Robert Buckley - Chief Financial Officer John Roush - Chief Executive Officer Matthijs Glastra - Chief Operating Officer.

Lee Jagoda - CJS Securities.

Good morning. My name is Angel and I will be your conference operator today. At this time, I would like to welcome everyone to the GSI Group 2016 Q1 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Robert Buckley, Chief Financial Officer, you may begin your conference..

Thank you very much. Good morning and welcome to GSI Group’s first quarter 2016 earnings conference call. I am Robert Buckley, Chief Financial Officer of GSI Group; and with me today on today’s call is Chief Executive Officer, John Roush; and Chief Operating Officer, Matthijs Glastra.

If you’ve not received a copy of our earnings press release, you may obtain one from the Investor Relations section of our website at www.gsig.com. Please note this call is being webcast live. It will be archived on our website.

Before we begin, we need to remind everyone of the Safe Harbor for forward-looking statements that we have outlined in our earnings press release issued earlier this morning and also those in our SEC filings. We may make some comments today both in our prepared remarks and in responses to questions that may include forward-looking statements.

These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of today.

We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So, you should not rely on any of today’s forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures.

A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment in our earnings press release.

To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our website. I am now pleased to introduce CEO of GSI Group, John Roush..

Thank you, Robert. Good afternoon, everybody and welcome to our call. So I am happy to report that we got off to a very solid start to the year with good Q1 performance. Our end markets and customer demand started off the quarter slowly, but picked up steadily as we went along.

Orders were particularly strong and revenue and profitability were slightly above our own expectations. Just to summarize things, Q1 revenue came in at $90.3 million, Q1 GAAP EPS was $0.05, adjusted EPS was $0.18, and adjusted EBITDA was $13.5 million. All those figures were consistent with both our own guidance and analyst estimates.

From a demand perspective, we are happy to come in above $90 million of revenue versus our own forecast of $89 million. The GAAP revenue figure of $9.3 million was down 5% from $94.6 million in the first quarter of 2015 driven largely by the divesture of JK Lasers last year.

Adjusted revenue growth, which excludes JK Lasers from both years, was 2% in the quarter, up from $89 million a year ago. Our organic revenue growth, which excludes acquisitions, divestitures, and the impact of foreign exchange, was down 1%.

Excluding the Dome radiology display product line, which we are in the process of actively closing down through Q1 2016, organic revenue growth would have been flat. But the real story is orders, which were $106.6 million, significantly exceeding our own internal forecast.

This is the highest single quarter we’ve had with orders since I’ve been here as CEO. The book-to-bill ratio was 1.18 with all three reporting segments and nearly all product lines well above 1. The strong orders give me increased confidence in our ability to step up the revenue run rate in Q2 and for the balance of this year.

And as the comparisons get much easier for us in the second half, we expect to see healthy organic growth at that point. As I mentioned, Q1 revenue was essentially flat on an organic basis, but we did see nice growth in a number of areas. JADAK had a strong quarter with a book-to-bill ratio above 1.5 and 7% year-over-year revenue growth.

Celera Motion had 24% year-over-year revenue growth.

A significant part of that was the acquisition of Applimotion, which occurred in late Q1 of last year, but the optical encoder products within Celera were up 10% versus last year, and Applimotion had solid growth when viewed on a standalone basis, so overall Celera performance was a strength for us in the quarter.

Having both the motor and the encoder makes us a more compelling technology partner to our customers. We are now seeing a strong flow of potential opportunities coming in from the OEM, so we are excited about the prospects for the Celera business.

We did see 3% adjusted revenue growth in the laser segment, but that was primarily due to the add-in of the Lincoln Laser acquisition. Revenue from the core CO2 laser and beam delivery products were down low single-digit in the quarter, as we work our way back from the slowdown that began with the China currency devaluation last August.

The encouraging part is that the laser book-to-bill ratio was 1.07 and we have a strong backlog position entering Q2, which gives us increased confidence that we will see a significant sequential step up in laser revenue in Q2 and we fully expect organic growth in the second half for these products. Now I will make some comments on the P&L.

First quarter GAAP gross profit was $36.9 million or 40.8% of sales, up from 40.6% in Q4, but down from 42.3% in Q1 2015. On a non-GAAP basis, first quarter adjusted gross profit was $39.5 million or 43.7% of sales, up 150 basis points on a sequential basis from Q4 2015, but down 70 basis points from Q1 of 2015.

I will note that our gross margins in Q1 were impacted by cost redundancies we see in several locations due to our transfers of the thermal printers and color measurement product lines to our Syracuse site.

Our gross margins were also unfavorably impacted due to recent acquisitions and to a lesser degree some unfavorable mix we see in certain product lines. Our GAAP operating expenses were down by over $300,000 from Q1 2015, but we are up slightly as a percentage of sales from 36.6% to 38%.

R&D expenses were $8.1 million or 8.9% of sales versus $8.2 million or 8.7% of sales in the prior year. SG&A expenses were $21.2 million or 23.5% of sales. This compared with $22.2 million or 23.3% of sales in the first quarter of 2015.

Our Q1 adjusted operating income was $10.2 million or 11.3% of sales versus $10.9 million or 11.5% of sales in Q1 2015. And as I previously mentioned, adjusted EBITDA was $13.5 million in Q1 versus $14.3 million a year ago. GAAP diluted earnings per share from continuing operations was $0.05 in the quarter compared to $0.10 in Q1 2015.

Our adjusted earnings per share was $0.18 in the quarter consistent with our guidance of $0.17 to $0.18 and down from $0.20 in the prior year. So now I’d like to comment on our corporate rebranding as rebranding as Novanta.

First, I’d like to remind everyone that we have our annual shareholders meeting next week, where among other things we will have the vote to change our name and our brand to Novanta. Assuming a favorable vote, we will begin deploying the new brand in mid-May.

We are all very excited about the opportunity to deploy the brand and the messaging around it, reinforcing the brand positioning for us as the innovation advantage for our customers. Our rollout of Novanta will include the change to our NASDAQ ticker symbol, which will be NOVT. We’ll start to being trading under the new ticker on May 12.

So all in all, I’m pleased with the solid start to the year and our progress in Q1, which gives me increased confidence around our full year objectives. So now at this point, I would like to turn things over to Matthijs to give you a business update across the company.

Matthijs?.

Thank you, John. Good morning, everyone. We are pleased with the start of 2016 as our teams continue to perform in the face of challenging economic conditions. Starting with our precision motion segment, which again delivered a solid performance of 14% year-over-year revenue growth and strong bookings performance with a book-to-bill of 1.2.

The Celera Motion business was the key driver here with 24% year-over-year revenue growth. Celera Motion enjoys favorable macro treads for precise and dynamic motion control in automation, robotics, satellite communication and medical markets. We feel we have a good product mix to take advantage of the growth opportunities in these start up markets.

We are further investing in innovation and expansion of our sales channels and are introducing a number of new motion products in 2016. One product Veratus is a new compact optical encoder that delivers best-in-class precision, reliability and dirt immunity for highly engineered, advanced industrial environments.

Another product, Optira, extended our leadership in miniaturized precision optical encoders in an incredibly small lightweight and easy to use form factor, which is particularly important in medical robotics and medical device markets. These products help us to expand our served market by $200 million.

We see great customer interest and are expecting solid design win momentum later in the year. Sales of our air bearing spindle products were down 7% year-over-year in Q1 driven by lower demand from mechanical PCB via hole drilling OEMs. This softness is directly correlated with the weaker industrial sector activity in China.

We undertook restricting actions in Q4 of last year to reduce cost in the spindle sites and delivered solid profitability despite the lower revenue. Bookings are up 38% sequentially in advance of a traditionally stronger Q2.

Turning to our laser product segment now where we saw an improving demand picture as the quarter developed with a solid 10% sequential bookings performance. Book-to-bill was 1.7, while reported year-over-year adjusted revenue performance was 3%.

Though the overall industrial environment was still weak with low single-digit year-over-year revenue decline in our base business, we do feel that most of the softness is temporary in the markets we serve. Our Q2 backlog supports a solid revenue step up versus Q1 with customers indicating growth in the second half of the year.

In the quarter, we saw strength in laser marking, laser additive manufacturing, OCT, microscopy and from new customers. More importantly, we are encouraged by the strategic growth performance of the laser group.

First of all, we see structural growth as a result of served market expansion and increasing laser and beam steering technology penetration in the markets we serve and target.

For example, we are expanding our served market by $200 million with a complete new product line up of pulse CO2 lasers focused on micro material processing applications of organic material. Example applications are textile and sports apparel, plastic foils for mobile phones, plastic or cardboard material processing in the packaging industry.

We see increasing laser penetration into these high precision segments where pulse CO2 lasers are the technology of choice due to the wavelength required to efficiently process organic material. Second, we are encouraged by the team’s strategic growth execution, which we measure monthly through design wins and new product revenue.

Design wins were up more than 50% year-over-year, a strong indication that our investments in innovation and commercial teams are starting to yield results. Key areas of strength were laser additive manufacturing, welding, textile manufacturing, converting and mobile phone production processes.

Our new product pipeline in the laser group is developing nicely. We have introduced eight new products last year and three in Q1. New product revenue doubled year-over-year in Q1. Although the revenue from these new products are still relatively modest, we expect new product momentum to further strengthen throughout the year.

I wanted to highlight one product, the Lightning II Plus scanner, which was introduced at the Photonics West Show in February. The introduction of this product was very well received with solid orders in the laser via hole drilling market. The Lightning II Plus scanner extends a world leading performance in speed and precision in laser beam delivery.

It increases via hole drilling process throughput by 10% and is able to drill 4,000 holes per second at 300 micrometer hole pitch, which then surpassed hole to hole, and run to run accuracy and stability. All of this is critical in advanced chip packaging applications for mobile devices. Finally, we are pleased with our Lincoln Laser acquisition.

The teams are integrating well and we are seeing good cross selling potential of Lincoln products through our laser sales channel. Though Q1 revenue performance was affected by the same softness as the rest of the laser group, Q2 outlook for Lincoln is seeing a solid pickup.

Turning to our vision technology segment, which focus on Camera, RFID and visualization based technologies to capture, detect, analyze and visualize images or objects in medical applications.

The overall benefit here is to reduce medical errors, improve work flow and patient outcomes in applications such as minimally invasive surgery, patient monitoring, life sciences and clinical lab equipment. We feel that the market penetration of these technologies is still relatively low.

In the quarter, we were pleased to see the JADAK business deliver record bookings growth of 56% year-over-year and revenue growth of 7% year-over-year leading to an overall book-to-bill of 1.33 in our vision technologies group.

Overall sentiment in the medical equipment and device market is steadily improving with patient monitoring, medical dispensing and blood glucose monitoring leading the pack. Also here, we have a very solid design win quarter closely doubling the number of design wins year-over-year.

We are pleased with our Skyetek acquisition, a leading provider of RFID solutions to medical OEM customers, which we have integrated into our JADAK business. The first RFID design wins have already been recorded and we see strong potential integrating RFID through our existing sales channel and product portfolio for medical applications.

From a market perspective, RFID enjoys favorable micro trends throughout the hospital environment as it helps to enhance workflow, patient safety, anti-counterfeiting and asset tracking.

As previously discussed, we are consolidating our printers and photo research product lines into JADAK’s vision engineering and production component center in Syracuse, New York. The production transfers are progressing well and will be completed by the end of Q2.

Our surgical visualization business has developed a strong new product line up with multiple new products hitting the market in the coming 46 months. These products are well received by the market and are a result of significant investments in the last 18 months in integrated operating room and visualization technologies.

Medical customer qualification cycles of these products are long, which is leading to a net decline year-over-year in the surgical business as the decline in legacy product is not yet compensated with growth in new products. We, however, expect positive momentum from new products in the second half of this year.

And as previously announced, we have decided to focus NDS on our surgical visualization business and have closed down our radiology business in Q1. The radiology closure had significant impact on our Q1 performance as it cost about 50% or $1 million in revenue of year-over-year revenue decline in our vision technologies group.

Adjusted gross profit margin in Q1 was down 170 basis points year-over-year and was adversely affected by radiology products as well, as products were sold off at low margins. We also encourage temporary production staff overlaps during production transfers of our printers and photo research product lines.

These are one-off effects in Q1 that should be mostly behind us. Turning to productivity now, we are on track to achieve $8 million in productivity savings, savings in 2016, up 45% versus last year as a result of driving our continuous improvement business system deeper into our sites.

We see solid savings from consolidating our supply base through our commodity team structure. For example, we are consolidating the majority of our PCB spend across the company from over 50 suppliers in 2014 to 3 strategic suppliers by the end of 2016. We are expecting over $1.5 million savings this year from our commodity approach.

Our cash performance was a disappointment this quarter. Demand was very backend loaded, the first two months were soft and demand was picking in March consistent with some of the boarder market sentiments. March was our single largest shipping month since 2011, making our receivable position much larger than you usual.

In addition, inventory grew to 104 days form 100 days at December 31, 2015 in anticipation of Q2 revenue step up. We expect the inventory position to be corrected in Q2. However, our inventory performance is still far from the world-class performance our teams have performed at in other places.

Now that we are starting to hit our stride and productivity, we have started to extend our continuous improvement focus to inventory performance while maintaining or improving our customer service levels. So expect us to further drive the inventory days down in the reminder of the year.

In wrapping up my section, we are encouraged by the order acceleration through the quarter and our strong Q2 backlog. Design win momentum and our new product pipeline are starting to develop nicely.

We have further strengthened our engineering and commercial teams and have put in place new global and regional sales leaders in the last 6 months to 12 months. These investments are funded with our continuous improvement business system, which will be delivering $8 million in productivity savings this year.

Our 2015 acquisitions are performing well and our M&A pipeline is strong. So with that I will turn the call over to Robert to provide more details on financial performance. Robert..

Thank you, Matthijs. Operating cash flow in the first quarter was $8.3 million, compared to $6 million in the first quarter of 2015. Capital expenditures were $2.3 million in the quarter and 60% of which was software purchases.

The largest of which involved the successful implementation of Oracle in both our NDS surgical business and our Synrad laser business. As mentioned previously, we’re engaged in a multi-year ERP implementation program with the goal of putting the majority of our business on Oracle.

Our net debt as defined in the non-GAAP reconciliation tables as part of our earnings release as of the end of the first quarter was $27.7 million. We did sell our Orlando, Florida manufacturing facility in the quarter for roughly $3.5 million. We also intend to repurchase up to $5 million of our common stock over the remainder of 2016.

We are in the final stages of our 2016 restructuring program, which is targeting $4.5 million to $5.5 million in annualized cost savings after the program is fully executed. We also made the decision to exit our radiology product line in the quarter, which was not contributing income and was a significant distraction outside of our core strategy.

In the first quarter, we incurred more than $4 million of charges related to these decisions.

We had $2.5 million of restructuring charges for our 2006 restructuring program, primarily related to the relocation of both the printers production line in Detroit, Massachusetts and our photo research production line in Chad Ford, California to our Syracuse, New York facility.

In addition, we are exiting our Netherland sales and service office for NDS and consolidating these activities in the Germany and the Czech Republic. As a consequence of our decision to shut down radiology, we incurred $1.8 million non-cash charge, largely associated with the disposition of inventory, which is no longer needed.

For the full-year of 2016, we continue to expect adjusted revenue to be up mid-single digits in the range of $375 million to $390 million. This compares to adjusted revenue of $368 million for the full year 2015. We also expect adjusted EPS to be up 8% to 10%, compared to 2015 full year adjusted EPS of $0.93.

For the second quarter of 2016, we expect adjusted revenue of approximately $95 million in comparison to $96 million of adjusted revenue in the second quarter of 2015. However, I’ll note that the second quarter of 2015 included more than $2 million of radiology product sales.

Despite this going closure, we expect to see a greater than 5% sequential increase in our revenue. We also expect adjusted EPS to be in the range of $0.23 to $0.25 presuming no significant gains or losses from foreign exchange. This compares to $0.20 in the second quarter of 2015. Adjusted EBTIDA is expected to be approximately $60 million.

As mentioned on our last earnings call, the second quarter of 2016 will be our last quarter of product line moves related activities. And therefore we expect to enter the third quarter with our relocation and restructuring activities being substantially completed.

Overall we continue to remain on plan for the year and are growing more optimistic in our outlook. We are seeing both the benefit of our productivity programs and the investments in our new product pipeline taking root. We feel we are well positioned to deliver on our commitments. despite the weakness in the industrial sector.

Finally, our acquisition pipeline is looking very healthy and continues to build. We feel good about the number of opportunities we can action over the course of the year. And consequently, we will be looking at amending and extending our bank credit agreement sometime in the next week or two. This concludes our prepared remarks.

We’ll now open the call up for questions..

[Operator Instructions] Your first question comes from the line of Lee Jagoda with CJS Securities. Lee, your line is open..

Hi, good morning Hi Lee..

So first and foremost as it relates to your order book, can you discuss the order patterns in April as it compares to the strong Q1 order book and has the trend continued?.

Lee it’s John. Thanks for the question so we have had good book to bill continued in April. It is always tough to judge one individual month in a quarter, but I think our view is that we're going to end the first half on a cumulative basis, you know well about one, but not as strong as we were in Q1.

So, I mean if you really just looked at April, you might conclude frankly that Q2 is looking like Q1. But as we really, we don't always just look at the one month will lay out the whole quarter and we do expect to most likely run a little below one in the second quarter and end the half somewhere in the 1.05 to 1.06 range, something like that.

So April has been good..

And given the typical quarter of the majority of the stuff you book in that quarter generally gets sold in the next quarter, what’s changing now, are the orders getting larger and you’re getting a little more visibility or what’s the dynamic look like there?.

You mean the dynamic that caused the strong Q1, is that really what you are getting at Lee?.

Yes, yes..

Yes, yes. Well I mean I would say the typical ratio, I mean this varies a little bit, but somewhere between 60%, 65% of the given quarter should be on backlog when we start.

So, it’s really kind of a two thirds one third, you have two thirds when you start and you get the other thirds, and then, so two-thirds of what you are booking in a quarter is relating to next quarter is a way to think about it. What we saw - definitely we started off slower and then it picked up as we went. It was kind of an across-the-board thing.

You can't really point out and say there was necessarily one big lump that created a good quarter for us, you will note that a few customers in JADAK in particular definitely ordered a lot. I mean they kind of forward ordered let's say. So JADAK’s book-to-bill was over 1.5%. And that’s not indicative that their revenue was skyrocketing or anything.

That was really maybe some increased confidence in the year that some of their quarters, some of their customers committed to the annual volumes earlier than they might have, but in general the strength was almost everywhere. So, it was a bit of a pickup in almost all the businesses that led to that queue.

It wasn't a larger order size as much as it was some amount of increased confidence to put more weeks on order let’s say. Instead of putting eight weeks on order, put 16 weeks on order..

Okay, great.

And then switching over to NDS, can you talk about the expected revenue and profitability from NDS post the exhibit of Dome and really what’s needed there to achieve the levels of profitability you may have originally expected with them in that business?.

So, two questions embedded in there. The first question is, where do we expect this business to deliver now on a go forward basis? I think, we expect it to now be breaking even frankly for us, as we continue the remainder of 2006, it was no longer going to be a negative issue for us to deal with.

We also expect that by the time we get to the fourth quarter that it returns to growth. So, we can start getting on the right track again with the business. How do we get it back to where it was in its heyday? I think that is really conditional upon some of these larger programs kicking in.

I will say it’s one of the only businesses that we have in the portfolio that does have that opportunity to double in size and if you do that you start getting back to the profitability that we saw when we first purchased the business.

So, we feel confident that that’s the path that we’re trying to get this business back on and we have taken enough steps to get it there..

There is really a dynamic that is going on in the NDS surgical business that’s legacy products and their trend line versus new products and how they get adopted. Matthijs, I don’t know if you want to any add any comments on that, but….

Yes, what we like about medical which is the long stay, business is also a bit of a negative with respect to growing new product revenue because you need to get the - through to qualification of the customers and to speed in medical is slow.

So, we are the kind of depended on the speed of the launch of our customers quite frankly, but we like attraction that we are us seeing throughout the qualification cycle, and we're pleased with our product pipeline. So, if anything, it’s timing..

I mean there is a slew of new products that we have exposed to customers in NDS. We, even to the point of going around the trade show setting up all the new products in a mocked up operating room that we do in hotel suites and bringing customers in. The reception has been excellent.

It’s really a case of when does it turn into the volume shipments and that customers have designed in the product, but aren’t yet taking quantities.

So we know it’s coming they didn't do all that work for nothing, but they have their own regulatory cycles and adoption cycles and it’s frankly taken longer than we had hoped, but when it kicks in I think it’s going to be attractive..

Okay.

And then shifting gears to CapEx, are there any additional either wants or needs as growth starts to pick up throughout 2016 in terms of both incremental capacity and/or new geographies that you are thinking about?.

Nothing immaterial nature. Generally speaking, the spend that is ballooning our normal spend is really associated with the Oracle implementation, where we’re spending a couple million dollars doing that.

Absent that, the base businesses themselves use about $5 million plus at this kind of revenue range for CapEx needs in order to deal with their production flows and new product efforts. That can ebb and flow a million dollars, but it’s not, our businesses tend not to be very capital intensive..

The only place you see, we spend on test equipment. A lot of what we’re doing is a very sophisticated test so as we launched new products at times we need to upgrade our tester capability to handle the new product. The one area where we actually have a little bit of thought around the real production capital is in the Westwind spindle business.

They have some machining capability and we’re using their capacity to make components for some of the other businesses, which is driving productivity initiatives and there is occasionally some tooling and some spending associated with that, but overall it’s a modest kind of thing..

Okay and one more question from me, and then I’m done.

The differences between our model in the quarter, and there weren't many, one was D&A that looked like it tweaked a little bit higher, the other one was your non-GAAP tax rate that looked closer to 35% this quarter, what caused that shift this quarter and how should we think about those going forward?.

DNA ticked up a little bit because we wrote off - that was really associated with the radiology closer, so you'd have a little bit on an acceleration of amortization depreciation associated with that. So that will tick back down probably to where you modeled for, for the second quarter on a go forward basis.

In terms of the non-GAAP taxes, you are right. Really, it’s easier to predict the full year then it is the individual quarters and that’s associated with shifts in jurisdictional link on the really, it kind of average down and trued up by the end of the year.

There's a number of discrete items that are now recorded in the current quarter and they kind of get adjusted out the full year. So, I think from a full-year basis, I don't think your model is that far off from a non-GAAP tax rate. There will be a little bit of ups and downs in the individual quarters..

So for the full year we should still expect that 32%, 33% consolidated?.

I would go back and, yes it is somewhere around 33%, 34% I think was the guidance that I provided, but….

Got it. Okay. Perfect. Thanks very much guys..

Thanks Lee..

[Operator Instructions] There are no further questions at this time. I turn the call back to the presenters..

Okay, thank you operator. So to summaries, I would say we are out of the gate in 2016 in a solid manner. We were pleased to see our order rates pick up and went through Q1. We executed well in most cases across the company. We feel that our strategic direction with close to half of revenue coming from healthcare positions us well.

We certainly expect to drive organic growth for the year as we said weighted to the second half. Our acquisition pipeline looks quite promising. We expect to be able to close multiple deals this year to add to our capabilities and further our growth strategies. So stay tuned certainly for more developments on the acquisition front.

We have a great team in place. A high a great team in place, a high degree of focus and accountability for results across the company and we’re confident we will be able to translate all of that into successful outcomes and value creation in 2016 and beyond. I appreciate your interest in the company and your participation in today's call.

I look forward to joining all of you in several months on a second quarter call. I’d also like to mention that we hope to meet with some of you at the Stifel Technology Conference in San Francisco in June, and the CJS Securities Summer Conference in White Plains, in July. Thank you very much. Today's call is now adjourned..

This concludes today's conference call. You may now disconnect..