Advanced Energy Industries Inc (AEIS) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Advanced Energy's fiscal 2007 fourth quarter conference call. All lines have been placed on mute to prevent any background noise. After the Speaker's remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS)

Now I would like to introduce Miss. Annie Leschin of Advanced Energy Investor Relations. Miss Leschin, you may begin.

Thank you and good afternoon. Thank you for joining us this afternoon for our fourth quarter 2007 earnings conference call. With me on today's call are Hans Betz, President and Chief Executive Officer, and Larry Firestone, Executive Vice President and CFO, who will both present prepared remarks.

By now you should have received a copy of the press release that we issued approximately an hour ago. If you are in need of a copy please visit our web site at www.advancedenergy.com or contact us at (970)407-4670. Before we begin, I would like everyone to know that Advanced Energy will be participating in Piper Jaffray's Third Annual Clean Tech Renewables conference on February 20th at 11:30 in New York City, and the Goldman Sachs 2008 Technology Investment conference on February 26th in Las Vegas. As additional events are scheduled this quarter, we will make additional announcements.

I would like to remind everyone that except for historical financial information contained herein, the matters discussed in this conference call contain forward-looking statements subject to known and unknown risks and uncertainties, which 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 customers, our ability to benefit from the continued cost improvement initiatives currently underway, and unanticipated changes in our estimates, reserves or allowances. These risks -- these and other risks are described in form 10-K and 10-Q and other reports filed by the Company with the SEC. In addition, forward-looking statements are made based on information presently available to the Company, and we assume no obligation to update the information that we provide you during this conference call including the first quarter guidance provided in our press release. Guidance will not be updated after today's call until our next scheduled quarterly financial release.

I will now turn the call over to Hans Betz.

Good afternoon, everyone, and thank you for joining us. Advanced Energy had a challenging year in 2007, with sales of 384.7 million representing a decrease of 6% over the prior year. Despite the drop in sales, we generated more 61 million in cash and continued to penetrate the solar market. We believe that current efforts to diversify our business will eventually help limit the impact of semiconductor cyclicality. We recognize the need for Advanced Energy to take additional steps to lower our cost structure. As a result, we plan to further improve efficiencies and to implement cost reductions in 2008.

Despite the semiconductor environment during 2007, I would like to quickly acknowledge some of the Company's accomplishments. During the year, we moved four of our manufacturing plants to China. As we closed our Stolberg Germany facility in an effort to continue to streamline operations and achieve greater efficiencies. Sales for the solar markets more than tripled to 26.5 million during the year, from 8.5 million in 2006. We expanded our solar product offering with the introduction of our Solaron inverter, which addresses the solar inverter market. Our product has already picked up notable recognition and traction and we remain excited about the long-term potential of this product.

Fourth quarter sales were in line with our revised guidance issued on January 22nd, at 83.8 million, a 7% decline over last quarter. We were disappointed by our performance in this quarter as sales continued to be pressured by the softness in the semiconductor capital equipment market. Lower sales pressured gross margins which declined to 39.1% in the quarter.

Additionally, operating margin was 5.1%. We generated $20 million in cash to end the quarter was 205 million in cash and marketable securities. Thanks to the semiconductor equipment, capital equipment industry declined 6% sequentially as orders from OEMs fell off during the latter part of the quarter due to pushouts from semiconductor manufacturers. On a positive note we are gaining traction at [key cons] and shares on selective tools that are critical for our 65 nm, 45 nm, which should position us well for the next year.

Looking into the first quarter, nearly all o f the key indicators for 2008 semiconductor markets have recently been revised downward. As a result we expect the weakness of the semiconductor industry to continue for the first half of 2008. We remain confident in our position with key customers and next-generation products which we believe will benefit us when the market improves. Our non-semiconductor business includes solar, both in [router] and (inaudible) deposition tools, flat panel displays, data storage, architecture of glass, and industrial coating, and emerging markets. So, sales to our non-semiconductor markets decrease 10% sequentially due to particularly large, third quarter sales in the industrial coating market. Our strategy to grow these markets remains intact.

Our sales of the flat panel display market were roughly flat, increasing 1% from the previous quarter. The next investment cycle has begun as key manufacturers started putting in their planned capital expenditures over the holiday season and now continuing that trend in the first quarter. We believe that Advanced Energy Industries is well positioned in this market with several growth drivers including, first, flat panel manufacturers advancing to 10/10 products. Second, upgrades to existing products which improved to its capacity. And third, retrofits to existing tools where Advanced Energy, which replaces current tools and improved capacities.

Weakness in the data storage industry continued and our business decrease 13% in the quarter driven by the decrease in the magnetic disk market. Given the shift in the last year, to perpendicular recording, the industry is just now implementing those investments. Having retooled virtually every machine to this technology, we do not anticipate the next investment cycle until late 2008.

The optical storage market continues to be soft because of the slow adoption of one HD format. Given the recent announcement by Warner Brothers, it appears the momentum has shifted sharply to Blue Ray's direction as HD format of choice. The recent adoption of this technology, (inaudible) changes in our OEM competitive landscape, may enhance Advanced Energy position in this market.

As expected, sales to the architectural glass market is decreased by 35% sequentially, consistent with our projections at (inaudible) from budget cuts have caused some programs to be delayed. Looking ahead, we have begun to regain tractions with a few orders in China and the new product for a customer in Russia. Additionally, since we sell glass our products directly to the end users, we are also working to strengthen relationships with the OEMs in an effort to continue to grow in this market.

Sales to the industrial coating market decreased 39% sequentially, mostly due to strong performance in the third quarter, driven by the emerging demand for thin film deposition and manufacturing process for EMI shielding products ahead of the holiday. We expect this market to remain mostly flat with the next investment cycle projected to begin in the second half of the year.

Now I would like to move on to our solar business. This business now comprises both, [photo will take] in film deposition tools and our new photo will take inverter product. Sales to the solar thin-film deposition tool market increased 32% sequentially. Advanced Energy's well positioned to benefit from this trend as our expertise in other markets, enables the move to solar. For our OEMs, are reporting strong demands, and we expect this to translate into production orders for next year. With seven Solaron inverters successfully installed on the grid, initial feedback has been very positive. Our inverter product is showing industry leading conversion efficiency performance. We are excited that one of our customers has agreed to serve as Advanced Energy (inverted) demo site in California. This will provide us the ability to show prospective customer our inverter product in action and should unlock new sales opportunities for us over the coming months.

In summary, although 2007 was a difficult year for Advanced Energy, we made progress diversifying our business in other markets. Given the challenging market conditions, however, we recognize the need to reduce our cost cutting progress through 2008. We will execute these reductions very strategically as we work to regain our growth trajectory. We will continue to invest in R&D for our next generation product opportunities in semiconductor and clean energy markets. This combined with our efforts to achieve a more balanced revenue strain between our semiconductor and non-semiconductor markets should position us well to grow at our 5 years (inaudible) of 20%. 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 Larry Firestone, our CFO, who will elaborate on operating results and financial performance for the fourth quarter and provide guidance for the first quarter.

Thank you, Hans, good afternoon, everyone. I will review the results for the fourth quarter of 2007 and discuss our guidance for the first quarter of 2008.

Sales for the fourth quarter of 2007 were in line with our preannounce guidance at 83.8 million. This represented a sequential decline of 7.4% compared to the 90.5 million for the third quarter of 2007, and a 19.8% decline versus 104.5 million in the fourth quarter of 2006. Total sales for 2007 declined 6% to 384.7 million. Sales to the semiconductor capital equipment market decreased 18.9% over the fourth quarter of 2006, representing approximately 68% of total sales in the quarter. Our non-semi business delivered 32% of sales this quarter, consistent with the same period last year.

Sales for the flat panel display industry increased 5% from total fourth quarter sales versus 4% in the third quarter, as we saw key customers pulling their capital expenditures during the holiday season, and we expect this trend to build through 2008. Data storage was consistent with last quarter at 4% of total sales as the magnetic disc industry continues to work through excess capacity. We expect this trend to continue throughout the end of the year with a possible rebound in late 2008.

Sales for the architectural glass market declined to 1% of total sales from 3% in the third quarter. This was on track with our plan as this market will continue to fluctuate with the low E glass market. Going forward, we believe we will see strength in the architectural glass market related to solar, which should lead to improved growth in this market based on our requirement for thin-film on glass to keep the solar efficiency at optimum levels. Our industrial coating and emerging markets represented approximately 11% of total fourth quarter sales down from 13% in the prior quarter.

Sales to the solar market in the fourth quarter were comprised mostly of thin-film deposition tools and represented 9% of total sales, up from 6% last quarter. We gained traction with our Solaron inverter product and plan to double our solar sales including both the inverter and the tools sales for 2008. Global services, which are embedded in each of the different markets, were consistent at 16% of the lower total sales in the fourth quarter. These are sales of upgrades and out of warranty repairs to our growing installed base.

Our book-to-bill ratio for the quarter was 1.03 to 1, and our backlog ended the quarter up 5% at 46 million. Our backlog includes orders for Advanced Energy products not covered in our just-in-time agreements. This is the first time in the last three quarters that our book-to-bill was above 1. Gross profit was 32.8 million, or 39.1% for the fourth quarter of 2007. This compares to a third quarter gross profit of 36.7 million, or 40.6% of revenues in the fourth quarter of 2006, and gross profit of 44.9 million for 42.9% of revenues in that quarter.

Gross margin was pressured by lower sales and absorption of factory overhead. R&D was 12.5 million or 14.9% over fourth quarter sales, compared to 12.9 million or 14.3% of third quarter sales and 12.2 million, or 11.7 million of sales a year ago. This was due to investments in both new and existing products. And despite lower sales growth, we continue to invest in R&D as we increased our spending 12.4% in 2007.

SG&A was 16.1 million or 19.2% of fourth quarter sales compared to 15.5 million or 17.2% of third quarter sales and 15.5 million or 14.9% of fourth quarter 2006 sales. SG&A increase from the prior quarter due to professional fees and severance costs. Fourth quarter net income from continuing operations was 4.1 million, $0.09 per diluted share compared to $5.9 million, $0.13 per diluted share in the third quarter of 2007. This compares to 40.4 million, $0.89 per diluted share in the fourth quarter a year ago, or 15.9 million and $0.35 per share from continuing operations excluding the tax benefit of 23.5 million in the same period last year. The lower net income was primarily due to the lower sales.

Headcount at the end of the fourth quarter of 2007 was 1,707 versus 1,756 employees at the end of the third quarter of 2007. This reduction was due to the closure of our Stolberg Germany facility. Cash and marketable securities increased 20.3 million for the fourth quarter to 205.3 million from 185 million in the third quarter. DSOs were 64 days at the end of the quarter. [Trade] accounts receivable were 61.5 million at the end of the fourth quarter of 2007 compared to 69.7 million at the end of the third quarter of 2007. Inventory turns were relatively consistent with the last quarter at 3.9 times. Inventory experienced a substantial decrease to 50.5 million from 57.4 million at the end of the third quarter of 2007. Capital expenditures were 3.2 million in fixed asset depreciation was 2.6 million.

Our guidance for the first quarter is as follows, given the market conditions and the continued softness in the semiconductor industry, we project sales to be in the 82 million to 88 million range. Gross margins will remain at similar levels to the fourth quarter due to product mix, and our earnings per share will be in the range of $0.07 to $0.11 per fully diluted share using a 32% effective tax rate.

As Hans mentioned, we are proactively driving cost reduction programs in the following areas, mature product lines, manufacturing locations, work-force reductions, as well as infrastructure and discretionary spending. These cost reduction plans are targeted to deliver a minimum of $10 million in annual savings to be fully realized in 2009. We expect this to impact costs of goods sold and operating expenses as well. We will continue our research and development investments so over the long term we can maintain our technology and market leadership.

This concludes our prepared remarks for today, and I would like to open up the call for questions.

(OPERATOR INSTRUCTIONS) And your next question comes from C.J. Muse with Lehman Brothers.

Thank you for taking my question. I guess, first question, can you talk a little bit about flat panel display, the linearity you expect there in 2008? And, I guess, where your lead times are today?

The flat panel display market is recovering, this is a consensus, it's mainly driven by the TV sets which are gaining traction now. The lead time -- It is hard to judge at this point.

Lead time on our products is about, anywhere between 8 and 13 weeks. I think, C.J., maybe part of your question is when are we going to see the order cycle? I think that's going to depend on the O E.M.'s lead time and what they're quoting to their customers.

We are seeing strong uplift at pretty much every equipment company across the board, whether it is tests, CVD, PVD, this quarter, I would think then, you will see it one quarter from now, or would it be two?

It will probably in the middle, we would probably be in the middle to maybe a little past the middle of the manufacturing cycle is where you'd see the order and then the delivery of the product. They won't need it on their floor until they're ready to fire the machine up.

So you're saying a strong ramp out of June or September?

I would guess we would see some activity early in the year. I don't know if we have got a line where we would put that level of granularity to it.

Okay. And, I guess, moving over to solar, are you seeing first generation production equipment orders yet? Or is it still all pilot line purchases?

Predominantly pilot line, but I think some of the higher volume hardware is starting to move out to the field.

What exactly do you need in terms of mix there to achieve, I think you said a doubling for 2008?

We haven't broken out the inverter versus the tool. But, I think, what we see is, inverter is starting from a pretty small base, so, substantial growth on the inverter side, and I think, it's still nice growth out of the tool side as well.

Last question for me. On the OpEx side, I know there were four main areas of cost improvement that you were focusing on prior to the announcement this evening, and I guess I am a little bit surprised that we are not seeing that savings in the 1Q guide in terms of the implied OpEx and gross margin. So, I guess, can you help me understand what the trajectory will look like now on the cost side?

Yes. I think there's -- well there are a couple things. When you are dealing with mature product lines or end of life decisions, there is timing that will be involved in that, manufacturing locations and workforce reductions as well, as well as some costs associated with that. So what I think we will see is us working our way, probably seeing the effectiveness of some of those cost reductions in the second half of the year and then fully realized in 2009.

Thank you.

Next question comes from Jim Covello with Goldman Sachs.

Good evening, guys. Thanks so much for taking the question. Just a quick one on the percentage of revenue that solar ultimately will represent with the target model. I think you said 9% in Q4, you're looking to double solar revenue. If I assume, because we are in an equipment downturn, your equipment revenues go down a little bit, maybe, theoretically we could be looking at about 25% of revenue coming from solar, exiting 2008. What is the long-term target that you have for solar as a percentage of the total revenue?

We have called that out, Jim. I think the -- your assumption of what it would exit 2008 really has a lot to do with maybe the trajectory that you have the annual revs at. So, that's where we sort of called it out on an absolute dollar basis, at about doubling what we have done this year. Long-term target for solar, I think, again, without having called it out in specific numbers, it's -- it's certainly, one of the -- with the angles that we play in solar and clean energy between architectural glass, solar on the thin-film deposition tool side and then on the inverter side, there's probably not a bigger combined growth engine that resides in the Company on a long-term basis. Again, we are very excited about it but I don't think we have got a number that we're going to put out there.

But if you think -- I understand you don't want to commit to a hard number, but, I mean, could it get to the half of the Company's revenue at some point in the future?

Yes. Yes, we said non-semi would definitely get there and solar, I think, would be a big, big part of that. So, it's going to depend on what the other markets are doing as well and in what time frame. But, it's, it certainly has the size and the strength and the diversity of products in the market to grow those levels.

Thanks so much.

Your next question comes from Timothy Arcuri with Citigroup.

Hi, guys, this is actually Brian Lee calling in for Tim. Just had a few quick things. Sort of a follow-up on an earlier question. Is it fair to assume that there is about a two quarter lag between the time that the OEMs start to see a pickup in orders on the flat panel side of the business and when you see it kind of impact the P&L? Is that a fair assumption?

When we see its impact our P&L?

Yes.

The way I guess I would address it it would depend on the OEM's lead time or the factory. If you have got some OEM's that are being aggressive in x-factory in six months then we would see it a little sooner. I think for the higher generation tools, or the new stuff that is going off, the lines, you will see longer lead times, maybe nine months to a year depending on where they are -- depending on the specs and things like that. It's probably a mixed bag. If I were to break it up geographically for you, I would say the orders are going to come in through Japan, and create the OEMs, and Japan (inaudible) to be a little bit longer than the ones that ones that come from Taiwan and China.

Okay. That is helpful. And then, I guess you are talking about doubling the solar revenues again in '08 after the big [growth] you saw in '07. Can you give a sense for what that mix of solar between the tool side and in orders could be in '08?

Oh, heck, yes, we know but we're not going to tell you. (laughter) We haven't disclosed what the mix is and what part of the business is going to go to inverter versus not inverter.

Fair enough. Last quick thing from me, I guess we're hearing more about pricing pressure across the supply chain, given the weak macro-economic fundamentals out there right now. How much of the margin decline this quarter was volume related and maybe how much was pricing related? I guess, sales had been flat this quarter with the levels in Q3. Would margins have been flat off of the Q3 levels as well?

I think most of what you have seen has been volume related. The lion's share of it is.

A quick housekeeping for me. Were there any share buybacks in the quarter?

No. We announced the share buyback program earlier this quarter, it might even have been right at the end of the year. But that hasn't been engaged yet until after this earnings call.

Okay. Thanks a lot, guys.

And your next question comes from Edwin Mok with Needham & Company.

Hi. Thanks for taking my question. Just a follow-up to the last question, in terms of pricing, have you guys seen any pricing pressure across the semiconductor space?

We always see pricing pressure from our customers. I think it's pretty consistent throughout the industry. We try to work on that. We typically like to have lined up the next generation product as a way for us both to gain from any reduction in what they're looking at as cost reductions, but I would say it is a pretty normal environment for us.

[Around the Solaron] Given that you guys expect Solaron to grow, is that any margin differences between solar and the other groups? And, also is there any margin differences between the inverter versus the two sides of your solar business?

Yes. I think the margins hold up pretty well. Our non semi-margins have a tendancy to be a little bit higher than the semi-margins. You have some early manufacturing runs that probably don't leverage the infrastructure or get to critical mass quite as fast, but I wouldn't look at those as being anything different than any normal ramp. We're looking forward to the margins that we get out of that section of the non-semi market.

How about the inverter versus [two side]?

Same.

Great. Thanks for answering my questions.

(OPERATOR INSTRUCTIONS) Next question is from Brett Hodess of Merrill Lynch.

Good afternoon. Two questions. First, on the semiconductor's side, if you look at the current environment, are you still seeing your OEM customers at this point reducing inventories, as their shipments are declining in 1Q, and based on their order guidance, likely to decline in 2Q? That is the first question. Does that take into account with your out look at this point in time?

Yes, Brett, if you look at it, and especially as you look at Q4, kind of in the what happened range, most of what we do with the semi OEMs is on an adjusted time basis. As we got to the last weeks of the quarter we saw some just in time orders not get taken off the dock or picked up, if you will. That is a pretty fluid environment. I think, overall, we are pretty comfortable with the operating environment that's going on with the deliveries that they are taken and also the guidance that we've given. We have not gone out into Q2 but I think you see what we have guided for Q1.

Okay. I guess, when you look at the other -- the non-semi businesses, in the last couple years you've had some single digit declines overall in those businesses, solar has been growing well but the other parts of the business all have proven to be pretty cyclical, some are up and some are down and they sort of have offset each other negatively and offset the solar negatively. I am sort of wondering, as you look at those businesses going forward, particularly things like flat panel and data storage and architectural glass that have proven to be really quite cyclical, at what point do you think that the solar side, or, either that or one of those product lines will prove to be a little bit more growth oriented such that you are not getting this offsetting affect that masks, sort of, the good diversification?

If you look at the different markets here, you will always have some kind of cyclicality in the semi-side and flat panel and data storage, just, generically. I think the only market which is purely growth, at least for the next foreseeable future, the next couple years, is solar. The question is, our these different cyclical markets dependent to each other? Most of the time they are independent. In particular, data storage is completely separated from semi. It may be one link, which is on the PC side, but in general, you will see different kinds of cyclicalities because depends on the capacity being brought on line. So, I think, you cannot get rich completely on this kind of cyclicality and you can not expect that the firing of the different markets are compensating each other.

Thank you.

And you have no further questions.

Thank you very much for joining us today. We look forward to seeing you at upcoming investor conferences and events Thanks.

This concludes today's conference call, you may now, disconnect.