Advanced Energy Industries Inc (AEIS) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Advanced Energy Industries second-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I will now turn the call over to Annie Leschin, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us today for our second-quarter 2014 earnings conference call. With me on today's call our Garry Rogerson, Chief Executive Officer; Danny Herron, Executive Vice President and CFO; and Yuval Wasserman, President of Precision Power Products.

By now you should have received a copy of the earnings release that was issued yesterday evening. For a copy of the release, please visit our website at advancedenergy.com or call us directly at 970-407-4670.

During the third quarter, advanced energy will be participating at the Jefferies Industrial Conference on August 11 in New York, at the Canaccord Genuity 34th Annual Growth Conference August 14 in Boston, and at the Credit Suisse Small and Mid-cap Conference in New York in September. As other events come up, we will make additional announcements.

Now, I would like to remind everyone that except for historical financial information contained herein, the matters discussed on this 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, plan, objective, estimates, anticipate, intends, targets, goals, or the like should be viewed as forward-looking and uncertain. Such risk 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; and unanticipated changes in our estimates, reserves, or allowances as well as other factors listed in our press release. These and other risks are described in Form 10-Q, 10-K and other forms filed with the SEC. In addition, we assume no obligation to update the information that we provided you during this call, including our guidance provided today and in our press release. Guidance will not be updated after today's call until our next scheduled quarterly financial release.

I would now like to turn the call over to Garry Rogerson, CEO of Advanced Energy. Garry?

Good morning, everyone, and thank you for joining us. We had a sound second quarter, growing revenue sequentially, driving strong profitability, and generating significant amounts of cash. In the midst of a downturn in one of our major application areas, we saw the power of our model to reach greater peaks and maintain high levels of profitability during troughs. This quarter the diversification of our revenue enabled us to largely negate the effects of the semiconductor cyclicality.

Our Precision Power applications remain at near record level, up 14% over last year. Shipments of our new 1-megawatt inverter product ramped in the quarter causing inverter revenues to rebound sequentially. All of this led to solid revenues of $146 million, non-GAAP EPS of $0.38, and GAAP EPS of $0.26 for the quarter.

With the completion of our fourth acquisition during the quarter, and today's purchase of UltraVolt we continue to put our cash to work in adjacent applications, increasing our geographic presence and accelerating revenues. We generated over $30 million of cash in the quarter and redeployed it through another acquisition, the payoff of the credit line, and the completion of a 25 million share repurchase.

My focus continues to be on market expansion, cash generation, and earnings per share. We plan to expand into new applications, accelerate revenue, and outperform industry cycles while delivering excess cash to our shareholders. We have once again proven the power of our strategy of centralizing manufacturing, decentralizing R&D, and building investing in our global distribution. This new structure will allow us to adjust that cost quickly.

With the exception of semiconductors, virtually all applications increased sequentially this quarter. And our recent additions to the industrial applications as well as our ongoing diversification of existing applications led to very high industrial revenues. The addition of HiTek Power to our industrials and semiconductors this quarter facilitated our entry into a number of new applications including mass spectrometry where we are now engaged with two of the top four customers.

With the strength of our sales distribution, R&D investment, and manufacturing engine we believe we can grow these product lines significantly. The opportunities for expansion across existing and new Precision Power applications continue. And we are deliberately and strategically diversifying into more adjacent applications where there is a good fit and growth opportunity.

While the current conditions and semiconductors are impacting our outlook, they were not unexpected. It is the inverter headwinds which were largely unforeseeable. Firstly was the announcement of the US government's decision to extend the substantial import duty to include Taiwanese panels. This is causing delays in large scale projects where our central inverters were planned. Second, there is a very rapid switch in the market to three-phase string inverters for commercial and low-end utility applications. These unexpected factors just a quarter ago will affect the utility scale inverter market for the next several quarters. While it is possible that a settlement between the US and China can be reached, we are, I can assure you, taking quick action to address these market conditions.

We believe our 1-megawatt product is among the industry's best. Many large utility scale customers rely on this technology and continue to believe in the value we bring in terms of harvest, performance, efficiency, and service. Given upcoming [utility] projects, we were ramping inventory to meet anticipated demands. Since the announcement of the import duty that demand has been largely deferred. Our focus now is on increasing distribution where possible to better manage the buildup of inventory until volume returns.

In three-phase string, we are aligning with the market trends to include a growing number of small utility installations as well as commercial applications. We are currently developing three-phase string products for different geographies such as Canada and Japan to broaden our reach and have a significant R&D pipeline. We are transitioning our manufacturing of the three-phase string in our 1-megawatt inverters to Shenzhen over the next quarter to lower cost and improve margins. This is a sound market for us, and we look to capitalize on a growing number of opportunities worldwide.

In keeping with our strategy, we see our business as a cohesive group of power conversion products targeting a variety of applications and geographies. The current environment in solar in the completion of two more acquisitions led us to reorganize the Company around a product line structure aligned under one leadership organization. Now, we will have a single team running our global infrastructure including sales, service, and manufacturing and all of our product lines will report to Yuval.

In so doing, we can redeploy our resources and more easily reduce costs by consolidating operations and accelerating the move of more of our newly acquired products, in particular, inverters to our central manufacturing hub. All of these actions will significantly reduce our fixed cost and provide us the flexibility to shift resources between product lines while capitalizing on the common resources of the Company to drive improved profitability. These and other cost-saving efforts from this restructuring are expected to save us approximately $8 million to $9 million. We believe these steps will ensure a stronger global team that is better able to leverage our capabilities and drive synergies throughout the Company.

As you saw last night, we added yet another product line to our growing portfolio. With the acquisition of UltraVolt we completed our third acquisition this year, demonstrating our ongoing commitment to strategically deploying our cash to grow revenues and profitability. With two acquisitions in the large and growing high-voltage market, we are fast becoming a significant player. This acquisition not only strengthens our position with key existing customers of ours, but it also allows us to add new customers and applications in industrial, medical, and semiconductor.

The complementary nature of the UltraVolt product to those of HiTek we believe creates more options for our customers, increasing our potential served market. Consistent with our acquisition strategy, we plan to drive synergies through the organization and this becomes a potentially significant contributor to our future revenue.

Under the current climate, we are more proud than ever that despite the environment our model is working successively. I am very encouraged at the progress our team is making to diversify our profitable revenue streams and redefine AE as a leader in power conversion across a growing number of applications and geographies. As we saw this quarter, our diversified portfolio across a number of application areas is broadening our reach and allowing us to largely balance out industry cyclicality, leading to our seventh consecutive quarter of year-over-year improvements.

Since 2011, average revenue and gross margin for quarter have grown to $146 million and 38% compared with $129 million and 39% for the last 12 months before then. Our ability to generate cash remains impressive with a total of $200 million compared with less than $60 million for the three previous years. Key to our success is our cash, which is allowing us to diversify and propel our business forward. We are excited at the opportunities ahead, and we remain committed as a company to executing on our strategic plan to grow revenues, expand margins, and generate cash. With that, let me turn over to Yuval. Thank you.

Thank you, Garry. Turning to slide 10. Revenue from our Precision Power product lines declined slightly this quarter, down just 1% from last quarter to $82 million. While semiconductor applications pulled back from their extremely high levels late last year, we saw growth across a number of applications with particular strengths in our industrial segment which now includes significant contributions from our recently acquired power control modules and high-voltage power product lines.

The high-voltage power products have added new applications in semiconductor and areas that we have never said before such as mass spectrometry, X-ray, and many others. The strong growth of these revenue streams largely offset the decline in the semiconductor segment as we delivered in our strategy to diversify our product lines and expand our addressable markets. Clearly, our strategy is driving our success through cyclical peaks and troughs.

Our acquisition of UltraVolt announced last night gives us a significant presence in the high-voltage market, adding a number of complementary power supplies and modules to our growing portfolio. Serving close to 100 industries, UltraVolt brings us new applications in medical equipment, analytical instrumentations, industrial applications, avionics, and defense while also expanding our presence in certain semiconductor and industrial applications. The combination with our HiTek Power offerings allows us to accelerate our potential high-voltage business further by leveraging the core technology and product architectures of both entities, creating products that are more configurable and flexible allowing us to customize and go to market very quickly with new solutions. With our global distribution channels, and low-cost operations, we believe we can drive synergies and accelerate our penetration into the global high-voltage market.

Let me now turn to our served applications and highlights from these areas beginning with slide 11. Sales to semiconductor applications declined sequentially this quarter consistent with overall industry trend. Foundries have throttled back spending while they bring the significant amount of equipment online that was procured in the latter half of 2013. While some installations are expected in the second half of the year, foundry spending should remain essentially flat near term. We anticipate the growth rate of the wafer fab equipment market that depends largely on the timing of investment in memory devices and the transition of 3-D devices and VNAND to high-volume manufacturing potentially late in the year or early 2015.

Our focus on developing and adding leading edge next-generation products has expanded our addressable market in areas such as advanced RF power, high-voltage, and power control. This strategy is positioning us to capitalize on important industry inflection points driven by new device architecture and channel materials. One of the key drivers behind our growing share is our recently introduced Paramount RF generator family. Our pulse 2-megahertz model is an extension of our winning advanced technology across multiple frequencies. We are now seeing a significant increase in demand for this product. It is being adopted for new and advanced etch applications and for displacing installed competitive products when extending the useful life of existing wafer fab equipment.

This quarter, through the acquisition of HiTek Power Group, we began to see contribution from new semiconductor applications including ion implantation, wafer metrology, and inspection. Coupled with our global distribution channel, these new products are diversifying our portfolio and accelerating a growing presence in multiple semiconductor processing applications.

The flat-panel display market appears to have begun to rebound this quarter with revenues recovering slightly sequentially. With market growth slowing for touch panels and inventory corrections pushing out further capacity expansion, significant buys in these segments are continuing at a slower rate.

For the remainder of the year, growth rates in the LCD and OLED markets for capacity expansion of new technologies will depend on the timing of major investments in Korea and China anticipated in 2015, driven by growing market acceptance of 4K and curved display.

In glass, purchases from China continued, albeit at a lower level, given ongoing industrial investment uncertainty in the region. Overall, we expect the volatility of the glass market to continue despite the rebound of glass orders from China in the near term.

Solar CapEx remains very low though we did see some six technology buys this quarter.

This quarter industrial revenues improved more than 100% compared to last year. Major factors included the series of optical coating projects in Japan, hard-coating purchases in Europe, and return of automotive headlight applications and contribution from power control modules in high-voltage products. The project-oriented nature of these applications continue to play an important role in our strategy. In note of our accomplishment, is the significant increase we saw in the second quarter was enough to essentially offset a downturn in semiconductors, our largest Precision Power market segment. We expect to come off of the record levels reached this quarter as customers digest the capital investment in tighter economic conditions in China's heavy industrial sector slowly push enough power control module business. We believe that our industrial business has reached a significant milestone in size and diversity as we continue to invest in this area as a fundamental part of our growth strategy.

Our service business was down slightly in the quarter with key customers controlling their service expenses through access inventory consumption and reduced RMA volume resulting in lower revenue in Asia. The semiconductor industry is growing in aftermarket sector for services and capital equipment reuse and repurposing that is beginning to rival the scale of the new equipment business. We see this large and growing market as a significant opportunity for us to collaborate with our key OEMs and service partners.

Turning to slide 12, once again this quarter we had an 86% conversion rate on the design wins and major projects that we have pursued. These results clearly demonstrate the strength of our R&D and effectiveness of our distributed model to stay close to key customers and integrate it into their product roadmaps. Our leading edge multilevel pulsing RF power supplies are winning etch and deposition applications in semiconductors and our bipolar DC power supplies are expanding our presence in glass coating, flat-panel display, and touch panels while our hard coatings solutions take us to more optical and automotive applications.

The strong performance of our Precision Power Products this quarter demonstrate the effectiveness of our strategy to profitably balance out the troughs and outperform at the peaks. With a contribution of our recent acquisition, we are expanding our served markets, geographic presence, and diversifying our product portfolio opening up new opportunities as we look for improved performance in the remaining of the year. I would now like to turn the call over to Danny to discuss our financials.

Thank you, Yuval. In today's call, I will refer to both GAAP and non-GAAP results. As reminder non-GAAP measures exclude the impact of acquisition-related costs, stock-based compensation, amortization of intangibles, nonrecurring tax items and executive severance. The reconciliation of non-GAAP income from operations and per-share earnings is provided in the press release table. I will be referring to the earnings slides posted on our website this morning.

Turning to slide 14, let me begin with the highlights of the second quarter. Total revenues were $146.3 million, representing a 4.7% increase versus the same quarter last year and a 3.8% increase from last quarter at $140.9 million. Non-GAAP adjusted net income increased 12% versus the same quarter last year, reaching $15.5 million while decreasing 14% from $18.1 million last quarter. We ended the quarter with $130 million in cash and investments, an increase of $7.5 million.

Turning to our revenue performance on slide 15, sales to data storage and industrial applications rose 51% to $16.6 million from $11 million last quarter, reflecting our expansion into new applications including our two recent acquisitions. Flat-panel display applications increased 18% sequentially to $2.6 million dollars, rebounding off of their lows. Inverter sales increased 11% sequentially to $64.5 million in the second quarter as we shift our 1-megawatt product in volume and continue to see strong demand for our three-phase string products. Sales to renewable applications were roughly flat with last quarter due primarily to ongoing purchases in China. Sales to semiconductor applications decreased 12.5% sequentially to $49.3 million in line with the expected market pause. Service sales were also roughly flat, down just 1% to $11.7 million in the quarter.

Turning to slide 16. Non-GAAP operating expenses increased to $35.7 million from $31.8 million last quarter as we included a full quarter of PCM and HiTek expenses. We also incurred pretax charges of $244,000 for restructuring, $470,000 in acquisition costs related to the purchase of [AEG Power Control Modules] and HiTek Power, $1.5 million of stock based compensation, and $2.2 million in amortization of intangible assets, and approximately $.9 million of nonrecurring executive severance charges.

Total non-GAAP operating margin decreased slightly to 11.5% from 12.7% in the same quarter last year and down from 14.8% recorded in the first quarter. Our-second quarter effective tax rate was 7.7% or $891,000 compared with $2.1 million recorded in the first quarter. As you may know, the US R&D tax credit has not yet been passed for 2014 so that is not reflected in our tax rate.

GAAP net income was $10.6 million or $0.26 per diluted share in the second quarter including $244,000 for restructuring and $470,000 in acquisition costs. This compares to $14.7 million or $0.35 per diluted share in the first quarter and a net loss of $9.8 million or $0.24 per diluted share in the same period last year. Non-GAAP adjusted net income was $15.5 million or $0.38 per diluted share in the second quarter. This compares to $18.1 million or $0.43 per share in the first quarter and $13.9 million or $0.35 per diluted share in the second quarter of 2013.

Turning to our balance sheet on slide 17. We ended the quarter with $130 million in cash and investments, up $7.5 million from the $123 million at the end of last quarter. During the quarter, we repurchased $25 million of stock and completed the acquisition of HiTek Power, a high-voltage and custom power solution company. This transaction was largely cashless although we did assume their pension liability for roughly 4 to 5 times EBITDA. We are already seeing HiTek contribute to a variety of areas in our business including industrial, semiconductors, and service, and we believe that it has potential to grow significantly over the next few years, more than balancing out the investment.

Inventory increased in the second quarter almost $9 million primarily due to the transition of the 1-megawatt. As Garry mentioned, with the recent announcement of import duty, we are seeing projects push out and delay purchases of our 1-megawatt products. As a result, we expect inventories to continue to increase with lead times until volumes pick up. This could potentially result in non-cash write-offs over time of as much as $10 million to $20 million if utility projects do not rebound. In total, our results met our expectations in the second quarter. Even under difficult conditions in some of our end markets, our diversified business model, coupled with our effective acquisition strategy, saw us increase revenues and profits, again, differentiating us from our peers.

With our announced acquisition of UltraVolt, a high-voltage power supply company based out of New York, we now have completed five acquisitions in the last two years. We expect this acquisition to be accretive within a year and contribute to future revenues and profits. This acquisition again demonstrates our commitment to accelerating revenue growth and profitability both organically and inorganically as we strategically deploy our cash and return value to our shareholders.

Turning to our guidance for the third quarter on slide 19. We anticipate revenues to be between $130 million and $140 million. We expect an effective tax rate of approximately 10% to 12% for 2014, given the expected geographic breakdown of profits. Based on this, we expect GAAP EPS without restructuring to be between $0.22 and $0.30 per share, and non-GAAP earnings-per-share to be between $0.30 and $0.38 per share.

Non-GAAP guidance excludes charges of approximately $2 million related to the restructuring that we just announced to align our business under one organizational structure. Our recent restructuring actions will be rolled out over the next six months and should result in cost savings of approximately $8 million annually. Other expected non-GAAP charges for the quarter include stock-based compensation of $1.7 million and amortization of intangibles of $2.1 million with acquisition related costs of approximately $400,000.

Third-quarter guidance will be down sequentially due to the challenging conditions in the solar industry and the pause in semiconductors. However, we expect to see some improvement in our Precision Power applications as the year progresses.

We continue to generate cash which we are putting to work in a variety of ways to return value to our shareholders and drive future growth. Our global presence is reaching more and more customers, allowing us to balance out industry cyclicality. We are excited at the opportunities ahead and continue to execute on our strategic plan to grow revenues, expand margins, and generate cash. This concludes our prepared remarks for today. Operator, I'd like to open the call for questions.

(Operator Instructions) Joe Maxa, Dougherty & Company.

Good morning. Question on the solar side, you are talking about some softness here in the back half related to the import duties. What would be your take on when you may see that division to break even? Previously I think you were talking fourth quarter.

Hi, Joe, thanks for the question. Let's talk about the solar business as a couple of product lines, which is the utility product lines and the more commercial product lines, or you can call them the central inverters versus the string inverters. The central inverters, which is the 1 megawatt for us, has been pushed back by our customers due to the government issues that we have talked about before. We haven't seen any lost business yet, or should I say we haven't seen any significant loss business because of the government issues. What we have seen is push outs. So it looks to us although it is going to be Q1, Q2, Q3 of next year, but it is a little bit of bet of when it will be. Remember, there is a cliff of 2017 so at some point before then there is quick to be a rush to do the installations. And that is all the US -- I just commented then on the US.

The three-phase string is a another kettle of fish entirely. The three-phase string is in the commercial area and nibbling into the utility area. And that is growing rapidly. The inquiries for that product are up enormously in the US and we are having a difficult time actually gearing up to that product line. It is -- the switch from central inverters in commercial to three-phase string was very rapid. Now, the good news for us here is that we have got the two product lines that have got some good hope for the future. Three-phase string, which is got a lot of legs in it, especially globally. And the central inverters for these large projects that is hung up due to regulation issues there. If that helps you --

Yes, that is helpful. Also, I am wondering regarding the pricing pressure related to same issues. I mean if there's more competition vying for --

There is absolutely pricing pressure because of these push outs. People are looking for business. And, again, as I've always said to you before, I would rather lose $6 million on 50 than $12 million on 100 and we will be there ready to take the business when it comes. After saying that, maybe I could just talk about the structure of the organization. Over the last six months, we have been talking to you about going to a more product-line focus as opposed to business unit focus. And that we have now totally accomplished. We talked about manufacturing being collapsed together and a variety of other things. We have now have got a much more functional organization, which will allow us to much more easily move R&D from inverters to semi or to wherever we wanted to do it or from semi to inverters. In fact, it allows us to transfer our information much more easily and allows us to get that final bit of cost out that we wanted to get out of the Company. So, we have got a new structure as well which will help us with that cost issue that you talk about.

Great. And I would just ask one on the Precision Power segment. You're expecting industrials to decline in 3Q. Just give maybe a little more color if that was more large-project specific, why you're expecting a downtick in 3Q. I'm also wondering what the contribution you may expect from UltraVolt.

I'm going to pass that to Yuval, but before I pass it to you Yuval I just want to say if you look at that -- [send someone back to] the inverter product lines out of the Company just to [send sale bids], it is incredible how what we have done over this cycle that we have been -- if you noticed, we have been pretty flat. It has been a remarkable performance considering how the semi goes up and down and we have done that through our industrial focus. I'm going to pass you on to Yuval for more detail.

Sure. On the industrial market, Q2 was exceptionally high because of two main areas of investment by our customers. We had a significant growth in optical coating in Japan and additional hard-coating business in Europe that made Q2 very, very high in comparison to Q1. We're coming off a high quarter in Q2 and in Q3 what we see is a slight decline because of the decline in industrial investment in China as China continues to struggle with the emerging debt prices in some decline in general industrial investments. It is not going to be a huge decline. It is going to be what I call a seasonality or a market-driven decline. Our industrial market continues to be a core building block in our strategy. And the recent acquisition of UltraVolt is just part of that thrust that we have in expanding our total available market by adding more products into our portfolio.

Good point, Yuval, maybe you should comment on the high-voltage strategy and how we are building a truly another plank for the Company.

Sure. So the high-voltage market, Joe, is very fragmented. It is a very large market. If you look at the total market in high-voltage power supplies it could be a $1.5 billion total available market including components and modules and systems and rackmount devices covering hundreds -- thousands of applications in hundreds of markets. The high-voltage market is market we have never served. We are expanding right now in this market as part of a strategy to build on a much broader served available market. The first building block for this strategy was the acquisition of HiTek Power. HiTek Power brings us systems and custom high-voltage power supplies that go to many industries from semiconductor new applications we never had before and to other markets like X-ray, mass spectrometry, and industrial.

The acquisition of UltraVolt brings us a totally different and very complementary set of products, mainly high-voltage modules and some systems that are taking us to the medical equipment, avionics, defense, as well as some unique applications in semi which we have never served before. These two entities or these two product lines do not cannibalize each other. They are fully complementary. Not only that, we believe that we can leverage the architecture of these products and come up with a new family of products that will be extremely [modular] and will allow us to go to market extremely fast with custom-made high-voltage power supplies.

And this industry is interesting. The high-voltage power supplies, a lot of the solutions are custom-made and the ability to very quickly derivatize and configure a product with specific applications in a very short time is a competitive advantage. Our strategy has been and is to remain closer to customers, be distributed, and develop solutions very quickly close to the customers. And that architecture will allow us to do that in the high-voltage as well.

I think one of the most exciting areas for me is mass spectrometry. I mean there you have got a $40 billion marketplace that we can now play in. And there are five or six players in that marketplace, mass spec companies. And that is ideal for us from our distribution point of view. We know how to deal with these large accounts. So that, with this technology, I think is a very strong play for us in the future. And I can imagine as we push out further, mass spec will become a bigger part of this Company. In fact if I remember rightly, we are ready now in two of the largest mass spec companies in the world.

That is great. And sorry for one more but could you give us an idea what the revenue is from [Ultratech] so we have a ballpark number to look at?

I won't say a number because we haven't said one, but it is not huge. I think the exciting [thing] for us is the future of the product line. And the combination with HiTek. But we have also said it will be accretive by the end of the year. As I always say, with these little acquisitions there are a few bumps on the road as we go forward generally in the first six to nine months. But we expect to be accretive within 12 months.

Thank you.

Pavel Molchanov, Raymond James.

Thanks for taking the question. You referenced the changes in the solar industry that are kind of shifting away from utility scale. And I know that historically you have said you do not want to be in the residential market, but obviously there is quite a bit of opportunity there. Are you reevaluating or rethinking that perhaps?

Well, firstly we have always looking at our opportunities. We always look at them. I personally don't think that is an opportunity for us now. Our focus is really the utility, which maybe I was too harsh on the utility. There is a drop off on that business at the present time. But those sites have not been canceled yet. But they are getting squashed up on that 2017 date. I do believe that the three-phase string is a product line that will do extremely well over the next few years, both in commercial, utility, and it will go into the higher end of residential, the higher end of residential. So it is a very flexible product line for us in the future.

But hey, I don't want to say never to anything. It is possible, but again, I want to say our new structure that we have at last got to, which we have been moving towards, a product line structure will allow us to move our internal resources wherever we want to and invest wherever we want to much quicker than we have before.

Okay. Let me follow up on the solar bid. The headwinds in the US market because of the trade war with China, is that something that you expect to essentially be perpetual now? Or is it only that at the beginning there is uncertainty and therefore these headwinds? So the question is does it subside at some point?

When you're on a conference call with our President, you should ask him that question, because I really don't know what the government is going to do. But we do know that there are lot of sites funded up until 2017 and we have the correct product for a lot of those sites. So that is what we are focused on at the present time. We also do know that the three-phase string is a product line that has got a hell of a future with it and it fits our model beautifully. I mean if you look at a three-phase string product, it looks like any of our other boxes. Shenzhen can manufacture it easily. We can distribute it easily. It is a really ideal fit to us. So I am very comfortable with that being one of our product lines in the future. It may not be the dominant product line, but it would certainly be a product line of ours.

Okay. Fair enough. Appreciate it.

Edwin Mok, Needham & Company.

Hi, thanks for taking my call. So first question I have is I just want to make sure I got directionally correct. So it sounds industrial will be down [where the] semiconductor will probably down as well because of the market. How about flat panel, inverter, and renewables? How do we think about, directionally, how those business will trend in the third quarter that is baked into your guidance?

Yuval, do you want to comment?

Can you repeat the question, Edwin?

Yes. So all the five markets that you guys laid out, right, or six [of them] including service, right? And then you said in this year we will be down a little bit because of this China [digestion] you mentioned. And I suspect semi is down, service slightly kind of stable. How about the other three -- flat-panel, inverter and renewables? How do you think, at least directionally, how do you think business will trend in the third quarter?

Okay. We think that semi will be flat to down in the quarter.

Yes. Yes.

We think that the inverters will be down in the quarter. And the others will obviously pick up where they are down and to get to the number we have suggested to you. Is that enough for you?

Yes, I think at least directionally we just want to get a sense of that. So okay, great, that is helpful. And I guess stick with the inverter first, right. Regarding your breakeven, [both] the cost reduction effort that you mentioned today. How do you kind of think about breakeven revenue now for the inverter business?

That is a wonderful question to us. There is pricing pressure, as was mentioned earlier, because of this delay and projects so people are searching out projects. There is also an issue that our inventory is building up because of this delay. We were believing we were going to ship at least twice as much as we are in the central inverters for this type of project. So, we have an inventory buildup as well. So clearly, I would like to move that inventory so there is going to be able to bit of margin pressure going forward. As I have said to you before, I am not willing to take -- to just chuck money down the drain as you know. And we will take actions to stop that happening as we move forward. So yes, there is margin pressure. Breakevens are in that $60 million to $70 million area I would think on our normalized margins.

But remember, Edwin, we have structured the company such it is a product line focus. So it allows us to take, I think we mentioned about $8 million annually out of our business. So that is a further improvement to reduce in that breakeven.

As we have moved to this more product line structure, it has allowed us two things -- one to move R&D around and have it in the right places, but, secondly, that last bit of cost that we had because we were a business unit focused, we can squeeze out as well. So we can take about $8 million which is $2 million a quarter for the inverters. So you can sort of work out yourself.

I see. So that $8 million is that all come from OpEx? And then now that, you know, since you have another acquisition, how do you think about OpEx trend in the third quarter? I imagine there is some incremental cost come from this new business that you bought. So can you give us some color around how that will trend as we get into 3Q and 4Q?

Yes, obviously with acquisitions our OpEx went up. Went up in Q2 because of the acquisition of HiTek and PCM, which I highlighted in my comments. And operating expenses will go up slightly because of the UltraVolt acquisition. But in general, our earnings should continue to grow as we do these acquisitions even though one particular line on the P&L might grow also. The thought behind of all these is to increase our revenues and increase our earnings. And they do that, as Garry said, within the year, we expect UltraVolt to be positive for us.

Well, I think the nice thing you are seeing is that the machine that we developed is really generating the cash. It is allowing us to grow our revenues. I think I mentioned or Danny mentioned, I mean over the last [2 1/2, 3 quarter] years, we have generated nearly $200 million of cash. And in the three years before that we only generated about $60 million. And margins have expanded and our revenues have grown significantly. So, revenues have grown significantly. Margins have expanded, and we have generated gobs of cash. And then we put that cash to work in either buybacks, i.e. giving it back to our investors, or in acquisitions. And you are seeing exactly our strategy. It is a very, very clear simple strategy that I believe over the long-term will work really well.

You know in 20 months we have acquired five companies. The acceleration is there, the diversity is there. That is why we are not suffering the same cyclicality as others. As we continue to buy these companies, it is just a long-term annuity that is going to help us in the future. This is not the AE of five years ago. It is certainly a different company with a different focus. It is about generating cash and growing earnings. And we are doing that.

Great. That was great color. Thank you.

(Operator Instructions) Josh Baribeau, Canaccord.

And if I missed this, can you help quantify the increase in capital intensity for ultra-high def versus standard high def? Or maybe the increase of capital intensity for OLED versus traditional LCD?

I'm going to have to pass that to Yuval.

I cannot comment to that. All I can tell you is that, as Garry said, we expect to see an improvement in our business that goes to glass, flat-panel displays, and that is driven by the market right now. We continue to see more advanced applications going to both flat-panel displays and to glass coating for which we have unique product offerings in the bipolar DC power supplies that allow us to go to these markets and not only grow with the market but gain share and expand the performance of our business better than the market in those applications.

And again, the only thing I want to keep reinforcing -- we keep mentioning the same application. As time goes on we are going to mention many more -- X-ray, medical, mass spectrometry. We are going to be able to expand into many more applications now. So the cycles hopefully are going to start going away for us.

Okay. And then can you help us out with a little bit of maybe operationally what you can do or what you have done to take some of your recent acquisitions, some of that production capacity over to your facilities in China, if there is any synergies to be had there?

It would be silly to get down into weeds and comment on any product line. But in general, what we are doing is taking in our supply chain group, number one, and looking at the product line and seeing if we can get cost reductions in the supply chain. And number two, the more routine products are then being moved Shenzhen. And the number three, we look at the more complex products. And it depends on the product line. For instance, a company like HiTek that has some very [specialty] testing of the products, so you can appreciate these high-voltage piece that they are producing, we would leave that specialty in their facility in the UK. But in general, our philosophy to continue to move things to our Shenzhen facility and then outsource from that facility. There is no thought in this Company of new buildings, new square footage. This Company is all about dollars per square foot, dollars per head, i.e. we want that cash. And then you are seeing the results. And we are just becoming a cash-generating machine, which is exactly what we wanted to happen. And it is happening.

Great. And then finally from me, could you talk about some of the other things that you are doing in the inverter space, if any I guess? We were certainly focusing on the negatives in the restructuring, but is there any investment that is happening, let's say, to integrate, different types of energy storage or other power management within those products that is booking?

Good question. Firstly, I don't actually think it is -- there is the negativity in the marketplace at the present time. But the product line that we have are very well-positioned in that marketplace. So then the question is what else are we doing? Firstly, it is becoming more global, becoming more global with these product lines; fitting our products to the individual markets wherever it is Japan, Canada, or wherever, or China or India, the obvious countries. That number that is number one. Number two is adding that those product lines, especially that three-phase string, to be a bigger product and smaller products. And then the main area, the other area that we are looking at at the present time is obviously energy, energy storage, which we have talked about. We have projects with the government going on. We have projects in Germany going on at the present time. And storage is obviously going to be a big area in the future in the energy business.

Okay. That is helpful. I will pass it on. Thank you.

And I'm showing no further questions. I will now turn the call back over to Garry Rogerson for final remarks.

Well, thank you for listening today. We continue on our journey. We are generating cash. We are expanding our earnings-per-share. We are focusing on our margins. We look forward to seeing you soon. I think Danny is going to be at the Needham conference next week.

A couple of conferences.

A couple of conferences next week. And I look forward to seeing you again very soon. Thank you. Bye-bye.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone have a great day.