Advanced Energy Industries Inc (AEIS) 2002 Q2 法說會逐字稿

Good morning. My name is Tamara. I will be your conference facilitator. I would like to welcome everyone to the Advanced Energy second quarter 2002 results 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. If you would like to ask a question during this time, then please press * and then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Kawakami, You may begin your conference.

Thank you. Good morning and thank you for joining us to discuss second quarter 2002 results. Today's speakers will be Doug Schatz, president, chairman and chief executive officer, Mike El-Hillow, senior vice president and chief financial officer. They will provide an overview of the results and will be available, along with Jim Gentilcore, our executive vice president and chief operating office, to take your questions. By now you should have received your copy of the press release issued earlier today. If you need to view a copy go to www.advanced-energy.com. Before we get started, I would like to remind everyone information contained herein, the matters discussed in this conference call contain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Such risks include the volatility and cyclicallity of the semiconductor capital equipment industries, fluctuations in quarterly revenues and operating results, Advanced Energy's ongoing ability to develop new products characterized by rapid technological changes, our ability to integrate the company's operations, and other risks described in our form 10-K, 10-Q and other reports and statements filed with the SEC. In addition, we assume no obligation to update the information we provide during this conference call. I will go ahead and introduce Doug Schatz.

Thanks. Thanks for joining us today. We are pleased to report a 58% quarterly sequential increase in revenue for the second quarter of 2002. The second quarter 2002 sales were 68 million, compared to $43 million in the first quarter of 2002. Aera and Dressler, which are recent acquisitions, contributed 14.1 million, representing strong improvement. If you take out the contribution from Dressler, we grew at 49% sequentially. We were able to reduce net loss to 5.1 million or 16 cents per share from the first quarter 2002 net loss of 8.7 million or 27 cents per share. We experienced increase in orders from our U.S.-based semiconductor OEM customers. We have made significant end roads into the 300mm programs and these increases reflect market success. We have made progress penetrating TEL, which is now a top five customers. There is strong relationship with TEL with our acceptance there. We are working on several deployment development programs and second source opportunities on existing applications. In addition to our increase in power management business, we experienced renewed strength in thermal business unit. Second quarter sales for optical thermometer products nearly tripled sequentially. Year to date, we penetrated 3 new fabs for NOAH, end-user products. This is important because this is one example that illustrates the success of our end user strategy. We are deepening relationships around the world so we better understand how they use our products and how we can help them develop solutions that resolve the ever-evolving manufacturing challenges they face. Our strong relationships with these fabs have resulted in AE becoming supplier of choice in two large IP manufacturers. We announced on May 21, the Delaware jury ruled AE infringed on a patent held by the Aspect division of MKS Instruments and awarded 4.2 million in damages. This affected the wrap-up product line in our sources product division. We were able to continue shipping the products to our largest customer after agreeing on royalty payment for each sold. Our sources group is preparing Advanced Energy sources that do not interfere with that patent and delivery of the new product technology and products are targeted for the end of the 40 quarter. By combining world-class operations of AA and Aera we have seen growth in our mass flow business. AE's strong relationship with OEMs has provided opportunities for the Aera products. We have penetrated TEL and other Japan-based companies with our power and thermal products and their established service and support capability has shown value both to existing customers and the mock-one product group. We recently announced Bob Berner would take over the mass flow business. As part of the Dressler acquisition, we are pleased to have Ulrich Hansen as part of the senior executive team. Ulrich provides 20 years of industry experience and will be a main contributor to continued expansion, especially in Europe. From a corporate standpoint, we have made significant additions to the management team expanding the depth and expertise of AE's leadership. Tom Werning is the new vice president of finance. Scott Burton was named senior vice president of operations. And Joseph Kovach was named vice president and chief information officer. All of these new employees have extensive high-tech experience in the various aspects of operations and they compliment the existing team. They have already been important contributors in the short time they have been at AE. The strength in the second quarter is positive news, but it is clear 58% sequential growth is not sustainable in the current environment. On paper, our order book continues to be strong for the third quarter. We are carrying momentum from the second quarter. In reality, though, we are seeing indicators this trend will not continue, all depending on the timing of the pick-up in the end market. Thus far we have estimated the third quarter will be essentially flat compared to the second quarter. We do not have the visibility to look beyond that right now. In our last comfortable call, we said we believe the industry is in early stages of recovery, which we still do. At the time, we were hesitant to call the near-term increases a ramp. It was due to lack of hard data points that would indicate the possibility of a strong and more importantly, sustainable quarterly growth. We continue to be cautious in our outlook, given the sustainable ramp is not yet materialized and we are reevaluating cost control and reduction programs to make sure we are in the position to achieve sustainable operating profitability at the $70 million revenue level by the end of the year. Mike will discuss this in detail in just a moment. Reducing cost is a key focus for the company. Looking longer term, we believe we used the last 18 months to our best advantage. We worked closely with customers on new development projects, maintaining R and D spending, adding leaders to the management team and integrating leading edge technology company that is expand total market opportunity. Our strategy is to use a system level engineering capability to combine the best components so that we can bring more powerful solutions that combine higher performance in a smaller space, with greater reliability at lower costs for customers. That concludes my remarks. I will turn over to Mike to review the financials with you.

Thanks, Doug. And thank you for joining us today. I will review the results of the second quarter of 2002 and provide guidance for the third quarter. Second quarter revenue was $67.9 million, up 58% from the from.9 million for the first quarter of 2002, and 47% f the 46.2 million from last year's second quarter. Aera and Dressler, we completed in the first quarter of this year, contributed $14.1 million in the quarter. On organic basis, AE revenue grew 48% sequentially and 68% year over year. Gross margin was $35.8%, compare wide 16.9% for the year ago period and 31.2% for the first quarter of 2002. Our net loss was 5.1 million or 16 cents per share, compared to first quarter net loss of 8.7 million or 27 cents per share. The second quarter of 2001 had a net loss of 14.5 million or 46 cents per share. The second quarter of 2002 included 5.3 million pre-tax loss related to patent infringement judgment on sources products and a 4.5 million pre-tax gain related to foreign exchange. Before we review our results of our financial position in detail, we would like to provide overview of key operating achievements and goals. As Doug said, we are pleased with our sequential sales increase. The design 300mm equipment we have achieved continue to position us as market leaders in power, flow and thermal measurement. Our customers look for new and innovative products. Our top sales line growth was not led to acceptable improvement in operating results. First, the higher concentration of sales of 300mm related products at the beginning of the life cycle continue to put pressure on gross margins. We are refining supply chain in the near term. Longer term, the addition of our new executive capabilities and worldwide operations gives us experience in global outsourcing. We believe we have significant opportunity to internationalize our product procurement in manufacturing and overall cost of production and return to historical peak growth margins approaching 50%, while meeting customer stringent pricing requirements and maintaining marketship. We have expenses associated with the acquisition of Aera. Aera is a market-share leader with tremendous reputation for customer support. It has been six months since we completed our acquisition of Aera. Our successful integration of Aera allows us to look at the combination of these two highly successful organization and put the best-class from around the world without impacting marketplace reputation. Finally, during the quarter, we intentionally allowed expenses to increase anticipating this would be early stages of what we hoped was the beginning of a significant long-term increase in sector growth. Since that does not appear to be the case, we have begun implementing stringent measures, while still continuing to invest in the critical areas necessary to meet our goals on a measured basis. Our objective is to end the year with operating model that will allow us to achieve target sustainable operating profitability at about the $70 to $72 million quarterly sales level. Over the next two years, we believe we will be able to leverage outsourcing and more efficiently use information flow and technology to reduce operating costs and lower our quarterly break-even as percentage of cyclic peak sales. On detailed level, sales in the second quarter to semiconductor customers represented 69% of total sales or 47 million. This is a quarter over quarter increase of 71% from 27.5 million. In the second quarter of 2001, sales for semiconductor capital equipment customers represented 60% of total sales or 27.8 million. Applied Materials is our largest customer, representing 33% of total second quarter sales or 22.5 million, compared to 24% of total first quarter sales of 10.3 million. In 2001, Applied Materials represented 18% of total sales or 8.5 million. Entertainment data storage, which is comprised digital video discs and compact disc markets was 5% of total second quarter sales or 3.1 million, which represents almost threefold increase in dollar terms compared to first quarter of 2002 amount of 1.1 million. This market represented 3% or 1.4 million in the second quarter of 2001. Typically this segment shows strength in anticipation of the holiday gift-giving season. The computer-data storage industry represented 1% of second quarter sales or $638,000, down from 2% of first quarter sales, or one million and 2% of total sales or $914,000 in the second quarter of 2001. We expect relatively minor sales in this category in the near term. Because the computer data storage facilities are a small percentage of the total category, we will combine computer and entertainment in the future to provide total data storage sales. Sales for flat panel display customers were 2.5 million, or 4% of quarterly sales, a 21% increase in the first quarter of 2002 in the amount of 2 million or 5% of sales. In the prior year quarter, this segment provided 8% of sales or 3.7 million. Advanced product applications were up 40% from 7 million in the first quarter or 16% of sales. Sales for this segment were 18% of total sales or 8.3 million in the second quarter of 2001. This category includes variety of applications, such as i-quote supplies, industrial codings and architectural glass coatings. Mobile support was 4.8 million or 7% of second quarter sales compare wide 4.1 million or 10% for the first quarter. Global support represented 9% or 4.1 million of total sales in the second quarter of 2001. Looking at sales by geographic region, domestic sales represented 68% of total sales in this quarter, compared to 62% in the prior quarter and second quarter of 2001. Europe was 13% of sales in both quarters this year, compared to 15% in the second quarter a year ago. Asia pacific represented 19% of sales this quarter compared with 25% in the first quarter and 22% a year ago. We ended second quarter of 2002 with total backlog of 51.6 million, more than double the first quarter backlog of 23.4. R and D was 18.5% of sales for the second quarter, up from absolute dollar amount of 11.2 million or 26% of sales during the first quarter. In the second quarter of 2001, R and D was 11 million or 23.8% of sales. Quarter over quarter increases primarily due to investments in integrated data management and redesign effort of sources products. Sales on marketing were 8.7 million for the second quarter or 12.8% of sales, up from 6.8 million or 15.7% in the second quarter of 2002 and 6 million in the second quarter of 2001 or 12.9%. The increase sequential spending was due to commissions on higher sequential sales level and expansion in the pacific realm. The year-over-year increase was due to Aera. GNA was 7 million, or 10% of sales, up from the 6.8 million in the first quarter or 60% of sales due to integration costs. Last year's second quarter was 5.6 million or 12% of sales. Again, the yearly increase was due to Aera. Headcount at end of the second quarter was 1521, up from 1432 of full-time and 89 with temporary employees. That is compared to the headcount of 1386 people at the end of the first quarter. Sequential increase is due to production-related employee addition of Dressler and the Pacific realm expansion. Our balance sheet remains strong at 198 million dollars. Trade accounts receivable increased to 49 million from 40 million at the end of the first quarter. Dso decreased to 58 days, compared to 59 days in the first quarter of 2001. Second quarter inventory was $65 million, down from 67 million at the end of the first quarter. Inventory (inaudible) two times the first quarter, but below the three times in the second quarter of 2001. Total days inventory was 135, down from 184 days in the first quarter. Capital expenditures were 2.7 million, bringing capex to approximately 5 million. Depreciation and amortization was 4.5 million for the quarter. We expect capex to be approximately 10 to 11 million in 2002. While we are entering the third quarter with backlog of 52 million, demand over the last few weeks shows weakness throughout the sector. Companies are beginning to discuss the potential for order push-outs and therefore, we are projecting third quarter sales of 68 to 70 million for a loss per share in the 10-12 cent range, before any one-time charges. Gross margin should be approximately 36 to 36 and a half percent. R and D should be in the 11 and a half to 12 and a half million dollar range. SG and A should be approximately 15 to 15 and a half million. Our tax rate in the quarter continued at 35%. We believe that rate will be sustainable throughout the year. Doug, Jim and I will answer questions. Operator, please open for questions. Thank you very much.

At this time, I would like to remind everyone in order to ask a question, please press *, then the number 1 on your telephone keypad. Your first question comes from Jim Covello.

Good morning. Couple of quick questions. You talked about achieving sustainable profitability at the $70 million level. Is that the official EPS break even or is it lower than that? What is the cash break even number?

Jim, earlier in the year, we were at the question of breakeven. We talked about breakeven is different in profitability. We are expecting the increase to continue throughout the year. Now, I would say the official breakeven and profitability is 70 to 72 million dollar level. So, your second question regarding cash break even. Could you give me more clarification on that?

The 70 to 72 million will be break even on cash level. Is the cash burn break even anything substantially different?

Maybe a little bit less because depreciation and amortization is 4 and a half million dollar per quarter and we will probably do 3 million in capex. It is a little less.

One quick follow-up. The softening of indications from customers, any sense of where that is coming from or how much is 200 versus 300mm?

This is Jim Gentilcore. Toward the end of this second quarter, throughout the second quarter, we saw a lot of strength in 200mm. That is the area we are most concerned about slowdown. I think it is basically across all the business units. 300mm in the areas where we have products for - across the business units, that continues to be strong at a lower level than 200mm.

Let me just give a frame of reference on 300mm. We have seen 30% increase in 300mm demand quarter over quarter and related to the end of last year. Give you a sense. We don't want to get into percentages, but that is a growing percentage of sales.

It looks like it is growing faster than the 200 mm. We have growing complications into not being able to see exactly into what tools and it is taking away the precision we normally have.

Thanks very much.

Your next question comes from Brett Hodess.

Good morning. On the gross margin question. You commented on different issues there. You know, given in the past when you were in the low 70 million, your gross margins were 40% or better. How much pressure you are seeing is integration related? And how much is the product mix has changed? And how much is it the supply chain has changed?

Let me give color on the numbers. It is misleading because it includes 70 million with Aera and Dressler. Infrastructure costs are higher. That being the case, we have plans in place to get back to peak gross margins at the top of the next cycle. As frame of reference, when you add Aera, that would be about 135 million. I will turn to Jim and Doug.

The thing I want to clarify was the either way you look at it, we are under traditional 70 million [KHR-] run rate or 68 million dollar run rate as far as the power products go. Of course, that is where we have most of the experience with the margin, whether you look at it as needing to get to closer to $90 million to get to the same level of equivalent profitability or whether you say it is really $55 million dollar quarter, whatever it would be from the original power products, basically the mechanics are similar.

As we are learning the mfc business, we are finding opportunities to use the same kind of outsourcing as in power, especially on the electronic side. We are trying to find ways to leverage the cost savings we have found historically over power businesses.

There is no question we are significant percentage of the way through integration. We expect to get greater benefits going further. Going back to the basic point of we are at the beginning of the life cycle of quite a few 300mm programs we have been working on during the downturn.

So. It is still a lot of integration issues. I think historically or in the past, we talked about Aera's gross margins not being vastly different than the power supply businesses once it is integrated. Is that correct?

That is true. Once we get to make the impact we make. Historically, and I think we said this earlier, Aera and flow control manufacturers margins are less than we have experienced in the power area. Of course, we are after changing that.

Thank you.

Your next question comes from Art Fitzgerald.

Thank you. With the profitability lagging is there any expense reductions, headcount or facility consolidations or anything planned going forward?

We are looking at all aspects of operations from around the world. Initially putting significant cost reduction in place and discretionary spending and then, earlier in the year, when we closed the Aera deal, we were asked about integration and elimination and we said we wanted to have 6 months to look at the Aera operation given the fact it was worldclass. We have six months behind us. Over the next 2-4 weeks senior management is looking at every part of the operation around the world. There should be some reduction in headcount coming up.

Okay. And does - I am kind of - you must have an internal view of what the markets are going to look like over the next 12 months. Does this slow down in the 200mm cause you to want to pull back in getting ready for the cycle?

Mark, I think as we said, the 200mm is probably the most unsteady quarter to quarter. We are trying to make sure in building the businesses, we are trying to keep focused on new products that are 300mm products. However, 200 is still a big part of the business. We have to make sure we run that effectively without affecting our customers.

Let me give one follow-up on headcount reductions. We will allow attrition to take its course. We will not go into a total hiring freeze, but positions going forward have to be critical and looking around for redundancies. We don't see there will be double digit reductions in headcount percentages. We do have opportunities. It is like best of class from around the world.

Okay. Quarter, can you give us a sense of what 300mm could represent of your business? Are we talking 50 to 60%, is that reasonable?

No. In Q3, is that the question?

Q3 or Q4.

We don't think it will grow that fast. Maybe 2003 to 2004 before we go to parity.

Okay. So, then, some of the gross margin issues - I mean, the contribution from 300mm has got to be relatively small in terms of dragging gross margin down. Is that fair?

Depends on how far off they are. We expect improvement there. If you take the 300mm and take the lower volume and take integration of Aera with lower gross margins, all of this basically fits inside of a model.

Okay. Can you give us a quick comment on the pricing environment out there?

Remains tough. I think that tremendous pressures that we were feeling 6 and 12 months ago have debated a bit. People need supply. They need new technology. They need us to do a lot of things for them that basically they - determined to permanently outsource to us.

Mark, I would add to that and as Doug said, pricing pressure is tough, we are finding our equipment manufacturing customers are willing to work with us on more than just price on looking at total cost of delivering solutions and as you know, our strategy is to bring more things to bear sooner.

Okay. Thank you.

Your next question comes from Kevin Vassily.

Kevin Vassily at Thomas Weisel Partners. Quick question on product mix. The contribution from Aera come in higher or lower than expectations going into the quarter?

I think they came in higher, but so did every area of our business. It grew more than the other sectors, but basically in line with the growth we did see. We have said because of where Aera fits in the supply chain, they tend to go down a quarter later than our power business. Therefore, they tend to come back a quarter later. I think it is safe to say senior management at Advanced Energy is pleased with the performance of Aera since we acquired them in early January.

Relative to contribution from 300mm this quarter, again, higher or lower than expectations going into the quarter?

From the power products it was basically on line. As Mike said, the whole pick-up toward the end of the quarter. We really have lost precision we had before because we knew we were basically partner number with power. It is more difficult when we pick up some of the flow control product.

Great. Thank you.

Your next question comes from Fred Wolf.

Yeah. Doug, could you give us a feeling in terms of softness. I don't know how much (inaudible) you have, but the geographical areas where the softness not from your customers, but from your customers' customers.

Of course, our customers in the U.S., which is the bulk of our business, they beat everything or most everything into Asia and the Pacific. Japan is still fairly weak. When Aera picking up as they did, a lot of sales go into Asia directly from an end-user point of view. We saw basically everything lift up with Japan behind and Europe behind a little bit. So, 65% of our business, Fred, I think winds up in Asia. We can't tell destinations from the 65% we ship into the U.S.

Okay. Thank you.

Your next question comes from C.J. Mews.

From Lehman Brothers. Provide color on the flat panel display business, particularly as it relates to the build-up in Taiwan.

Most of our visibility in flat panel display comes through the OEMs, both Japanese and U.S. We are seeing increases, but not tied specifically to any of the factories in Taiwan.

Okay. And aside from applied, whether there other customers that represented 10% or more in sales?

There were not.

One last house keeping question. My pen failed me. On revenue breakout, could you give me the numbers for semiconductor and non-PC data percentage? (inaudible) 47 million. You said non-computer data storage, 3.1 million.

Great. Thank you.

There are no further questions at this time.

Okay. Thank you very much for listening in on our Q2 conference call. Both Mike and Cathy will be available later on.

We look forward to seeing you tomorrow afternoon at our analyst meeting. Thank you.

Thank you.

Thank you for participating in today's teleconference. You may now disconnect.