Advanced Energy Industries Inc (AEIS) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Advanced Energy's second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session.

(Operator Instructions). I'm turn the call over to Ms. Leschin, Investor Relations. Ms. Leschin, you may begin.

Thank you, operator. Good afternoon, everyone. Thank you for joining us this afternoon for our second quarter 2009 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. Both of them will present prepared remarks.

By now, you should have received a copy of the press release we issued approximately an hour ago. If you would like a copy, please visit our web site at www.advanced-energy.com or contact us at (970) 407-4670. I would like to take a moment to let you know we'll be participating in a number of conferences during the third quarter, including Pacific Crest on August 10th in Vail, Colorado, Citigroup on September 9th in New York, Deutsche bank on September 16th in New York and B of A on September 21st in Boston. As additional details become available, we'll make other announcements.

Now I would like to remind everyone that except for the 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. Statements that include the terms believe, expect, plans, objectives, estimates, anticipates, intends, targets or the like should be viewed as forward-looking and uncertain. Such risks and uncertainties include, but are not limited to, the volatility and [cyclity] of the industries we serve, the timing of orders received from our customers, our ability to benefit from the continued cost improvement initiatives currently underway and unanticipated changes in our estimates, reserves or allowances.

These and other risks are described in Form 10-K around 10-Q and other reports filed with the SEC. In addition, we assume no obligation to update the information we provide to you during this conference call, including the third quarter guidance provided during the call and in our press release dated today. Guidance will not be updated after today's call until our next scheduled quarterly financial release. I'll now turn the call over to Hans Betz.

Good afternoon, everyone. Thank you for joining us. We ended the second quarter of '09 with a particularly bleak view of the market and have since exited the quarter with signs of life returning and an improved outlook for the equipment industry. We have been encouraged to see long-awaited signs of stabilization and pockets of improvement in our markets.

Semiconductors have begun to show a moderate upturn. Also reflected in our service business, by its solar equipment group despite the continuing panel of supplies. Flat panel's selective financing shows no sign of ending before 2010.

However, different avenues are opening up to address financing issues, not the least of which are the stimulus plan by various governments around the world. We remain optimistic that the effects of these programs will eventually have a positive effect on the macroeconomy, particularly areas such as solar and converter. From our current vantage point, the worst of the declines in our markets appears to be behind us and the outlook is positive.

Second quarter results delivered sales of $35.6 million and a GAAP loss of $0.38 per share. We believe that careful but substantial cost-cutting measures implemented over the last several quarters were critical to weathering the storm. We continued to conserve cash as we closed the quarter with $175.3 million.

Our strong balance sheet is a key strategic advantage as we navigate through the cycle. But more importantly, it enables us to invest in next generation's power conversion products and technologies, such as the expansion of our solar arm inverter product line. We have delivered on our commitment to accelerate technology investments and keep R&D spending steady at recent levels in an effort to roll out new products and gain market share in our markets.

After a year and a half of declining sales, the semiconductor market was at a particularly vulnerable point when the economic crisis hit last fall. During the first quarter of 2009, however, capital equipment spending in the semiconductor market appears to have bottomed and since then, the market has begun its recovery, albeit slowly. Semiconductor OEMs have continued to work through the inventories and finally reached a point where the purchase of spare parts and the repair of equipment have become essential to meet current levels of demand, forcing our service revenue to grow as well. We are beginning to see orders from new products which reflect investment in technology to advanced semiconductor equipment to the next note, rather than the expansion of FAB capacity. We're also seeing certain markets such as Korea, where we have a strong market presence emerge as strong second tier players in the global capital equipment supply chain.

Additionally, our next generation power conversion products, Paramount, continues to gain momentum in the market. Paramount that only increases the technological capability of our customers, but also lowers their cost of ownership. We are starting to see volume production orders of this product targeted at the stock 45 net nanometer notes. Based on our results and customer feedback, we believe the semiconductor market will show gradual improvement throughout the rest of the year, based in part on technology investments at Intel, AMD, Samsung and Kia. However, visibility remains limited longer term.

In our nonsemiconductor markets, solar once again leads the way. Similar to most solar equipment vendors, we, too, experiencing the effect of (inaudible) oversupply, in the form of orders pushout. We are seeing certain geographic areas such as Asia buck the trend and continue to invest and expand its solar panel manufacturing capacity with the majority being more silicon and the IGS. Despite these pockets of growth, we have been fueled primarily by government funding. We anticipate investments in photo equipment will recover slowly over the next few quarters as financing becomes available.

We have also begun to see significant traction in the inverter market with our 500KW solar on converter product announced earlier this year. We spent the last two years feeding this market with the 333KW product, establishing our product reliability at 97.5% conversion efficiency. We recently received our first megawatt order from a utility for a large ground mount installation.

We are seeing our backlog increase significantly with orders from other utilities. In total, we have sold or received orders for 42 333KW and 24 500KW inverters, three times as many 500KW inverters as we did in the first quarter. We're currently expanding our manufacturing capacity to handle growing demand.

We have successfully established credibility in the large commercial markets and the strengths of our service business and global footprint are being recognized as a key asset to servicing the worldwide installed base of solar areas. We believe our technology, efficiency and expandability was crucial to winning these orders as it satisfies the market need for large power conversion. Based on the feedback we have received from the markets, indications are promising that our one megawatt product targeted for release is the first quarter 2010 will be highly regarded as well.

The strategic decision we made a few years ago pursue the inverter market has not only added to the power conversion product line, but also allowed us to target a different kind of market that, for the first time, the Company's history has driven, not only by capacity expansion but by the installation of solar rays as well. Why production of solar panels has fallen off in recent quarters due to overcapacity, casting a shadow on investments in capital equipment for new capacity in the near term, the return on investment for solar installation has become more attractive with lower payment prices and subsequent begun to drive demand. The result is an increased converter sales as every solar installation requires inverters to convert DC power that the solar panels deliver into AC power for use.

Other market factors such as US economic stimulus package, the passage of the ITC and associated initiatives surrounding the renewable movement will only serve to motivate solar sales, expedite the installation of solar farms and with that, improve sales of high-powered inverters. With this as backdrop, even if solar market conditions remain relatively stable, inverters have the potential to grow significantly in the next year just to keep pace with installation.

The flat panel market, on the other hand, may take some time to recover as the declines in this market continued in the second quarter. The good news is that flat panel prices appear to have stabilized. While consumer demand for LCD panels has improved, it is not yet strong enough to require increased production capacity and the associated financing needed for production equipment.

Until this market receives financing, we do not expect to see a return of capacity growth. We believe that Taiwan and China will be the next geographical markets to move ahead with five to seven panels and new investment in China targeted for early 2010 which should spur demand for equipment to the end. But the older market will not see much of an improvement until 2010.

Looking at our service business, January appears to have been the trough in our repair activity. As I mentioned, semiconductor manufacturers have finally begun to place orders to replenish the inventory of spare parts. With that utilization in both semiconductors and flat panels beginning to pick up, we expect this to drive service revenue. As a leading indicator, service revenue increases should come ahead of a recovery in the economy at large. Our other business lines showed mixed results this quarter with data storage was perhaps the highlight. Demand for Blu-Ray and (audible) media remains soft through year end.

In summary, with the first half of 2009 behind us, we look forward to the rest of the year with cautious optimism. With at least one of our major markets, semiconductors, beginning its recovery, the large scale inverter market opportunity growing, we are hopeful other markets, such as solar equipment for panel manufacturing will follow suit in the next few quarters. We are especially encouraged by the growing interest in our inverter products. We introduced the 500KW solar product at what appears to be the optimum time as the size of the solar installations are increasing and the financed utility customers are taking advantage of our technology.

We view the downturn in the economy and our markets as a unique opportunity to review our product and technology road maps and ensure we address our target markets in the most advantageous and strategic way possible. Our outlook, while cautious is, much brighter than just a quarter ago. Our strategy of diversification between semi and nonsemi markets combined with our strong balance sheet and the key investments we have made including our solar inverter products, we continue to pay off and distinguish AE as a unique subcomponent supplier among its customers.

I would like to take a moment to thank the entire Advanced Energy team worldwide for their diligent efforts and hard work. Now, I would like to turn over the call to Larry Firestone, our CFO, to provide some details on our operating results.

Thank you, Hans. Good afternoon, everyone. Total revenue increased 9% to $35.6 million from $32.6 million in the prior quarter, driven primarily by growth in the semiconductor and service sales this quarter. Revenues were down 59.6% from the $88 million in the second quarter of 2008. Semiconductor capital equipment market sales increased 27.3% sequentially to $12.2 million or 34.3% of total sales in the second quarter.

We believe the trough in the semiconductor capital equipment market occurred in the first quarter of 2009. And we saw the beginnings of a recovery with the second quarter orders from key OEMs to replenish their inventory as well as addressing new orders. Despite being strained by the ongoing lack of financing and general economic conditions, sales to the nonsemiconductor markets were 41% of total sales in the second quarter. Nonsemi sales were down 5% to $14.6 million due to declines in flat panel display and architectural glass markets.

Sales to the solar market were roughly flat at $6.3 million in the second quarter or 17.6% of total sales. As the industry continues to struggle with solar panel oversupply, manufacturers are focused on reducing their inventory and selling their existing capacity instead of expanding their production capacity. Funding to finance expansion is limited as a whole.

Sales to the flat panel market fell 14.3% from last quarter to $2.9 million and represented 8.2% of total sales as expansion capital remained limited in this market. Architectural glass sales were 1.5% of total sales or $526,000 compared to 5% of total sales or $1.6 million in the first quarter due to the lumpiness of this market. Industrial coating and emerging markets sales also improved this quarter with a number of small orders showing strength in Europe and North America. Sales grew 9% to $3.6 million or 10% of total sales versus $3.3 million in the prior quarter.

Data storage market sales were $1.3 million or 3.6% of total sales, up $809,000 or 2.5% of total sales in the first quarter. While the majority of data storage remained weak, we received a large upgrade order from a customer in Singapore in the magnetic storage market. Service was another highlight this quarter driven by growth in semiconductor utilization. Sales rose 14.2% from last quarter, representing 24.8% of total sales or $8.8 million with strength across geographic regions.

Our book-to-bill ratio returned positive this quarter, increasing to 1.06 to 1 from 0.87 to 1 in the first quarter of 2009 on a higher revenue base. We ended the second quarter with $26.2 million in backlog. All of which is shippable over the next 12 months and approximately 88% of it which is shippable in the third quarter. This is compared with last quarter's backlog of $24.4 million.

Gross profit was $7.9 million or 22.3% for the second quarter, compared to $6.4 million or 19.6% in the first quarter. This sequential increase was driven by the overall growth in sales as well as the lower freight and manufacturing expenses. Gross profit declined from the same period last year of $35.3 million or 40.1%. R&D decreased 3.2% to $10.7 million or 30.2% of second quarter sales, down from $11.1 million or 34.0% of first quarter sales and $13.8 million or 15.6% of sales a year ago. We continue to focus our R&D investments in development efforts on key emerging technologies and new market opportunities.

Staying a consistent 28.6% of total sales, SG&A increased to $10.2 million from $9.4 million last quarter, a decrease from the $14 million or 15.9% in the same period last year. The sequential increase was due to a $1 million one-time reduction in depreciation associated with our building in Japan that occurred in the first quarter and $400,000 of costs in the second quarter associated with moving out of one of our facilities in Fort Collins. This space reduction will save us approximately $500,000 a year -- per year going forward and we have plans for further building consolidation.

Our income tax expense was $2.8 million, due to the income in our German and Japan subsidiaries during the quarter. Going forward, we expect a similar charge on an absolute dollar basis while the US tax base will remain at zero. GAAP net loss was $16 million or $0.38 per share compared to a net loss of $79.8 million or $1.90 per share in the first quarter and a net income of $5.9 million or $0.14 per diluted share in the second quarter of 2008.

Second quarter GAAP net loss included a $739,000 or $0.02 per share charge related to our recent restructuring efforts. Head count at the end of the second quarter was 1,195 employees, compared to 1,251 employees at the end of the first quarter. As of June 30th, cash and investments including auction rate securities were $175.3 million, an increase of $1.9 million from the $173.4 million last quarter and down from the $180.1 million at December 31 of 2008. The increasing cash was driven by strong customer collections, a gross inventory reduction of $6.2 million and a $1.8 million tax refund.

During the quarter, we repatriated approximately $46.2 million in cash from our Japanese subsidiary. Trade accounts receivable dropped to $32.3 million at the end of the second quarter, compared to $35.6 million at the end of the first quarter. We took proactive steps to collect on outstanding accounts receivable. As a result, DSOs were 74 days, compared to 109 days in the first quarter. Total net inventory was down significantly to $39.8 million from $46 million last quarter and inventory turns on a net basis improved slightly to 3.6 times from 3.8 times last quarter. Capital expenditures were $742,000, fixed asset depreciation was $919,000 and our intangible amortization was $120,000 for the second quarter.

Our guidance for the third quarter is as follows. We expect sales to be in the range of $40 million to $45 million. We expect our gross margins to be in the range of 23% to 27%. And we expect our GAAP loss per share to be in the range of $0.35 to $0.29 including an estimated $2 million tax expense related to earnings at our regional offices in Japan and Germany.

In summary, we're cautiously optimistic about the business levels we're seeing in our key semiconductor and service markets. Coupled with proactive measures to lower our cost structure and improve operational efficiencies, our strong balance sheet has allowed us to continue to invest strategically in key products and technologies for various markets and position us well for market share and financial gains when the upturn in our markets occurs. That concludes our prepared remarks for today. Operator, I would like to open up the call for questions. Operator?

(Operator Instructions). Your first question comes from the line of Jim from Goldman Sachs. Your line is open.

This is [Kate Kablarsky] for Jim Covello. A couple of questions. First, I wanted to ask about your guidance and try to get a sense for which markets you think are going to be driving most of the upside next quarter, whether you think the semiconductor customers are going to be driving most of the upside or whether you do expect something from some of your nonsemi markets. That's the first question.

As far as the drivers for the next quarter, we see in essence three drivers. One is semiequipment which is improving, of course. The other one is solar. Within solar, mostly driven by a strong converter business. We see. And of course (inaudible). Maybe at the fourth driver, as we indicated in the last quarter call, that the industrial coding which probably will benefit first from the stimulus package, we see it growing strongly in the third quarter as well.

As a follow-up on that as it pertains to the solar business, it sounds like customers generally speaking in the solar space are still pretty cautious and it is great to see that you guys are seeing good traction with the inverter product. Is some of this share gains as the geographic exposure. Want to get a sense for why you guys are more optimistic than maybe some of the other companies in the solar space.

The reason is pretty simple. I think we have been in China for a long time. We have a strong position. I think we have a pretty strong position in Europe as well. What we see is in particular in China, the stimulus package given by the government is bearing fruits already and our business and solar business in particular in China is pretty strong. It is a different pattern, US versus China, for example.

Okay. That is very clear. Thank you. And then just one question on the model for next quarter. Any change to the $60 million breakeven target you guys had talked about before? And just wanted to get a sense for whether there's any change in the OpEx next quarter versus what we saw this quarter.

We're still in the range of -- $60 million breakeven is where we're heading. And OpEx, the same.

Any charges next quarter that you guys are anticipating?

The only one I mentioned was a $2 million tax expense. I would make sure I modeled that into your numbers for earnings in Japan and Germany, as the US tax rate will be zero.

Is that something you're anticipating in the following quarter as well? Or is it more a one quarter phenomenon as you see it now?

Yes, I would see that in the following quarter as well, Kate.

Okay. Great. Thank you so much.

Yes.

Your next question comes from the line of Chris [Bancar] from the Banc of America.

Hi, this is Paul Thomas for Chris [Bancar]. Thanks for taking my question. Could you talk a little more about just beyond Q3 into Q4. I know that sales are starting to pick up. Are we going to see some expenses come back in from the temporary reductions? Or maybe even a little further than that?

The temporary reductions we have in -- are planned in and pretty well locked in through the end of the year. We haven't really laid in our plans for next year, but we have a combination of more permanent reductions. I mentioned on the call that we moved out of one of our facilities. That's going to save us about a $0.5 million a year.

Beyond that, we have other facilities, consolidations that we're looking at and executing. And beyond that, we have -- I would call it efficiencies in the business to go gain. What our target is -- at this time that we would roll out of our temporary cost reductions, that we would have a permanent cost reduction to match up with that along the lines that I mentioned.

Okay. Thanks. And then also on the guidance range in terms of gross margins, you talked about the revenue drivers. What's going to drive the gross margins to one or the other of the 23% to 27% range?

It will really be product mix and also the revenue range.

Is it -- which is the lower gross margin driver on that of the three drivers you talked about, the semi, solar and service?

Yes. We wouldn't break it down to that level of granularity.

Okay.

Your next question comes from the line of Weston Twigg. Your line is open.

This is [Tony Chen] for Wes.. Thanks for taking my question. Our question is regarding the order business. Can you tell us exactly how many units you shipped during the quarter?

How many units we shipped during the quarter?

Yes.

We shipped four units during the quarter.

And another question regarding the 1,000 kilowatt order, is that units -- and also any comments on the timing of the shipment.

On the one megawatt?

You mean the timing of the one megawatt?

Yes.

I think it was in the script already is that we plan to release the one megawatt in Q1 next year.

Yes. We didn't say we got any orders for the 1 megawatt. That's still in development.

I'm sorry. I missed that part. All right. That's very helpful.

The figures that we mentioned were really on the 500 kilowatt inverter. That was an exceptionally strong quarter.

I got you. Thank you.

Yes.

Your next question comes from the line of C.J. from Barclays. Your line is open.

Hi. This is Olga calling in for C.J. A couple of questions. First, on the solar side, given the inverter backlog that you currently have and then your conversations with your traditional customers, can you talk about how you see that business ramping into the second half given the pretty subdued first half?

As far as the converter -- inverter business is concerned, I think we have seen very strong traction. All of the indications are that this is going to accelerate. That's the reason, by the way, why we're increasing the manufacturing capability in order to cope with the demand we expect. As far as the PV equipment is concerned, I think we still see flat because of the oversupply which will not go away any time soon. I think it would probably last through Q3, maybe in Q4 it is easing off.

When you map that out, can you talk about some range of magnitude of your solar revenues for the second half?

No. Not really guiding at that level, Olga.

Okay. All right. And then on the LCD side, you guys sound pretty subdued about that. Listening to the panel makers so far, there's definitely a lot of projects being outlined and Gen 7, Gen 8. Can you talk about where you're seeing the discrepancy and also where your competitive positioning is at the Gen 8 level?

I think as far as the competition is concerned, we have a -- of course, Japanese competitors. I think the indicator whether or not the flat panel display business will pick up is in our view, either the announcement of new projects and easing of the financing. We haven't seen that in the recent weeks or months. Therefore, we think that new capacity is coming online for flat panel, probably not before 2010.

I'm just -- you've seen LCL talk about an expansion for their Gen 8 FAB. AUL this morning is ramping (inaudible) and restarting construction of the Gen 8. I'm just wondering your tone versus their tone, there seems to be a discrepancy there.

If something comes up this way and if they are really placing order and building these new FABs, I think that would be very nice. But in order to see a real rebound in ACD, I don't think that's already an indication for us.

Olga, the steady business that we do have or the business that we do see in flat panel and that we've experienced over the last several quarters has been -- I think we described has been the activity out of Japan and Korea. With respect to your comment on LPL, that would be the kind of business that we would see on an ongoing basis. I think we all think the surge or the next real upturn is going to come out of places like Taiwan and China, as Hans mentioned in his script. That will be on the back of financing.

And then just as a housekeeping question, the $2 million tax expense, is that something we should be thinking about for 2010 as well?

Yes, I would say so. I would say so. I would say that's a safe bet.

Okay. Got you. Thank you.

Yes.

(Operator Instructions). Larry Firestone, you may begin.

Thank you, operator. Thank you, everyone. We look forward to seeing you, pardon me, all at our next conference on August 10th in Vail, Colorado, hosted by Pacific crest. Thank you and bye-bye.

This concludes this conference call. You may now disconnect.