Azenta Inc (AZTA) 2010 Q3 法說會逐字稿

Good afternoon and welcome to the Brooks Automation earnings conference. Please be aware that today's conference is being recorded. At this time, I would like to turn the call over to your speaker today, Mr. Martin Headley, Chief Financial Officer. Please go ahead, sir.

Thank you, and good afternoon, everybody. I'd like to welcome each of you to the Brooks Automation fiscal 2010 third quarter results call. A press release was issued at about 4 PM Eastern time this afternoon, and is available on our website, www.Brooks.com, as are copies of our third quarter Form 10-Q and the illustrative PowerPoint slides used during our call today. I would like to remind everybody that during the course of the call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are a number of factors that cause actual financial results or other events to differ significantly from those identified in such forward-looking statements. I refer you to the section of our earnings release titled Safe Harbor statement, the Safe Harbor slide on our website and to the Company's various filings with the SEC.

I would also note that we will make reference to a number of non-GAAP financial measures which are used in addition to, and in conjunction with results presented in accordance with GAAP. These should not be relied upon to the exclusion of GAAP measures. Management believes these financial measures provide an additional way of viewing aspects of our operations, that when viewed with our GAAP results and the reconciliations to GAAP measures provide a more complete understanding of our business.

Joining me on our call today are our Chief Executive Officer, Bob Lepofsky, and our CEO designate, Steve Schwartz. Bob will open the call, after which I will provide a more detailed overview of the third quarter financials and a summary of our outlook for the September quarter before Steve provides his perspective. We will then take your questions and at the end of the call, after that Q&A period, Steve will provide some concluding prepared remarks. Over to you, Bob.

Thank you, Martin. And good day, ladies and gentlemen. We do appreciate you joining us today. These are exciting times at Brooks as we take full advantage of the current strong market conditions, maintain a cautious view of next year, given the uncertain pace of the broader economic recovery, and accelerate the pace of our own work in new product and market segment development.

The current market is allowing us to deliver strong operating results, $0.26 a share in the June quarter, and an expected $0.31 to $0.34 a share next quarter. We continue to see revenue growth and even faster margin expansion, at least through the end of calendar year 2010. While we're maintaining a cautious view of next year at this point in time, as people debate the strength of the semicap equipment investment cycle, we are encouraged about the success of our new product launches and the impact that they will have on 2011 results. From where we sit today, we think that new business will more than mitigate any downward pressure on our core business and 2011 will still show growth over 2010. Building on the successes of our product and market development activities, quarter by quarter we believe that you will see an accelerating impact of new product initiatives. Some of these we have talked about in the past, others will emerge over the next several quarters.

The really good news for today is our current position. As a direct result of the incredible work of the entire global Brooks team, we are stronger today than at any time in our history. Three years ago, we set out to turn the potential of Brooks into real performance for the benefit of our customers, employees, and most importantly, the patient shareholders of Brooks. We knew at the time that we had many of the critical pieces of the puzzle, a strong technology base, a core group of employees who really wanted to succeed, a global customer list with demanding requirements and growth opportunities, and a strong balance sheet. And we have high expectations.

What we did not appreciate at the time was that the world was headed into an unprecedented economic collapse that would impact everything we wanted to do. Despite the challenges, the Brooks did what they needed to do and the results we announced today are reflective of the collaborative efforts of an incredible team. Martin will go into the details of the quarter in a moment, but before he does, I want to make one thing clear. These results are not the culmination of our work. Rather, they form a foundation and are the first steps that will support a long-term growth strategy. We have no intention to be merely another semicap industry cycle rider. We will continue to build on our strong position in the semi space, but we'll intensify our efforts in new adjacencies where we can leverage our core technology capabilities.

In the near term, you will see important results from our efforts to expand existing relationships, such as our work on high productivity tools for general lighting applications of high brightness LEDs, innovative new solar cell production tools, and simplified analytical tools used in a widening range of markets. Longer term, I think you will see the market breadth that can result from the strength of our core competence, capability and capacity. Yesterday afternoon, we announced the final step in our ongoing and completely seamless management transition. I will resume my retirement at the end of September and Steve Schwartz, who joined us earlier in the year as President of Brooks and who was just elected to our Board, will succeed me as CEO. Steve will provide you some insights into his expectations for Brooks right after Martin's comments.

So in closing, let me say that it has been my pleasure to work with the customers, employees and shareholders of Brooks these past three years. I am pleased with where we are at and I'm excited about the future that lies ahead for Brooks. Martin?

Thank you very much, Bob. During my prepared comments, slide references relate to the PowerPoint presentation posted on our website, that accompanies these remarks. As Bob previously mentioned, we reported net income attributable to Brooks of $16.6 million. Both GAAP and non-GAAP diluted earnings per share were $0.26. The non-GAAP earnings improved 67% sequentially from $10.1 million or $0.16 per share.

As many of you will recollect, our GAAP earnings in the second quarter of fiscal 2010 were favorably impacted by both a significant $7.5 million aftertax gain on the sale of intellectual property rights and a $3.9 million tax credit arising out of recent economic incentive legislation. Our earnings beat our preannounced range of expectations as a result of favorable resolution of some foreign tax matters which effectively eliminated the tax provision in the quarter. Our minority and joint venture earnings were adversely impacted by a significant shipment into Japan missing customer qualification before the end of the quarter. This should provide impetus for higher joint venture earnings in the fourth quarter. A significant driver in performance this quarter was the very strong $6.4 million increase in operating profit before special charges on an $8.4 million growth in revenues.

Slide number four shows the 300 basis point improvement in gross profit and the 370 basis point improvement in non-GAAP operating margins. The operating margin performance at 10.7% is the strongest quarterly performance on record for Brooks. We saw continued top line momentum from our Brooks products and extended factory during the quarter, with extended factory remaining at similar levels within the overall business mix.

The quarter saw a broadening of the customer and product growth profile, and a consequent moderation of the core semiconductor content of the revenue mix from 85% to 81%. We drove exceptional gross margin drop-through of $7 million on $8.4 million of incremental sales, reflecting improved cost performance, favorable mix within our Brooks Designed Systems portfolio, and particularly strong revenues from our continuing IP license agreements. Research and development spending increased very modestly to $7.9 million, as we continue to build the competencies and breadth to support our goals for ongoing innovation. Higher selling, general and administrative expenses were net of a $0.7 million lower stock compensation expense. The increases included both some permanent cost additions to support our long-term growth profile, and some one-time costs that should not recur.

Slide five sets out how the revenues and operating profits before nonrecurring income and special charges bridge from the March quarter, our second quarter of fiscal 2010, to the June quarter. The critical solutions business provided additional operating profits of $2.6 million on $4 million of incremental revenues. A 65%, somewhat higher than our modeled drop-through, with benefits from both cost and mix performance. The systems solution business provided $3.2 million of incremental profits on $4.5 million higher revenues. Cost performance was particularly strong from this segment, complimenting a mix of products focused on higher margin applications. Finally, our service business saw a $0.2 million decline in the top line from the continuing move away from low margin, labor only contracts. Reduced stock compensation expense of $0.7 million, and higher expense of $0.2 million from additional engineering resources round out the profit movements in the quarter.

Slide number six charts the revenue and adjusted EBITDA progress over the past five quarters, with a $40 million growth in adjusted EBITDA while revenue expansion has been $113 million. EBITDA margins are now 14.4%, and continue to expand. While we had a disappointing quarter in the first quarter of the fiscal year, where the marginal profit growth fell behind our expectations, perseverance and dedication to our continuing margin expansion initiatives have borne fruit and we have recovered. From a Reg G perspective, please note that the adjusted EBITDA reconciliations are provided as a supplement to each of our quarterly Earnings Releases.

We generated cash of $7.2 million in the quarter, as shown in slide number seven. Restructuring cash outflows were $1.5 million. We are now within 12 months of the end of this cash drain, most of which is related to charges taken some years ago. We utilized $12.6 million of additional net working capital in supporting the revenue increase. Mostly the result of $13.4 million growth in inventories. Cash flow from operations was $8.6 million. Capital expenditures for the quarter were $0.7 million. We should see full fiscal year spending of less than $4 million for capital expenditures.

Looking at some critical balance sheet accounts as set out on slide number eight, cash and marketable securities grew from $125.8 million to $132.9 million. This includes those securities classified as long-term on our balance sheet which are nevertheless freely marketable and can be considered readily liquid. Overall, our working capital velocity remains significantly favorable to historical levels at 14.3%, although slightly muted from the position at March. Our receivables DSO was approximately flat and the dollar growth was volume related.

As previously mentioned, inventories increased by $13.4 million. Some of this increase was planned and was associated with initiatives to reduce logistics costs, both for us and for our customers. Additionally, we built inventory to support our new product launches and our customers' launches. Days payable outstanding moved out three days, resulting in payables increases of $3.8 million.

The next three slides, I'll briefly cover our sequential segment performance. On slide number nine, we reviewed the sequential results of our critical solutions segment. The top line increased sequentially by 6.7% with the strongest growth in our Polycold products. Gross margin improved to 40%, slightly offsetting this we commenced increasing our engineering investments which resulted in higher operating expenses. The reported segment operating income for critical solutions was $10.2 million or 16% of revenues.

On slide number 10, we summarize the performance of the systems solution segment. Revenues grew by 6.3%, including our initial next generation LED platform deliveries. Gross margins improved by $3.7 million to $16.8 million or 21.8% of revenues, with relatively flat operating expenses, the gross margin leverage improved segment operating margins to 9.8% of revenues.

The global customer operations results set out on slide number 11 shows the slight decline in revenues previously noted, but a strengthening in gross profits. Our margins from the service and repair activities are now 22.5%. The improvement in these margins narrowed the segment operating loss to $0.3 million. It's important to understand that our Customer Service engineers have important interactions with our customers that benefit our business as a whole. This internally we look at this business from a managed contribution perspective which is a print of a reasonable level of black ink.

Turning to our financial outlook. We continue to see robustness to our order bookings, gross bookings for the third quarter were $166 million and we have continued with a book to bill above one in the first month of the fourth quarter. Accordingly, we now view the September quarter to produce revenues of at least $175 million. With continued margin growth, we expect that this will translate into diluted earnings per share of between $0.31 and $0.34.

The improved operating margins and disciplined balance sheet management should continue the expansion of our return on invested capital to levels above 35% from just shy of 30% in the current quarter. And looking into the final quarter of the calendar year, we anticipate continued growth, which will result in a calendar year 2010 non-GAAP diluted EPS in excess of $1.

Finally, in closing, I want to revisit the impact of this guidance on our adjusted EBITDA momentum. Chart 13 portrays the likely outcome as we exit the fiscal year, where we should be generating a run rate of close to $120 million of adjusted EBITDA, and should be holding at least $140 million of cash at that juncture. And now I'll turn the call over to Steve.

Thank you, Martin. As Bob mentioned, we're in a very strong position, both financially and with our customers. In my remarks today I'd like to just take a moment to reinforce the direction of the Company. We spent a significant portion of the last several months honing our product and business strategy, and as a result, we are even more enthusiastic about our prospects to serve markets where controlled environments are important. For the most part, our direction is straightforward. We'll continue to serve the semi market well and better by offering new products that address the ever-changing needs of the market and second, we'll further develop products to leverage our core capabilities that can address the technical applications for adjacent markets where we are advantaged.

Our initiatives in the semi space continue to strengthen our leading position. In the area of robotic handling critical components we're presently engaged in the design and adaptation of systems for customers that includes both large and smaller OEMs. In our CTI cryogenics vacuum product family, we responded to the needs for fabs to dramatically reduce power consumption by developing a cryogenic pumping system that delivers the same level of performance but with significant reduction in power consumption. Testing at customer sites has begun, and the expectations and enthusiasm for our approach are high.

In the June quarter, we introduced and began taking orders for the first offerings in our evolving Simplicity Solutions product family that incorporate unique technology to address residual gas analysis applications. Our technology provides significant advances in smaller size, much lower power consumption, and measurement speeds more than 10 times faster than conventional approaches. Initial customer feedback from evaluation units is very positive and our manufacturing is ramping. We continue to see a broad application of this technology.

We also continue to broaden our footprint beyond front end semi, where our technologies bring benefit to controlled environment manufacturing for other markets. In our systems solution group, we achieved design wins for two MEMS applications and one for 3DIC advanced packaging technology. We see these markets evolving to need more automation and we will pursue our proprietary systems business as these markets continue to grow. We are adapting our market leading Mag-7 and Mag-8 product technologies to extend to additional high capacity applications where the mass and/or temperature of the payload are both higher than for conventional semi applications. Specific products include applications for display and illumination markets.

In our Polycold division we see the demand for thin film display coatings is driving more business for large coatings systems that are required to keep up with the high demand for tablet computer. The markets beyond front-end semi are increasingly important to Brooks and we expect to aggressively pursue these opportunities as we move forward. With that I'd like to turn the call back to Martin to begin the Q&A session.

Thank you, Steve. Operator, we are now in the position to take calls.

(Operator Instructions). Your first question comes from the line of Patrick Ho with Stifel Nicholas. Please proceed.

Thank you very much and congratulations and Bob, just want to wish you the best in your retirement. In terms of the LED market expansion, can you just discuss what the margin profile is and whether you're going to go through some of the learning curves before you get it to your corporate average, what's kind of like the time frame to get it to where you would like it to be in line with, again, your corporate average?

I think we actually feel in terms of the margin profile that we have established a business model that enables us to reflect pretty much the level of corporate outreach going out of the gate with the opportunities for expansion thereafter. If there is an investment at the front end, it's probably in the balance sheet side of things, rather than impacting the P&L. So at the moment, this opportunity is only accretive to our gross margin and operating margin profile going forward and it's not of weight in any fashion, Patrick.

That's great to hear. Secondly, in terms of the supply situation in your supply chain, we're still hearing at least across the board that there are constraints in pockets here and there. What are you seeing with your supply base and whether any of those constraints are being alleviated on a going forward basis?

I think that we have continued to see during the course of this quarter, constraints that have impacted our ability to be as efficient as we would like to be and maybe pretty close on delivery to customers in certain situations. And you work through those, I would say that some of those situations -- when you're knocking some down, we have had situations where others have arisen. So whilst I think there have been improvements, we would be cautious about whether other ones will arise, but we do see broadly an improving position, for instance, in the last month as compared to what we saw during the course of the third quarter.

Okay. And just as a follow-up to that, is any of that inventory increase kind of like a strategic decision on your end to ensure that you have some components, given that the overall demand environment seems to be pretty healthy? Are any of the inventory increases related to ensuring that you have the parts necessary, should demand continue to grow on your end?

There are some of those elements. But there's a larger element from the supply chain point of view, as you tend to get an imbalance when you have those suppliers that are working like clockwork and delivering and then you're in a hold position from the missing pieces that are not procuring or not being delivered to schedule. So it's more that element that's a cause of the inventory build.

Great. Thank you very much.

Your next question comes from the line of Ben Pang with Caris & Company. Please proceed.

Thanks for taking my questions. First, in terms of your comments for calendar 2011, what type of mix do you assume between semi and your non-semi business?

I think we see a continuation of that trend where semiconductor will have a pace of growth of our non-semiconductor exceeding the semiconductor. I don't know that we have a specific target for the whole of 2011 at this juncture. But you see modest improvements and you've seen how it could move just 4% in the course of this quarter.

Is it likely to be I guess your semi to be below 80%?

I believe our semi will definitely be below 80%. I wouldn't necessarily want to peg it where at a particular point below that, Ben.

Okay. And then in terms of your new opportunities, which part of the business has a higher roll in terms of your critical systems versus your system solution in the new businesses?

In the new businesses, the growth favors the system solutions by virtue of the growth in the next generation LED platforms which are complete platforms that are going to grow the quickest. So it will favor that group ahead of the critical solutions, although they will also have a nice growth from those initiatives as well.

So in that scenario, is there kind of a negative margin impact if the system solutions -- ?

As we said, all of the new opportunities represent opportunities that are at least as good as the corporate average, if not better. Therefore, they will boost the margin performance of both of those segments.

Okay. And my last question, you kind of mentioned I guess some conservatism about 2011. Can you share with us I guess what's the most negative thing that you're hearing out there from your customers or what do you see out there that makes you more cautious in 2011?

I think the caution will be just that the strength of demand that is coming through in the latter part of fiscal 2010, what does that do to customers, end customers pulling back some on capital expenditure plans in 2011, particularly if we have an adverse macroeconomic environment. So our comments should be taken in the context of that overall view. Our visibility's relatively limited in terms of specific order profiles, et cetera, and, thus, we are reading tea leaves much the same way you are, Ben. It's not that we have specific customer insight that give us a situation that's a road map that puts that caution to our comments.

Ben, I think that you could actually look at it that it is the uncertainty and lack of visibility we have that gives us caution and that we are certainly not blinded by the strong current activity, but it's the lack of visibility that just has us in a caution mode, prepared to move forward smartly or pull back, if necessary, in our semiconductor space. We're obviously a lot more optimistic about the non-semiconductor space.

Thank you very much and congratulations again, Bob, you did a great job and good luck in your retirement and good luck to Steve in the future.

Thank you.

Thanks.

Your next question comes from the line of Hari Chandra with Deutsche Bank. Please proceed.

Thank you. First question is for Bob regarding succession. What prompted the Company to look for someone outside of Brooks?

As you know, my original commitment to the Company when I was asked to come on-board was for a two-year period. That was -- would have ended a year ago. Since that time, the Board of Directors conducted a comprehensive review of internal candidates and a nationwide search encompassing external candidates, both from within the semiconductor space and outside of the semiconductor space and it was the conclusion of the Board and as a member of the Board and the CEO, mine as well, that Steve had a unique set of characteristics. His deep knowledge of the semiconductor space, but also his views and vision about opportunities beyond the semiconductor space.

And he emerged as clearly the strongest candidate for the situation that we had in Brooks and as I said and has been our long-standing position and Steve has commented, a position he shares, we'll build on our semiconductor space, but we're also aggressively pursuing adjacencies and work beyond the current space. Since Steve arrived, all of our work and Steve has worked intensely with members of the Board and myself and the team here, we have just been more and more certain that we, as I said in the press release yesterday, we have the right person at the right time to carry Brooks forward.

And if I might follow on my question for Steve. What will be your focus at the Company, growth or cost or is it both? Do you envision acquisitions, given that the Company has a $200 million shelf offering out there? And on the cost side, is there much to cut or is this as lean as the Company can get?

Yes, hi, Hari. You kind of touched on all the topics that are dear to the Company right now. We spent really the last four months going over that conversation internally. We're going to absolutely build on the core technology capabilities he we have as a Company. We have very strong customer connections and probably first and foremost, as our customers in semi branch out into other areas in other markets, we're there with them. We continue to follow them to support their next requirements for technology applications beyond semiconductor. We will absolutely leverage the core technical capabilities we have into other markets because of the status of the balance sheet, the cash position, fact that we have a shelf registration, it gives the Company opportunities to consider things that will more quickly grow market, grow market opportunity for us.

So we're thinking through those plans. Those are things that were under way long before I came to the Company, but it does give us opportunities that we didn't have even a couple of years ago and we're certainly not ready to comment on some of the specifics, but we do have opportunities that we will exploit as a Company, as we think through the specifics of the strategy over the next couple of months. From the cost standpoint, there are opportunities from a cost reduction standpoint. We'll continue to -- on the path of cost reduction and efficiency improvement as Martin and Bob have been describing to you over the quarters, that we will continue on those paths and take advantage of those opportunities, but the strategy we're putting together is really related to growth opportunities for the Company, the tactical actions that we're taking are dedicated to the improvement from a cost structure.

Appreciate that. Thank you.

(Operator Instructions). Your next question comes from the line of Srini with Barclays Capital. Please proceed.

Hi. This is Srini calling for C.J. Muse.

Hi.

Hi, Martin. My first question is to you, Martin. How is the target model for Brooks looking these days? That is, what kind of revenues could we expect? What kind of gross margins and operating margins, assuming that 2011 is a good year or a bad year? And where is the breakeven currently?

Okay. A number of questions. What is the target model? Well, I think the revenue potential for this business is clearly dependent upon market activities and where one might project in particular semiconductor, but also the other markets that we participate in, to the extent they're cyclical, where do they peak out? We can clearly see with the business that we have if there were favorable trailing winds, there's a good deal of runway above the current levels of revenues that we currently have. And that we probably have with this business today, revenue levels that will be nicely above the peak in the past.

In terms of the breakeven, I like to look at the adjusted EBITDA breakeven as the critical breakeven point as being the best proxy of cash breakeven. At our current mix of products and our current performance, that's round about $95 million, plus or minus, in the mid-90s. And that includes, as accounting within the fixed cost structure, a number of positions that are actually temporary or contracting positions, so we can add adjust that to the market conditions and requirements and have a degree of flexibility there.

In terms of the business model, where we've talked about what's the marginal drop-through, the contribution, I think the charts that we've included in the conference call tell it all. They basically show that with a heavy extended factory content, currently running about the order of 34%, we've averaged a variable contribution, a variable drop-through to the bottom line of about 36, 37%. And that's whilst that contribution, that percentage has been growing. So we believe that the model we set out before, which would be with a lower extended factory percentage and 40% drop-through still remains entirely intact.

Thank you very much. I just have one follow-up. Regarding 450-millimeter, how do you plan to do R&D on that? Would you be requesting some funds from your OEM customers or would it be completely self-financed?

We have over the last couple of years continued to support customer requirements for 450. We were very well positioned because existing products had been designed for that extension, with minimal incremental investment and so most of the prototype hardware that's out there today was extension of existing products, supplemented by customer funds.

Thank you very much and Bob, good luck on your retirement.

Thank you.

I would now like to turn the call back over to Mr. Martin Headley for concluding remarks.

And I'll turn it to Steve who has some concluding remarks.

Okay, thanks, Martin. Thank you, operator. With yesterday's press announcement on Bob's decision to retire, I'd like to take a moment to say a few words about Bob Lepofsky and his impact on Brooks during the last three years. I'm new to Chumsford, but not new to Brooks; it's a Company that I've known for many years. During the last four months here at Brooks, I've met with customers, investors, visited most of our facilities around the world and one thing I can say that's abundantly clear, Bob has grown a strong culture that emphasizes value to our customers and our shareholders.

It's because of Bob's vision, steady hand and exceptional leadership that we emerged strongly from the worst downturn in our industry in a generation. We are record profitability, a stronger market position than ever before, and a substantial and solid platform on which to continue to grow the Company. I know that I represent all Brooks employees when I express our deep and heartfelt gratitude for all that Bob has done for the Company. All of us thank you for your time today and we look forward to speaking with you at our earnings call following the fiscal fourth quarter. Thank you.

Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.