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Edited Transcript of PRCP earnings conference call or presentation 12-Nov-19 1:30pm GMT

Q1 2020 Perceptron Inc Earnings Call

Plymouth Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Perceptron Inc earnings conference call or presentation Tuesday, November 12, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jay W. Freeland

Perceptron, Inc. - Chairman of the Board, Interim President & CEO

* Laura Pecoraro

Perceptron, Inc. - Executive Officer

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Conference Call Participants

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* Christopher Ralph Van Horn

B. Riley FBR, Inc., Research Division - Analyst

* Danny James Eggerichs

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* Mike Houston

Lambert, Edwards & Associates, Inc. - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Perceptron First Quarter Fiscal Year 2020 Financial Results Webcast and Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Mike Houston of Investor Relations. Please go ahead, sir.

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Mike Houston, Lambert, Edwards & Associates, Inc. - MD [2]

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Thank you very much, Chuck. Good morning, and welcome. Thank you for joining the Perceptron conference call and webcast to discuss the company's financial results for the first quarter of fiscal 2020. After market closed yesterday, Perceptron issued this quarter's earnings release and Form 10-Q, which is available on the website, investors.perceptron.com.

Joining me on the call today are members of Perceptron team Jay Freeland, Chairman and interim CEO; and Laura Pecoraro, Vice President of Finance. We will begin the call with Perceptron team's prepared remarks and then open the call up to questions. However, before we begin today's call, it is my responsibility to inform you that some of the material that we will be discussing today constitutes forward-looking information under the meaning of the Private Securities Litigation Reform Act. Any forward-looking statements made are based upon information believed to be true as of today. Please review the release and SEC filings for information on the risks and uncertainties that may cause actual results to differ materially from the forward-looking information provided.

Perceptron is not responsible for transcripts of this call made by independent third parties. Unless otherwise noted, comments are in U.S. dollars and references to years will be for fiscal years, which end on June 30.

I will now turn the call over to Jay. Jay?

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Jay W. Freeland, Perceptron, Inc. - Chairman of the Board, Interim President & CEO [3]

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Thanks, Mike, I'll start the call today by discussing the leadership change followed by my thoughts on the quarter and a couple of product development highlights. After my comments, Laura will provide a detailed review of the financials. And then, I will conclude with some comments on our outlook for the remainder of fiscal 2020.

As all of you have probably seen by now in this morning press release, the Board has appointed me interim CEO in addition to my duties as Chairman. We are grateful to Dave for everything he has done for Perceptron during his tenure as CEO as well as during his time as CFO before that.

From the Board's perspective, we're at a critical juncture in the company's life. We have amazing technology and amazing people, but we have not delivered value for our shareholders and we have underperformed our opportunity set. Additionally, we're in a period of uncertainty in both the automotive industry as well as the broader global economy. Our company, your company needs to rapidly adjust to the environment and get ahead of the curve to be prepared for when the near-term uncertainty subsides.

We need to leverage our strengths and at the same time, reposition ourselves to better anticipate what's around the bend, not just 3 or 4 blocks north but also 3 or 4 blocks to the east and west. Perceptron is a company with an amazing core that should benefit from a revitalized vision for what is possible, but also preserves what we do so well already.

We need to understand this vision and the context of long-term value creation for our shareholders and the optimal path forward. The vision and strategy for Perceptron are under comprehensive review at the Board, and I anticipate your company will be measurably stronger and more valuable when we're done.

As also mentioned in this morning's press release, the search for a permanent CEO is already underway under the direction of the Board. We're looking for a leader who can accelerate Perceptron's forward momentum and maximize the underlying value that is not reflected in the current share price. We're looking for a leader who will drive change within the organization and at the same time, develop the team and create a new sense of shared purpose.

We are looking for someone who has led a complex global organization. He's customer centric, technically savvy, understands the manufacturing environments that we sell into and has the vision and passion to lead this company in a new direction. While I can't predict how long the search will take, I can assure that we will not settle for anyone who doesn't match those skills and embrace the mission.

In the meantime, I will personally be fully engaged launching and driving the transformation until we find the right leader and have that person fully integrated into Perceptron. This company has very talented senior leaders who I deeply respect, appreciate and believe in. While a change in leadership is never easy, the strength of our core executives gives me confidence in our ability to drive improved results, bookings growth and market share gains even during this interim year.

I'd also point out that our Board, all but one of whom have served for less than 3.5 years, are incredibly dedicated to this company and fully support the path we're taking.

Let me shift gears now and talk about our first quarter financials for a few minutes. We started the year with mixed results. Bookings were just over $17 million, reflecting softer than expected order intake. We saw several orders get delayed that we're expecting this quarter, which continues a trend we were seeing last quarter and reflects the uncertainty we're facing in the automotive market.

We also won a few orders that had smaller content value than we were planning on. The reduction in content value is not a reflection of competitive gaps, but rather a function of the automotive uncertainty I just mentioned.

Sales in the first quarter were just under $18 million, which is also lighter than the volume we were expecting. Last year's Q1 sales were over $21 million, but included some large programs that we were wrapping up in Americas. That being said, Q1 2020 sales are below our target.

Profitability in the current quarter was stronger despite the delayed orders. Gross profit was 39.7% and operating income was $1 million or 5.7% of revenue. That represents our highest gross profit as a percentage of sales since the first quarter of fiscal 2018.

The global economy remains challenging, and we are working hard to adjust and anticipate what's on the horizon. The continuing trade tensions between U.S. and China is certainly one factor. But even without that, overall automotive production in China continues to decline, now down approximately 20% from just a couple of years ago.

We also believe that the shifting trend in automotive industry towards automatic or electronic and autonomous vehicles is causing investment delays for new models, which historically has been a key driver of our business. However, while we recognize that Perceptron remains subject to our customers' timing and frequency of new program launches, we believe that technology investments we have made over the last several years will allow us to benefit from these industry changes. Regardless of macro headwinds and shifts in customer order timing, Perceptron's value proposition remains very much intact. Our integrated customer solutions, improved quality and efficiency, reduced downtime and shortened product launch cycles, which drives substantial value for our customers.

On the product development side of the business, we're starting to get traction from our new AccuSite product, and we have orders from several large global customers. I'll also note that a few weeks ago AccuSite was selected as a finalist for the PACE Award for innovation, a nice recognition for our development team.

Our AutoGauge ACF solution, an expansion of the AutoGauge product line, was developed to measure our broad array of parts near-line, while this product will enable us to penetrate industries beyond automotive as evidenced by our recently announced win at a global appliance manufacturer.

Finally, our auto guide solution for robot guidance has been expanded to enable applications beyond the traditional focus on high-end robot guidance, and we will continue to augment this platform to enable simpler robot guidance applications that do not have the same precise requirements of assembly. This will create another opportunity for the company to move beyond our traditional automotive focus.

The company held its annual customer open house at our headquarters in Plymouth 3 weeks ago. More than 60 customers attended with approximately half representing our traditional customer base and half representing new potential customers.

Feedback on our product development was overwhelmingly positive, and we had 3 main takeaways from the event. First, AccuSite receiving meaningful interest from most of our customers and puts Perceptron in a leading position in absolute measurement. Second, AccuSite's ability to improve the accuracy of a robot in an industrial environment should open up many new applications. And third, AutoGauge ACF is seen as a valuable alternative to in-line measurement by enabling near-line measurement of smaller manufactured assemblies.

Perceptron's underlying business remains strong as we continue to develop industry-leading products, while maintaining our deep customer relationships. These fundamental elements of our business as well as our dedicated team create a unique competitive advantage for us.

Before I turn the call over to Laura, I want to reaffirm our belief that the development path we are on will lead to new opportunities within automotive and its changing landscape towards EV and autonomous vehicles and further down the road, to sectors beyond automotive.

As we continue to execute on our most promising opportunities and deliver exciting new products, we believe we will provide sustainable and profitable growth for the company and its shareholders, which will lead to enhanced enterprise value. Executing while optimizing this plan along with a thorough review of our entire business should position Perceptron, our talented employees and our shareholders for lasting value creation.

I'll now turn the call over to Laura to provide more color on the company's financial performance.

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Laura Pecoraro, Perceptron, Inc. - Executive Officer [4]

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Thanks, Jay. First quarter bookings were $17.2 million, an increase of 5.7% on a constant currency basis compared to the first quarter of fiscal 2019, a $3.3 million increase in in-line and near-line measurement solutions in our Americas region was partially offset by decreases in our Europe and Asia regions of $1.8 million and $1.2 million, respectively.

First quarter bookings included an unfavorable currency impact of $0.5 million. Bookings in the first quarter of fiscal 2020 fell short of revenue by $0.7 million, which caused a decrease in our backlog to $37.7 million. Our Q1 bookings and the potential of continuation of the challenging uncertain global economic environment mentioned earlier have led us to update our guidance, which Jay will address more specifically in his closing remarks.

Revenue in the first quarter of fiscal 2020 exceeded bookings by $0.7 million, which caused a decrease in backlog to $37.7 million. Sales in the first quarter were $17.9 million, a 1.6% sequential decrease from this past Q4 -- to 16.4% from the first quarter of last year. Our first quarter sales results had an unfavorable foreign currency impact of $0.5 million when compared to prior year's first quarter, primarily due to the dollar-euro and dollar-RMB exchange rate fluctuation.

Our Europe region had sales of $7.1 million, which was an 18.9% decrease from the same quarter of last year. This decrease was due to softness across all product lines. Sales in Asia were up $0.3 million in the first quarter to $4.6 million compared to sales of $4.3 million in Q1 of prior year. The increase was primarily due to an increase in the in-line and near-line, partially offset by a decrease in our off-line product sales.

Sales in our Americas region were down $2.1 million to $6.2 million for the quarter. This decrease was primarily due to in-line systems.

Gross profit as a percent of sales for the first quarter of fiscal 2020 was 39.7%, which is up 90 basis points as compared to the same period of our fiscal year 2019. The increase is primarily due to mix including the impact of new products and our cost-cutting initiatives.

As we have discussed in the past, our longer-term aspiration is for consistent quarterly gross margin levels above 40%. We have seen the benefits of the actions we've taken to reduce both our fixed and variable expenses, and we'll continue to identify additional opportunities to expand our margins.

Now let's turn to the operating expense line items. Engineering expenses, which include our R&D, decreased approximately $0.4 million to $1.8 million in the first quarter of fiscal 2020. This decrease was primarily due to employee-related expense.

Selling, general and administrative expenses were $4.2 million for the quarter, a decrease of $0.4 million compared to last year's first quarter. This change is due to a decrease in legal fees, employee-related costs, commission and amortization expense.

Operating income for Q1 was $1 million, down from operating income of $1.5 million in prior year Q1. The decrease was primarily due to the lower sales volume level.

Cash and short-term investment balance ended the first quarter at $4.7 million, down from $6 million at June 30, 2019, and $8 million at September 30, 2018. We had no outstanding borrowings on our $8 million line of credit at the end of any of the aforementioned periods.

I'll now hand the call back over to Jay for his closing remarks.

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Jay W. Freeland, Perceptron, Inc. - Chairman of the Board, Interim President & CEO [5]

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Thanks, Laura. Despite the headwinds I discussed earlier in the call, the Board and I remain extremely confident in long-term growth potential of Perceptron. We believe there's significant upside and value creation opportunities ahead for the company. As I stated in this morning's press release, we will in the near term conduct a thorough evaluation of our cost and organizational structure. We will take a critical eye to various strategic options, including potential divestitures and strategic business partnerships. And most importantly, we will leverage the strength of Perceptron's core technology and its talented employees to drive substantial value creation for our shareholders.

Before moving to the Q&A portion of the call, I would like to review our outlook and guidance for the rest of fiscal 2020. We are targeting double-digit growth in bookings over the fiscal 2019 results. We are also looking for revenue growth for the full year of fiscal 2020 to be in the low- to mid-single-digit percentage range compared to fiscal 2019 and operating margin in the single digit -- mid-single-digit range.

I'd like to thank the global Perceptron team for their continued dedication to our company's success. And I will now turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Chris Van Horn of B. Riley FBR.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [2]

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So just to touch on the outlook quickly. Could you maybe highlight have you included any of the potential initiatives that you're working on in that guidance and really what are the kind of the puts and takes when you look at the ranges that you provided?

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Jay W. Freeland, Perceptron, Inc. - Chairman of the Board, Interim President & CEO [3]

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Yes. So I'll say, first, on the -- when it comes to the operating margin and the probability for the company, we do have initiatives underway and we'll have some additional initiatives that will take place through the course of the rest of the year that are reflected in those numbers, certainly the initiatives that have already taken place and are in the process of taken place. So there is -- that is baked in. There is some potential upside that would come with future initiatives that I have not baked into the numbers, and Laura has not put in the guidance that we have out there right now.

On the orders and revenue side, obviously, we've taken down the orders guidance slightly, given this uncertainty that we see in the marketplace. The range of double-digit could have been very low double-digit. It could be, for sure. Could it drift into the single digit? It's possible. The uncertainty is obviously kind of -- that's the issue right now. Automotive is a piece of it. Germany and China and the economic situation in both countries, obviously, we're watching closely Germany's report on Thursday of this week just to see where they end up and do we see a trend moving in a negative direction there. So that's what sort of gives the uncertainty for the company.

I can't put a more specific number on it outside of that. I think there is still plenty of opportunity out there. When we look at the leads that the team is working on right now, both the ones that have already been bid and the ones that are in the earlier stages of the process, we feel good about that double-digit number. And obviously, there is a little bit of visibility when you get to deep Q3 and Q4 is where we pause and say that's what causes the uncertainty on giving a more specific set of guidance from there.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay. When it comes to the order delays, are most of them kind of being pushed to the right? Are their cancellations? And are you seeing just kind of a sentiment from your customers around the uncertainty, just changing timing or are they changing wholesale decisions on product launches altogether?

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Jay W. Freeland, Perceptron, Inc. - Chairman of the Board, Interim President & CEO [5]

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Yes. I would say it's more the former first. We are seeing some push to the right. And that's not unusual. I've seen that before. As you go into periods of uncertainty, particularly when it comes to any type of investment expenditure, that's the first to get set on the block where they will pause for a quarter or 2 to see what happens.

I will not say we're seeing tons of cancellations. We've seen a little bit of scope reduction of some of the projects that we had that we were chasing. So in some respects, scope reduction is a partial cancellation, but it's not a full cancellation of a program they may have just decided that they're going to do -- structure it into 2 tranches, do part now and part later. And that could be that specific customer's way of dealing with the uncertainty. But I can't say we've seen a ton of just flat-out cancellations at this point. That's not -- we're not in that type of environment.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [6]

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Okay. Got it. And then, obviously, gross margins looked really good. I think you mentioned cost cutting and mix. If you could give us a little more detail on specifically what you're seeing on the cost-cutting front. And then, maybe -- and then, again, on the mix inside and any sort of commentary around what that split was for the improvement.

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Laura Pecoraro, Perceptron, Inc. - Executive Officer [7]

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Yes. I would say on the cost-cutting site, it is really broadly across the entire organization. We are really not leaving any stone unturned. The 40% on the gross margin side is something we're very committed to. We got close this time. We're going to continue those efforts.

Mix, very definitely -- the new products really played a big part in the profitability, in the gross margin this quarter. We would hope that continues, we see that continuing. And then also, we have a lot of shipments. We have a tendency to do well when we're materially focused on the hardware and also when we're keeping everybody busy on the installation side, right? So we don't under absorb the installation and the hardware goes out. Those are very good quarters for us. And that's what Q1 look like.

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Jay W. Freeland, Perceptron, Inc. - Chairman of the Board, Interim President & CEO [8]

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Yes. And I'll add to that, Chris, that particularly, when it comes to the new products, a new product development cycle is not just improving the feature set and the functionality for the customer, but it must include cost reduction as well. And that has been a piece of the focus of the development team, the engineering team over the last 2 years. And I think they've done a nice job there. There's always room to improve that. There is design changes that can take out costs. There are technology changes that allow you to take cost out just by the pure mindset or the fact that technology that took 3x of the product or component 2 years ago is now done in a single component because of the technology itself has changed that much your supply base that allows you to take out cost. So there's lots of ways that we continue to do that to help drive towards that 40% gross margin. And as those new products become a deeper part of the mix, then it also helps ensure the path there.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [9]

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Okay. Understood. Last for me. You obviously announced a pretty significant strategic evaluation here. Maybe Jay, do you have milestones that you have in your head or timing of how you like to see this play out? And any sort of specifics around how that would work?

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Jay W. Freeland, Perceptron, Inc. - Chairman of the Board, Interim President & CEO [10]

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I would not feel comfortable putting specific dates out, Chris. What I will say is that the strategic review of the company is already underway in many respects that started several months ago. And taking a look at what do we do best, where is our core. Some of that helps us understand near-term things that can be done just structurally which is not as much attached to a long-term vision and strategy from a market standpoint, but obviously as a positioning play and a positioning maneuver.

What I will say is that the Board has everything on the table right now, and we have the best interest of Perceptron in mind. So what's best for the shareholder, what's best for the employee base, what's best for our customer base. There are real opportunities out there, and we just need to accelerate our focus on those. And they could come in a variety of different areas.

So we will certainly provide more specific updates with each call as we go forward. This is not a 2-year process though, I will tell you that. This -- I tend to move things in 2- and 3-month increments and they need to have meaningful progress in those increments. So even though we are searching for a permanent CEO, that does not mean we're going to sit and wait 6 months, 3 months, 9 months, however, long it takes to find that person to start executing on that strategy because this Board is committed to the long term on what's right.

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Operator [11]

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Our next question will come from Greg Palm of Craig-Hallum Capital Group.

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Danny James Eggerichs, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [12]

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This is actually Danny Eggerichs on for Greg today. I guess just going off your earlier comments on the fiscal year outlook, you kind of guided down orders a little bit. You mentioned that it could be low double digits and could possibly slip into high single digits. I guess what is your confidence in your margin and profitability trajectory given that you reiterated operating margin guidance. If it ended up slipping into those ranges, how confident are you that you're able to achieve those -- that guidance there?

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Jay W. Freeland, Perceptron, Inc. - Chairman of the Board, Interim President & CEO [13]

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Yes. I think we feel pretty confident about that. Otherwise, we wouldn't have put that range out. The concern is, obviously, if a little -- if a few of the orders push out, push out, you get to Q4 and they push out a little bit again, obviously, you have less revenue to work from just based on how the project cycles work and delivery with our customers and the installation with our customers.

I think that the team has done a nice job taking out fixed cost structure in the organization. We talked before about the improvement in product cost as it relates to particularly some of the newer products. So that helps improve gross margin. Mix obviously helps it. But even without a major mix shift, there have been changes that would help the gross margin. And if you bake the business around certain assumptions on gross margin and you've set your fixed cost structure to place you're comfortable with, that should allow it to fall through.

That being said, I will not ever say that we are done looking at fixed cost structure of the organization because there's always opportunity to do things differently and more efficiently. And so that's part of the strategic review that we're going through both as a Board and will be going through as a senior leadership team as well.

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Danny James Eggerichs, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [14]

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All right. Great. And then earlier with the management change, you mentioned that the Board has kind of everything on the table with the best interest of Perceptron. I guess the language in the press release this morning hint to that kind of strategic options. You mentioned divestitures and partnerships. Is there any thought of kind of reviewing any outright sale of the company? Is that included in partnerships or I'm just trying to see what you're getting out with that comment there?

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Jay W. Freeland, Perceptron, Inc. - Chairman of the Board, Interim President & CEO [15]

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Yes. So I'll give you what I'm sure will probably feel like a generally vague answer, Danny. So I apologize. I will say, look, we are a public company. The Board understands its responsibility. And obviously, as a publicly traded company, there's always the possibility of a different owner, a different structure that could go with that. And we would certainly consider if it was the right transaction for Perceptron and the right transaction for the shareholders, we know what to do there.

That being said, it doesn't mean that, that has to be the end result as well. There are plenty of things that we are looking at from a partnership standpoint. Yes, we are looking at the possibility of some divestitures that may make sense relative to the structure we have today, relative to the strategy of where we want to go moving forward. We have amazing automated 3D measurement technology in-line, near-line. We do a ton in automotive. There are a lot of industries that we should be in that we are not in currently. And so there is focus there. And all of those give the opportunity for changing the strategy for the organization. And those -- so I will say all of that is on the table as it should be for an organization that's going through sort of this period. As we said, it's a critical point in our life cycle right now, and so we need to be looking at all of those options.

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Danny James Eggerichs, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [16]

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Got it. Makes sense. And then last one for me. I guess some commentary further on that automotive end market specifically. Have you seen any impacts from the GM strikes? I don't know if you've seen that come through or if you've seen anything at all there?

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Jay W. Freeland, Perceptron, Inc. - Chairman of the Board, Interim President & CEO [17]

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Yes. I can't say that we've seen something specific yet that I would put a finger on and say, "Yes, we know program X or Y has been delayed, canceled." Obviously, when you have the type of financial impact that GM had from the strike, particularly, the impact to their free cash flow for the year, it obviously creates some concern. GM is one customer among many. We're pleased that the Ford transition went much quicker. I think they probably witnessed and saw the result and decided that they are going to move in a different fashion, I guess, as they sent through their process.

So yes, we look at it. I would be concerned about it, but I can't say I'm seeing anything that makes me substantially concerned, particularly as it relates to the overall profile of the company. Look, we have lots of puts and takes, lots of customers. So it takes multiple deals flowing off the table before you start feeling substantial impacts at the top line.

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Operator [18]

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This concludes our question-and-answer session. I would like to turn the conference back over to Jay Freeland for any closing remarks. Please go ahead, sir.

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Jay W. Freeland, Perceptron, Inc. - Chairman of the Board, Interim President & CEO [19]

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Great. Thank you, and thanks everyone for joining us on today's call. And thanks the Perceptron team around the world for your dedication to making this company successful. I look forward to updating all of you again at the end of the second quarter.

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Operator [20]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.