Good morning. 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 2015 Q1 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 morning and welcome to GSI Group’s first quarter 2015 earnings conference call. If you have 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 and 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 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 have changed. 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 website. I am now pleased to introduce Chief Executive Officer of GSI Group, John Roush.

Thank you, Robert. Good morning, everybody. We are glad you can join us today. So I’m certainly happy to report that GSI got off to a strong start in 2015 with a very good Q1. Our end markets and customer demand were better than we had anticipated, and we executed very well across the company during the quarter. Thus, we delivered revenue and profitability that exceeded our own expectations. Robert will comment on the numbers in more detail on his section, but I’ll briefly summarize on things. Q1 revenue came in at $94.6 million, which was up 20% year-over-year on a reported basis with organic growth at 9%. Q1 GAAP earnings per share was $0.10 and adjusted EPS was $0.20, with adjusted EBITDA at $14.3 million, up 26% versus last year. All of these figures were above both our own guidance and analyst consensus. From a demand perspective, we were pleased to come in at the $94.6 million revenue, which was several million dollars higher than we had expected. There were several main drivers of that good performance. First, the Precision Motion business was stronger than we had forecasted. We saw an acceleration of customer demand for both optical encoders and precision motors, in terms of design wins as well as order volumes from existing customer programs. For us having both the motor and the encoder now makes us a more interesting supplier and a technology partner for many OEMs, and it also enables us to make joint approaches to customers to increase content when the customer had been buying only one of the technologies from us in the past. The second area of upside for us was the medical market. On our last earnings call, we had commented that there was a general slowing of medical equipment orders last…

Thank you, John. Good morning, everyone. I’m going to provide you with the financial summary of our first quarter’s results, highlight a number of areas, and provide you with some detail around our second quarter and full year 2015 guidance. First off, I’d like to start by saying we had a solid start to 2015. Reported revenue in the quarter was up 20% to $95 million. Organic growth was up 9%. Unfavorable foreign exchange represented a negative headwind of approximately 5.5% or $4 million. Revenue growth was driven by solid growth in all three operating segments. Our Laser Products business was up 7%, Medical Technologies was up 39% and Precision Motion was up 24%. Laser products experienced growth in all its major product segments with particular strength on laser scanning solutions, low power and medium power CO2 lasers and fiber lasers. We continue to invest heavily in new products with 14 new products under development in 2015, that will expand our product offering to OEM customers and advanced industrial and medical end-market applications. Medical technology is benefited from the acquisition of JADAK, which offset declines in our visualization solutions product. While the overall medical end-market remains weak, the first quarter did demonstrate an earlier recovery than we planned in the stabilization of the market. The second-half of 2014 was clearly impacted by the significant regulatory changes, particularly the electronic medical records requirements in the U.S. and changes in medical reimbursement rates. While we are still anticipating the first-half of 2015 to be impacted by higher than normal IT spending by hospitals and other healthcare providers, we are optimistic with the improvements seen to-date. And we expect the second-half will be stronger. Turning to our Precision Motion segment, the acquisition of Applimotion benefited the segment as well as strong double digit…

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

Hi, good morning.

Hi, Lee, how are you?

Good. Can you start, and I don’t know if you gave this in the prepared remarks, but the contribution from JADAK in Q1 and the growth rate year-over-year assuming, it was in the business for the full period in both periods?

We do not have that in our prepared remarks, I have to get back to you on that.

Yes, I mean, but the important thing year-over-year, it behaved like our other medical business, it was down a little bit, not big, but it was down kind of high single, comparable to what we saw in basically all the medical business. There was just a few areas picked up that surprised us in all the ones that we mentioned, which was not affecting JADAK so much.

Okay. And then given the strong organic growth in Q1, do you feel, or think that there was some degree of pull-forward on behalf of - on the side of your customers? And if you, if that is the case, can you quantify that?

Yes, I mean, there definitely was some instances, where customers accelerated some things into the first quarter. We had sitting in the second quarter and when we go back to them and say, well, was that, because business is picking up, and there will be a corresponding impact on Q2, so far they’re not committing to that. So, I mean, that’s why we just said, we think if you blend our Q1 and Q2 together, you’re back and more in the mid-single range. And then so you can kind of do the math. The areas where it really happened, robotic surgery was one just sort of general encoder demand was really picking up through the quarter. And to some degree we saw the same thing on Applimotion. And then the scanning business, Cambridge Technology had a number of customers that pushed them to get stuff out the door by the end of the quarter that we weren’t really planning on doing.

Okay. And then one last question, I’ll hop back in queue. Can you update us on the performance within the laser quantum minority interest? And maybe comment on where that business fits into the long-term strategic plan?

Well, let me hit the long-term strategic plan. We do like that business. We think they have a good management team. Of course, we sit on the Board, so we have the ability to interact with them quite a bit. Matthijs Glastra, our COO is the one who actually has the Board seat. I met with the management at Trade Shows. They are good people. They have good technology. We really like their business model and they’re addressing the sort of latest generation DNA sequencers with their technology, so good place to play. What we don’t like at this point is their overconcentration into one or two customer accounts. And so we’re working with the company to kind of address that. If that were to be the case, we have an ever increasing interest in this business. But if it stays kind of tied to a couple of accounts, we’re more cautious about it, I don’t know, in terms of the financial impact.

The business surprisingly does better every year, it’s got strong growth, it is tied to, as John said to one or two key customers that drives the bulk of that growth and profitability. And unfortunately for that business that those customers aren’t very solid and expected to continue to do very well.

But you still you have some caution about that. So there is a strategy in the business to diversify the product set and the customer base, and that’s an ongoing thing. But it hasn’t really fully come to fruition yet. So we like it, but it has to develop a little more for us to increase our interest.

Great. Thanks very much.

Thank you.

Your next question - sorry, your next question is from Jim Richiutti with Needham & Company. Your line is open.

Good morning, John. Good morning, Robert.

Hi, Jim.

Good morning.

Robert, by the way, thanks for some of the help on the specific OpEx items, as it relates to JK. I wonder if we could go back to gross margin that we put aside the improvement that you’re expecting from the divestiture of JK. Would you anticipate, if you put that aside, would you anticipate your gross margins trending higher, as you go through the year just in light of some of the things you’re doing in terms of lean and other areas, where you’re trying to improve manufacturing and productivity?

Yes, I do. So for the second-half of the year, I expect gross margins to come up and that’s one of the reasons why you can get to the profit range that we guided on.

And is that, Robert, is that kind of across the board in the three segments is one area, in particular, going to be a driver, or is it something that you see fairly broadly across the three businesses?

At this point it’s broad across all three operating segments.

Got it. And just in light of the way the business portfolio has changed, is there - how should we think about seasonality in the business, as we look at the second-half? I’m just wondering, is there any changes in the way the business operates Q3, Q4, just in light of the divestitures? Thanks.

The one thing I would tell you, Jim, on that point is, if you were to look over the last 15 years, 20 years, most people would tell you that medical capital equipment spending by hospitals is lower towards the back-end of the year that there are number of key trade shows that occur late in the year. And that’s the behavior you can expect is to see a surge in demand late in the year. Now we didn’t have that happen in 2014, because the whole industry kind of was on this down cycle to varying degrees, but based on technology. But so we can get - that was sort of what happened as the big bump did not occur like it supposed to do last year. But you would expect some seasonality there based on that. Yes, so particularly, it’s recovering half of weakness. The industrial markets, not necessarily, a big seasonality there. I think it’s more of the case, so that you can actually see some dropping.

So I would say with the mix of price we have right now. In Q3, it has to get a little weaker as most of Europe goes on vacation, and there is a - that impacts some of the factory production, and in Q4, we’ll pick up a little bit. And then as John mentioned, the medical area should pick up in Q4 based upon historical trends. It didn’t happen last year due to really two factors, but that is something that is a possible outcome for this year.

Got it. And then - so, John just - so it’s something like RSNA Show, which I guess it’s what in November, is that a big show for you guys now with the different medical properties?

Yes, I would - historically, RSNA has been a minor factor. And I wouldn’t say, it could be even less of a factor. MEDICA in Düsseldorf is a really big show.

Okay.

It’s a sort of broader set of applications. RSNA is really radiology and interventional cardiology, and certain related fields, but it’s diagnostic imaging focus. Yes, it’s interesting if you look at our array of products. We don’t really sell all that much in the diagnostic imaging. We’re in patient monitoring. We’re in surgical. We’re in drug delivery. We’re in life sciences tools, but not so much in diagnostic imaging, inside of a CT or in MRI system, or an x-ray radiology system a little bit, but not a ton.

Got it. Okay. And final question for me is just looking at the R&D line, fairly significant growth in R&D year-over-year and some of that obviously due to the new businesses you’ve added. But it just sounds like you have a lot - a number of new product initiatives underway. And two questions, how do we think about R&D going forward? And how should we think about some of these initiatives in terms of the timeline for monetizing some of these?

Well, a couple of different points in there, Jim. One thing I would say is, we talked about this. But going back 10 years and more, GSI didn’t really have a strong track record of driving the organic growth. And for us it’s a two-step process. We don’t sell off-the-shelf technology. We have the base platforms of products that are generic and then we adopt those to each application. So you have to have a good technology kind of on-the-shelf as a starting point then you have to be good at adapting that. I think GSI has always been good at adapting, working hand-in-hand with the OEMs, but the base technology needs to be kind of refreshed. And so a lot of the investments you’re seeing now will get better base technologies. So we can have more interesting conversations with the OEMs about what we’re going to adapt for their specific needs. I don’t necessarily think the rate of increase is something we need to sustain, where there are some catch-up we’re doing in a number of the areas in the encoders, in the scanners, and in the CO2 lasers, where we’re putting more base technology into the mix. So we can then pursue more design wins, it’s true of NDS as well. But you don’t have to do that sort of every year all the time. The adapting you have to do every year all the time, the application work. But if you look and say, okay, R&D is a lot higher than what it was 12 months ago, or whatever, it’s not like it has to do that every year. You’re not going to get rid of what you have, but you’re not going to keep increasing at. I think, the percent of sales we have - we’re getting to where it needs to be and then can kind of stay there.

So one of your other question is how long does it take? And I think that varies depending upon when we start the projects. And but generally speaking, you’re looking at on the industrial side somewhere in the range of 18 months. And on the medical side, it could be two years. And so we really have to balance that properly and make sure that we get the proper mix of that. So we started getting the returns out sooner.

There are always the projects that I highlighted a few in the comments, where you get a customer that sees your new technology and it’s exactly what they need and moves fast, right? And even inside of the year, you can get into some meaningful revenues, but that’s not the norm, those are the fast cases. But I think Robert’s timelines are right. I mean, we’re not starting from T equals zero right now though. I mean, we have been working on some of this and we’re and we’re seeing the growth picking up already from things we were doing in the last 12 months, but..

Got it. That’s helpful. Thank you.

Okay.

[Operator Instructions] The next question is from Keith Maher with Singular Research. Your line is open.

Good morning. I had a question about the JK Laser divestiture. I understand, it sounds like the margins in that business a little bit below your company margins, and for other reasons it lacks some of the synergies. But I was curious just to where it actually came from that you actually owned it, did it come into the company through another acquisition?

Well, the JK Lasers business is a legacy GSI business that goes back a long time. Back to the sort of 99 timeframe when the old General Scanning merged with Lumonics laser, so it’s a legacy business. Now having said that, the fiber laser program that was done within JK was a somewhat more recent phenomenon. It was kind of an organic startup of fiber laser development inside of an existing division. Basically, you had JK Lasers, the old Lumonics technologies who are in lamp pumped lasers and DC-CO2, which were going down, and so we sort of took the infrastructure and invested and repurposed that into a fiber laser program.

Okay.

And ultimately, we had some success with it. And we sort of commented that to take it to the next level really, I think, it was better in the hands of other companies that were deeply committed to the high power, industrial materials processing, and that’s not something we really do in the company anywhere else. So it wasn’t a great fit. I mean, but it ended up being attractive. The proceeds we got for, I mean, that’s a real positive for us.

Okay. And I think in the short-term, it sound like you just probably just pay down debt and then redeploy in the future?

That’s correct - I think immediately we’d probably use it to look at our debt balances. But ideally in the short-term, we actually like to do acquisitions. We have a number of different targets inside, a lot more bolt-on type of transactions similar to what’s you saw with the Applimotion deal. And so to the degree if we can redeploy that capital back to those returns, that’s a much more attractive thing for us to do.

Okay. And any other divestures plan through this year?

I think, for the most part you can say anything of any significance we’re done with. At this point in time, as John mentioned before, we were sort of done with the transition of this company to a portfolio products that we feel very good about and that we can go, as John said, go to battle with.

And there is always small things that you might be looking at from time to time. But things that really are transformative, I don’t think so, small at the margin is possible product line here. But we feel the portfolio was well designed now to do what we want to do. It’s just, we want to make it bigger and we want to scale and prosper over a longer period of time, but…

Okay. One more question before I hop back in queue. On the Applimotion acquisition, so it closed in February. And I understand it sounds like, you’re going to probably do some integration work, so you can go out to the market with the solutions to use, but their technology already have. How quickly does that happen in terms of kind of getting the product ready to go out and go out and try to get some design wins?

Well, what I would tell you is, when we say, okay, it’s an 18-month cycle in industrial, that’s an average in, couple of years in medical, that’s an average. When you’re going into an account because of the strength of the relationship you already have and saying by the way, I have this other technology and you’re already using that. On a platform that I’m already involved in it’s the people I already know, it can be faster. I mean, it’s not going to be massively faster, but there are cases what we think, well, inside of the year we can get some actual revenue out of that, just because of the cross-selling, it’s an easier prospect than a clean fresh start to sell with some you don’t know as well.

Okay. That was helpful. Thanks a lot. It’s all I had.

Good.

[Operator Instructions] And it appears that we have no further questions at this time. I’ll turn the call back over to Mr. Roush for any closing remarks.

Oh, thank you. So I’d like to wrap up today’s call by reiterating that we’re pleased Q1 was a successful start to the year for GSI. We made strong progress on our strategic agenda. We executed well commercially and operationally. And we had reasonably healthy end-markets that combination adds up to success. As we move to the year, we expect to see continued reported and organic revenue growth as we benefit from the momentum we are seeing in Precision Motion, the recovering capital spending in the healthcare space, and the ongoing solid performance of our laser product lines. We’re benefiting in all of these areas from new product platforms we’ve launched in the last year, as well as design wins are awarded over the last several years. While the global economic picture continues to remain uneven and subject to some disruption, my view continues to be that if you put all this together, it adds up to mid-to-single - mid single-digit organic growth less this year. Our profitability continues to be solid, as we emphasized applications, where our technology creates value and differentiation for our OEM customers, and that enables us to defend pricing and margins. At the same time our program is focused on lean manufacturing, strategic sourcing, and other key productivity areas like value engineering enable us to drive that waste and unproductive cost and let us replace it with investments in new products, applications resources, and expanded sales coverage, all of which enable us to sustain our organic growth over time. And we can make these investments while still delivering profitable growth to our shareholders. So to summarize, we feel good about the way the company is now positioned and aligned for success. We’re very proud of the extended leadership team we built here at GSI over the last couple of years. There are very focused on the right programs and initiatives and they’re all committed to delivering strong results this year and over time. I know I speak for all of them and our Board of Directors when I say that we greatly appreciate the support of our investor base, as we continue to transform GSI into a world-class technology company. We appreciate your interest in the company and your participation in today’s call. We look forward to joining all of you in several months on our second quarter earnings call. And I mentioned that we hope to visit with some of you in person at the CJS Securities Summer Conference, which we will be attending in July. Thank you very much. The call is now adjourned.

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