Azenta Inc (AZTA) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Helix Technologies Second Quarter Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call today, please depress star, then zero. This conference is being recorded.

I would now like to turn the conference over to your host, President and Chief Executive Officer, Mr. 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 have done in the past, realizing the demands on your time during this busy earnings release period, we're going to plan to finish up today in about 35 to 40 minutes. We will keep our introductory remarks relatively short and to the point in order to allow adequate time for your questions.

Joining me today are Jay Zager, our Chief Financial Officer, Beverly [Armell], our Director of Investor Relations, and Jim Gentilcore, our Chief Operating Officer, who is here to help us in the Q&A session. We assume that each of you has received a copy of the two press releases that we released just after the market closed this afternoon, one covering our second quarter results and one announcing our increased dividend. If that is not the case, please call 508-337-5172. We'll fax you copies immediately.

Now before we begin, I would like to ask Bev Armell to take a moment to review our Safe Harbor disclosure. Beverly?

Thank you, Bob, and good afternoon, everyone.

The following conference call contains forward-looking statements, including statements regarding the future performance of the company's business and the semiconductor capital equipment industry, which are subject to a number of important factors that may cause actual results to differ materially from those indicated. These factors include, among others, market acceptance of and demand for the company's products, the success of the company's strategic initiative, including its global support operations, the health of the global semiconductor capital equipment market, and the timing and scope of any change in industry conditions, the company's success in sustaining order bookings, and other risks contained in Exhibit 99.1 to the company's Annual Report on form 10-K and its other filings with the Securities and Exchange Commission. The company assumes no obligation to update the information in this call.

Thank you, Bev.

As you would expect, we are quite pleased with our performance in the second quarter. With revenue growth at the high end of our guidance, asset management performance continuing to achieve impressive goals, EPS exceeding expectations and continuing strong demand from our customers, the entire Helix team is executing quite well. Throughout the quarter, our people continued to pursue opportunities for revenue growth and margin enhancements. They have done, and continue to maintain, the balance between executing for today and preparing for tomorrow. For us, the challenges for tomorrow are twofold. First, to implement the strategic initiatives that will continue to move us across the fab and beyond our current products and services. And second, to be well-positioned to outperform throughout the industry cycle, not just at the peaks.

Eighteen months ago, we told you in our year-end 2002 conference call, that "We had completed a roadmap to achieve our goals both in the near term and in the longer term." We said that the Helix management team was, "Committed to a path that ensures profitable operations and positive cash flow generation." We said that, "We believe that our commitment to unmatched customer satisfaction and operational excellence are critical elements to achieving our financial goals." We said that we believe that our strategy of expanding across the fab and beyond our own traditional products is a winning strategy aligned with the strategic imperatives laid out by our customers.

Eighteen months later, we remain on track. There have been many questions about where we are in the cycle, and there have been many baseball analogies used in the answers. I will continue the theme by telling you that I don't know if we are in the third, fourth, sixth or seventh inning of this particular game. What we do know is we see continuing strength in our current business. We see an upward trend in forecasted near-term results, and we see real progress in the pursuit of our long-term strategic initiatives. Some of these initiatives are paying off now. Some will pay off later this year with the widely anticipated acceleration of 300-millimeter tool deployments. Some will pay off as business moderates, and some will pay off entering the next upturn. We think we have the right balance and focus on today's performance and tomorrow's opportunities.

As I hope you can tell from the tone of our comments, we are pleased with our progress on all fronts, but by no means are we complacent. As we complete each task, fulfill each commitment and pass each milestone, we remain focused on the next challenge, the next step that will move us closer to our long-term goals and distance us from potential competitors and distinguish us among our very capable, able and competent peers.

Continuing our practice of ensuring that we provide you with full and timely disclosure, we have filed our 10-Q for the quarter this afternoon. In a moment, Jay will go through the details of our strong financial results in the quarter and provide you with some guidance looking forward.

But before Jay begins, let me just comment. We saw strength in all elements of our business, pumping systems, instrumentation products and global support services. We continue to have success with our newer product and service offerings. On-board IS vacuum systems from CTI Cryogenics, micro-ion plus gauges from Granville Phillips, and True Blue service agreements are not just valuable trademarks, rather they are the source of a real value generation for our customers and our shareholders. The acceptance momentum of the on-board pumping solution is increasing, replacing our basic on-board platform in some applications and diffusing any interest that competitive offerings might have stimulated at OEM accounts. The micro-ion plus gauge solution continues to outperform alternative solutions, positioning us to increase market share in the combination gauge segment and open new opportunities for us outside of our traditional core markets.

True Blue service agreements continue to gain traction around the world. They are producing tangible financial returns for our customers by eliminating unscheduled downtime and improving tool productivity. They are meeting our internal objectives of building a growing stream of predictable revenues and contribution unrelated to new tool shipments that we believe will enhance our performance throughout the business cycle.

The signals, messages and, importantly, order bookings from our OEM accounts remained strong throughout the last quarter, and we have seen no pullback in the opening weeks of this quarter. As we have noted in the past, Helix products are typically ordered, produced and delivered late in the build cycle of our customers' tools. Our short cycle time manufacturing process, industry benchmark quality and on-time delivery performance works well for our customers and for Helix.

For all of our good news, we are not without our challenges, but they're all good challenges. Our retrofit and upgrade business is challenge by our ability to get access to tools during this period of high fab utilization. Our product development teams are challenged by customers who want application-specific variants of a number of our products to increase the value we bring to their tool sets. Our supply chain management team is challenged to accelerate the pace of bringing on new low-cost suppliers who are prepared to embrace our lead manufacturing principles and help us maintain our margin improvement trends. And our business development teams are challenged to accelerate the pace of our march across the fab with products and services that move us beyond our traditional offerings. These are all great problems to have, and we want to assure you that we are working hard and that we are unrelenting in our quest for excellence.

With the closing of each quarter, we initiate a process of re-examining where we have been, where we are at and where we are going. We review expectations and uncertainties. We discuss our conclusions with the management team and with our Board. We look hard at our business model, our opportunities, risks and resources. As you know, we focus our management processes on both the operating statements and the balance sheet. We think that capital productivity is as important to our shareholders as it is to our customers.

As you also know, our Board has had a long-standing policy of distributing to our shareholders cash in excess of our business needs. With the strength of our current balance sheet and the demonstrated performance of our business model, we also announced today that our Board has voted to increase our quarterly dividend from four cents a share to eight cents a share. This move is reflective of our confidence in our business.

Against that backdrop, I'd ask Jay to discuss our quarterly financial performance in more detail, and then we'll open the lines for your questions.

Thanks, Bob, and good afternoon, everyone. I'd like to provide some insight into the financial results we just released and offer our perspective on the current quarter. Sales for the second quarter were $44m, an increase of about 9% from our Q1 levels and almost 80% higher than a year ago. Our operating profit for the quarter was $6.7m, or 15.1% of revenue, compared with $4.9m, or 12.1% of revenue in Q1, and a $2.6 m operating loss a year ago. Net income was $6.3m, or 24 cents per share, reflecting our continuous improvement over prior quarter results. Orders for the quarter were $45.9m, up about 12% from Q1. Our book-to-bill ratio was about 1.04.

Let's look behind these revenue levels. Sales to semiconductor customers were about 70% of our total, unchanged from the prior quarter. Sales attributable to our CTI Cryogenics vacuum pump products were about 84% of our total, with sales of our Granville Phillips vacuum measurement and controls instrumentation products at about 16% of the total. Because of our strong product sales in the quarter, our global support business contributed about 30% of our total revenues in the quarter, essentially unchanged from Q1.

Our global support business continues to do well, particularly with respect to our True Blue service offerings, which continue to be well received by our customers. OEM sales as a percent of revenue were slightly under 60% of total sales, while sales attributable to our largest customer, including outsourcing partners, were 29% of our business compared with 34% in the prior quarter. And we ended the quarter with a backlog of $17.5m, up from 15.7m in Q1. Headcount at the end of the quarter was 607 people, including temporaries, compared with 593 people at the end of the first quarter. The majority of this increase was related to temporary manufacturing personnel. Our permanent headcount remains below 500 people.

Our gross margin in Q2 was $18.1m, or 41% of sales, an improvement of 190 basis points over Q1. This improvement was due to both increased volumes and continued improvements in our manufacturing operations. R&D expenditures for the quarter were $2.5m, essentially unchanged from Q1. Selling, general and administrative expenses were $8.9m, compared with $8.3m in the prior quarter. The major factors behind this growth were increases in performance-based compensation and additional costs associated with statutory and compliance activities.

As a result of these factors, our operating profit was $6.7m compared with 4.9m in Q1. The contribution to our profits from our joint venture in Japan was $860,000, compared with $595,000 in Q1. We continue to be pleased with the performance of our Japanese joint venture, and net interest income for the quarter was $221,000, essentially unchanged from the prior quarter. Profit before taxes was $7.7m compared with $5.7m in Q1, and we earned $6.3m, or 24 cents per share, reflecting an 18% tax rate, which remains our projected full year tax rate based upon current assumptions.

Helix has been subject to an IRS audit related to certain tax positions taken on prior year returns. This audit is expected to be resolved sometime this year. It is probable that the resolution of this audit may result in a one-time favorable tax benefit. This benefit will be recorded in the period in which the audit is settled, and is not reflected in our current tax assumptions.

Let me now turn to our balance sheet. At the end of the quarter, our cash and investments were $72.2m, an increase of slightly over $2m from Q1 and almost $5m higher than at year-end. Cash from operations exceeded $5m in the quarter. During the quarter, we elected to make $2.1m in contributions to our pension plan, in excess of our full year minimum contribution requirement of $1.8m. We may choose to make additional contributions during the second half of the year.

Customer receivables were $27m, an increase of about $3m from Q1. This increase was due primarily to our higher sales volumes. Our DSOs at the end of the quarter was 55 days, essentially unchanged from Q1, and we do not have any significant collection issues. Inventory levels declined by over $1m in the quarter to $21.5m, and are at the lowest levels since the second quarter of fiscal year 2000. Despite the significant upturn in revenues, we are continuing to closely manage our worldwide inventories and have seen our inventory turns increase to 4.8 turns compared with 4.3 turns in Q1 and 3.6 turns at the end of fiscal year 2003.

Capital expenditures were about $900,000 for the quarter. We anticipate full year capital spending will be in the four to $5m range. Depreciation was $1.3m for the quarter, and should remain at that level for the balance of the year. And yesterday, as Bob previously mentioned, our Board approved a quarterly dividend of eight cents per share, an increase from the four cents per share that we had previously been paying.

Now, I'd like to provide some insights on the current quarter. We continue to see strong demand for our products across all product lines and service offerings, and while our key OEMs have not yet held their quarterly conference calls, they continue to give us positive indications as to the current state of their business. This is an important indicator for us, in that our revenue tends to closely track with key OEMs shipments. We have noted, however, that several of the other semiconductor equipment components manufacturers have issued very tempered guidance for this quarter.

Taking all of these factors into account at this point in time, we anticipate that Helix's Q3 revenues will be modestly higher than Q2. We also expect to see sequential improvement in our gross margin percentage due to both the projected increase in volumes and due to continued improvements in our manufacturing operations and processes. Sales, general and administrative expenses will be above Q2 levels, reflecting the impact of several key industry and trade shows that occur in the third quarter. As a result of these factors, we anticipate continued improvement in our operating profit and sequentially higher earnings per share.

And now Jim, Bob and I will be happy to answer questions. Operator, we are now prepared to open the lines for questions.

Ladies and gentlemen, if you wish to ask a question, please press star, one on your touchtone phone. You will hear a tone indicating your line has been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the buttons. Once again, if you do wish to ask a question, please press star, one.

And our first question comes from the line of Avinash Kant from Adams Harkness. Please go ahead.

Good afternoon, Bob and Jay. The question I had was what percentage was True Blue of the total service revenues?

I can help. We don't want to get into a practice, Avinash, of disclosing actual percentages. What we've said in prior-- previous calls is that the True Blue contracts had exceeded our initial goal of 10% of our service offerings, and our objective, as we see this playing out, is for these contracts to approach 10% of our total company revenues. So, that should give you some framework as to where we are, but we're not going to get into the practice of releasing those numbers every quarter.

Any idea about margins on those businesses? Is it above or better or below current levels?

Our margins tend to be very strong as a result of the fact that these contract are using our GOLDlink technology and really are enabling us to very effectively manage-- support operations in our key customers. The margins actually tend to be above our traditional margins, so as we increase the contribution from our True Blue offerings, they tend to help our overall bottom line.

And a housekeeping question. What should we model for tax base in the year '05?

We've not really put a lot of emphasis into it, but 32 to 35 percent is the order of magnitude that would be appropriate.

Thanks very much.

And the next question comes from the line of Ali Irani from CBIC World Markets. Please go ahead.

Good afternoon, gentlemen. That would be CIBC World Markets. First, I like to congratulate you on the quality of your results and the quality of the earnings and the outlook. Bob, it sounds like you're going through these cycles just getting better at the execution.

And I was hoping you could give us a sense of, again, the revenue growth as we're going from the 200-millimeter platforms to the 300-millimeter platforms, and your dollar opportunity per new-- per 300-millimeter. It seems we're in a pretty significant inflection point in that transition, and I'm hoping you can give us some color on the trends ahead for Helix specifically. And I have a follow-up after that. Thank you.

Thank you, Ali.

That is an incredibly difficult question for us to answer because it is very tool-specific. As we have explained before, unlike some components, vacuum pumping does not scale linearly from 200 to 300, but tool configurations in 300-millimeter systems are really significantly more complex. We also have the advantage that, with these more complex tool sets that are pervasive in the 300-millimeter processing, we have more non-process chamber pumping opportunities, specifically in buffer chambers, transfer chambers, load locks, etc., so we have what we consider both active chambers and passive chambers, but all requiring pumping solutions.

So, on the pumping side, the transition from 200-millimeter to 300-millimeter is additional revenue generation, but it principally comes from configuration and actually an increased number of pump products. On the instrumentation side of 300-millimeter, in some cases, again it's related to the complexity of the chamber. It is also related in some areas to the initiation of our new products.

As you know, we have been investing in the product development portfolio at Grandville and, in most of those investments, it has been to target areas that we have not had product offerings in the past, i.e. market share gains. The timing of some of those projects were late for early prototype 300-millimeter machines, but we are very, very-- and I think you-- before I make the next comment, I want to reiterate my standard position that we tend not to proclaim design wins. We only proclaim orders, revenues and profits.

But we are very, very pleased at the rate of displacement of alternative-gauge products for our new work Granville Philips offerings. And as 300-millimeter systems increase as scheduled later this year, you'll see an acceleration of the Granville Phillips side on 300-millimeter, which is market share gain for us. So, that dynamic plays in.

And then finally, at the-- in 300-millimeter tool sets, our ability to do more, albeit still limited, integrated solutions including pumps, gauging and controls, is also additive for us in revenues. Bottom line, it sounds like it's a simple question that should have a simple answer. It's a complex question that becomes very, very much customer-specific. I would say in the aggregate, however, we remain extremely bullish about the impact of 300-millimeter on our revenue stream.

Just to follow-up on that, obviously you're looking at SemiCon West, the 300-millimeter PVD platforms in particular are very large, and I noticed the on-board IS pumps just at every node. I'm wondering if that platform in particular is one where-- the PVD platforms in particular are ones where you're making these penetrations with the Granville Phillips instrumentation, or whether this broader than that in segments such as CVD and Atch [sp], or other emerging segments like ALD.

Yeah, it is across the board, but on the PVD side, if one examined some of the early 300-millimeter tool offerings, one might have seen that there were places that did not have Granville Phillips gauges. Returning to SemiCon West next year, you'll see that those opportunities will be full of blue labels.

Terrific. Congratulations again.

Thank you, Ali.

And we have a question from the line of [Tim Summers] from Sanford Group. Please go ahead. Mr. Summers, your line is open.

Sorry about that. I had the mute button on. Applied Materials has recently been making comments that they wanted to increase the presence in their service business, and I know that you get a large percentage of your revenue from service. I'm wondering if you could amplify on any discussions that you might be having with them about some joint service offerings or other discussions that you might be having with them. Thanks.

Thank you, Tim. As we have communicated in previous calls, Applied Materials is a valued business partner of ours across our full range of products and services. We have a joint commitment, both companies, to satisfy in the best possible way-- and by that, I mean both cost-effectivity, time for response, the needs of the ultimate user of product.

Working in conjunction with each other, we find what is the best way to deliver our particular services and, in some cases, that may result in a decision for us to have a direct relationship with the chipmaker. In other cases, we would do that through applied or other OEMs similarly, where basically the vacuum subsystem is considered a carve-out and a pass-through.

The real key is that we work collaboratively with the OEMs, not competitively, for the mutual benefit of the end users, the chipmakers, to ensure optimum tool availability and productivity. It's been successful to date, and we see no conflict in the strategies of our OEMs in Helix. Rather, we see complementary and cooperative opportunities.

So, would it be fair to say, Bob, that, as you progress down the discussion path, that whatever the end result is, it would be favorable for Helix?

I'll only say that our track record to date has been a win for all three parties, OEMs, Helix and the ultimate shared end user that we share as a customer with our OEMs, and that as we have not in the past, we do not expect in the future to be in conflicts. We found the mechanisms, whether it's on new equipment or in our service offerings, to really have win-wins because we share common goals, common objectives. So, it's not a "one wins, one loses," situation.

Okay. Thanks, Bob.

And with that, I'll turn the conference back over to you, Mr. Lepofsky. Please go ahead.

Thank you, Operator. As we finish up tonight, I want to thank you for your participation in our conference call. While there is always uncertainty in the pace of change quarter by quarter in the semiconductor capital equipment business, as shareholder of Helix, you can be certain of one thing. We continue to run this business in your best interests, focusing our talents and resources on creating real value for our customers and our shareholders.

We remain committed to the premise that there are very attractive opportunities throughout the business cycle for innovative companies that can enhance the performance and improve the productivity of production tools that produce the semiconductors, display and storage devices that have become so pervasive throughout the global economy. We see opportunities to deliver outstanding performance for our shareholders throughout the business cycle, and will continue to focus the collective energy of our people to that end.

We thank you for your continued support. Please have a good evening.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Conference Service. You may now disconnect.