Azenta Inc (AZTA) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Helix Technology second-quarter conference call. At this time, all phone participants are in a listen-only mode. Later, if you should wish to ask a question, you may press the 1 on your touch-tone phone. You will hear a tone then indicating that you've been placed in queue and you can remove yourself from queue at any time by pressing the pound key.

If you should require assistance during the conference, just press zero, then star, and as a reminder, this call is being recorded.

I'd like to turn the conference over to president and chief executive officer, Robert Lepofsky. Please go ahead, sir.

Thank you very much.

We appreciate each of you joining us for our second-quarter conference call. As we realize, there are a number of conference call scheduled for this afternoon, we're going to plan to finish up today in about a half an hour. Therefore, we'll try to keep our introductory remarks relatively short in order to allow adequate time for your questions.

Joining me today are Jay Zager, Helix senior vice president and our chief financial officer, and Beverly Armell, our director of investor relations.

We do assume that each of you has received a copy of our press release that was released just after the market closed this afternoon. If that's not the case, please call 508-337-5172, and we will fax you one immediately.

Now, Bev Armell will take a moment to review our safe harbor disclosure. Bev?

Thank you, Rob, and good afternoon.

The following call contains certain forward-looking statements, including statements regarding the company's future performance. Such statements are based on current expectations, and are subject to risks, uncertainties, and changes in condition, including, among others, market acceptance of and demand for the company's products, the success of the company's strategic initiatives, including its global support operations, the health of the global semiconductor capital equipment market, the timing and scope of any change in the current depressed industry conditions, the company's success in sustaining order bookings, and other risks indicated in the company's filings with the Securities and Exchange Commission.

Accordingly, actual results could differ materially from those indicated. The company assumes no obligation to update the information in this call.

Thank you, Bev.

I would characterize our message today as being very positive about our second-quarter results. Pleased with the litigation settlement that we have just announced, relatively comfortable about the third quarter, focused on returning this company to profitability, uncertain about the fourth quarter, and determined to emerge from the current difficult business environment very strong and very well positioned for sustained performance.

Let me comment quickly about each of these points before turning the call over to Jay, who will fill in the details.

As you would expect from anyone in this business, the second quarter was very good. For Helix, it was an extremely good quarter that reflected continued sequential quarterly improvement, with total sales up 42% and gross profit up 93%. It was also our first positive year-over-year comparison in some time.

Business was strong across the board. Pumps, instrumentation, and global support.

Business improved in all geographic regions as well.

In addition to the very strong showing in our product businesses, our global support business grew 27% sequentially. We continue to have high expectations for this business unit.

For all the good news, our strategic investments, our increasing payroll and benefit costs, and the cost of our global infrastructure did contribute to an operating loss in the quarter, even before the onetime charge related to the litigation settlement.

Both Jay and I will speak to the issue of our break-even point in a few minutes.

With regard to the litigation settlement that we announced today, we believe that the settlement is good news. Almost four years ago, Raytheon company initiated legal proceedings regarding alleged defects in products we delivered in the period from 1992 through 1994. We haven't even sold these products that are involved in the dispute since 1994.

After over three years of discovery, there was no evidence of misdeeds or wrongdoing on the part of Helix and the case was, in our opinion, focusing increasingly on technical issues and interpretations of contract law. The case was headed to a jury trial, and our insurers and we decided that it was in our mutual self-interest to settle the case and avoid the distraction and expense of going to a jury trial.

While the settlement costs resulted in a 8-cent-per-share charge in the quarter, we are pleased to close the book on this issue and to focus our energy on our current business.

Looking ahead, we've been reviewing the impact of alternative revenue models on both our third and fourth-quarter profitability targets. Based on all currently-available information, and the increasing uncertainty surrounding our product-oriented businesses later this year, we are currently refining our business model.

We can build credible scenarios that reflect revenues as much as plus or minus 10% in Q3 and Q4. Product mix and the strength of our global support business will have a strong impact on the final result.

What is very clear to us at this time is that the rate of sequential improvement in sales that we saw in the first half - namely, 18% improvement in Q1 and 42% improvement in Q2 - is just not going to be sustainable in the current business environment.

That said, our original 2002 planning was gearing our cost structures to support a higher level of sales in the second half. As I have said on numerous occasions, the Helix management team is committed to returning this company to profitability and as external conditions change, we will change.

Consequently, we are now readdressing our total cost of operations to move us closer to achieving that goal, with or without near-term revenue growth.

We will continue to balance our commitment to near-term performance while adequately funding the investment initiatives that are central to our longer-term strategic plans.

During this period of industry uncertainty, we will not merely sit back and wait for revenue gains to achieve our financial performance objectives. We will manage this company for performance.

Let me turn the call over to Jay for some detailed insights into our financials. Jay?

Thank you, Bob, and good afternoon, everyone.

I'd like to provide some insight into the financial results that we just released.

Sales for the second quarter were $29.0 million, an increase of about 42% from our first quarter, and 9% higher than Q2 of FY 2001.

This was our first year-over-year increase in revenue since our peak quarter of Q4 FY 2000. Our net loss for the quarter was $3.8 million, or 15 cents per share. These data include the impact of a $2.8 million pretax litigation settlement charge with Raytheon company. Without this charge, our operating loss was $1.9 million, or 7 cents per share.

Orders for the quarter were $29.8 million, up 31% from the Q1 levels, and almost 23% higher than a year ago.

Our book to bill ratio was 1.03.

Let's take a look behind these revenue levels.

Sales to semiconductor customers were approximately 73% of consolidated sales for the quarter, the highest level since FY 2000. Sales attributable to our CTI cryogenics vacuum pump products were about 80% of the total, unchanged from the prior quarter, with sales of our Granville Phillips vacuum measurement and controls instrumentation products also about 20% of the total, unchanged from the prior quarter.

Our global support business contributed about one-third of our total revenues, compared with about 36% of total revenue in the first quarter.

OEM sales as a percent of revenue were slightly under 60% of the total, while sales attributable to our largest customer were about one-third of our total business, up from about 25% in Q1 and 14% in Q4.

And at the end of the quarter, we had 671 employees, up about 48 people from the first quarter. The vast majority of the increase was in temporary employees, primarily in our factory operations, reflecting the increase in our sales volumes.

Our gross margin in Q2 was $9.4 million, or 32.3%, compared with 23.7% in the first quarter.

The increase in our gross margin was due primarily to higher volumes. Direct labor and material costs, as a percent of revenue, remain essentially at traditional operating levels.

R and D expenditures for the quarter were $4.0 million, a slight increase from the first quarter. Selling, general, and administrative expenses for the quarter, excluding the costs associated with the litigation settlement, were $8.5 million, about half a million dollars higher than the first quarter.

This increase was due primarily to training costs associated with the implementation of our new corporate information system which went live in the United States earlier this month. And as a result of these factors, our total operating loss for the quarter, excluding the litigation settlement, was $3.1 million, an improvement of $3.6 million or 54% from our first-quarter loss.

The contribution to our profits from our joint venture in Japan was $14,000, reflecting the continued slowdown in the Japanese semiconductor industry, and net interest in the quarter was approximately $300,000.

The next loss before taxes, excluding the litigation settlement, was $2.8 million, and our tax rate remains at 32.5%.

Let me now turn to our balance sheet. At the end of the quarter, our cash and investments were $75.7 million, a slight increase over our first-quarter levels, and we continue to have no debt.

Customer receivables were $18.3 million, up from about $14 million in Q1, reflecting the higher sales levels. Our DSO was 57 days, an improvement of 5 days from our Q1 level. And we do not have any significant issues with collections.

Inventory levels declined in the quarter to $26 million, which was a reduction of almost $1 million. Inventory turns were 3.0, which was an improvement from 2.3 turns in Q1, and 2.0 turns at the end of last year.

Capital expenditures were $2.3 million for the quarter, primarily spent on the new corporate information system.

With the successful implementation of our system earlier this month, we anticipate that capital spending for the last six months of the year will be about 15% lower than for the first six months, and depreciation in the quarter was $1.5 million.

And last week, our board approved a quarterly dividend of 8 cents per share, which was unchanged from the prior quarter.

With respect to the current quarter, we have seen our order and shipping rates remain strong during these past few weeks. We do not, however, expect to continue to sustain the impressive sequential revenue growth that we experienced in the first half of the year. As of today, our internal forecasts reflect modest growth in the quarter. With Q3 revenues approximately 5 to 10% above Q2 levels.

But as our key customers firm up their Q4 buying plans, which impact our Q3 revenue levels, we could see substantial movement in this forecast, with a possibility that revenues could even wind up slightly below our Q2 levels.

And when we look beyond this quarter, the view becomes much more uncertain.

Taking a look at our expense models, it's clear to us that our cost basis changed over the past two quarters. Earlier this year, we indicated that we believed our break-even revenue level was about $28 million, which was down from about $35 million a year ago.

That number has increased, due to several factors.

First of all, our personnel costs are higher, due to normal salary increases, increased benefit costs, and higher head count levels, reflecting our investments in key strategic initiatives.

Secondly, we have seen and will continue to see an increase in depreciation expense, reflecting the significant increases in capital expenditures over the past few years.

And third, we have seen some short-term increases in operating costs associated with our new corporate information system.

So while it's not entirely clear how Q3 will unfold, we want to take actions to avoid being in a position of having flat revenue levels with lower earnings.

So in summary, we're extremely pleased by our Q2 performance from both a revenue and an EPS perspective. We exceeded the guidance the company had previously conveyed, and while we have more uncertainty about the current quarter than we would normally have, we are committed to continuously strengthen our business model, improve our asset performance, and return the company to profitability as soon as possible.

And now I'd like to turn the meeting back to Bob.

Thank you, Jay.

Before we open the call to your questions, let me say that we think Helix is very well positioned for the future, regardless of how the short term shakes out.

Next week at Semicon West, we will highlight now industry leading technology products from both our CTI cryogenics and Granville Phillips operations. We will also be highlighting the power of blue. Throughout our industry, people rely on Helix and the Helix blue labels that are so prevelant in every semiconductor fab speaking to the breadth of our impact. Standing behind those blue labels is the most responsive company in this business. The power of blue is what our customers value. Helix's support, Helix's solutions, and the dedication of Helix's people. Our customer support business continues to execute on its growth strategy. We continue to believe in and support the work of our information-centric integrated solutions group whose work is aligned with our customers' future needs. This group is influencing the future of each of our internal business units and affects every aspect of our business.

Our Gold Link enabled products and services are continuing to be in synch with our customers' purchasing decisions and is keeping us aligned with the changing expectations of the market.

As a company remain focused on strategy execution, returning Helix to its traditional position of delivering industry-leading financial metrics, and emerging from the current difficult business environment as a key player in the semiconductor capital equipment supply chain.

We thank you for your attention and we'd now like to open the lines for your questions. Operator?

Yes. And as a reminder, if you wish to ask a question, you may press the 1 on your touch-tone phone at this time.

One moment for our first question.

Our first question comes from Ali Irany with CIBC World Markets. Please go ahead.

Good afternoon, gentlemen. It sounds like you're taking another axe at fixed costs going forward. Assuming revenues would come in flat to the June quarter, where would you expect your gross margins or operating margins to be able to head towards?

Again, this is Jay, Ali. Very simply, I would think with flat revenues, our gross margins would be essentially where they were this quarter, but that obviously depends on the product mix, the mix between the pump business, the Granville Phillips business and the service business. And as you indicated, correctly so, the challenge for us is really to be taking - continue to take a hard look at our expense base and react appropriately, but at the appropriate time, in terms of any actions we may take.

Does that mean, Jay, that in the quarter, you'd be looking at more immediate cost reductions, such as R and D programs, or discussionnary SG and A?

We're always - we're always looking at those areas, Ali.

Yeah. I'm not sure we're using the word "axe." I'll have to add that one to the - to the vocabulary here.

Everything is on the table. The real key for us is simple. As we had our 2002 plans in place, we believe that we would have substantial revenue growth in the second half. We also were on a track to allow some expense growth. We would obviously continue to be dropping very impressive dollars of every incremental dollar to the bottom line.

We're now saying, "Let's build those scenarios, as Jay has suggested and I have quantified, of a range of plus or minus as much as 5 to 10%, and seeing how that will play out. And solving for, quite frankly, the worst-case scenario rather than only solving for the optimistic scenario."

I think we will look at our facilities, our people, everything is on the table, so it is not just SG and A costs, and as we continue to say to you, the challenge we have is balancing the things that we are absolutely committed to in the future, which would be, in some cases, easy cuts. We're not going to mortgage the future, but we are going to lean the place down.

Recognizing that your June quarter revenues came in quite strong sequentially and at a higher base, at this point do you have any guidance from your customers for the third quarter, and even the fourth quarter, or have they not yet provided you with fourth-quarter guidance?

Yeah. And again, we want to be reasonably cautious about what we say about our customers' plans, realizing that our customers will be speaking to you, the first one beginning at 5 o'clock tonight.

The essence of what you should read from our message today is, we are fairly comfortable with what we have and know about Q3, but we are getting increasingly uncomfortable about the signs and signals and conversations about Q4, and again, just as we've just had a very strong Q2, given the fact that every - virtually everything that we ship actually goes on a tool that actually goes out the door in fairly short order, we're not concerned about July and August but we are concerned about what people are saying about Q4 and how that might affect us at the end of Q3.

Okay. Thank you very much.

Thank you, Ali.

And we have a question from Fred Wolfe with Adams, Harkness and Hill. Please go ahead.

Yeah. Bob, getting back to the break-even, can you tell me what the current break-even is, and assuming we go into a pessimistic scenario where your revenues are actually sequentially down, what could you possibly drive your break-even down to? Or would you?

Yeah. One of the - let me give you a range, and the range is because we talk about revenue break-even, and therefore, product mix really plays into that.

But sitting here today, Jay and I would scope our current break-even, including the future quarters amortization - remember, we're going to take this hit on depreciation and amortization - in the 33, 34, 35 million range. So you've got today plus tomorrow's depreciation, if you will. Okay?

Yeah. And if things get bad, where would you want to drive it down to?

Well, in any scenario, we're - we're hell-bent to, you know, play the numbers. Twenty - 29, plus or minus 10, gives you an idea of where we're starting at. We're going to drive that thing back down below 30 with the fixed costs that we've got around our neck, if you will, from the investment program.

Okay. Great. Thank you.

We have a question from Mark Miller with Hoffer Arnett. Please go ahead.

I just wonder if you can provide some color or some breakout in terms of your pump orders in the semi-space. Are these going to more 300-millimeter fabs, are they more replacement pump orders, or are they new technology? Do you have any color on that?

Let me take the easy part first.

When we talk about the strength in our pump business, that is new pumps for new tools. When we talk about the strength in the global support business, that would include the, you know, replacements/upgrades.

The new - the new pump and instrument business in the quarter was obviously very strong. The 200, 300-millimeter mix, I don't have at my fingertips, but I would characterize 300-millimeter shipments in Q2 as being higher than in Q1, and current information suggests that 300-millimeter will continue to grow in Q3.

You mentioned - I'm just wondering also, you mentioned you're increasingly uncomfortable, just from some signs you're seeing. Are these things like talk about major equipment push-outs? I'm just wondering if you can give us a little more depth on what signs you're worried about.

Yeah, I think that's the dilemma that we and our peers face.

As Jay said, we don't have any negative hard data. The order book is holding up well. The shipments are holding up well. The dialog with customers is holding up well. The opportunity track is holding up well.

What has us nervous is the conversation, and at this point, there's a fair amount of conversation, and I think you'll, you know, again, have to kind of listen to our customers' conference calls over the next nominally week and a half, the Semicon reports, and, you know, what is - you know, what's behind the conversation. At the end of the day, it goes beyond this industry to the general will economic uncertainties as people start to look out into the fourth quarter and the rate of economic recovery, IT expenditures, et cetera.

So it's that far out, as opposed to hard data that's currently affecting our order book or our shipment rates.

Just a final question. What do you - what are you seeing in some of our smaller markets, like flat-panel, data storage. Are these weakening or strengthening?

No, they're moving along as well. Obviously, in this quarter, the key driver for us in terms of revenue growth was the semiconductor business. I mentioned I think it grew to 50 - 73% of our total business in the quarter and by comparison, that number was about 58% in the first quarter.

So on an absolute basis, those other businesses are growing, but the fueling instrument for us, in terms of growth, was the growth in the core semiconductor business.

Okay. And just finally, I just wanted to confirm. You said currently right now you believe you're going to drive this down, but you believe you're around mid-30s for break-even? Did I understand that or was that a mistake on my part?

Again, what we try to communicate is that that revenue break-even pointed is very much product mix related, but you could basically look at the kind of dollars we dropped down and conclude that the break-even point's 33, 34 million.

Thank you.

And we have a follow-up from the line of Ali Irany. Please go ahead.

I was hoping whether you could guide us to the global support business and what kind of visibility you have there, in terms of some of the upgrade programs and projects in the third quarter or even the dialog with the end user customers beyond that.

Yeah. Again, that business had nice growth in the quarter, nice momentum, continues to have the momentum. We are - we've consistently taken the view that our global support business is less about the outside world and more about our execution, that the opportunities are there, and so it's our execution issues.

So we are continuing in that piece of the business to forecast continued positive sequential gains, quarter by quarter.

Any projects that you see at this point with visibility into the fourth quarter, Bob?

In that business -

Because if I remember well, some of the big upgrade programs with your customers spanned several quarters.

Exactly. And again, it gives us - you know, the fourth quarter has a detail which can be either positive or negative for us, and that's the whole issue of the Christmas holidays and the last two weeks. That can be good for that business because we can get access to facilities.

So if you had a scenario where the customers remained committed and things slowed up a bit, we get the full 13 weeks and we get a nice year-end - or end of the quarter push there, on the retrofits and upgrades.

The other side that gives us warmth on the global support business is the continued very positive performance of our Taiwanese global support activity. In the quarter, they continued, as expected, to accelerate and they're running hard over there and we have no indication of any pullbacks in that side.

Great. Thank you very much.

Okay. As we said, we were going to wrap things up at 5:00, principally in deference to our listeners and our callers, so that you can get on some of our customers' conference calls. Jay and I will be at Semicon West next week and we look forward to the opportunity to see many of you at that time, and we thank you for your continued interest in Helix. Have a good afternoon.

And that does conclude our conference for today. Thanks again for your participation and also for using AT and T's executive teleconference service. You may now disconnect.