Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the GSI Group 2014 Q4 Earnings 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, Chris. Good afternoon and welcome to GSI Group's fourth quarter and year-end 2014 earnings conference call. I am Robert Buckley, Chief Financial Officer of GSI Group. If you have not received a copy of our earnings press release, you may obtain one from the Investor Relations section of our Web site at www.gsig.com. Please note, this call is being webcast live and will be archived on our Web site. 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 afternoon and also those in our SEC filings. We may make some comments today both in our prepared remarks and our 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 to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to the GAAP measures in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our Web site. I'm now pleased to introduce Chief Executive Officer of GSI Group, John Roush.

Thank you, Robert, and good afternoon everybody. Welcome to the call. I'm very pleased to report that GSI performed well in Q4 and finished 2014 on a positive note. And I would say as with most years things did not develop exactly the way we drew it up on the chalkboard at the beginning of the year, but we accomplished many important things that move us closer to our strategic goals and better position us for future success. We also during the year responded well to several issues that unexpectedly arose, so I'm pleased about that and I'll share some detail. From a financial perspective, I will give you a few highlights and Robert will go into much more detail in his section. In the fourth quarter, we had sales of $94 million that was up 14% reported and 1% on an organic basis. The Q4 revenue was impacted over $1 million relative to the guidance we had issued in November because of the strengthening U.S. dollar. The GAAP EPS for the quarter was actually a loss of $0.82 due to the impairment of intangibles that we'd announced on January 12 of this year. A non-GAAP EPS was $0.24 in the quarter and adjusted EBITDA came in at $15.3 million. Both figures were above our own expectations as our productivity initiatives enabled us to expand our non-GAAP gross margins by over 70 basis points year-over-year. That margin expansion along with a generally cautious approach that we took to discretionary expenses in Q4 enabled us to more than offset the negative impact in Q4 of the strengthening U.S. dollar. For the year, we ended up at $365 million of sales up 15% reported and 1% in organic basis. The full-year GAAP EPS was a loss of $0.49 again due to the…

Thank you, John. During the fourth quarter of 2014, GSI generated revenue of $94 million an increase of 14% from $82 million in the fourth quarter of 2013. Changes in foreign exchange rates adversely impacted revenue causing a roughly 2% decrease in reported revenue. Excluding the impact of the JADAK acquisition and changes in foreign exchange rates, the company's revenue increased by approximately 1% compared to the fourth quarter of 2013. Growth in our advance industrial applications was partially offset by year-over-year weakness in medical and market applications. Sales to medical customers were down due to significant U.S. regulatory changes going into effect in 2015, which disrupted hospital capital expenditures in the fourth quarter. The medical market is showing signs of stabilization now but the majority of our OEM customers are expecting a better outlook for 2015. Turning to our segments, sales of laser products for the fourth quarter of 2014 increased 7% to $46 million compared to $43 million in the prior year. The business experienced solid growth across all business lines. While we experienced some weakness in medical end-market applications, our laser scanning and beam delivery technologies were up nearly 10% whereas our laser source technologies were up mid-to high single digits. Sales of medical technologies for the fourth quarter 2014 increased 30% to $32 million compared to roughly $25 million in the prior year. The JADAK acquisition drove the increase in reported revenue. However, sales of our visualization solution sold underneath the NDS and Dome brands were below fourth quarter 2013 levels. Sales of precision motion for the fourth quarter of 2014 increased 10% to $15 million from $14 million in the prior year. The business experienced solid growth across all product lines. While the business experienced some weakness in medical end-market applications, demands for our products…

Thank you. [Operator Instructions] Your first question is from Lee Jagoda with CJS Securities. Your line is open.

Hi. Good afternoon.

Hi, Lee.

So John you mentioned that you did the study and defined your addressable market at about $2 billion. Can you define that market into some broad buckets in as much detail as you'd like?

Well, I mean we have a map of it because you are looking at technologies down one side and then you are looking at application areas across the other side. But some of that is in traditional laser materials processing applications. You've got a lot of precision motion applications. You have auto-ID applications. There is a lot of different things going in there and that's medical and industrial. So and it's kind of hard to walk it through verbally what all that is. But, the interesting thing is, when you look at and say okay, if you view medical as a broad area and advanced industrial is a broad area, they are both in the range of about $1 billion, what we can access. And they have similar growth rates frankly. We are a little weighted sort of 60:40 industrial to medical right now. But it doesn't say that there is a big difference in our growth opportunity across one of the other. But the way we built that up Lee is, we did strategic plans in all the businesses and then kind of had enough of standardization of how they define it. Then you can then start to aggregate the stuff.

Okay, great. And then just following up on the SG&A side, I would assume that the SG&A as a percent of sales goes up particularly because of currency and there's no real significant offset there. You've talked about adding sales and marketing ahead of future growth. Can you talk about some of the initiates you are planning on the sales and marketing side and when we expect to see the acceleration of growth because of those additions?

Well, I mean the first thing to realize is just the way we sell. I mean it's a designing process that you could think of that designing process as a year plus or minus in industrial application then two years plus in medical applications, right? So you can't walk in the door and have a meeting and then leave with an order. What you are working towards is a design win. And then when you get the win, you still have work to do before you see revenue. So we have to add resources ahead of when the demand shows up and it's a one to two-year lag on that. So I mean we have made additions. It's not like we're just starting it right now adding some of those front-end resources we have been doing it. But, you kind of have to keep doing it and there is a lag effect. But, we didn't get a lot of organic growth in 2014 fair point. We're seeing more flowing in there even in Q1 and as we move through this year we are going to start to see some mid single-digit organic growth opportunities. So I think we're getting some benefit from that and you would see even more next year of course.

The one thing I would add to that is, traditionally as you look at how we manage your SG&A and even our R&D for that matter. We've been fairly conservative in adding those resources into that organization. So this is probably the first time as we get into 2015, we have enough confidence, so we can start to add those resources and we know where to put them.

Yes. I mean it's a good point what Robert saying. What we tend to do is, drop a plan to add a lot of these resources. But we've been conservative where if the revenue was not happening, we will go back on it and preserve the profit margins and all that and there's goodness in that instinct. But, at some point you have to just go forward. Because really there is this lag and we're not going to get a sale with any customer in the first few months or even really in the first 12 months that we add a sales person. Occasionally it happens in some kind of serendipitous way that we walk into an account and there is some supplier there that's falling down and you can kind of jump in there and take the business over. But that's not our normal way of acquiring business. It's really when the customer is doing R&D and we collaborate and we get incorporated into their new product launch. It just doesn't happen that quickly.

And is it fair to say that most or the vast majority of the SG&A and R&D is U.S. centric and wouldn't be – you wouldn't get the benefit of the FX that you are getting hit for on the top-line?

Well, I would say it's certainly on the R&D, that is not necessarily the case on the SG&A side, but certainly on the R&D side that's the case.

Okay.

That the vast majority of our centers of excellence reside in the U.S. From an SG&A perspective there is a little bit of arbitrage that we can play out there and we continue to look at those opportunities.

It actually even for business reasons never mind FX reasons. We need to get our sales channels more developed in Asia and even really in Western Europe in some cases. And that actually would play okay when you are seeing the weakening euro or whatever. But we wouldn't do it just for the currency reasons. But, R&D right now is pretty U.S. dollar centric. We have on the Board some programs to start doing in country R&D in China and doing perhaps some limited R&D in Europe, but it's not big numbers. That's skewed in a significant way into the U.S.

Okay, great. I will hop back in the queue and let others ask questions.

Thanks Lee.

Your next question is from Jim Ricchiuti with Needham & Company. Your line is open.

Hi. Good afternoon. Question on gross margins, some nice improvement that you showed in Q4. How should we think about gross margins over the next couple of quarters?

For the full-year we give guidance around 160 basis points that was somewhat applied at the gross margins that you see in the fourth quarter. Certainly hold into the first half and then begin to increase as you get into the back half of the year. So there is continued gains there. When you look at the volume to volume ratio on a year-over-year basis you should expect to see some margin expansion.

Okay. Thanks. And John, I think you alluded to an up tick in the medical segment, the medical business orders. Do you expect to see the growth in that business more weighted toward the second half of the year?

Yes. Jim I think that's an accurate way to look at it. I mean just because I mean there is a little bit of a correction system being a component supplier, when you have a sudden slowdown as you can imagine like your equipment is not selling. They already have some inventory of our components right? So then they try to shut-off deliveries of components and then as it starts to trend back there is always this lag affect because we are at the end of the chain, right? So as they start to see – they had probably too much inventory of our product at a point in time, so there is a bleed-off, they start to pick up in sales, but we don't see it right away. But, ultimately when they bring bleed through some of the inventories both see the pick back up. We're getting those positive signals. It is definitely more skewed to the second half and first half, but some good signs already.

Got it. And just as we look at the portfolio of businesses, there have been some adjustments that you have made you've been acquisitive. How should we think about the year both from the standpoint of potential acquisitions that you see in the pipeline and should we consider that there may be any additional adjustments to the existing portfolio of businesses?

There could be. I mean we are always active. This is something that never stops in terms of cultivating acquisitions meeting with companies. We source our own deals that we think fit our purposes. We don't kind of respond to the typical sales processes that are happening and so that you can never stop doing that. Some things are further long than others. Some transactions are larger and smaller than others. It's difficult to predict. But there is a good likelihood. We could have additional transactions happening this year on the acquisition side. With respect to divestitures; we always evaluated, I used the term we rack and stack the portfolio and always say there are a few, what are your best businesses, most quarters what are you are doing, somewhere in the middle and somewhere last quarter and you are always sort of evaluating that, but nothing that we can speak to it at this time anyway.

Sure. And I may have missed it, but I think you talked about savings in the area of $6 million. And I wasn't sure again I missed the reference, was it geared more toward some of the initiatives you've taken on a procurement front and if that's the case how should we think about that playing out over the course of the year? Is that something you think will be more impactful in the second half?

Well, I mean, the first part of your question, the savings are somewhat more skewed to the supply chain because that's where the cost is. I mean we just have 70% to 80% of product cost is purchase material. So you got to work on that to get savings. And if we are skewed and the $6 million you could think of it roughly as one-third in-house labor overhead type cost and one-third in the supply chain, this labor overhead and cost of poor quality, the internal cost. The other part is the supply chain. When you drive this up – this is all based on planned and efforts that were already being worked on through the course of last year. So you do have the ability to get some of the savings even early in the year, but it builds upon itself as you go through the year. And we now have it in a process; every one of our sites has specific projects not just a dollar figure. They got projects that lead to the dollar figures. In the supply-chain and in their own factory cost structure and the projects and the savings from those are reviewed every single month and we track against it like it’s a normal part of the budget now. I mean it's much further along than we were to say 12 months ago where we had aspirations and we had efforts and intentions, but it's just was not structured that way. Our view is you got to drive this kind of productivity every year. It's not a one-time event. And we put in place – we said IT, but what it really is, we did a spend analytics tool we implemented. And that is basically a system that sucks all of your procurement data out of your underlying systems in that factory. It says what parts are you buying, from whom, in what quantity, what supplier, what price are you paying? And brings all that data into one place and then you can compare notes and see, well, here we buy printed circuit boards from 20 different vendors or 30 different vendors and consolidate that buy in five vendors, you could get a savings on that and you do something about it and then when you do it you can track it. So it's called the spend analytics tool. It took a while to implement that. So now you can push a button and get all the data. Look at it weekly and refresh it. So it's an excellent tool that really now say what are we spending, where is the spend? How do we go after this and drive it. This is the same process we've done in other companies. Our team has done it other companies and once you get that infrastructure, it's a big step forward. You are always now negotiating with a lot of information and a lot of knowledge and you know where to focus.

And John, this has been implemented across the business units?

Yes. Because it's a centralized tool, the spend analytics has been mapped to each system in the field but the data pools into one place and so it's, yes, all the sites are linked to it.

Every supply chain leader across our sites, every general manager, every production line leaders can see the information.

You imagine we run different ERP systems in a lot of our different factories. So if you don't have this, you are on the phone trying to say hey, where do we buy circuit boards and what do we pay for them? And it's highly inefficient to ever try to get real savings out of a process. Now we can see all that with a push of a button, where do we buy where, prices, trends our prices moving up or down or so you can start to really build a program and say where do go renegotiate some of this or looked at strategically consolidate the buy. And it's racked how much of what you are buying is coming from low-cost countries and things like that. There is this tendency in smaller companies and businesses like we where our roots are that everybody buys from vendors that are within an hour's car ride where the factory is. And that's not a way to drive productivity. So now you are able to kind of get out of that.

Got it. Thanks very much. That's very helpful.

Thanks Jim.

Your next question is from Keith Maher with Singular Research. Your line is open.

Hello.

Hi, Keith.

I was wondering if you could provide a little bit more detail – financial details on the Applimotion acquisition just if you could share in terms of how much revenue that entails – what kind of margins?

It was more of a technology acquisition; it was relatively small in nature. But that being said, we haven't provided a lot that's not incorporated that much of our guidance at this point in time. Again, it's not very big, but we haven't provided a lot because it's a small business that's never prepared its books in anything other than QuickBooks and certainly not on a GAAP basis. So we have to sort our way through that and get that fixed before we started giving some updates there, but that certainly could surprise a little bit of upside on the top line.

And it has not closed yet, I guess?

Just recently closed and so its couple of weeks of revenue – probably couple of weeks of revenue for it.

All right. And in general, you are not including any acquisitions at this time are you?

No. We're not including any acquisitions or divestitures in our forecast at this time. Certainly there's plenty of things in the pipeline that we look at as John mentioned before on both sides and we will evaluate it at the time as appropriate.

Okay, great. And with regard to the negative FX you are seeing, I mean a little bit perhaps to maybe trying to raise prices or maybe I misinterpreted that. Is that something that is realistic and I'm just thinking of your competitors or [indiscernible]?

Yes. I mean that's the issue. What you just said is the issue. In a number of cases we have direct competitors that are private companies in Germany or in the Eurozone that have all their costs in Europe. So if we try to recapture margin by raising the prices we become uncompetitive with those. So it's a balancing act. You look at where you maybe able to do that, but we don't want to have a short-term knee-jerk reaction that disadvantages us in the longer-term customer relationships. We don't want to let the enemy into customers.

Right.

Okay.

I think sometimes that you got to take into consideration – there is a lot to place. We tend to be a heavy U.S. dollar cost structure organization. But that doesn't mean that we are 100% U.S. dollars. So there is opportunities even to change the currency in which we transact in that could have a benefit to us. So we started that in the fourth quarter when we started to see this trend in Europe was likely going to continue for a little bit. And try to better match what we transacted versus what we are producing. And I think we made some good progress on that that's incorporated into our forecast for now, but hopefully it provides us with some opportunities as we go throughout the year.

Okay, great. And finally, you are talked about the nice design wins in the laser product area. Just curious how long does it take for those design wins to get into your customers product and get shipping I guess in driving revenue?

Yes. I mean that is the kind of the key question. Business like ours that are highly engineered component business. We owned shelf-stuff out of a catalog. We don't have finished good sitting on a shelf waiting for anybody. What I would say is, in the industrial applications and the CO2 laser is predominately an industrial type of technology, it's shorter. I mean it is still typically averages over a year. But you can have some ramp up. The stages you go through is initial prototype samples and then qualification samples preproduction samples where the quantities are a little bit more and then ultimately production volume. You are not going to get to the production volume in less than a year normally. But you can start to see a ramp to that. It's the medical that takes longer because you have a regulatory cycle sometimes in FDA or 510(k) process. So that just takes longer. But with it – some of those can turn into revenue. You will see something in the first 12 months, but then you will hit a run rate in a year and a year and half.

And then how long is the lifecycle, once you are in?

That's another great question. When you are looking at industrial applications it tends to be – is about the seven-year type of range. When you're looking at medical though and we're sitting in platforms that are 10 or longer years and so it becomes an annuity stream. So one of the things that you always constantly focusing on is that annuity stream that you have how much of that is coming up for bleeding off meaning that they are moving off of that platform into something else. And then how much new business can you get in? I think we finally got ourselves into a position where we are generating more new opportunities than we've seen coming off and so we're feeling better about that.

Okay. Thanks. That's really helpful. That's all I had.

Thank you.

[Operator Instructions] Your next question is again from Lee Jagoda with CJS Securities. Your line is open.

Robert, just a couple of bookkeeping items, your expectation for amortization of purchased intangibles as well as the GAAP tax rate and the non-GAAP tax rate that you expect sitting here today.

I will start back with on a non-GAAP tax rate around 35% for 2015. On a GAAP basis it's going to be – it's difficult to predict. I have an impairment charge that obviously threw-off the 2014 number pretty significantly, so we finish off around 5%. But we were trending before that in the call 35% range as well. Arguably, they should be fairly close on a GAAP and non-GAAP should be not that different, see you can use those two numbers. From an amortization of intangibles on a total basis, portion of that goes up in our cost of goods sold. We gave in an 8-K release earlier in the year about $11 million that is our guidance. And I still see that. So we're sitting somewhere around $11 million then depreciation is somewhere around $7 million to $8 million or closer to $8 million.

And of the 11, what portion of that goes into cost of goods?

It's about – $7 million is going into operating expenses.

Okay.

And there are no further questions at this time. I will turn the call back over to Mr. Roush for any closing remarks.

Okay. Thank you, operator. So as we move forward in 2015, we do see a positive outlook for GSI. We made tremendous progress as an organization. We're in a better position to drive forward with our strategies and ultimately control our own destiny as a company. We built an outstanding team and more attractive portfolio and a solid execution capability that enables us to drive sustainable profitable growth. So the agenda for 2015 is clear. As demand from medical OEM customers recovers, we need to continue to serve them well bring new products and technology to market and capture design winds which are the lifeblood of our business. And those secure our future growth. Demand across our industrial applications has been healthy. We expect that to continue. We got to execute on our strategic plans and ensure that we capture the future opportunities we do see across the market. Following the closing of the Applimotion transaction, we are now implementing our integration program for the business to bring it together with our encoder business. As we said, there are significant opportunities for the combined business, so we need to get aligned quickly to take advantage of those. On the operational front as I mentioned earlier, we now have concrete planned-in programs to drive productivity and operational improvements in each site. We are moving out of these plans, tracking progress on a monthly basis and operating reviews and I should expect to see a very good impact in 2015. The economics uncertainty remains a part of the landscape in which we operate. The strengthening of the U.S. dollar, it's going to have an impact on us like it will on many if not most global companies reducing reported revenue into extent pressuring margin. We are not deterred by that factor. We have confidence in our team, our strategy and our ability to create value. The leadership team here at GSI is fully committed to deliver on our 2015 goals and to strengthen our foundation of the company to ensure our future success. I'm confident we will get there. I appreciate your interest in GSI and your participation in today's call and I look forward to joining all of you in early May on our first quarter earnings call. Thank you very much.

The call is now adjourned.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.