Advanced Energy Industries Inc (AEIS) 2002 Q3 法說會逐字稿

Good afternoon. My name is Heather and I will be your conference facilitator. At this time, I would like to welcome everyone to the Advanced Energy third quarter 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 period. If you would like to ask a question during this time simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star and then the number two. Thank you. Miss Cathy Kawakami you may begin.

Thank you and thank everyone for joining us this afternoon to discuss our third quarter 2002 results. Today's speakers will be Doug Schatz, Chairman and CEO, and Mike El-Hillow, Senior VP and Chief Financial Officer. They will provide an overview of our results and then will be available to take your questions.

By now you should have received your copy of our press release that we issued approximately one hour ago. If you still need a copy of the release please contact us at 970-221-4670 or you can view the release on our website advanced-energy.com.

Before we get started this afternoon, I need to remind everyone that, except for any historical information contained herein, the matters discussed in this conference call contain certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expected or implied by such statement. Such risks and uncertainties include but are not limited to the semiconductor and semiconductor capital equipment industry, fluctuations in quarterly annual revenues and operating results, Advanced Energy's ongoing ability to develop new products in a highly competitive industries which is characterized by increasingly rapid technological changes, our ability to successfully integrate the company's operations and other risks described in our Form 10-K, Forms 10-Q and other reports and statements as filed with the SEC. In addition, we see no obligation to update the information that we provide during this call.

And with that I'll go ahead and introduce Doug Schatz.

Thanks Cathy, and thanks for joining us today. We reported third quarter 2002 sales of $70.7 million, up 4% compared to second quarter sales of $67.9 million and within our expectation. We carried some of the second quarter momentum into the third quarter and we were able to maintain a fairly steady order rate throughout most of the quarter. We experienced a pick up in demand across all of our non-semiconductor markets, including over 100% sequential increase in flat panel display related sales. Semiconductor related sales were down 7% compared to the second quarter of 2002, reflecting end of quarter softness in the semiconductor OEM order patterns, including some order push outs. On August 14th, we announced operational changes and put a cost reduction and action program into effect. These changes included: reducing headcount by 7% or 100 individuals, manufacturing and facilities' consolidations at our Aera Austin location, and stringent discretionary spending restrictions. We took these actions as part of our internal plan to reduce operating expenses in order to enable us to reach operating profitability at the $70-72 million quarterly revenue level. We expect to incorporate the full benefit from these actions beginning in the first quarter of 2003 and we are on track with all of our objectives to date. The Austin location is on target to close its manufacturing operation by November 15th. The transfer of equipment to our Hachiogi Japan mass flow operation has proceeded ahead of schedule and we began shipping product without any interruption to our customers' order fulfillment.

The softening in order patterns that we are currently experiencing and our expectations for fourth quarter revenue levels lead us down 22-25% sequentially. That indicates that we must take further action to improve operating results at a lower revenue level.

Our outsourcing strategy is designed to reduce our longer-term break even and we are in active discussions with several potential contract manufacturing partners to meet our outsourcing goals. We believe that we have a significant opportunity to internationalize our product procurement and manufacturing and lower our overall cost of production. Much of the benefit of our outsourcing plan is expected to be realized by the fourth quarter of 2003.

In addition to outsourcing, we are currently reviewing every aspect of the organization worldwide in order to further reduce our break even at current business levels to the $55-60 million revenue range over the next several quarters. Although our plans are not yet complete in terms of the specific tactics we'll implement to meet these goals, we will deploy further cost reduction actions this quarter.

Turning to the third quarter highlights, we were successful in deepening our market reach in all of our product areas through key design wins. Yesterday we announced that Aera's mass flow controllers had displaced a competitor at Mattson, to be named to the default standard on Mattson's strip tools. We have a strong relationship with Mattson on both our mass flow and power management product areas, and this expands our presence with the semiconductor equipment customer. The design win represents further justification of Aera's superior field performance and our significant global network of customer support operations, the two key factors in this most recent success.

Aera has also made good progress at US and Asian semiconductor OEM's, with our new designs on various platforms. Aera sales continue to be strong sequentially in the third quarter, partly due to the delayed response that occurs with mass flow control orders when OEM order patterns begin to change. And of course this is compared to a primary experience with power supplies.

Aera's strong relationships with Asian semiconductor OEM's have helped us secure our first second-source opportunities for our Aera product group on a high volume oxide etch product with a Japanese OEM. Although we've made significant inroads at Tel over the past few years, Aera plays a key role in helping to build their confidence to expand the relationship of our customer. Our Aera product group made further progress in winning oxide etch designs at a major US OEM customer. We were able to demonstrate technological superiority in several areas, which enabled us to capture this win against two competitors. This is a critical area for us given that oxide etch is expected to be the fastest growing etch application in the future, and we have significant market share growth potential on this category.

Our flat panel display-related sales growth is attributed to a pick up in demand as our customers address both the new size large panel manufacturing, known as Gem 5, as well as the small PFT displays used in mobile phones and other hand-held devices. We achieved a major DC power win against two competitors at a Japanese OEM and we expect this opportunity to grow over the next few quarters. Our DC power group is also capturing opportunities on three millimeter PVD applications, which help to protect our dominant market share position as the industry transitions from two hundred millimeter tools.

While we continue to be cautious about the outlook given the poor visibility, we are making significant progress across all of our product lines. Our integrated controls product division is working with each of our product groups to develop sub-system solutions that offer lower cost and better performance solutions to our customers' plasma processing challenges. We expect to have initial beta units available mid next year that will introduce a new type of platform and that platform will demonstrate a completely level of technology, linkage and integration. These sub-systems are a good representation of our strategy to use a system level engineering capabilities to bring much more powerful solutions in a smaller piece with greater reliability at lower cost for our customers. That concludes my opening remarks and I will turn the call over to Mike now so he can review the financials with you. Mike.

Thanks Doug and thank you for joining us today. I will review the results of the third quarter 2002 and then provide guidance for the fourth quarter. Third quarter revenue was $70.7 million, up 4% from the $67.9 million for the second quarter of 2002, and up 83% on the $38.7 million for last year's third quarter. Revenue on the second and third quarters of 2002 includes contributions of the Aera and Dressler acquisitions.

Gross margin was 37.6% for the quarter, compared with 35.8% for the second quarter of 2002 and 28.5% for the year-ago period. Our net loss for the third quarter was $5.6 million or 17 cents per share, including restructuring charges of $3.2 million on a pre-tax basis. This compares to the second quarter net loss of $5.1 million or 16 cents per share and a third quarter 2001 net loss of $7.5 million or 24 cents per share. Excluding restructuring charge and small foreign exchange loss, our net loss for the 2002 third quarter would have been $3.3 million or 10 cents per share.

Before we review the results of our operations and financial position in detail, we would like to provide an overview of key operating achievements and goals. We carried momentum from the second quarter into the third quarter and were able to achieve a modest sequential improvement in results. Strengthened flat panel display-related demand helped to offset some softness in the semiconductor sales, and we continue to have success in winning new tool designs for a number of our products.

On a detail level, sales in the third quarter to semiconductor capital equipment customers represented 62% of total sales or $43.9 million. This is a quarter over quarter decrease of 7% from $47 million. In the third quarter of 2001 sales to semiconductor capital equipment customers represented 47% of total sales or $18.1 million. Applied Materials is our largest customer representing 27% of total third quarter sales or $18.9 million, compared to 33% of total second quarter sales of $22.5 million. In the third quarter of 2001 Applied represented 17% of total sales or $6.5.

Sales to flat panel display customers were $5.4 million or 8% of quarterly sales, a 115% sequential increase from the second quarter 2002 to an amount of $2.5 million or 4% of sales. In the prior-year quarter, this end market provided 10% of sales or $3.7 million. We experienced an increase in demand from our flat panel OEM customers as end users ramped capacity to manufacture the new generation of large displays as well as the smaller TFT displays used in mobile phones and other hand-held devices. We expect flat panel OEM sales to continue.

Data storage, which is a combination of digital video disc, compact disc and computer storage markets was 7% of total third quarter sales or $5 million. This represents a 33% increase in dollar terms compared with a 2002 second quarter amount of $3.8 million. This market represented 10% or $4.1 million in the third quarter of 2001. The sequential growth is attributable to the increase in production of DVD's and recordable DVD's in anticipation of the holiday gift-giving season.

Advanced product application sales were $10.4 million or 15% of third quarter sales, up 6% from the second quarter sales of $9.8 million or 14% of sales. Sales in this category were 23% of total sales or $9.1 million in the third quarter of 2001. This category includes a variety of applications such as our ICOR power supply for the high-end computing market, industrial coatings and architectural class coatings.

Global support was $6.1 or 8% of third quarter sales compared with $4.8 million or 7% for the second quarter. Global support represented 10% or $3.8 million of total sales in the third quarter of 2001. The increase in global support was due to a higher level of activity related to our Aera mass flow controller company. Looking at sales by geographic region, domestic sales represented 58% of total sales in the third quarter, compared to 68% in the prior quarter and 56% in the third quarter of 2001. Europe was 15% in the third quarter compared to 13% in the second quarter and 22% of the third quarter of 2001.

Asia Pacific represented 27% of sales in the third quarter compared with 19% in the second quarter and 22% a year ago. We ended the third quarter of 2002 with a total backlog of $32.6 million, which is down sequentially compared to the $51.6 million in the second quarter. Our R&D spending was $12.2 million or 17.2% of sales for the third quarter, down from the absolute dollar amount of $12.6 million or 18.5% of sales during the second quarter. In the third quarter of 2001 our R&D was $11 million or 28.3% of sales. Sales and marketing was $9.7 million or 13.8% of sales in the third quarter compared to $8.7 million or 12.8% of sales in the second quarter. Sales and marketing in the third quarter of 2001 was $5.7 million or 14.7%. The quarter over quarter increase is attributable to trade show expenses. The year-over-year increase was due in part to Aera and we are working to reduce redundancies in the global Aera organization while focusing on cross-selling opportunities.

G&A was $7.2 million or 10.3% of third quarter sales compared to $7 million in the second quarter or $10.4 of sales. In last year's third quarter, G&A was $4.8 million or 12.4% of sales. Again, the yearly increase was due to Aera. Headcount at the end of the third quarter was 1,495, of whom 1,412 were full-time and 83 were temporary employees. That compares with a headcount of 1,521 people, including 89 temporary employees at the end of the second quarter. The decrease is due, in part, to the headcount reduction announced on August 14th. We expect headcounts to decrease in the fourth quarter due to the manufacturing facility closure in Austin on schedule to be completed by November 15th.

Our balance sheet continues to be strong with cash equivalents and marketable securities of $189 million. Trade accounts receivable decreased to $45 million compared to $49 million at the end of the second quarter. DSO's were 59 days in the third quarter compared to 58 days in the second quarter and 80 days in the third quarter of 2001. Third quarter inventory was $67 million, up slightly from $65 million at the end of the second quarter. Inventory trends held steady quarter over quarter 2.7 times and up compared to 2.3 times in the third quarter of 2001. The quarter-over-quarter increase in inventory was primarily due to end of quarter shipments in the Asia Pacific area and that inventory was being shipped at that time. We continue to make progress in reducing our inventory on a straight operational level. Finally, total days inventory was 135, the same as in the second quarter. Capital expenditures in the quarter were $2.4 million, bringing our year-to-date capex to $7.4 million. Depreciation and amortization was $5.5 million in the quarter. We expect capex to be approximately $10-11 million in 2002.

Demand over the last few weeks has begun to show some weakness throughout the sector, and we anticipate a general slowdown in the semiconductor industry. We have experienced some order push outs and are currently projecting third quarter sales of $53-55 million with an operating loss per share in the range of 28-30 cents. Gross margins should be approximately 30-31%. R&D should be in the $11.5-12 million range, and SG&A should be approximately $15.5-16 million. Our tax rate in the quarter continues at 35% and we do not expect changes in this rate in the foreseeable future. Doug and I will now be happy to answer any questions. So, Operator, please open for questions. Thank you.

At this time, if you would like to ask a question you may press start then the number one on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from Kevin Vassily.

Yeah, hi guys. I'm curious to get your opinion on what you think inventories at your customers look like for products like yours. Thanks.

Kevin, at the end of the quarter, as we routinely do, but at the end of the quarter at this particular time as we enter a slowdown we were calling all of our customers, certainly our major customers. And we do not believe that we have pipelines still going on. So that is based upon the most current information. We are particularly sensitive to that at any time we see a slowdown. So we don't anticipate any significant problems based upon these phone calls.

And then a quick follow-up on that note. Right now what are your - I guess it's probably different for different products - but what would you say your average cycle times from order to shipment times are for the company?

Boy, those are really mixed. I mean it goes all the way out from units that are available on site and essentially consignment inventory. Some people are placing orders for staging on major products that are two months out and I think part of that and it was reflected in the extra inventory we had, is that once on the water across to Asia because somebody's planning to go through an integration process. So it really expands things pretty widely, Kevin.

Okay. Alright, thank you.

Your next question comes from Brett Hodess,Merril Lynch.

Good afternoon. You know your comments about reducing the break even to $55-60 million if industry conditions continue, in what timeframe do you have to make that decision do you think?

Well, basically, we've made the decision. What we're doing is going through a planning process to make sure we implement it well. We've already got a lot of things underway that we put in place to get the break even down to 70-72 in Q1 and those are being carried out successfully. And so we'll probably just put this on the back of that. But we want to be really clear about what we're doing. Obviously, we have to be careful we don't take away the future.

And then a follow on. When you look at the integration of Aera at this point - you commented a bit on this - but, at this point you've got your hands around them pretty well, do you see ability to continue to drive the costs down in that business -

Absolutely.

- from this level?

Yeah, it's pretty exciting actually.

And then, final question. You know you commented on some of the design wins and what-not, how much of the business that you're winning now in design wins do you think is still for the discrete solutions, you know power solutions or flow control solutions? And how much of the wins do you think are contributing from - you know you are integrating some either sensing and control or stuff like that together with your traditional products.

You know, one of the things that we've found is that almost no-one is selling anything where it's a complex cross-technology solution. They are selling elements of it to go into gamos with things like that. In a lot of ways our core products are really an integrated solutions and they do use sensors, and we were the first ones to include a lot of the high quality sensing and measurement in just the standard products. And in the RF products you look at how sophisticated that can get, you go out into these matching networks and the voltage and current sensors, like our Z-scan and we are starting to do some predictive analysis of [sone] qualities. People are placing orders for those.

But, as a general trend, it seems like what the customers is more of a value chain solution at the moment. You know where it gets closer to the wall and closer to the chamber and we haven't seen that much direct activity going horizontally, where you're picking up multiple sensors and you've got multiple things that you're controlling. I think that's on the roadmap for another year or two out.

Okay, thank you.

Your next question comes from Ali Irani.

Good afternoon, gentlemen. I'm wondering how much of the drop in gross margin from the fourth quarter just relates to the lag in implementation of - or the lag in delivery of the cost cuts you're implementing right now. Meaning, if revenues were to be flat in the first quarter of next year, what should one expect your gross margins to recover to significantly in that time or by that timeframe.

Ali, the reduction in gross margin is purely volume. We will continue to reduce costs and, in fact, our guidance includes cost reductions and continued cost reductions. The largest of which in the gross margin area is the completion of shutting down the Austin area location.

Are there any one-time costs associated with the gross margin guidance you've provided for the fourth quarter?

One-time costs in what way, Ali?

For the shutdown.

That's already included in the $3.2 million restructuring charge we took this quarter.

So, am I to conclude that, looking back for example at your historical sales that, at the current run rate, you're being diluted by lower margins at Aera?

A little bit, yes. And, Ali, you know we're not giving guidance for it but we've got definite projections to get back to our historic margin levels.

I know recently some of the comments you have talked about have surrounded outsourcing and build of your products in low-cost markets, such as China. Could you give some more color as to what timeframe that could be implemented to bring up the company margins higher?

During 2003.

By the second half? Do you think even by mid-year we could see some incremental margin adds from that?

Certainly by the second half.

Then, finally, as you can see Doug and Mike my focus here is really on the cost line given the lack of visibility on the revenues. On the operating expenses side, any potential for R&D efficiencies to bring the R&D line lower or SG&A efficiencies to bring that SG&A lower as well over the next three quarters?

I think we'll see everything come lower.

Alright. Thank you very much.

Your next question comes from Steve Pelayo.

Just a quick question. I understand some of your major customers give you six-month forecasts. I'm curious, what are you hearing from them as we go into the seasonally slow first quarter and Chinese New Year, what do you think the March quarter will look like?

We don't really have a clue. What we've been hearing from customers - one customer said expect this to last for two or three quarters and then they have a vertical wall that we want you guys to be prepared to scale. He said he had absolutely no insight other than gut feel to have made that statement.

We're not seeing that we've got any visibility. We don't see our customers do either. I think we have gone to the bottom, we've had it bounce up and up then it will go back down and I think we can see this for a little while.

Alright. Fair enough. I'm looking forward to the vertical wall.

Well, we've got our climbing shoes on.

Your next question comes from Fred Wolf.

Yeah Doug, you mentioned you expect continuing momentum in the flat panel area. Can you talk about what the customers are telling you for the outlook for next year? Whether you're looking at continued growth or will the capacity going in cause a slowdown in demand for that from those customers?

Fred, this is Mike. We really can't go too far in the next year but in the near term our customers are still being bullish. And so we're hearing a lot of things in the marketplace that say otherwise but from our customer standpoint we had a good third quarter and it appears will continue at least near term.

Okay. Thank you.

Your next question comes from Jay Dania.

Good afternoon. I was wondering if you guys could just give us a sense as to inventories. I'm sorry if this was covered, I just hopped on the call a few minutes ago. Inventories at your customer base - is that a situation that can be pretty much rationalized in the December quarter or is that something that could linger a little bit longer?

It is a question that came up and we very briefly said we are monitoring inventory constantly but especially at the end of a quarter where there's been a decrease in demand, and based upon our walk-arounds and calls we do not believe it's going to be a problem.

Thanks.

Your next question comes from Bill Maraman.

Hi guys. I actually have a couple for you. First one: the income tax receivable of $20 million, is that actually a receivable you're due from IRS and if so -

That should be coming in late this year, early next year.

Okay. So you're actually going to get $20 million cash from IRS then?

Probably not $20 million at that timeframe but north of $10 million.

Okay and collect all of it by said mid next year?

We would expect that by mid next year it will all be available, correct.

Okay, super. On the inventories, it seems like they're a little high, especially given the Q4 sales projections. Have you really scoured them to make sure there's no excess of obsolete inventory issue?

We're not uncomfortable with any type of excess throughout. It has more to do with - we had some inventory that was being shipped early in the fourth quarter. We are in the process of ramping down our con bonds and so we would expect to see a reduction in inventory in the fourth quarter. But some from the standpoint of excess and obsolete we're fine.

Okay, super. If you have this by any chance - cash break even level. Do you know what that would be, excluding changes in balance sheet items?

The best way to answer that is we have plans in place to be in the $70 million operating break even in the first quarter and we are well on our way to get there. As Doug said we are going to further refine that. But, I would adjust that to about $63-65 million on a cash flow break even, assuming there's not a significant change in the working capital.

Got you. So in other words with $63-65 million in revenues you'd be on a cash flow break even.

Right.

Right. If I caught you correctly, you said you have about $2.5-3.5 million in capital expenditures for the rest of this year. Is that correct?

That is essentially correct, yes.

And then what about 2003? Have you looked forward that far yet?

We haven't done our planning for next year. But, generally speaking, you can assume it's going be in the same area. The one thing that could account for a bit of a spike up is the outsourcing that we plan to do in the Pacific Rim area. But we're not talking significant emphasis.

Okay. And then this last question I guess would be for Doug, and I think you may have already kind of answered it. But I know one of the things with all your acquisitions that you were trying to do is put together like a package of product for your customers instead of just individual solutions. How has the uptake been on that? I think you talked about that with the design wins but does it look like they're amenable to it or is that something that they're really not interested in?

No, I think they'll be interested in it. I think it's such a paradigm change that we're not going to see it occur very often for the next year to two years.

Okay, but in a year or two that's when you think they'll be looking for the one source for multiple products?

I think they're looking now - they like the capabilities that have broader both infrastructure and technology. We've also been providing a roadmap for an architecture that the customers are looking at and really liking. So within that architecture there's the ability to expand sideways.

And then I guess one other follow-up question. Is this something that's going to have to be designed in, in a new tool or is it something that they could modify the current design to accommodate?

It'll be new designs from AE.

But I mean like, for example, with the new tool customers, would they have to be coming up with a new tool in order to be able to use this program or could they take the tool of the current manufacturing and selling and just basically put your parts in place of others?

Well, generally, that isn't how they would do it away because that would have to go through the qualification. So it would just be basically if they feel that there's enough advantage then they would come up with another version and also what we provide would also be augmented by other things that they would do. So it would be a high performance version or data productivity or something like that. But, basically, it turns into another tool.

Got ya. Okay, so that probably explains the urgency. Okay, great, thanks. I appreciate it.

At this time there are no further questions.

Good. Thank you very much for listening in and we look forward to talking to you later.

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