geography, bookings in the
Americas and Europe declined $4.5 million and $200,000 respectively.
While bookings in Asia increased by $1.9 million.
On a year over year basis, the majority of our bookings decline was in Europe, which experienced a $4.7 million decline
year over year. Gross profit as a percent of sales for the fiscal second quarter was 37.2% up 60 basis points from Q2 over
the prior year.
As a result of our cost restructuring, we expect approximately a 30 basis point benefit to our fiscal year 2020 results and a
200 to 300 basis point improvement in our gross margin for fiscal 2021.
Turning to operating expenses, engineering and R&D expenses were $1.6 million in the fiscal second quarter, a decrease
of approximately $200,000 compared to the previous quarter, and a decrease of approximately $500,000 from Q2 off the
prior year.
As a result of our cost restructuring, we expect total engineering and R&D expenses for fiscal 2020 to be in the range of $6
million to $6.5 million. Sales, general and administrative expenses were $4.3 million in the quarter, an increase of $100,000
from the previous quarter, and a decrease of $600,000 from Q2 of the prior year.
As a result of our cost restructuring, we expect total SG&A costs for fiscal 2020 to be in the range of $16.8 million and
$17.2 million. Severance, impairment and other charges for the quarter were $0.5 million, compared to a credit of $0.6
million in the second quarter of fiscal 2019.
As a reminder, the credit for the second quarter of the prior year relates to the true-up in the cost of a legal settlement.
While the expenses in the second quarter of the current fiscal year relate to severance costs associated with our former
CEO.
As a result of our costs restructuring, we expect fiscal 2020 severance, impairment and other charges to be approximately
$1.1 million. We had tax expense for the quarter of less than $100k. Net income for the quarter was $0.8 million or $0.08
per diluted share, compared with $0.6 million or $0.06 per diluted share in the prior quarter and net income of $1.6 million
or $0.16 per diluted share in Q2 of the prior year.
As a result of the cost restructuring, we expect fiscal 2020 net income to range from breakeven to $2.7 million or zero
cents to $0.28 per diluted share based on 9.7 million shares outstanding. Adjusted EBITDA for the year is expected to
range between $3.2 million and $6.5 million.
As of quarter end, we remain debt-free with no outstanding borrowings on our line of credit, and had $11.2 million in total
cash and cash equivalents and availability on our lending facility. In summary, we've begun to take the necessary actions
to reduce costs while growing targeted investment in high return organic growth opportunities.

We continue to focus on generating positive free cash flow, while maintaining significant balance sheet optionality. With
that, I will now turn the call back over to the operator who will open the call for your questions.
Operator Thank you. Will now be conducting a question and answer session. [Operator Instructions] Our first question comes from
the line of Greg Palm with Craig Hallum. Please proceed with your question.
Gregory Palm Good morning, and thanks for all the helpful commentary around the P&L. I guess just kind of starting, Jay, maybe a little
bit more on kind of what you're seeing out there in the market. I mean in terms of visibility, you mentioned maybe some
positive trends in the second half of this year in the fiscal '21. But how good is your visibility at this point?
Jay Freeland So thanks, Greg. The visibility is very good for the next two to three quarters which is not unusual for Perceptron. That's
usually the kind of scope that we have. And when you get outside of the third quarter, it obviously starts to fade off a bit.
The things that we're looking at right now are now dependent upon customer decision making on when they execute new
programs, new vehicle launches, new line launches, we have a good feel for when all of those are scheduled.
The question becomes, do any market conditions cause the customer to shift or delay those. And like I said, we're not
seeing any cancellations. We clearly saw some delays. And we've not seen any major competitive losses, where we would
be concerned that there was something that we are missing or lacking from a technology or solution standpoint in the
market.
So what we see right now is favorable. The pipeline is very full. Obviously, there's some reality to how much will close and
how much may, either delay again or move again. And that's always been the case for the company. But we feel good
about what Q3 looks like and very good about what Q4 looks like as well.
The one area where we're still developing visibility is as it relates to electric and autonomous vehicles. And that's one
where even the OEMs themselves. It's not us lacking contact with the manufacturers, it's more than manufacturers
determining; what's the right path? What's the right release schedule? What's the right launch time cycle?
And so it's more of that than our ability to see what they're working on. They're giving us plenty of visibility and access as
they always have.
Gregory Palm And I mean, as you think about that core automotive customer. I mean, what's the biggest external impact out there? I
mean, what are your auto customers telling you that they want to see or have happened to really sort of resume the
investment schedule and launch new vehicles?
Jay Freeland Yes.
So market demand is I think, in my opinion, and I think our sales team would say the same thing, still the primary driver.
So demand was, I believe, relatively flat the last year, year-over-year. And we would expect to see some return and
acceleration there again, particularly again as the electric vehicles come -- start into more of a mainstream production and
across a broad array of manufacturers that will increase some demand.
Not surprisingly, there's a near-term issue at the moment as it relates to both the trade war, less so the trade war now, but
more of the coronavirus is a very near-term issue.
We are -- you probably just heard in the news that GM has pulled a very large contingent of American workers out of
Wuhan in the near-term that could delay, does it delay by a month or two the timing of a planned implementation possibly.
The other issue is supply chain and we are certain -- we're certainly seeing that and hearing that from the customers as
well that while there was enough on the shelf to keep moving in the near-term and enough already in route, depending on
how much longer restrictions lay in place from a worker standpoint, a travel standpoint and a shipping standpoint that could
potentially create delays across automotive, as they refill the pipe.
Many of the OEMs obviously run on relatively lean inventory schedules and are dependent upon that to keep themselves
efficient.
So we may see a little bit of near-term impact there, but nothing yet that we -- any of our sales people have said, oh my
god, this is a this is a substantial issue.
Gregory Palm And I mean, specifically as it relates to supply chain disruptions. Anything in your book of business in terms of procuring
parts from supply chains in China that worries you?
Jay Freeland Nothing on our side.
Gregory Palm Okay. And then in light of this sort of ongoing volatility softness in your markets any change in the competitive landscape
that you're seeing?

Jay Freeland Nothing major.
I think we are familiar with who we compete against in the marketplace. We've not seen anything from a technology or
solution standpoint that would raise eyebrows or cause us to be concerned. We feel very good about what's in the
development pipeline right now.
We're in the middle of the initial installations of our new active site, which is a -- in our opinion is a meaningful technology
change in the marketplace.
And so as we get feedback there, that obviously creates additional opportunity downstream.
So those are important programs for us right now. But I would not say there's anything that we've seen that would cause
concern from a competitive standpoint.
Gregory Palm Okay. All right. Thanks for the questions, and I'll hop back in the queue.
Jay Freeland Thanks, Greg.
Operator Thank you.
Our next question comes from the line of Chris Van Horn with B Riley FBR. Please proceed with your question.
Chris Van Horn Hi. Good morning, everyone. Thanks for taking my call.
Jay Freeland Morning, Chris.
Bill Roeschlein Good morning Chris.
Chris Van Horn So, thanks for the guidance here. And you mentioned kind of breakeven to $2.7 million on the net income side. Could you
go through the puts and takes of that range and what gets us to the higher end there?
Bill Roeschlein It is primarily revenue driven as we have at the $75 million range.
Our margin is higher in the 37.5% kind of range. At the lower end it'd be a couple 100 points basis points lower primarily
because of some fixed manufacturing overhead that we have. That is the biggest driver that's going to impact what comes
to the bottom line.
Jay Freeland Yes, and what I'll say -- I'll add to that, Chris is that obviously the $14 million in the second quarter from an order
standpoint, is lower than we normally see and not what we were expecting for sure. Backlog is still strong. We still have
$33 million in the backlog.
And so if the pipeline for Q3 and Q4 was meaningfully lighter, or if I was getting feedback from the sales organization that
they did not have confidence in their ability to return the orders volume to our typical levels, then I would be more
concerned. But the feedback we're getting from the sales team is favorable.
And so having that backlog to work through in Q3, obviously creates comfort in what the Q3 number looks like. And
assuming we hit the Q3 orders number, which would translate into revenue in Q4 that gives us that confidence that we
should be towards the higher end of that range.
Chris Van Horn Okay, got it. Got it. And then on the gross margin side during the quarter, in light of lighter volumes, you were able to kind
of see an increase year over year, you cited product mix. Could you give us any more detail on what was driving that
product mix?
Bill Roeschlein A lot of it comes down a lot more to the projects and the stages that they are in the phases that they're in.
And so we had more phases that we are shipping early with equipment, which tends to have a higher margin than in the
later phases of a project, which is the labor installation piece. And that would be the primary difference in the two margins.
Chris Van Horn Okay.
So a little bit of timing element, correct?
Bill Roeschlein It's a definitely a timing element as all of our sales take place over a period of time from the actual equipment, shipment to
the installation and acceptance.
Chris Van Horn Okay. And then, on the initiatives, you talked about diversifying into non-auto markets. And obviously, I can see some
synergies with what you do in the automotive side and how it would apply to those other manufacturers.
And I'm sure that, there's a lot of overlap. Could you talk about like the competitive dynamics? Do you have to display
someone? Are there are a number of new programs coming online in those markets that you could see yourself winning
share or just being competitive? And how does that play out?

Jay Freeland Yes.
So my gut, Chris, is that and the initial feedback is that it's a little bit of both.
For sure there is some competitive displacement. Obviously they are companies in that sector are not running blind. They
are using technology at various levels.
And to be fair, automotive has always been a bit of a leader there. And I say to people all the time that when you see what
it takes to build an automobile is one of the most amazing and for most people, the most technically advanced item that
lever on. I mean really is pretty amazing.
So, other manufacturers are leaning in that direction. Aerospace is kind of right in the same bucket. The needs in
aerospace are different and the needs for our type of technology are different. They're in our opportunity to penetrate
maybe more at the tier level than at the OEM level, just given the size and scale of product in the aerospace field.
So, there'll definitely be a bit of displacement. Obviously, part of it would be new programs and part of it would be knowing
and being able to share examples of, here's what we do in automotive, right. Take an example of sheet metal stamping
and how you form it and what the need and the tolerances may be different from industry to industry.
But the actual need in the productivity associated with it is the same. And the productivity impact to a customer at their line
is down because they have sheet metal components that don't fit is the same. The cost impact in the FBO for every minute
down is a meaningful amount of loss to that customer.
So that's where the opportunity lies. What I will say though is that for certain, we will need to bring in some sales people
who have experience in those industries.
Our folks are experts in automotive and unbelievably knowledgeable and that's why we're so successful there.
And that’s why so many customers rely on Perceptron. And why we have such deep relationships there where they share
program launch cycles and schedules and things that do not get shared out openly with the public until they're deep, deep,
deep into the process.
So that's where we obviously need to add some additional expertise so that we have the same level of competency and
ability to serve in those other verticals.
Chris Van Horn Okay, great. Thanks for that. And then last for me, I think the previous caller touched on EV and autonomous vehicles.
Just to remind us, I believe that there's higher tolerances and [indiscernible] lower tolerances and a lot. This is a bit secular
growth theme for you all going forward and maybe just a little more detail on is there more expenses needed or more
measurement needed and how more complex that line could be?
Jay Freeland Yeah, so it's interesting. What we see right now and obviously some of this is still developing is that when it comes to body
and gap and flush and tolerances requirements there probably will be very similar to what you have in automotive today,
certainly at the higher end manufacturers. What they already demand and what they're already capable of is leaps and
bounce ahead of where it was even five years ago, 10 years ago.
One of the areas that the company historically I think had been concerned with as you move to electric vehicles, just use
that as an example is that the engine block and the engine itself changes dramatically. And the question was, would there
be the same needs, because you don't have necessarily all the same moving parts.
The answer is, yes it changes in some respect, but then there's additional opportunity created and things. I'll just use this
as one example, the battery tray itself. The precision required there for accurate assembly, effective assembly and
avoiding any scrap and rework. Like you mess up the battery tray. The impact downstream of not being able to continue to
produce if you have to shut down and rework is just as impactful if not more for one of the OEMs or one of the
manufacturers, as if you shut down any other part of the line in a traditional vehicle today.
So the opportunities, I think they are, they will be slightly different, the tolerance needs will at least be identical. And it's
possible there will be slightly higher tolerance needs in some areas. In that part, I'm not sure we have a perfect deal for
yet. But that would be -- that's a capability that we would have the ability to serve, once we identify those with the
customers.
Chris Van Horn Okay, great. Thank you so much for the color and appreciate the time.
Jay Freeland Yes. Thanks, Chris.
Operator Thank you. There are no further questions at this time. I'd like to turn the call back over to Mr. Freeland for any closing
remarks.
Jay Freeland Great. Thanks, operator. And thanks, everybody, for participating today.

If you have any additional questions, obviously you can reach out to the company or you can reach out to Noel Ryan,
Vallum Advisors, who's our Investor Relations partner, and he can be reached at investors@perceptron.com. And we look
forward to updating everybody again at the end of Q3.
Operator Thank you. This concludes today's teleconference.
You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Perceptron Q2 Earnings Call Highlights Cost Cuts and Growth Strategies

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