Azenta Inc (AZTA) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Brooks Automation third-quarter 2008 earnings conference. At this time I'll participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Michael McCarthy. Mr. McCarthy, you may begin.

Good evening, everybody. My name is Mike McCarthy, Director of Investor Relations and Corporate Communications for Brooks. I'd like to welcome each of you who are joining us to discuss our fiscal 2008 third-quarter earnings results. A press release was issued at about 4:00 PM Eastern time and is available on our website, as are copies of slides used as background for call this evening. The URL is www.Brooks.com.

Before we begin I'd like to remind all participants that during the course of the call we will be making some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements. I refer you to the section of our earnings release titled Safe Harbor Statement and the Company's most recent filings with the SEC including our 10-Q which was filed in conjunction with our issuing the press release this afternoon. This call will remain archived for instant replay on our website until we report our fiscal 2008 fourth-quarter results in mid-November.

Bob Lepofsky, our CEO, will open the call with some brief comments about the Company's performance and strategic positioning. He will be followed by Martin Headley, our CFO, who will provide a more detailed overview of our third-quarter results, after which we will begin the Q&A session. I'd now like to turn the call over to Bob.

Good afternoon, ladies and gentlemen. We appreciate you taking the time to join us for today's conference call.

I'm sure I do not have to remind anyone on this call, we're operating in a very difficult external environment. Results for the June ending quarter came in just below the low end of our expected range of performance, not bad under the circumstances. The semiconductor capital equipment industry remains depressed and uncertainty surrounding calendar second-half end product demand is limiting forward visibility. Chipmakers around the world are also well aware of the short cycle times that are now the norm in our business.

Coupled with weak demand, you have production equipment delivery times that are very short. Consequently, from a chipmaker's point of view, there is little incentive to rush to place new orders until there is more certainty regarding demand and thus the need for additional capacity in their fabs.

On the other hand, while they are not buying equipment today, when they do begin buying again, they expect OEMs and their suppliers to be prepared to ramp, and ramp quickly. Anyone unprepared to respond risks losing opportunities and market position.

At Brooks, our game plan is simple. We are using this time to improve our business model, capture market share and ensure that our engineering, production and product support capacity is aligned with the short-term requirements and long-term needs and strategies of our customers.

As Martin will detail in a few moments, our uninspiring bottom line this quarter masks the progress we have made since the first of this year. Despite printing red ink on the bottom line after all charges, we have been able to deliver positive EBITDA and cash generation from operations as a result of our restructuring initiatives.

As those of you who follow Brooks know, we set out a three-step game plan. First, we focused on improving customer responsiveness and our financial performance. Second, we focused on investments the Company had made, looking to harness the yet untapped potential of those moves, particularly those in product development, acquired assets and strategic partnerships. Finally, we said we would look to opportunities that could broaden our product portfolio, extend our market reach and accelerate our growth in the years ahead.

While our top line has remained under pressure, we have executed on our plan. And as a result, we think we are now well-positioned to move forward. We have substantially restructured this Company. Along the way we have simplified organization, added new talent, took about 15% out of the payroll, eliminated about 15% of our global floorspace. What we didn't do was to reduce our ability to ramp, to invest in our future or respond to new opportunities. We've just become more effective, more efficient and more responsive to our customers.

We have ended up with an operating model that ensures positive EBITDA and operating cash flow. It is a model that can drop at least $0.40 of every incremental dollar of sales to the pre-tax line, and we are, as planned, converging on a $125 million quarterly revenue breakeven point. Consequently, while squeezed at current revenue run rates coming out of the downturn, we're prepared to deliver higher profitability and cash flows than at any time in Brooks' history.

In the current environment, with some of our largest OEM accounts, we saw quarter-to-quarter declines of 40% to 50% from the March to June ending quarters. Other customers actually recorded sequential growth, so with the breadth of our customer base we were able to limit the overall revenue decline to only about 16% sequentially.

Importantly, over the last six months our customers have seen the difference that has come from our work. Several of our largest customers now refer to us as the new Brooks, and they are rewarding us with new business and expanded scope of supply opportunities. It is this kind of new business that we think will help mitigate some of the revenue pressure that we would otherwise expect in the upcoming December ending quarter.

As we have reported earlier, a part of our restructuring was changing the mission of our Wuxi, China facility. That facility is now expected to operate as an extension of our Portland operations, serving the needs of our customers' own China and Asian strategies. The facility was re-tooled and shipment-ready in record time. It will make its first shipment under this new mandate next week on time, on budget and meeting all of our customer requirements. As a result, Wuxi is a critical link in several customers' Asian strategies.

We've come a long way in a facility that was losing $500,000 a month just seven months ago.

In the Japanese market we're continuing to make important strides. Our YBA joint venture logged major milestones with our largest OEM target. We shipped our first vacuum robotics solution in the quarter to that key OEM and are aligned for participation on several new product roadmaps. Across our product lines and around the globe, our people are deeply engaged with customers and are logging design-in wins. From pumps to gauges to robotic modules and load ports, more customers are turning to Brooks every day. Our engineers are very busy working on new designs and new applications, another good sign we're on the right track.

Over 15% our revenues currently come from customers outside of the semiconductor industry, and at the present time we are very actively engaged in building this part of our business. We have been investing in product and market development in a number of areas, including solar. Led by initiatives in our Polycold and CTI groups, our book of business is growing and our customer base is expanding. Most thin film solar production lines operating today depend on our products. In many cases our vacuum solutions were designed in from day one. In other instances, we are now being brought into solve newly identified problems or displace underperforming alternative solutions.

At the same time we have sharpened our focus on product development activities to ensure that, longer-term, customers can benefit from the full range of our expertise in both vacuum solutions and automation solutions. So, while new orders are sparse, new applications and new opportunities are not, and we're prepared to support these activities today in order to reap the benefits tomorrow.

Our works in areas such as the solar sector are but first steps in our plan to broaden the base of Brooks. We do not intend to de-focus or dilute our work in the semiconductor sector, but we do want to expand our reach and enhance our growth track. We are evaluating internal and external growth initiatives and will deploy our resources to projects that can further broaden our base and accelerate our growth.

So, despite the current headwinds, we think that Brooks is well-positioned to begin a period of sustained growth and performance as we come out of this downturn.

Now, before I hand the call over to Martin, I want to take this opportunity to thank our employees and business partners who are working harder and accomplishing so much more than we could reasonably expect in an environment that is far more challenging than many have seen and none of us could have predicted just nine months ago.

With that, I would ask Martin to give you some more detailed insights into our quarter and our prospects.

As Mike mentioned earlier, we have again posted slides to the Brooks website that we believe will be useful in getting a clearer understanding of our results. During my prepared comments I will make reference to the appropriate slide.

Turning to slide two, I'll begin by walking you through how our results compared with our guidance provided for the June quarter at our last conference call. As you may recall, we provided revenue guidance of $125 million to $140 million and indicated that the resulting diluted loss from continuing operations excluding special charges should be between $0.12 per share at the low end of the revenue range through to breakeven at the $140 million revenue range, revenues of $124 million for the quarter and a GAAP loss from continuing operations of $10.3 million or $0.17 of what we reported today.

This loss included restructuring expenses of $2.6 million or $0.04 per share. With the vagaries of rounded earnings, this results in a loss before special charges of $43.2 million or $0.12 on a diluted per-share basis. So, although revenues were below the low end of the revenue guidance range, our restructuring and cost containment activities enabled us to achieve a slightly better than modeled profit performance.

For those analysts and investors modeling on a cash EPS basis, the impact of the $4.1 million quarterly intangibles amortization was $0.06 in the second quarter, $0.07 in the third quarter with a reduction in the average diluted share count, and has been $0.17 through the first nine months of the fiscal year.

Slide three shows the summary second-quarter and third-quarter income statements through the operating loss line. The cost reductions executed during the quarter and the full-quarter impact of second-quarter actions offset the loss variable contribution from the reduction in revenues from $147.6 million in the second quarter to $124 million in the third quarter. To better understand these dynamics, we've included slide four, where we bridge from the operating performance in the second quarter, a loss of $7.5 million, through to the operating performance in the third quarter, a loss of $9.6 million. The significant contribution margin on lost revenues, at least 40% on a routine basis, was the boat anchor.

Revenue declines were $23.6 million but included a $1.1 million increase in royalty license revenues, which flows through the operating profit [at a 100]% contribution. The loss contribution on $24.7 million [few of] products and service revenues was $12 million. Our restructuring and cost containment programs had the impact of reducing costs by $5.1 million in the quarter. Most of these savings are permanent as the restructuring program will have reduced headcount by 15% when fully implemented in the upcoming weeks and we'll also have reduced our facility footprint by nearly 15%.

Success in settling the class-action lawsuit arising from equity incentive matters had a positive impact both in recognizing a $1.4 million reimbursement of previously expensed professional fees as well as a $1 million reduction in the burn rate of legal costs we continue to incur on these matters. You will see that both the claim for liability settlement and the receivable for full collection from our insurance underwriters are included in our June balance sheet on the resolution of the matter.

We also benefited from avoiding a couple of nonrecurring costs arising in the second quarter. The $600,000 incurred in connection with the collection of a foreign VAT receivable and the $800,000 atypical warranty costs in our automation systems business. Finally, any good reconciliation includes a small other; in this case, the net impact from cost increases and items such as product mix.

Slide five shows what happened below the operating profit line with lower net interest income, sequentially driven by lower return rates and lower average cash holdings following the stock repurchase activities early in the second quarter. We had no recurrence of the second quarter permanent impairment charge of $2.5 million. And finally, we saw a reversal of the favorable foreign currency impact in the second quarter. A significant piece of this issue was the impact of the Japanese yen strengthening against the dollar in the March quarter and weakening during the June quarter. There were also less marked fluctuations in the Korean won and Singapore dollar.

In the next three slides, I'll briefly cover our sequential segment performance. On slide five, we set out sequential performance of our Critical Components segment, where revenues declined 19% sequentially with the largest decline on an absolute and relative basis occurring in our CTI vacuum pump business for semi wafer equipment customers. Earlier in the fiscal year the segment benefited from some end market diversification. You can see the impact of the flow-through of loss variable contribution at over 40% levels with the underabsorption of fixed cost moderating the gross margin rate.

Operating expenses declined, principally because reduced corporate cost resulted in lower allocations to the segment.

On slide seven we see the sequential impact of the Automation Systems segment. Here, the higher license revenues impacted both revenue and gross profit to the extent of $1.1 million. Excluding this impact the Automation Systems product sales were down $23.7 million, a sequential reduction of over 25%. This segment, with a greater customer concentration, saw the greatest reduction as compared to our business expectations going into the quarter.

Operating expenses were reduced by 18% sequentially from both research and development savings as new programs release into volume production and the impact of the broader-based restructuring activities across the whole Company.

On slide eight you'll see that we had strong performance from our Global Customer Support segment with strong contributions from legacy hardware products. The gross margins benefited slightly from the volume fall through, and restructuring and cost containment again benefit the operating expense levels.

Turning to slide nine, we see that we continue to report positive adjusted EBITDA and cash flow from continuing operations even below the $500 million annualized revenue run rate and before all our actions to improve profitability have rolled through. Cash flows from continuing operations were $1.4 million in the quarter with adjusted EBITDA of $1.8 million and a reduction in net working capital being offset by the costs of executing our restructuring program. Our net working capital as a percent of annualized sales slipped to 21.1% at June 30, 2008, from 18.3% at March 31, 2008, with lower accounts payable at the lower activity levels, some inventory purchased in support of new programs and some build in the inventory of long leadtime components. As a contrast, our receivables management continues its improvement, achieving less than 15% of annualized quarter revenues.

Capital expenditures during the quarter were $6.5 million with approximately $4.3 million of that associated with investments in our Oracle ERP implementation.

Slide 10 sets out our guidance for the September 2008 quarter. The semiconductor wafer fab equipment market shows no sign of recovery in the September quarter, and we're projecting that revenues could be in the range of between $110 million and $125 million. Though we are targeting to exit the quarter with a breakeven at about $125 million, the projection of revenues below that level and a higher breakeven earlier in the quarter will result in another GAAP loss for the quarter excluding special charges. Our GAAP earnings guidance for continuing operations before special charges is between $0.05 and $0.15.

Finally, one statistic I have not provided yet is the order bookings for the June fiscal quarter of 2008, which were $106 million, down 20% on a sequential basis.

With that, I'll turn the call back to Blanche for the question-and-answer segment of our call.

(OPERATOR INSTRUCTIONS) [Jennie Yun], JP Morgan.

As some semi OEMs are indicating that shipments could be up for them in the calendar fourth quarter; if that's the case, then when would you see that trickle down to your revenue?

We would actually see that quite quickly, particularly in our extended factory business. As Martin noted, the Automation Systems activity was the area that fell off the fastest. It will also turn around the fastest. In order for the OEMs to make their shipments, they need the output of our extended factory activities.

So, does that occur simultaneously, that their shipments are up in the fourth quarter; would your revenues go up in the fourth quarter?

If their shipments increase, our shipments increase, very closely coupled.

You mentioned that you are getting into more solar business. Do you want to give us a sense of what kind of solar revenue you could generate in like calendar '08 or calendar '09?

At this point we'd stay with the broader definition of what our total non-semi are, heavily influenced by solar because of the vacuum solutions. The vacuum solutions are increasing. But, as you know, the issue of revenue on new production lines is somewhat uncertain in terms of the rate of ramp.

Timothy Arcuri, Citigroup.

You are somewhat unique because you are giving earnings somewhat later than most of your peers, so you have a little bit more visibility into the quarter than I think others do at this point. So my question is, if you had guided two or three weeks ago, when most of the big OEMs reported, would your guidance have been the same, or would it have been different than it is?

I'd say essentially the same. Translated -- we have seen no additional deterioration in recent weeks.

Okay. There's a pretty big uptick in your spares, in your services margins. I'm wondering -- maybe I missed it on the call. But what was the reason for that, and is that sustainable going forward? Is that the right sort of new margin level to think of in that business, going forward?

Two parts to the answer. One is that, in any given quarter mix will really impact the margin level. Remember that within that business we also support many of the legacy products, and they are lumpier, but they can be positive. I'll disconnect the current quarter from the go-forward and merely comment that we are currently very focused on rebuilding the service franchise that is core to our strategy, core to our position. So you will see as we move forward an upward trend in the performance of that business. We think that that business has been underperforming. I think you know that earlier in the year we did some restructuring there. We are highly focused on that segment of the business.

Does that mean that we should think about this 24% as more of a one-timer?

No; I wouldn't see it was a one-timer. It was influenced by a particular mix in the quarter. But our focus and what we can achieve with the service business will give us an upward trajectory that we would hope starts from here. You may have, with mix, a slight dip for a quarter or whatever. But there should be something all better than this that we're looking for as the longer-term margin rates of this business.

And longer-term shouldn't be read that a year from now we'll see improvements. We're on a pretty fast-track. So, as Martin says, you can take this as the beginning and another element of positive traction at Brooks.

What's the operating breakeven in the Systems business, and what will the gross margin be at that revenue level?

The breakeven of that business is essentially driven by the 40% pull-through from the business. So, as you can see for the current quarter, where we're losing $10 million on $58 million a quarter, in order to get that pull-through at that level, it's going to be another --

First of all, the model to use now is $0.40 drop-through, and that says that, compared to Q2, at our current operational performance, we get revenues up in that 80-85 level, we are back making money.

So you would be breakeven if you had revenue back to what Q2's revenue was?

Exactly. And that fits in with the earlier question and our response. If you believe the projections relative to Q4/Q1 of our major OEMs, you can translate it into that sector.

Yes, if you believe that, yes, that's right. Thanks.

Ben Pang, Caris & Company.

One, just a follow-up from the previous question. If you look towards the end of the calendar year on the profitability scenario, does the mix matter in terms of how a potential rebound might occur?

Mix always matters for us. However, this minimum of 40% drop-through takes into account most likely scenarios, including the fact that our focused factory/extended factory activities will tend to ramp first and fastest. They are also our lowest-margin business. But on incremental drop-through, we've got mix issues factored in there.

In your non-semiconductor business, how many customers do you have?

A pretty broad base. And that is, if you go into, for example, our Granville Philips organization, they literally have thousands of customers for their devices. If you narrow it down to a market sector, such as solar, we actually have a very broad base of customers ranging from the large OEMs to smaller OEMs to emerging technology players, both on the equipment and on the operating side. But that would be a list that you'd measure in less than 100 versus some of the other areas that it gets up to 1000. We also have concentration in areas such as the analytical instrument business, where we're partnered with major OEM accounts.

When I look at your design activity on that area, because a customer is so large, are you really gaining any share there? Or, do you just look for the large OEM to increase shipments, and that's how we really get the growth in that area?

In our non-semi area?

Correct.

No. That is about growth of opportunities, additional opportunities, new product offerings that address broader customer problems.

Patrick Ho, Stifel Nicolaus.

This is [Mary Lee] for Patrick Ho. My question is, when the semi-cap space does finally turn around, do you think the Company can quickly react, and fast enough to meet a potential surge in demand? If you could give us some color about maybe how many cycle times have improved to face the situation?

The answer to the first part of your question is, absolutely. And key to our strategy and really an important part of our message today is that, while we went through a restructuring, we took out substantial cost of operations, simplified our operations. We did not limit the critical ability to ramp and ramp quickly. As a matter of fact, we think now, we and our customers believe, that we are even better positioned to ramp and ramp quickly.

Two ends of our business have very short cycle times. Our extended factory operations react very quickly, and our Critical Components Group historically have response times measured in days to weeks. Our Automation group in our robotics solutions -- there, in terms of custom-designed systems, their cycle times, and leadtimes, have shrunk. But there, you're talking about weeks to months. In the robotic modules area, again, you talk principally in weeks of lead time.

(OPERATOR INSTRUCTIONS) Jim Covello, Goldman Sachs.

This is Kate Kotlarsky for Jim Covello. Recognizing that you have fairly limited visibility, I was curious what your thoughts are on the December quarter and what you think the probability is that revenues could be flat or down versus up, which is kind of an indication we get some of the larger OEMs?

Here, we will really give you color, rather than hard facts. Our planning scenario suggests that the December ending quarter will continue to be a difficult quarter from the Brooks -- and one of -- there's really two elements to that. One is, when the turn, quote-end quote, actually takes place, as well as the always issue relative to year-end close-downs and the effect of the Christmas to New Year's vacation week time. That can represent 7%, 8%, 9%, 10% of revenues in that calendar fourth quarter, which is always dicey to project.

For us, we have a certain level of cushion, if you will, relative to new mandates and new product flow even in the existing market that we'll see continued to ramp into the December quarter. So I know that's not a precise issue -- answer to your question. We really have this balancing act that we're doing between the uncertainty relative to the time of year, meaning the Christmas/New Year break, representing 7% to 10% of the quarter; the timing of the turn, offset by our own ramping of new opportunities and new product flow.

That's helpful, thank you. My other question was in R&D. Your R&D has been coming down a bit over the last couple of quarters. I was curious whether you feel like, at this point, the R&D is rightfully sized or whether we should expect it to come down slightly over the next couple of quarters or maybe even creep up a little bit.

No; it's at a good point now. Again, we'd only emphasize that there's two dynamics that have helped to bring it down. One is the transition of several products, particularly in our Automation group, that have transitioned out of the development process into the product manufacturing cycle. So that helped a little bit. And now we have, I think, a little stronger focus on the projects we're working on. So we're comfortable at its current level.

How should we think about interest and other expense for next quarter?

I think we should think about interest probably being at roughly the same levels as you have seen for the current quarter, and I think that we would see that the other expense will significantly reduce. We've taken some actions to reduce some of those foreign currency exposures that had such an adverse impact in the third quarter. So I'd see a significant decrease, maybe not an elimination of that.

Hari Chandra, Deutsche Bank.

I just wanted to know what percent of your sales comes from turns business.

The turns business is probably -- 40% to 50% of the business, is what I would estimate.

Do you have any target for the non-semi business as a percentage of revenue going into next year, or year after that?

I think that talking about numbers in the 25%-plus range are realistic, realizing that that factors in growth of the semi business as a result of the turnaround. So, on a growing semiconductor base we think that we'll still be able to continue to expand the non-semi from our core business. And so a 25% number is not a bad target.

And finally, [any part] from share repurchase and what share count numbers should we use for the fourth quarter?

You will have noted that we did not make any share repurchases during the course of the third quarter. We continue to evaluate what we do with our cash and our capital structure on a very regular basis. With the current uncertainties in credit markets and some of the opportunities that we have been looking into that represent growth opportunities for the Company, we've concluded that it wasn't appropriate to participate in a buyback activity at this time, and you could probably reasonably expect a similar kind of conclusion going forward into next quarter.

David Nierenberg, Nierenberg Investment Management.

I'd like to follow up on the comments you just made about share repurchase by noting that the Company's total cash and investments are now $178 million. Your inventories look high to me at $111 million, relative to your revenue run rate. And you guys own probably in excess of $50 million of unencumbered real estate at a time when you are exporting manufacturing to other countries. Are you trying to tell us that you need $250 million to $300 million to make acquisitions?

We believe that we need not all of that amount, but we would seek to have an appropriate cushion as we do the analysis of what cash that we should retain on hand for uncertainty in our business level and funding short-term requirements. And so, as we done that analysis, we've concluded that we believe that we should stand pat. We concluded during the quarter that we should stand pat with the activities that we had previously engaged upon.

Well, as your largest shareholder, I respectfully disagree. As you and Bob know, when market sentiment about this industry changes, your share price can double overnight. So when the circumstances happen that increase your confidence, you will then conclude that the shares are too expensive to repurchase. I honestly don't understand why you guys aren't endeavoring to repurchase 20 million shares at these price is right now.

As I say, we've carefully considered the situation, David, and we've come to the conclusion that that is not an appropriate action at this time.

Mr. Nierenberg, you have a follow-up question?

No.

Jennie Yun, JP Morgan.

Just a couple of modeling questions. If I wanted to pull out your amortization of intangibles, where do I pull that out of?

If you look at the amortization of intangibles, it's in two places. You have the element that's in the gross margin line, which is about $1.3 million, and then you have -- sorry, $2.3 million -- and then, you have $1.7 million that's in SG&A.

Then, your guidance of a loss of $0.05 to $0.15 -- does that include amortization of intangibles?

Yes, that does include amortization of intangibles. So, you can expect that the impact of that in the fourth quarter would be about $0.06 or $0.07.

I don't know if you've mentioned this before, but will there be any restructuring charges in the September quarter? Or, are you done with that?

We haven't said the exact amount. We continue to evaluate those as we go through the program. There will likely be some, but we're not giving guidance to exactly how much that amount might be.

Thank you very much. At this time, we have no further questions. Mr. McCarthy, I'll turn the call back over to you for your closing remarks.

Thank you, Blanche, and thank you everyone for your time this evening and your interest in Brooks. Should you have any questions, please feel free to call me or e-mail them to my attention. Have a good evening.