Advanced Energy Industries Inc (AEIS) 2007 Q2 法說會逐字稿

Good afternoon, I'll be your conference operator today. At this time, I'd like to welcome everyone to the Advanced Energy 2nd quarter 2007 earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. Ms. Shillman, you may begin your conference.

Good afternoon. Thank you for joining us this afternoon for our second quarter 2007 earnings conference call. Hans Betz, President and Chief Executive Officer and Larry Firestone, Executive Vice President and CFO will present the prepared remarks. And Steve Rhoades, Executive Vice President and Chief Operating Officer will join us when we have the call open for questions. By now you should have received a copy of the press release that we issued approximately an hour ago. If you still need a copy, please contact us 970-221-4670 or simply view the release on our website at www.advanced-energy.com.

Before we get started this afternoon, I'd like to remind anyone except for historical financial 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 expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the industries we serve, the timing of orders received from our customers, our ability to benefit from the continued cost improvement initiatives uncurrently underway and unanticipated changes in our estimates, reserves or allowances. These and other risks are described in Form 10-K and 10-Q and other reports filed with the SEC. In addition, we assume no obligation to update the information that we provide you during this conference call, including the third quarter guidance provided during this call and in our press release dated today. Prices will not be discussed after today's call. I will now turn the call over to Hans Betz.

Good afternoon, everyone, thanks for joining us. Advanced Energy had a mixed second quarter as we began to experience the impacts of a decline in demand from the semiconductor industry as sales declined 4% sequentially to $103 million. However, with 11% growth in our non-semi markets we experienced more modest decrease than the rest of the semiconductor industry. Our margins were lower proportionate with our revenues and additionally we had costs associated with transition of our manufacturing in Germany to China, as gross margin for the quarter was 43.6% and operating margin was 15.8%. During the quarter we generated $22 million in cash as we closed the quarter with $178.5 million in cash and marketable securities. Our sales to the semiconductor conductor market declined 10% sequentially, 66% of total sales as caution surrounded the potential oversupply of ERM and related CapEx declines for the remainder of 2007 took hold.

We saw OEMs take a more cautious approach to the new orders utilizing existing inventories and pushing off ERM related orders. We expect these trends to continue into the third quarter as reflected in our guidance. Overall, semi market is expecting a roughly flat year in CapEx compared to 2006 with moderate growth forecasted for 2008. We believe this along with our share gains will create additional upside potential when demand increases. Our sales in the non-semi markets increased 11% sequentially, driven by strengths in our solar, flat panel displays, data storage and architectural glass markets. All flat panel display business increased 15% in the second quarter with the help of higher service sales. We expect greater strength in the market towards the end of 2007 and into 2008, driven by the investment in generation 6 and 7 systems in Taiwan and China, and generation 8 and 10 systems in Japan and Korea.

Near term we are working with OEMs to create innovative solutions for end users to enhance and extend the longevity of their current systems. Data storage sales increased 19% compared to the first quarter. We saw a strong demand in the magnetic storage market for existing customers as -- and a new customer in Japan. We believe the second half of 2007 may experience seasonal softness as the industry digests current capacity tasking installed over the past 12 months for (inaudible) coating as, well as the recent industry consolidation. You see this market made up for both perpendicular recording and optical storage driven by the multi-year retooling cycles we mentioned last quarter, the growth in consumer electronic devices driving hard disks drive sales. The retooling of these markets will be a long-term revenue stream for Advanced Energy.

Sales to the architectural glass market was 4% of sales due to high demand for new coating lines and upgrades at key OEMs, as energy efficient load e-glass becomes more prevalent. Looking ahead, we expect this demand to moderate somewhat in the second half of 2007, but this market is driven by large orders that create large quarterly fluctuations. In the long-term we see this market as a key driver for us, as additional glass flow lines are added and the complexity of the films on glass increases.

Now, I would like to talk about the evolving solar market. Our performance in this market continues to be strong and we are still on track to deliver three to four times our 2006 solar revenues this year. Our solar revenues this quarter was 6% of total sales. There have been a number of recent announcement from OEMs about their growing contracts and backlogs for deposition tools in solar. As this technology is being developed we expect this backlog of orders to spread across 2007 and 2008. Along with the demand for (inaudible) we are seeing greater percentage of solar demand from the thin film solar cell market, which will acquire more advanced energy products. We believe growth in our solar business will be aligned with increasing -- increases in capacity for both these markets.

In addition to our thin deposition tool business for solar, we have increased our R&D spending, having invested a portion in a new product for the photovoltaic inverter side of the industry. We see this as a natural extension of our existing business as the opportunities for both thin film and inverters arise from the same architecture. Depending on the technology, for example, a 10 mega watt line results in a 1 to 1.5 million of thin film opportunity for AE power control equipment. Same line produces two to three X that opportunity for sales of solar inverters of all types every year. We currently have inverter prototypes running in grid-connected applications. We plan to make further announcement regarding this new market opportunity and elaborate on our strategy as the year progresses. We believe our expanding footprint in solar keeps us on track to play a significant role in this exciting market in 2007 and into the future.

Our service business remains strong this quarter with approximately 15% of revenue. We believe this continues to be a very strategic piece of the business that strengthens our relationship and further entrenches us with our customers to gain valuable insight into their emerging needs. To summarize, second quarter of 2007 was a slightly down quarter for Advanced Energy. Despite short-term cyclicality of the semiconductor market, we believe we are on track to meet our long-term growth targets of 20% annualized growth. We continue to invest in our strategic initiative, such as the solar inverter in order to diversify and extend our market opportunities and capture additional share in our existing markets. Each of our markets has significant growth drivers that will shape AE's revenue trajectory going forward. I would like to thank the entire Advanced Energy team around the world for their hard work. I will now turn over the call to CFO Larry Firestone who will elaborate on operating results, financial performance for the second quarter and provide guidance for the third quarter.

Thank you, Hans, and good afternoon, everyone. I will review the results for the second quarter of 2007 and discuss our guidance for the third quarter. Sales for the second quarter of 2007 were $103 million, down 4% sequentially compared to $107.3 million in the first quarter of 2007 and down 1.5% versus $104.6 million in the second quarter of 2006. Sales were below our forecast due to lower than expected semiconductor sales through OEMs particularly in the U.S. and Japan. Sales for semiconductor capital equipment customers decreased 10% representing about approximately 66% of total second quarter 2007 sales. Our non-semiconductor businesses delivered 34% of overall sales in the second quarter of 2007 compared to 30% in the second quarter of 2006. Our non-semi business includes solar, flat panel display, data storage, architectural glass and industrial coating in emerging markets, previously known as advanced product applications or APA.

Sales for the flat panel display industry represented 6% of total second quarter sales versus 5% in the first quarter, due to higher service revenue and new orders that provided growth exiting the quarter. We expect this market to begin its next capital equipment investment cycle in the second half of 2007 and continuing through 2008. Data storage sales grew to 7% of total sales up from 6% in the first quarter and, as Hans mentioned, higher sales were driven by a continued momentum from the perpendicular recording retooling that is driving the disk drive industry. Additionally, we are looking to the retooling of optical disk industry due to adoption of HD and and/or Blu-ray technology. Sales to the solar market in the second quarter, which comprised almost entirely sales to the thin film deposition tool applications versus inverters, represented 6% of total sales down from 7% of total sales in the first quarter. As Hans mentioned, we are still on track to deliver three to four times our 2006 solar revenues in 2007.

Architectural glass returned to our more normal levels to 4% of total sales from 1% in the prior quarter. As mentioned earlier, this volume was due to large orders for new coating lines and upgrades at key accounts. Our industrial coating and emerging markets represented approximately 10% of total second quarter sales, which is consistent with the prior quarter. Global services, which is embedded in each of these market areas, achieved record results representing 14% of total second quarter sales, an increase of 2% sequentially and up 14% over the second quarter of 2006. The strength in the quarter was due to an increase in upgrade service revenues and strength in Korea and Taiwan. Our backlog ending the quarter was 47.7 million compared with ending backlog of 61.8 million exiting the first quarter. This drop in backlog is related to the semi business for their non just in time products that they order from us.

Gross profit was $45 million or 43.6% for the second quarter of 2007. This compares to a first quarter gross profit of $48.3 million or 45% and a second quarter 2006 gross profit of $44.8 million, with a gross margin of 42.8%. Gross margin was pressured by lower revenues and higher direct labor and overhead and into the transition of our production from Germany to China, which will be complete by the end of the year. However, going forward, we have cost reduction initiatives in place to create additional margin leverage in order to achieve our long term gross margin. R&D spending was $12.9 million or 12.5% of second-quarter sales compared to $12 million or 11.2% of first-quarter sales and $10.8 million or 10.3% of second quarter sales in 2006. The R&D increase was due to continued investment in growth projects, targeted market share opportunities in new growth markets such as solar inverter, as well as sustained engineering on existing platforms driving improved quality and reliability programs.

SG&A was $15.4 million or 15% of second quarter sales compared to $15.2 million or 14.2% of first quarter sales, and $14.2 million or 13.6% of second quarter 2006 sales. Amortization of intangible assets was $202,000 in the second quarter of 2007, compared to $324,000 in the first quarter of 2007 and $453,000 in the second quarter of 2006. This reduction was a result of full amortization of the intangibles related to Aera acquisition. We recorded a restructuring charge of $158,000 in the second quarter related to the closure of our Stolberg, Germany facility. This was below our $400,000 estimate for the second quarter due to costs that have not been incurred to date or will be by the end of the year. Looking forward, restructuring costs will be approximately $500,000 per quarter.

Net income, the second quarter net income from continuing operations was $11.7 million, or $0.25 per diluted share compared to $12.7 million or $0.28 per diluted share in the first quarter of 2007 and $18 million or $0.40 per diluted share in the second quarter of 2006. This was primarily due to lower revenues and the change in the effective tax rate from 11% in 2006 to 35% in 2007. Head count at the end of the second quarter was 1,788 employees compared to 1,755 employees at the end of the first quarter of 2007. Cash and marketable securities increased $22.1 million for the second quarter to $178.5 million from $156.3 million in the first quarter, due to strong operational performance and improvements in accounts receivable. Our DSOs were 60 days at quarter end, as trade accounts receivable were $72 million at the second quarter of 2007 compared to $73.5 million in the first quarter of 2007. Our inventory turns stayed consistent in the 4.0 range as second quarter inventory was $56.9 million down from $57.7 million in the first quarter of 2007.

Capital expenditures were $2.1 million and fixed asset depreciation was $2.1 million for the second quarter. Our guidance for the third quarter is as follows. Given the expected softness in the semiconductor industry, our sales will be in the range of $95 million to $100 million. Gross margins will be at similar levels to the second quarter, as we continue the Stolberg transition and earnings per share will be in the range of $0.19 to $0.22 per fully diluted share using a 34.7% effective tax rate. That concludes our prepared remarks for today, and I'll now open up the call for questions.

(OPERATOR INSTRUCTION) We'll pause for a moment to compile the Q&A roster. Your first question comes from Robert Maire.

Hi, Robert.

Your inverter product to roll out and when you would expect revenue and obviously you're selling into a different market there, how you see that growing over time.

Robert, you kind of came in, in the middle of your question there, so if you could start it over again that would be great.

Yes, great. Couple of questions, first in terms of the inverter market if you could tell us what your expectations are for revenuing product and how you see that new area rolling out, given that it's sort of a different market that you're selling into And what percent of the solar business, overall business, do you see that being over time, what are your expectations for it, in other words?

Yes, as Hans said in his prepared remarks, we've got -- we have a couple of prototypes in the market right now, and up on the grid, so it's a little too early to call the rollout of revenue. I would say that it's certainly down the road for us as we continue to get acceptance of the product and start to market the product. As we said, we'll have more information about your business trajectory a little bit later in the year.

Okay. And the second question was in terms of your move to Shin Jiang, is that basically over or can we expect any further gross margin improvements through local sourcing, local design, or are there any sort of leftover cleanups that might help out the margin over the next couple of quarters.

Steve, do you want that one?

Are you on the phone?

I'll go ahead and take it. We've got -- near term, we're moving the production of our Stolberg operation to China and that will have some pressure on gross margin through the end of Q4 and then at that point we should be completely out of Stolberg, Germany and all the costs associated with the transition. So we should see margin improvement from that starting in 2008. And with the rest of the cost reduction programs that we've been talking about, those should continue to improve our results as we go forward, as we look out towards our target model.

And one last question, you targeted some strong growth for your solar market this year, growing 3 or 4 X your previous year, any preliminary guess as to whether you can keep that up for the 2008 year or are you seeing a similar sort of ramp rate going out of the year?

Yes, it's too early to call.

Robert, it depends very strong how successful we are entering into the inverter market.

Okay. Very good, thank you.

Your next question comes from the line of Brett Hodess.

We should dial back.

Good afternoon, the backlog number you gave indicated a little over 20% decline and that's primarily semi equipment. Do you see the -- is that sort of a proxy for how you see sort of the semi equipment part of your business over the next quarter or two, down in that kind of range, and obviously offset by the other businesses.

Not really. It is a piece of it, Brett. A lot of the semi business that we have is -- in fact the lion's share of the semi-business that we have is just in time product, which doesn't enter into that backlog number. So this would be -- these are the types of products where they order a little bit longer term, they're a little bit of a lower volume, high-mix products. So what you see is, as Hans mentioned, as the semi-cap suppliers are tightening down on inventories and starting to work off of existing inventories, this is the type of result we would expect to see, actually.

And then the other question I had was, if you look at the comments on the flat panel display equipment markets, it is starting to pick up potentially in the second half. Are you already starting to see your flat panel OEMs looking to you for an increase in orders, or is it more that the CapEx will start to pick up and the equipment will follow that a little later?

I think it is going to be a classic flat panel market. When you think about Korea and Japan, they've got the money to pursue their growth plans and that's going to be in the Gen 8 and Gen 10 area. And when you think about the Taiwan market, 50% of the players are in Taiwan, that will come on the heels of raising capital, which is already starting to percolate in the market in Taiwan. So I think there is a -- still always is sort of a mixed market there. And then the players in China, the main players in China who will enter into the investment phase as well will -- they have got the capital to support their needs. So it is a little bit of a mixed bag and I think what we'll see is that market really open up a little bit as we get through the second half of the year.

And I think at one point why we think that the second half will be strong, we see in all of these key players in the flat panel market, a stabilizing in the prices for flat panel, which is an indication for that there are, the inventories are getting tighter and they are poised for putting new faps into operation.

Very good. Thank you.

Your next question comes from the line of Tim Arcuri.

My first question is what kind of margins are you expecting on your solar inverter product, because companies like Zantrex that are already in that space are experiencing margins of 30%, which I would think is significantly below your corporate average.

Yes, we're not at the point, yet, where we're rolling out pricing and margin information, but I would say that in conjunction with our overall business structure, we have very, very cost-effective manufacturing platform to build and deliver products. So I think our infrastructure is very sound and, as Hans mentioned, this is an extension of existing products that we currently serve for markets that are non-semi and in those areas those have a tendency to run either at or above the corporate margins.

Okay. What kind of differentiation would be there for your invertor product?

I think in essence there are three. The first thing is, as I mentioned before, we have been in this market, at least in the inverter market, which are the high-powered system for example glass coating for solar applications for a long period of time. So that means we have a vast experience how to operate those systems. And on the other side, this is a market which is kind of emerging because all the high-powered stuff is connected with the commercial and with the big plans which are just now coming online. Therefore, and it is a just one step back, if this is something which differentiates the margin, as well. I mean, if you are looking at the 30% margin, it is an average on all the inverters. We are very picky and just getting in those markets which are on the high power realm. The second point is, I think we have probably the best worldwide coverage of all those potential competitors. And the third point is, I think we have probably the best low-cost high quality manufacturing in comparison to all of our competitors.

Okay. Great. Can I ask you another question or would you want me to --

No problem.

Okay. My other question is, what is the size of your available market for a 40 megawatt PV plant or any size you want to choose, but I just wanted to know what would be the size of your market for that?

What would be the --

Size of your market. For your products.

If you -- let me just try and answer it this way, because I think Hans had it in his script. For a 10 megawatt -- I think you're talking about the solar the thin film solar side of the market, the deposition tool side?

Plus the inverters, for example.

Yes, we haven't characterized what the inverter side is other than to say what the annuity was. So for a 10 megawatt solar line.

It's a 1 to 1.5 million, and for the same line which is cranking out the panels, it is round about 2 to 3 times higher per year. So from that you can make the math what the revenue stream is going to be.

Okay. And are you experiencing any pricing pressure in your core markets, basically the semiconductor market?

Yes, I mean, we consistently and constantly experience price pressure from our OEM customers across all of our markets, and --

But anything --

Say again.

Anything incrementally that is worrisome, that could cause you some worry -- because the business is soft during the second half of the year and I do know that some of the memory companies are putting pricing pressure on the OEMs, so is that being passed on to you?

Yes, I would say, I mean, if we're thinking about it from a cost perspective, we consistently get pressure from our OEM suppliers and we're constantly working on cost reduction opportunities within our own structure to make sure that we line up and we can all achieve our goals. From a gross margin perspective, if that's where you're heading with the question, I think what we've said in prior calls is that the semiconductor market is actually run south of the corporate gross margin average. So as you see softness in the semiconductor market, that will typically, longer term, will typically align with -- actually move into the corporate average up a little bit.

Okay. Thank you. I might come back with some more questions, but, yes.

Your next question comes from the line of Jim Cavello.

Hi, this is Kate Kotlarsky on behalf of Jim Cavello. Another question on the margin side. I know that last quarter you had talked about a number of initiatives you were taking to reduce costs. I was wondering if you can talk about where you are relative to some of the initiatives that you've taken and whether you've accelerated some of them given the deteriorating environment on the semiconductor side?

Yes, I would say we're still tracking. There was four main -- there is four main, what I would call line of sight cost reduction programs that we're working, design for cost reduction, so we're designing costs out of our systems. We have insourcing programs where we're actually bringing low volume, high-mix components that we have contracted out in some areas, in house to produce those in China in our factories and produce lower costs. We have freight initiatives that continue to come into play. They were actually negotiated last year and they're coming into play as we utilize our freight routings and our freight channels for this year. And then the last being is -- is vendor supply shifting from existing supply chains over to, further into China. So we'll we'll be burning through inventories at different suppliers and eventually sourcing in other parts of the world, which is also, by the way, very consistent with what we'll see as we continue to migrate the Stolberg production to China.

So where are we in those? We're probably -- I am taking on average on all four of those we're probably greater than half-way done or greater than half-way through the process, and starting to realize some of those but, depending upon market structure and depending upon, for example, the inventory or design things, depending upon how fast we can get to those changes and get them approved by our customers, will determine how fast we can get to those cost reductions. So it is a little hard to just lay a line on a chart for you, but I would say greater than halfway through the implementation. That doesn't mean we're greater than halfways through the savings.

I think -- this is Steve -- I think that that should be realized that as we moved our manufacturing, we actually incur a little bit of cost associated with moving our manufacturing from Germany to China, so we aren't going to see linear reduction in our cost reductions, even if we're doing well in the programs.

Okay. That's very helpful. And just a quick follow-up. I wanted to clarify, in terms of the margin guidance, I think you mentioned you expect margins to be at similar levels next quarter to this quarter. And it would seem to me like there would be some incremental margin pressure given the revenue and the earnings guidance you provided, so I just wanted to make sure I understood that properly.

Again, the semi-margins are a little bit south of the corporate average. So the absence or the falling of semi revenues and the softness in the cycle actually support the margin -- similar margins to what we did this quarter.

Okay. Thanks very much.

You have a follow-up question from the line of Tim Arcuri.

Thanks. I just wanted to go through your logic about the flat panel display. You were saying that there were some signs of life coming back to the flat panel display market?

Right.

Yes.

And so your question -- I think we covered it pretty well. But what is the question?

My question is like you're saying that you're expecting sequential increases in the flat panel display market from now on?

That is the common census. If you look at the forecasting of all the companies which are dealing with that, you see a rebound in the second half and going through the '08. And one of the key drivers I mentioned before and therefore the rationale is logic, is the consolidation of the prices of the flat panel displays.

Okay. Okay. One last question. You recently hired Yuval Wasserman. Does that mean you will be getting into the APC market as well or that was just independent of that?

No. It has nothing to do with going into APC. One of the key elements, and I think we make it clear all the time, we are focusing on what we can do best and we are absolutely not in a position to get into the APC. But I know Yuval for a long, long time and he was been at the final tenure in the APC but before that he was not and he was primarily in the semiconductor equipment. And we hired him because his extensive knowledge and experience in marketing, in management and in the knowledge about this industry.

Okay. Thank you very much.

Your next question comes from the line of Tim Summers.

Hi. Just a housekeeping question. On the gross margin degradation quarter-over-quarter, could you help us quantify how much of that was due to the move from Germany to China and how much was due to lower volume and how much was due to other factors?

Boy, yes, how am I going to -- Yes, I would -- I would say we're probably -- I mean, just in round numbers, Tim, probably call it a half point to each, so -- just in rough numbers, I mean, we don't really have it broken out like that, but if I think about the pressure on the margins, from Stolberg and pressure on the margins from softness, it is probably in those kind of areas. A little tough to answer.

Yes, okay. That's good enough.

Your next question is from Krish Shankar.

Hi guys. Just a couple of quick questions, what is AMAT as a percentage of sales.

AMAT as a percentage of sales was about 28% in the quarter.

And how should you think about Opex in September, should we expect R&D to continue to increasing or is it going flattish at this point?

R&D should hold in the ranges that it is in. It may tip up just a little bit, but it should be in the range that it is in right now.

Okay. And you guys spoke about (inaudible) solar opportunity, is there any opportunity in the crystalline silicon side and if so, can you quantify it in the same way did with (inaudible).

You want to take that?

I think in both areas you have potential applications. Of course, we prepared (inaudible) side because there are more (inaudible) than the bar silicon, but it is hard for us to break it down, who was -- what kind of percentage in the bar silicon and what kind is in the (inaudible) silicon, because for us it is not that important to break that out.

For a 10 megawatt crystalline (inaudible) silicon line what would the opportunity be on the bar supply side?

It would be about a half a million, in that kind of a range.

All right. Thank you.

It is still very important for us, because as you know, bar silicon is still accountable for nearly 90% of all of the photovoltaic cells and therefore it is as important for us for us as (inaudible), but on a going forward base, we like (inaudible) more.

At this time we have no further questions.

Great. Thank you, very much, for joining us, and we look forward to seeing you at upcoming conferences.

This concludes this conference call. You may now disconnect.