Advanced Energy Industries Inc (AEIS) 2008 Q3 法說會逐字稿

Good afternoon. I will be the conference operator today. I would like to welcome everyone to the Advanced Energy call. (OPERATOR INSTRUCTIONS) Thank you and at this time, I would like to turn the call over to your chairperson Miss Ann [Lesushin].

Thank you for joining us this afternoon for our third quarter 2008 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 the press release that we issued approximately an hour ago. If you would like a copy, please visit our website at www.advanced-energy.com or contact us at 970-407-4670. Before I begin I would like to let everyone know that Advanced Energy will be participating in Boston's first energy conference in early December in Scottsdale, Arizona and Barclay's Capital Global Technology Conference on September 10th in San Francisco. As additional events are scheduled in the quarter, we will make additional announcements.

I would like to remind everyone that except for 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 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 our orders received from our customers, our ability to benefit from the continued cost improvement initiative under way and unanticipated changes in our estimates, reserves or allowances. These and other risks are described in 10-K and 10-Q and other reports filed with the SEC. In addition, we assume no obligation to update the information we provide you during this conference call, including the fourth quarter guidance provided during the conference call and in our press release dated today. Guidance will not be updated after today's call until our next quarterly scheduled financial release.

I will now turn the call over to Hans Betz.

Good afternoon, everyone and thank you for joining us. The third quarter marked the continued successful execution of our overall reason to concentrate on the product strategy, to diversify our overall business and to expand our non-semiconductor sales. Given the ongoing challenges presented by the conditions of the semiconductor market coupled with the looming global economic crisis, we are proud to have achieved our financial targets with sales of $84.5 million and a GAAP EPS of $0.13. As a percentage of the total sales, non-semiconductor revenue represented 48%, semiconductor revenue represented 34% and services represented 18%. Total gross margins were 41.7%. Our cash position remains strong, ending the quarter at $168 million in cash, marketable securities and long-term investments.

Weakness in the semiconductor market continued with consolidations and project push outs leading to a decline in capital spending by our customers. So our sales to the semiconductor OEMs declined 20% sequentially. We believe our share gains and strong performance at Korean OEM's help minimize Advanced Energy's quarterly decrease in semiconductors where there's was the more dramatic decline throughout the industry.

The outlook for the semiconductor market remains tenuous as conditions have been exacerbated by the recent credit crisis, which is causing semiconductor manufacturers to reevaluate their equipment purchasing strategies and they are investment decisions in an effort to conserve cash which is in turn lowering 2009 capital spending predictions. We believe this may lead to a slower recovery in semiconductors that anticipated. However, we are focused on securing next generation's wins during this downturn.

Non semiconductor revenues had another strong showing this quarter, contributing 48% of total sales, with particular strength in solar and across many of our emerging markets. We continue to build and improve our portfolio of products as we work to expand Advanced Energy's presence in the non semi markets. Solar sales grew 43% sequentially to reach an all time quarterly high of just over $19 million. Photovoltaic thin-film solar tools continue to account for the vast majority of our solar sales with the remainder coming with our solar on commercial inverter. Demand for Photovoltaic thin-film solar tools was strong during the quarter led by growth in Europe, China, US and Korea. OEM's capacity to build enough product to meet the end market demand is currently the limiting factor.

So we expect to see this growth continue through 2009. We are witnessing an impact from the credit crisis as solar manufacturing have begun to struggle to obtain the financing needed to build out their current project. Given the strong demand for solar panels, the related demand for panel manufacturing tools, we remain confident that these manufacturers will be among the first to obtain the necessary financing to drive this market forward. Additionally, our relationship with the key OEMs and our continued effort to build and improve our product portfolio should allow us to capture a healthy share of this high growth market.

Also the solar on commercial inverter is currently a small piece of our sales. We are encouraged by the continued strength of our 333-kilowatt inverter during this quarter. We have now sold a total of 43 units to date with approximately 14 running successful on the grids and another 11 currently under evaluation at customer sites. We also recently expanded our inverter portfolio with the addition of our 500-kilowatt solar converter released earlier in month. This inverter features a strong ROI and an expected efficiency rating of 97.5% CEC., which means California Energy Commission. Similarly to the unsurpassed rating of the 333-kilowatt inverter. We anticipate first orders and revenue in the first half of 2009.

This new offering will allow us to address markets with a particular focus on large power insulation such as utilities and solar farms and is leading the trend towards larger profitable installations. We are continuing to drive the power requirements higher. They are currently developing a 1 megawatt Solar inverter, which we anticipate will enter the market in the second half of 2009.

An important issue that affected the inverter market in recent months and caused the postponement of many solar installation until 2009 was the delay of the ITC legislation providing tax credits for solar projects. With Congress's recent passage of the bill, we would expect to see more demand in US inverter installations. Additionally, the removal of the alternative minimum tax will allow the utilities to participate to the ITC benefits. We believe the financial strength of utilities and large commercial customers will enable them to sell, finance or be among those best able to obtain financing to complete solar installation projects. These events will open up more inverter opportunities in the first half of 2009 and beyond. We believe the commercial and utility power range will be the fastest growing market for inverters in the future and the most likely to be the first to reach grid parity.

Sales to the flat panel (inaudible) market rose 50% sequentially this quarter. We believe this was the height of the first wave of the current investment cycle. This wave of investment was driven primarily by the build out of Gen-8 and Gen-8.5 designs. As with the semiconductor market we are seeing the Korea OEM's gain share in the flat panel market. We await the next series of series of investments by the Taiwanese and Chinese to upgrade to Gen-6 and Gen-7, with the caveat that they must first obtain the necessary financing which could prove challenging in the current environment. Looking ahead to Gen-10, we remain optimistic about Advanced Energy's position. Although we don't expect to see significant investment in this market until the second half of 2009. We are currently investing in new products to position us well when the next generation's design unfold.

After a strong second quarter, architectural glass at 39% sequential declined. Sales were driven by one large shipment to a new OEM customer as we continue to build on our OEM relationship. Due to the lumpy nature of this business, we expect weakness in the fourth quarter but anticipate strength in 2009 as the world continues its trend toward energy conservation compelling to move to low E glass.

Industrial coating and emerging markets is a very fragmented part of our business with many players across several industries, including universities, science labs and consumer electronics. Given the strength of the solar market, we are seeing some historical industrial customers shift to solar which we see as a positive for our business. This quarter, sales to this market declines 26% sequentially, due to a variety of economic and seasonal factors. This market is very much driven by consumers and therefore may be more sensitive to macroeconomic factors.

Beta storage fell 41% from last quarter due to seasonality in the optical media market. In magnetic media we are witnessing capacity additions after a year long absorption period from the last investments. We expect upside in early 2009 driven by the continue build out of media capacity and new growth opportunities in optical media formats such as Blue Ray, as media prices decline and consumers become more willing to upgrade.

Summary, overall we were very pleased with our performance in the third quarter despite the weakening economic climate coupled with continued challenges in the semiconductor market. We acknowledge there will be near term lumpiness in the market we serve, but we remain committed to addressing our customers' needs. With that in mind, we have made incredible strides in our non-semiconductor markets focusing our efforts on growing market share, investing for the future, introducing new products and ultimately positioning ourself to take advantage of the long-term growth of existing and emerging markets.

I would like to thank the entire Advanced Energy team around the world for their hard work. I will turn the call over to Larry Firestone, our CFO, to elaborate on our operating results.

Thank you. Good afternoon. I will review the results of the third quarter of 2008 and discuss our guidance for the fourth quarter.

Despite the softening economic environment and the continued weakness in the semiconductor climate, strength in our non semi markets drove or sales to $84.5 million. With solid 11% growth in non semi revenue, we achieved a healthy balance between our semi and non semi business. Year-over-year revenues declined 7% from the $90.5 million in the third quarter of 2007. This quarter we have separated our service business from the components of semi and non semi revenues, as this will provide additionally clarity around product revenues versus recurring revenues derived from the service business.

Sales for the semiconductor capital equipment market represented 34% of total sales in the quarter at $28.2 million. The industry continued to weaken driving sales down compared to last quarter's 40% of sales or $35.3 million. Sales to the non semiconductor markets were very strong at $40.7 million or 48% of total sales compared to $36.6 million or 42% of sales in the second quarter of 2008.

Sales to the solar market this quarter, which were comprised mostly of sales to our OEM customers that manufacture thin film deposition tools represented a record 23% or $19.3 million of total sales versus 14% in the second quarter. Architectural glass sales fell to 3% of total sells versus 4% in the second quarter. Clean technology, which compromises both solar and architectural glass was 26% of overall sales.

Sales to the flat panel display market performed well at 11% of total sales in the third quarter versus 7% in the second quarter. This quarter represented what we believe to be the peak of the first wave of this investment cycle with Gen-8 and 8.5 investment and the result is that we expect sales to moderate in the near term until the next round of investment and upgrading to Gen 6 and 7 is made by the Chinese and Taiwanese.

Sales to our industrial coding and emerging markets were approximately 9% of total sales, down from 12% in the prior quarter. As a reminder this area is not trend driven as it is quite fragmented and represents sales to a collection of customers in various markets, but tends to hover in the range of 10% of sales.

Data storage decreased to 3% of total sales compared to 4% in the last quarter as Blue Ray continued its slow adoption in the market. Our service business was once again strong this quarter representing about 18% of total revenue. Beginning this quarter, we will provide a comparable number for the prior period allowing you to find historical market breakdown going back three quarters on our website for comparison purposes.

We are witnessing an important new trend in our service business with the onset of the financial crisis. Customers are conserving cash and looking to extend the life of their current manufacturing equipment and facilities by refurbishing, upgrading, et cetera. This is resulting in increased maintenance service and upgrade business for AE. Our book to bill was 0.92 to 1. And we ended the quarter with a backlog of $48.9 million, which was down from last quarter's backlog of $55.6 million. The lower backlog was a result of the lower slow down and in particular, lower revenues in the semiconductor, data storage and architectural glass markets.

Gross profit was $35.3 million or 41.7% for the third quarter as compared to $35.3 million or 40.1% in the second quarter. The sequential improvement in margin resulted from favorable product mix, which reduced material costs. Additionally cost of good sold to decrease by approximately $1.2 million in overhead absorption related to the increase in inventory during the quarter. Year-over-year, gross profit increased from $36.7 million or 40.6% in the third quarter of 2007. R&D increased to $14.7 million or 17.4% of third quarter sales, up from $13.8 million or 15.6% of second quarter sales and $12.9 million or 14.3% of sales a year ago. The increase was mainly due to our continued investments in solar equipment and the recent expansion of our inverter portfolio. Despite the current economic cycle, we are committed to investing in new growth areas in order to position Advanced Energy advantageously, when the environment improves.

SG&A increased to $14.6 million to 17.2% of third quarter sales, compared to $14 million or 15.9% of sales in the second quarter and $15.5 million or 17.2% in the same period last year. This increase was due to an increase in reserves for bad debt. We also had restructuring charges during the third quarter of $522,000 as we announced a reduction in overhead personnel in our operations area.

We hold approximately $35.7 million in auction rate securities, $30.5 million of which are in student loans and $5.2 million are in municipals, which are classified as long-term assets. The market for trading these securities is limited. During the third quarter, we sold approximately $900,000 of auction rate securities leaving a balance of $35.7 million and we have recorded accumulative temporary impairment charge of $2.4 million to date. During the fourth quarter, we have already sold $4 million in student loan auction rate securities and received an agreement from our money management firm that the remainder of these assets will be purchased at par value beginning in June 2010.

Third quarter net income was $5.4 million or $0.13 per diluted share due to a favorable tax of 9.4% in the quarter resulting from the change in the mix from profits and losses in the countries that we operate. This compares to$ 5.9 million or $0.14 per diluted share in the second quarter utilizing a 26.1% tax rate and $5.9 million or $0.13 per diluted share a year ago with a 25% tax rate. Our head count at the end of the second quarter was 1,772 employees, compared to 1,767 employees at the end of the second quarter. Cash and marketable securities, including auction rate securities decreased to $168.2 million from $175.7 million in the second quarter due to increases in inventory and accounts receivable during the quarter.

DSOs were 66 days and trade accounts receivable were $64.4 million at the end of the third quarter of 2008 compared to 62 days and $59.8 million at the end of the second quarter of 2008. Total inventory increased to $53.6 million from $48.4 million in the second quarter. This increase was related to an inventory bill to support a product transition. This drove inventory turns to 3.7 versus 4.1 in the prior quarter. Capital expenditures were $1.8 million and fixed asset depreciation was $2.4 million for the third quarter.

We initiated a cost reduction program in the fourth quarter of 2007 last year with a goal of total cost savings of approximately $10 million by 2009. Today, we are pleased to report we have accomplished this achievement a quarter early. However, based on the continued economic weakness in our markets, we are proactively implementing both short-term and permanent cost reductions to drive higher efficiency and effectiveness, while reducing our break even point to allow us to run a healthy business. These actions including phasing out mature product lines, optimizing manufacturing strategy, reducing our work force in selected areas, reducing discretionary spending, shutting down for a week over Thanksgiving and two weeks over the Christmas holidays. We will execute these reductions very strategically as we work to gain our growth trajectory. We will continue to invest in R&D for our next generation product opportunities in semiconductor and clean energy markets. These -- this combined with our efforts to achieve a more balanced revenue stream between our semiconductor and non semiconductor markets should position us well to grow when the market returns.

Our guidance for the fourth quarter is as follows: sales will be in the range of $66 million to $72 million and gross margins will be in the range of 35% to 37.5% and GAAP earnings per share will be a loss of $.05 to $0.01 per fully diluted share using a 22.5% effective tax rate. That concludes our prepared remarks for today. Operator, I would like to open up the call for questions.

Your first question is from Brett Hodess. Your line is open.

This is Paul Thomas for Brett. Just a question on solar. The jump you had this quarter was from PV deposition and you had the new products coming out. What is the mix of solar going to look like by the end of next year? Will it be mostly PV?

As we continue to gain traction in the converter business, that will still be a longer trajectory roll out. I think it is safe to say given the activity that is going on in the deposition tool market, PV will still dominate the landscape. We haven't given any color as to what percentages those are.

You mentioned the credit situation. Do you have any thoughts on what portion of your addressable market is still in financing?

In the solar business?

Yes.

I don't think that's in our purview given the fact that our channel to the market is principally through OEMs.

Okay .

Next question is from Joe Feng.

Can you give us some more details on what you're seeing in the fourth quarter. Essentially, you are guiding roughly down 15% to 22%. Solar is going to be up. Does that suggest that semi will be down worse than that?

I don't think we gave the direction on any of the markets. Semi is the biggest contributor of the downward shift in revenue in the markets though.

In the past you mentioned that solar will double in 2008 and do you think you are still on track for that guidance?

Yes, we are.

Any thoughts for '09?

We are not at a point where we are giving an outlook to '09 solar revenues .

Do you think there is a minimum maintenance level that you can give me for the semiconductor orders that is sustainable no matter what goes on out there? Maybe where you are at.

It is a little bit of a tough question to answer. Every year we live, we have more products that come out of warranty which go out of the available market for service, our service business. I think -- we continue and have continued to see over the last several years growth in our service business. It is a nice performing part of our portfolio of businesses. I don't know that there is a minimum level of service regarding semi. Certainly the focus on utilization of fabs and kind of mining productivity out of existing capital structures is favorable to that business today.

Perhaps I can follow-up with 200 millometer fabs going out or retiring, how is that going to affect your service business moving forward?

If we retire, it does not affect. If they would like to use the equipment for other kind of products, they probably need some upgrades and this would be positive for our service business.

Thank you.

Next question is from Timothy Arcuri.

This is actually Brian Lee calling in for Tim. I had a couple quick things. Follow-up to the last question, if I look at the last time the semi business got this bad it was in the 2000, 2001 cycle. At that point you guys weren't breaking out service. You were running the sub $20 million per quarter in the semi business, is there any sense you can give me as to how much of that was service back in that trough?

That is way before my time.

Mine too.

I don't think we have those numbers at our hands.

To ask it a different way, is there anything fundamentally different mix wise or exposure wise to give you comfort that things won't bottom to similar levels in 2000 and 2001.

That was seven years ago, so in the meantime the install base has grown substantially, from that point we would assume that the service business has grown accordingly. In the meantime, I think they are working heavily on having more products on the service side aside from the break and fix business. We would assume there is a substantial difference between 2001 and today.

On the semi new product side as well, I think the influences in the market are a little bit different than they were in 2001 and 2002. It is hard for us to say.

Fair enough. Switching gears a bit. What was break even this quarter and what do you expect it to be at the end of Q4?

Break even is running a little north of $70 million and we expect it to be in the $70 million-ish range by the end of Q4.

Last question from me, how much of the service business is related to the semi side and how much is related to the non semi side?

I think it is dictated by our installed base over the years and the concentration of revenues that we have seen in the semi market. It is predominantly out of the semi side but we get service revenues from really all parts of our business.

It should be more than 80%.

80/20 would be reasonable?

Yep.

Next question is from Jim Covello.

This is Mark [Delaney] calling for Jim. Thanks for taking my question. Maybe you can comment on the inventory situation, maybe what you are seeing on your customers and where you see it going for your own business. I know you had commented on it a little bit in the prepared remarks but more color on that.

Sure. Inventory with the OEM structure in semi -- I assume you are focusing on the semi side -- inventory with our customers on semi most of that we do with our large OEMs is just in time. I think the inventory structure is still running pretty lien. Inside AE we still have some inventory build up going on as we transition manufacturing from Fort Collins to China and as we transition from an older product to a newer generation product as well. Some of that is -- I would say most of what you see an increase in inventory is less market specific and more AE specific in moving pieces from one technology to another and one manufacturing site to another.

That's helpful. Thanks. Maybe getting back a little bit to the solar business for you guys, you talked a little bit about the financing and maybe you have a great view onto that. Wondering do you have any sense of how much of the orders that you guys are getting is related to new capacity and what that might be if it is kind of the same players as opposed to new players getting into the business?

Everything we are getting as far as new orders is related to new capacity. It is all capex build with either new solar lines going in on the thin film deposition side, be it whatever technology is being used in the end panel manufacturers plants and new capacity on the inverter side as well.

What kind of time frame would you be looking at before you would expect repeat orders in the absence of capacity expansion?

That will depend on -- we get repeat orders from the OEM customer. Repeat orders from the same customer through the OEM is a question we would have to ask one level up in the chain. If you take our OEM customers, their level of getting repeat orders will dictate our repeat orders on the thin film equipment side. On the inverter side we have already seen repeat orders from a couple of customers.

Thank you.

Next question is from Olga [Levinson].

Larry, you commented on break even at the end of December, can you give the various initiatives that you outlined without giving numbers, where do you expect break even to be by the mid to end of 2009?

Olga, I don't have a number for you by the end or mid to '09. What I can say is the short-term cost structure initiatives that we have brought us to place to bring us to the $70 million range at the end of the Q4 as we have sat down as a management team some of those are not repeatable or not long-term running in nature. We will be using Q4 in the time between now and the end of the year to organize the more permanent cost structure initiatives and what we will plan on doing is driving the break even point down to the point where we are successful in the market and we still run a healthy business. I think safe to say there is some -- as you all know, as we look at things like head count there would be restructuring costs in the near term quarter with a long-term permanent benefit from that. Where we will end up in the middle of the year will depend on the time we will take and really what we can push out of the business and the decisions we make between now and the end of the year.

Now, that you are breaking out the service portion, I guess, can you tell us what it was in the first two quarters of the year and how you expect it to trend in 4Q?

I don't think -- wait a second. Maybe I do have that. Q1 was 17% of revenues at $15.2 million. Q2 was 18% of revenues at $16.1 million and we haven't -- we don't give specific parts of the business guidance with respect to that.

Do you expect it to be down, flattish, any direction?

Again, haven't given any visibility to that.

I guess how should we think about the tax rate in 2009?

Tax rate in 2009 I would put it very similar to the Q4 tax rate in the 22% range.

Thanks so much.

There are no further questions. Thank you.

Thank you, everybody, for joining our call and we will see you at the up coming conferences