Advanced Energy Industries Inc (AEIS) 2004 Q2 法說會逐字稿

Good afternoon. My name is Debbie and I will be your conference facilitator. At this time, I would like to welcome everyone to the Advanced Energy second quarter results conference call.

[OPERATOR INSTRUCTIONS].

Thank you. Ms. Kawakami, you may begin your conference.

Thank you. Good afternoon, everyone and thank you for joining us today. Doug Schatz, Chairman and Chief Executive Officer and Mike El-Hillow, Executive Vice President and Chief Financial Officer will be today's speakers and provide an overview of the results before they open the call to take your questions.

By now you should have received a copy of the press release that we issued earlier today. If you still need a copy, please contact us at 970-221-4670, or view the release on our Web site at advanced-energy.com.

Before we get started this afternoon, I would like to remind everyone that, except for any historical information contained herein, the matters discussed in this conference call contains certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the semiconductor and semiconductor capital equipment industries, the timing of orders received from our customers, and our ability to execute the cost production initiatives that we've had underway.

Other risks are described in our Form 10-K, 10-Q, and other reports that are filed with the SEC. In addition, we assume no obligation to update the information that we provide to you during this conference call.

With that I'll go ahead and introduce Doug Schatz.

Thanks, Cathy and thank you all for joining us this afternoon. Today we reported sequential sales growth of 4% to $109 million for the second quarter, which is within the expected range that we provided during our Q1 press release.

Diluted earnings per share of 13 cents were lower than anticipated. This was due primarily to product mix issues and the continuation of higher-than-expected China-related and Tier One supplier transition costs. Our China manufacturing facility have moved to Tier One suppliers on a long-term strategic initiatives to allow us to continue to provide the most technologically advanced products at the lowest possible cost and maintain our market leadership position as a global solutions provider.

We are on plan to have a approximately 60 to 70% of our manufacturing volume to come out of China by the end of 2004, and we are seeing the expected benefit of lower manufacturing costs in that facility. Currently, we are manufacturing both power and mass flow controller products in China.

Unfortunately, the transition issues that we have previously discussed, such as duplicate manufacturing and procurement costs and start up costs associated with the transfer of each product line continue to significantly impact our operating performance.

While all of our major customers are accepting or have qualified China based products, the products differ among customers. Therefore, we have not yet been able to transfer entire product families to China and still have duplicate manufacturing lines and procurement teams in both Fort Collins and China.

We are working with our OEM customers to qualify additional products out of China and are making good progress, but it is taking longer than we initially thought to move the entire product families. We expect this to remain an issue over the next several quarters.

In most ways, the China manufacturing initiative continues to go very well. We have successfully transferred several high volume product lines to an offshore location, a first for AE. We are realizing anticipated lower direct labor costs. And other ways, as I have discussed above, we fell short of our own internal and aggressive expectations.

We have learned from these experiences and are better prepared to implement the final stages of this major manufacturing transition. We have the right people and the right plans in place to best leverage Shenzhen and Fort Collins manufacturing for maximum cost advantage over time.

Turning to market and product performance, semiconductor orders held steady sequentially and we experience continued strong demand for flat panel display and data storage customers. As we discussed in our last conference call, we anticipated a leveling of orders from semi conductor OEM's, following two strong quarters of sales growth as the industry absorbs several months of accelerated equipment shipments.

In the third quarter, we anticipate continued cautious spending patterns by end users, but we do believe there are favorable demands for the industry that could drive future growth, particularly as new 300-millimeter fabs begin to come online.

The flat panel display industries continues to show strength and we are well positioned with product on all panel generation. In addition to strong DC power and flow positions in the current Gen 5 and Gen 6 path, we have some new opportunities for RF power and thermal products in Gen 7 and Gen 8, which are primarily targeted for large class display markets.

Capacity expansion continues, and industry analysts estimate that a record amount of capacity will be added in 2004. We continue to extend our market position in all markets served. Our new and existing products continue to drive advanced technology and competitive differentiation for our customers.

We're also leveraging our enabling technologies to address opportunities in new markets. As a recent example, a customer turned to us to provide processed power in a unique approach to CMP processing. This is a market we have never before addressed. Some of these new and emerging opportunities are difficult to measure, but they demonstrate our continued ability to help our customers push the process technology envelope further.

In our core markets, we demonstrate leadership. The LSI recently reported 2003 market share numbers for the components and subsystem sector, and AE continuous to gain share on core power market defined as DC, RF and matching networking products. In 2003, we had 49% of that market, an increase from 47% in 2002, and approximately 20 points higher than our nearest competitor.

If we take each product group individually, we grew an already very dominant DC power share by 4 points both holding our leading position in RF power and matching networks flat year-over-year. Our RF share will be driven higher as 300-millimeter comes online due to our design wins in high growth areas such as bioelectric gas.

According to the LSI research, our newest competitor lost share in both DC and RF, which are AE's core markets. Our enabling technology such as our very high frequency Ovation power delivery system for application such as critical etch has driven market share expansion.

At Semicon West last week, we showcased our product portfolio that enables customers to go to the next level in terms of processing technology. Whether it is a new material or larger wafer or smaller geometries such as 90 and 65 nanometer applications, our products provide better technology and better results. We enable better quality films and better quality wafers as well as increased differentiation for our customers and ultimately for their customers.

I'd like to now turn the call over to Mike, so he can discuss with you the financials in more detail.

Thank you, Doug, and good afternoon, everyone. I will review the results of the second quarter and then provide guidance for third quarter 2004. Revenue for second quarter of 2004 is $108.9 million, 4% higher than first quarter 2004 revenue of $104.5 million. Year-over-year revenue increased 73%, compared to second quarter 2003 revenue of $62.9 million.

Gross margin was 34% for the second quarter compared to 36.8% for the first quarter 2004. Second quarter 2003 gross margin were 32.2%. As Doug mentioned gross margin was impacted by product mix and related higher costs of manufacturing transition. We experienced higher demand for two specific product groups that currently have lower gross margin in our corporate average. These product lines are in transition to China and other cost reduction initiatives are in place to mitigate their impact in the future.

Net income for second quarter 2004 is $4.5 million or 13 cents per diluted share compared to first quarter 2004 net income of $6.9 million, or 21 cents per diluted share, and second quarter 2003 net loss of $5.8 million, or 18 cents per share. For 2004 second quarter we had 32.2 million diluted weighted average common shares outstanding, compared to 32.2 million in the second quarter of 2003.

Similar to other companies in the industry, we provided evaluation allowance for our deferred tax assets in third quarter 2003 resulting in expectations for 2004 effective tax rate of 20%. This was an estimation based on expected sales from foreign entities. In the second quarter these foreign entities contributed a larger percentage of sales resulting in a 29% tax rate for the quarter as we get our year-to-date tax rate to approximately 24%, which is below our historical normalized rate of approximately 35%.

Semiconductor capital represented 64% of total second quarter sales, or $70.2 million -- up 2% compared to $69 million in the first quarter of 2004. As anticipated, semiconductor sales held relatively flat quarter-to-quarter, but are slightly higher sequentially considering Q2 did not have revenue contribution from our (inaudible) products, a company that we sold in the first quarter. (inaudible) exclusively to this industry. In the second quarter 2003, sales for semiconductor capital equipment customers represented 60% of total sales or $37.8 million.

Applied materials, our largest semiconductor capital equipment customer represented, 31% of total second quarter 2004 sales or $33.2 million, up 13% from first quarter 2004 sales of $29.4 million. In the second quarter of 2003, Applied was 18% of total sales or $11.6 million. Flat panel display sales represented 12% of second quarter revenue or $12.9 million. This represents sequential 22% in dollar terms, sequential increase of 22% in dollar terms, compared to $10.6 million of total sale in the first quarter of 2004.

Flat panel display represented $5.2 million, or 8% of total sales in the second quarter of 2003, a year-over-year increase of 147% in dollar terms. We have experienced strong growth in flat panel display sales for several quarters and we are well positioned to benefit as the industry adds capacity into the next year.

The data storage industry, which is comprise of optical data storage market including digital video disks and compact discs and the magnetic data storage market was 9% or $9.9 million of total second quarter sales, which represents an increase in dollar terms of 14% when we compared to first quarter 2004 sales of $8.6 million.

We experienced strength in aspect of this market although the significant capacity built in the first half of this year will most likely result in a shorter season this year. We anticipate demands to decline somewhat in the second half of 2004 as the holiday season is nearing its end. This market represents 13% of total sales or $8.3 million, in second quarter 2003.

Advanced product applications represented 15%, or $15.9 million, of total second quarter sales, a modest decline of 2%, compared to first quarter 2004 contribution of $16.3 million. Prior quarters included revenue related to a significant architectural glass order. This market represented 19%, or $11.7 million of total sales in the second quarter of 2003.

In addition to architectural glass, the includes a variety of applications such as the core power supplier for the high end computing markets, industrial coding and laser and medical application.

Looking at sales by geographic region, North America represented 54% of total second quarter sales compared to 57% in first quarter 2004, which is flat in dollar terms. North American sales represented 44% of sales in the second quarter of 2003.

Sales in Europe represented 18% of total second quarter sales compared to 15% in 2004 first quarter, an increase of 20% in dollar terms. Europe represented 22% of sales in the second quarter 2003. Asia pacific represented 28% of second quarter sales, which is the same percentage as the 2004 first quarter, but up 4% in dollar terms. Asia Pacific represented 34% of second quarter 2003 sales. We ended the second quarter of 2004 with the total backlog of $63 million compared to first quarter 2004 backlog of $59.9 million.

R&D spending was $12.8 million or 11.8% of sales in second quarter. This compared to $13.4 million or 12.8% of sales in first quarter 2004 and $12.6 million or 20% in second quarter 2003. SGNA was $14.1 million or 13% of sales in second quarter 2004 compared to $13.8 million in the first quarter 2004 or 13.2%. This compared to 12.6 million in the second quarter 2003 or 20% of sales. Amortization of intangible assets was $1.1 million, in the first second quarter of 2003, $1.2 million on the first quarter and $1.2 million in the second quarter of 2003.

Head count at the end of the quarter was 1,697 people of whom there were 1,421 full-time and 276 temporary employees. That compares with the head count of 1,547 people at the end of first quarter 2004.

At the end of the second quarter, our cash, cash equivalents from marketable securities totaled $124.4 million down from $127.6 million at the first quarter. The sequential cash reduction was caused by higher than expected receivables as quarterly shipments of back end loaded and an increased in inventory level because of the slower production transition to China.

Our account receivables were $79 million for second quarter, unchanged compared with the first quarter 2004. Day sales outstanding were 57 days in the second quarter 2004 compared to 60 days in the first quarter of 2004 and 57 days in the second quarter of 2003.

Second quarter inventory was $83.7 million compared to $72.1 million in the first quarter 2004. Inventory turns were 3.6 turns in the second quarter, 3.8 turns in first quarter and 3.1 turns in the second quarter of 2003. so these inventory was 103 days up from 95 days in the first quarter of 2004 and 119 days in the second quarter of 2003.

Our capital expenditures in the second quarter were $3.6 million compared to $3.8 million in the first quarter 2004 and $5.1 million in the second quarter of 2003. We are making investments in IT infrastructure and expect Capex to be approximately $14 to $15 million for the full year of 2004. Depreciation was $3.5 million in the second quarter compared to $3.2 million on the first quarter 2004 and $3.3 million second quarter of 2003.

Based on our view that the industry is pausing in between 200 millimeter capacity purchases and the build out of 300 millimeters fabs, we believe third quarter sales could decline 2 to 5% below the second quarter level to the $103 million to $107 million range. We anticipate earnings per share of 18 cents.

We will make improvements to gross margin all although we expect continuation of some of the issues impacting gross margin with we discussed earlier. Third part of gross margin should range between 34% and 34.5%.

R&D should be essentially flat compared to the second quarter. SGNA will increase to approximately $16 million including amortization of intangibles, and this increase is due semiconductor expenses and Sarbenes-Oxley implementation. Doug and I will now we will be happy to answer questions. So operator, please open the line for questions. Thank you.

[OPERATOR INSTRUCTIONS].

There are no questions at this time, sir.

We want to thank everyone for participating this afternoon and we will speak to you soon. Thank you.