Coherent Corp (COHR) 2002 Q3 法說會逐字稿

Good day everyone and welcome to the Coherent third-quarter earnings results conference call. Today’s conference is being recorded. For opening remarks and introductions, I’d like to turn call over to the Chief Financial Officer of Coherent, Helene Simonet. Please go ahead.

Thank you Dave. Good afternoon and welcome to our third-quarter conference call. As is our custom, first I will speak to the results of the recently completed quarter and then Bernard will speak to operational activities and milestones achieved during the quarter as well as the summary on the state of the Company.

Remember when we speak of results of operations, we are speaking specifically about results from continuing operations. We will also continue to provide forward-looking financial guidance for at least the current quarter. The current market’s uncertainties make any guidance beyond three-months quite difficult, and please remember that the guidance provided is only an estimate and is subject to other risks and uncertainties detailed in our Safe Harbor statement, which I will now read.

The statements in this conference call that relate to future plans, events, or performance, including rates of growth and spending are forward-looking statements and involve risks and uncertainties, including risks associated with uncertainties related to currency adjustments, contract cancellations, manufacturing risks, competitive factors, uncertainties pertaining to customer orders, demand for products and services, and other risks identified in the Company’s SEC filings. Actual results, events, and performance may differ materially. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak as of the date hereof. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Listeners are encouraged to refer to the risk disclosures described in the Company’s reports on Forms 10-K, 10-Q, and 8-K as applicable.

I’m pleased to report that the results for the third quarter fell within the range of guidance provided during our last conference call. Sales were slightly below consensus street estimates but well within our guidance range. Earnings per share of 10 cents, excluding impairment charges from the gain from discontinuing operations was in line with consensus street estimates of 8 cents. I could have said that we exceeded street estimates, however, the third quarter results reflect the benefit of an unusually low tax rate.

It is important to note that we continue to be on track of our goals, we remain profitable from operations for fiscal 2002. This of course is excluding impairment charges.

As announced earlier, the third-quarter results, include impairment charges against our Lumenis stock holdings and against our Passive telcom fixed assets. I will get back to this later on.

The incoming order rates from the quarter again showed improvements. Overall, our book-to-bill was 1.16 to 1, the first time since Q1 ’01 as the corporate book-to-bill exceeded a ratio of 1.

Within our Electro-Optics segment it was 1.04 to 1, and within Lambda segment is 1.63 to 1, and that is a significant improvement from the immediately preceding quarters’ 0.87 to 1 ratio.

Our balance sheet continues to be and emphasis for management.

The current quarter’s balance sheet remains very strong with over $235 million in cash, equating to about $8 per share, and a book value of approximately $19 per share. Although no one could have predicted the extreme drop in the value of the stock market, and more specifically, our Lumenis ownership position, this was one of the risks we understood over a year ago when completing the sale of our former medical segment.

Although the dropping of value in our ownership position in Lumenis appears large, the quarter-to-quarter impact on coherent book value per share is about $1.3 per share.

As to our cash reserves, it remains our intent to invest in opportunities to grow our Company, thereby enhancing shareholder value. We are evaluating a number of opportunities at this time and we will only consider a dilutive transaction if the long-term benefits are obvious and the dilution is short-term in nature.

New orders of $111.6 million were our highest in five quarters, with the first positive book-to-bill ratio in six quarters. While customers continue to be cautious, our order rate would suggest a modest improvement in the underlying economy.

Our Electro-Optics segment bookings of $79 million increased 7 percent sequentially, with particular strength in the lasers for use in semiconductors and materials [indiscernible].

Our Lambda Physik subsidiary posted a 73 percent sequential increase in bookings, quarterly bookings of $32.6 million compared to Q2’s $18.9 million order rate. Later in our report Bernard will provide an update on what is going on at Lambda and why we’re confident in the future. As a reminder, Lambda Physik will present their specific results in detail early tomorrow morning and Bernard will supply you with the appropriate conference call numbers.

Total company sales in Q3 ’02 were $95.9 million, down 2.8 percent sequentially from Q2 ’02, and down 20.7 percent from the same quarter a year ago.

By business segments sales were as follows: Electro-Optics $75.9 million, a decrease of 1.3 percent from Q2 ’02 and a decrease of 19.3 percent from Q3 ’01. Lambda Physik, $20 million, a decrease of $1.7 million, or eight percent from Q2 ’02 and a decrease of $6.8 million, or 25.3 percent from Q3 ’01.

I will now give you the Electro-Optics sales by significant market application for both the third quarter, as well as fiscal year-to-date. Semiconductor equipment 12.5 for the quarter; year-to-date, 33.2. Telecommunications, 0.5 for the quarter; 2.0 year-to-date. Material Processing, 10.2 and 27.1 year-to-date. Scientific and Instrumentation, 47.7 and year-to-date 147.1. Printing and Reprographics, 5.1 for the quarter and 17.4 year-to-date. Total Electro-Optics 75.9, year-to-date 226.8.

For most of last year the Telecom business has been virtually nonexistent and it is clear that no short or mid-term recovery can be expected. As a result, executive management revised its strategy and decided to see most of its activities targeted at the Passive Telecom markets. This decision triggered a comprehensive review of the Passive telephone assets, causing us to take an active tax impairment charge of $6.6 million, or 23 cents per share.

Since most of these assets were not yet placed in service, the future quarterly [indiscernible] benefits are small. Later in the conference call Bernard will provide an update to our thoughts and strategies in addressing the overall telecom markets.

Gross profit of $38.5 million fell 0.9 percent below the low rank of guidance, which is primarily the result of lower volume and unfavorable product mix at Lambda Physik. The break-outing of gross margin by segment is as follows: 42.1 percent for Electro-Optics, an improvement of 0.8 percent from Q2; 33.2 percent for Lambda Physik, a drop of 5 percent from Q2. Total operating expenses of $37.4 million including intangible amortization, but excluding impairment charges, are slightly below Q2 ’02 expenses, reflecting our ongoing efforts to monitor and control costs.

R&D spending for the quarter was 13.1 percent of sales, which fall within our guidance of 13 to 15 percent of sales. As we have said in previous conference call, we are committed to maintaining our market leadership position in those market applications we serve, and despite the weaker economy it is our intention to continue investing in those areas we see as most promising for the creation of long-term shareholder value.

SG&A for the quarter, again including amortization expense, but excluding impairment charges, expressed as a percent of sales were 25.9 percent, which is at the mid-point of the guidance range we provided.

Moving on to the balance sheet. As mentioned before, our balance sheet remains very strong. However, during the quarter we were required to report several significant impairment charges against our balance sheet. The [indiscernible] we discussed earlier, related to Passive Telecom assets. Secondly we reported an impairment charge against our holdings in Lumenis shares. In April I mentioned this possibility, but none of saw that the shares would drop another 70 percent since then. As we determined that out investment in Lumenis was other than temporarily impaired, we wrote-down the investment to the fair value of the stock, as of 29 June. At $3.71 per share, our investment classified as marketable equity securities on the balance sheet, is now valued at $20.2 million. The income statement impact of this impairment charge was an after-tax loss of $79.2 million or $2.74 per share.

Coherent’s cash, plus short-term investment position at quarter-end, was $235.2 million, a $2.4 million increase during the third quarter. During the same period, total long-term and short-term borrowings decreased by $8.8 million. Again it’s worth noting that we met our stated goal of maintaining it at the minimum, a cash neutral position from operations.

At the end of Q3 ’02, accounts receivable day-sales outstanding decreased to 68 days, slightly less than the level of Q2 ’02. Electro-Optics receivable day-sales outstanding improved to 62 days from 66 the prior quarter. Lambda’s receivable days outstanding was 92. Inventory day outstanding stood at 97 days at quarter-end, versus 91 days at the end of Q2 ’02. Electro-Optics inventory day-sales outstanding remained flat at 72 days during the quarter, while Lambda’s inventory days increased from 157 to 186. The quarter-to-quarter increase at Lambda was partly attributable to the acquisition of one of its suppliers, [Optimesh] and was partly the result of their lower sales orders.

Capital spending for the quarter was $10.5 million, or 10.9 percent of sales, very much in line with our guidance of 12 to 12 percent of sales. With new capital commitments in the year running at about 6 percent of sales, year-to-date, we expect that capital spending over the next year will run closer to 6 to 8 percent of sales rather than this year’s 10 to 12 percent.

Let me now give you some guidance for the fourth quarter. The improvement in quarterly orders gave us some confidence of the guidance we provided were achievable. While current [indiscernible] helps us provide guidance for the current quarter, market conditions still make it very difficult to forecast, with any confidence or certainly beyond that. The messages we have received from the market remain mixed. While our current order numbers suggest a modest recovery, market is improving at a much slower rate than anyone forecast it or had hoped. Taking all this into account we anticipate that Q4 ’02 revenues will 1 to 5 percent higher than Q3 ’02.

We again expect gross profit rates in the 41 to 43 percent range. As we stated in several previous conference calls, currency fluctuations can of course impact our margins, operating expenses and other income expense. R&D should continue to run in the 12 to 14 percent of revenue range, and SG&A, including goodwill amortization will likely fall in the 26, 27 percent of revenue range.

Also we anticipate other income and expense as a favorable amount between zero and 2 percent of sales.

Finally the fourth quarter tax rate is expected be consistent with the actual third quarter tax rate of approximately 26 percent.

To summarize, we’re still in a very uncertain market, with the [indiscernible] of book-to-bill rates that would limit its visibility. We think we’re doing everything we can do to sustain profitability. Our new product pipeline is in good shape and we believe always have opportunities to continue improving our already strong financial condition.

I am now pleased to turn you over to Bernard Couillaud, our CEO.

00:14: 29 Bernard Couillaud: Good afternoon and thank you for joining us for the Coherent Q3 conference call. In addition to Helene, present around the microphones are Bob Quillinan, our former CFO and current Executive VP on mergers and acquisition, John Ambroseo our COO and CEO Elect, and Vittorio Fossati, President of our Active Telecom Group.

This is the last time that I will have to report directly on the company status. Starting 1st October, John Ambroseo will succeed me in the CEO position, where I will assume the position Chairman of the Board for Coherent. This step will be the last in a successful planning process started close to two years ago now. You will recall that last April, as part of this process, Bob Quillinan our CFO for almost 20 years, stepped down from his position to pick up our merger and acquisition executive VP. Helene, who just presented you with our financials, succeeded Bob in the CFO position.

I would like to report that the transfer of my responsibilities and functions is now near completion. It has been made very easy and even enjoyable by the strong team building achieved between the members of former management and the new leaders over the past six months. [indiscernible], we want to note, when we started this succession planning process, we certainly did not expect that 2002 would be such a challenging environment. While our expectations were to hand over the company leadership to John and Helene during a solid recovery phase to the economy, the unexpected evidence of the last few months has derailed the strategy.

The new team will not have the luxury of as stable and as positive an environment as I would have liked it, I am, however, quite confident in John’s and Helene’s ability to respond to the [indiscernible] situation, to see and develop huge opportunities, to increase Coherent’s shareholder’s value during those trying times.

Let me now go to the performance and highlights for Q3 FY ‘02. Let me start with the painful facts. During Q3 Coherent had to [indiscernible] impairment charges into the [indiscernible]. Helene has already mentioned and explained the Lumenis related charge of $79.2 million after tax, and I will not expand more on this issue. I will address the $6.6 million after-tax impairment charge when I comment on the status and strategy of our Telecom initiative.

Now, on a more positive note, with sales of $95.9 million in income from continuing operations before internal charges and gains, resulting from these continued operations, of 10 cents per share, our performance is well within opening guidance for the quarter. With bookings of $111.6 million which spans for the third quarter in a row, a quarter-to-quarter booking increase, where order received in Q3 represents 21 percent increase over orders received in the immediate Q2 quarter. The book-to-bill ratio of Q3 stands at 1.16, crossing the border line for the first time since Q1 ’01.

During Q3 [Enabling] technology orders have remained strong and will experience a modest increase of order for capacity related equipment. Overall, Q3 has exhibited the same slow growth already experience during Q2, thus validating the beginning of what we believe is a modest recovery. The recent events in the [indiscernible] markets have [indiscernible] led to a different environment which calls for caution. Some of the early expectations of [indiscernible] can change our growth rate for the second half of [indiscernible] ’02, have started over the last few weeks.

Moving on the side of caution, our customers are re-setting their position to anticipate a slow growth of their business over the next 3 to 6 months. Well [indiscernible] to all our market segments, still represent overall a good description of the current business environment. We currently expect that Q4 and Q1, we go from the modest recovery already started in Q2 and Q3.

Let me now move to more specific issues, by sharing with you the highlights of our Electro-Optics segment. The Electro-Optics segments correspond to all Coherent [indiscernible] minus Lambda Physik. Let me start with some specific information for the market, starting with telecommunications. I will not surprise anyone by saying that the telecom markets are showing very low signs of life, if any. We do not expect any sizeable recovery of this market before at least the very end of [indiscernible] ’03.

Recognizing the dry spell in front of us, we have gone through a thorough analysis of our ongoing efforts in both Passive and Active activities. As mentioned during our Q2 conference call, we have consolidated our Passive activities within our four optics group. This realization has subsequently been followed by a shutdown of our activities related to [indiscernible]. This is an area where we were developing our own machinery with a goal of substantially increasing a yield in this industry. The [indiscernible] market [indiscernible] today, even under the assumption of a strong come-back, the capacity is enormous, and the expected future price point will not allow us to sustain a profitable business in the future.

The $6.6 million internal charge, after tax, taken in Q3 is directly related to our abandonment of the [indiscernible] System market. This level may seem low compared to the charge taken by some our competitors. There are two reasons for this. First we were in the development phase of our machinery, and as such we have not yet fully operated the production lines. Second, because of our [indiscernible] high-yield process, we needed substantially less machines than our competitors.

On the Active sides of Telecom, we believe that Coherent has a role to play in the telephone Active markets, which includes transmitters and receivers. During Q3 we have maintained a high level of activity in the development of our OPS technology in several directions, devoting a substantial part of our resources to the development of [tunable] transmitters.

During Q3 the [indiscernible] market remained solid, displaying its usual cyclical behavior with a small leveling off explained in large part by the beginning of a new [indiscernible] in Japan. The [indiscernible] is still hampered by the capex cut-backs in the pharmaceutical and biotech industries. Our new [transmission] was all solid-state, sapphire to laser, is a key element in [indiscernible] the growth of our business in this [indiscernible] market segment.

The importance of this new innovative technology was revealed during the last ISAC show - I-S-A-C stands for International Society for Analytical [Cytology]. This meeting was held in Santiago on 4 May, and at the meeting four major audience displayed a sapphire laser instrument. Four of the five new products that went to the ISAC show.

The [indiscernible] market continues showing cautious signs of recovery in Q3. The [indiscernible] market, dormant for several quarters, showed dramatic improvement in Q3, leading to optimism that this market is recovering.

[indiscernible] processing market is generally up with new machine tools openly investing in laser-based technology. The graphic art market is still flat with the advertisement art reaching a low point.

Consistent with our strategy to maintain a high level of R&D throughput during difficult time, several new products have been introduced during Q3. This is not an exhaustive list of those products, but the more new products introduced, the [indiscernible] a solid-state [TW] high power, 532 nm laser pumped by a single diode module. With it’s low cost of ownership, the V6 is aimed at a wide range of applications, including semiconductor inspection, [indiscernible] and laser pumping.

The Chameleon, introduced at the end of May at the [indiscernible] conference, Chameleon is the first hands-free single bus, ultra-fast laser turning over more than 210 nm. With greater than average power, Chameleon provides [tunable] sensor second pulses. Chameleon was primarily developed to meet the needs of [indiscernible] which is one of the fastest growing applications of ultra-fast lasers.

During Q3 we also expanded our family of [CO2] laser. The [indiscernible] Gem-Q 400, and Gem-Q 3000, developed with our [indiscernible] technology, are the world first commercial available CO2 Q switch lasers combining high peak power pulses and a high rep-rate with a wavelength well-matched to [indiscernible] materials, the Q-switch CO2 lasers enable increased throughput and yield in [indiscernible] applications, including PCB drilling and flex circuit machining.

Finally, demonstrating our leadership in the all solid-state generation of UV light, we received during Q3 a multi-year contract for [indiscernible]. The multi-year agreement is target towards the development of laser systems at wavelengths below 200 nanometers, systems that will be required to [indiscernible] advanced photographs for the sub-70 nonometers nodes of the semiconductor [indiscernible].

Let me move now to our second reporting segment, Lambda Physik. As you all know now, Lambda Physik is a public company, listed on the Neue Markt in Frankfurt Germany. More information on the Q3 performance of Lambda Physik can be obtained through the replay of the Lambda Physik conference call, available until Sunday 28 July. The number to call for the replay is 49 699 205 3444. With sales at $20 million for Q3 the revenues were 8 percent lower than previous quarter at Lambda Physik, resulting in a below [indiscernible] performance. Lambda Physik [indiscernible] results in [indiscernible] costs were unfortunately not able to compensate for the [indiscernible] shift of several industrial systems from Q3 to Q4.

On the bright side, with a sequential increase in booking of 73 percent, Lambda Physik reports $32.6 million of bookings, and the first backlog increase since Q4 2001. With a book-to-bill ration of 1.3 in Q3, Lambda Physik sits now on roughly $45 million of [backup]. With respect to the different markets, the semiconductor industry, inkjet printer and medical applications remain slow, while the industrial business continues to develop positively, mainly driven by use of [Exemer] lasers in the flat panel display industry.

On to highlights for the quarter. Lambda Physik acquired the majority stake in [Optomesh] GmbH. Optomesh is a contract manufacturing company producing laser discharge tubes for the Lambda Physik Exemer lasers. By taking over the majority in the company, Lambda Physiks gained exclusive access to an important supplier and expect to achieve further cost reductions.

During Q3 the [indiscernible] bookings almost doubled from aspect of Q2, with a record order of $4 million of orders for 157 nanometer [indiscernible] lasers.

Lambda Physik has been extremely active in the [indiscernible] area in Q3, primarily with a continuation of very high priority R&D activities and they are continuously lowering the cost of ownership of laser sources. As well as with the development of new performance lasers.

the A4 003, [indiscernible] lasers, introduced during Q3, is [indiscernible] bandwidth lasers for 193 nanometer [indiscernible]. With 21 [indiscernible] output a 4 Kw rep-rate, and a bandwidth of less than 0.3 tickometer, the A4 003 is directly aimed at the [indiscernible] 193 nanometer systems.

The fourth Lambda Physik International 157 EUV Symposium was held in Fort Lauderdale with more than more than one half of international [indiscernible] including customers, end customers and members of Research Institute. 157 nanometers and EUV were both confirmed as milestones on the [indiscernible] during this [indiscernible].

I will end now my presentation with a forward-looking statement. I still believe that we have started to engage in some modest recovery. The single [indiscernible]. I am however, more than ever concerned with the current situation in the financial market. If we do not see a regain of confidence from the investors, the businesses will suffer and the recovery will significantly be delayed. It is today more difficult than ever to predict what will happen in following months. From Coherent’s point of view the cautious approach to business displayed by our customers leads us to expect that Q4 will be only slightly better than Q3.

Today, and I say today, I do not see any signs of strong recovery during Q1 fiscal ’03, that is the quarter ending December ’02. And as such we [indiscernible] a lean business with the same goals for profitability, cash flow positive and R&D investment established during the previous quarter.

While the timing of the recovery is difficult to predict, it will come. Coherent is ready, and impatient to respond to the charge. I’m now turning the meeting to the Q&A session.

Thank you Mr. Couillaud. Today’s questions and answer session will be conducted electronically. If you would like to ask a question you may signal us by pressing the star key followed by the digit one on your touchtone telephone. We’ll pause just a moment to assemble our roster.

And we’ll take our first question from Max Scheutz with Credit Suisse First Boston, please go ahead.

Two questions, one on the Lambda side, and the TFT driven business there, it sounds like capital spending in the TFT monitor market. It’s still looking fairly strong, but it sounds like you guys are also cautious across all of your in-markets, so I wondered if you could comment on the sustainability of that recovery, or if you expected that piece of Lambda’s business to hold up? And then also you mentioned sort of flattish outlook for the printing and reprographics business, which would of course be a big improvement over the sequential declines we’ve seen there for the last two quarters. I was wondering if it felt like we had bottomed in that business, and if you felt like we could hold these level?

Starting with the TFT business, the TFT business was forecasted and is still forecasted I think this year to be about 20 percent below what it was last year, and in the year 2003, our understanding is this business could grow as much as maybe 25 to 30 percent. So that’s where we stand. We’re not going to see this year the same order that we saw last year, certainly at Lambda Physik, but the level of orders is still very consistent and we are certainly the major player in this business, thus we’re benefiting basically of 95 percent market share.

The second question was related to the graphic art display business. We’ve [indiscernible] don’t know what -- because you know again the market is so volatile. What we could say certainly is that the reason for us that we see some flattening maybe of this market is that we start to shift new products to new customers, and that should help us in basically stopping the trend down. But there’s a keen element in all those markets of graphic art is the advertisement arts, and the advertisement arts, to my knowledge, are not decreasing but are still on the very low end of the scale. And thus until advertisement arts are coming back I don’t see the graphic art market will take off.

And again to ask a question, that’s star one on your touchtone telephone. We will now go to Mark Miller with Hoefer & Arnet, please go ahead.

A question then, one around Semicon, the last couple of days I’ve talked to lot of components supplies to the major OEMs in the semiconductor business, and I’m getting reports from some of these people that they’re under a lot of pricing pressure from the major Semi OEM houses. And I’m just wondering if you’re seeing any of that?

Yes, there’s always price pressure obviously from all parts of the business, but I can’t say that we’re are under a very strong pressure for [indiscernible]. That’s a generic answer obviously, because you would have to look at it by each and every piece of our business, but in general I would ay we are not under very strong price pressure.

[indiscernible] reported the other day rather large order for it’s new multi-laser and an increased market share, are you -- I mean are you doing anything about this in your strategy? I know we’ve talked about [indiscernible] before, but this was the first tangible -- it was a fairly large order about $130 million.

And this order is to be achievable in the years to come, it’s not achievable orders in the near future, at least to my recollection of the [indiscernible] presentation. Let’s just say that without going into the strategies of Lambda Physik or the future strategies of Lambda Physik, I would say that obviously Lambda Physik is well aware of the [mobile] situation and is currently working on answers to that.

: Just a reminder, to ask a question, that’s star one on your touchtone telephone. We will go next to Byron Walker with UBS Warburg, please go ahead.

A couple of questions. The low tax rate, can you just help me understand that, is that a function of some of the charges?

It’s primarily driven by the Lumenis impairment charge. We had an impairment charge of $104 million, and that’s treated as a capital loss. And we taxed the sector to loss to the extent we had capital gains, which resulted in a 25 percent tax rate for that major portion, bringing the total tax rate down. That’s the majority of it.

That’s the majority of it, so there’s no net loss carried forward?

No that’s the majority.

And then the inventories at Lambda seem pretty high, are there any concerns over that at this point?

In fact we are not very high, what we have seen is -- you have to have been high at Lambda in let’s say in the last 2 or 3 quarters, first we have seen a trend and there are a lot of pressures to increase our inventory. What happens is that with the acquisition of Optomesh the trend down is hidden because in acquiring Optomesh they acquired about EUR3 million of inventory. In addition to this, if you look at the inventory, not in terms of dollars but in terms of day outstanding, you have to be careful because with the low revenues this quarter that has a tendency to increase the numbers. So I think that the real way to look at the inventories at Lambda Physiks is dollars. And from the dollar standpoint there’s a decrease if we don’t there’s a [indiscernible] decrease, which matches our expectations, if we do not take into account the acquisition of the [indiscernible] Optomesh.

And I don’t know if you mentioned the time of the Lambda call, you gave us the number?

I gave you the numbers because you cannot access the call, the direct call, but you can access the replay Byron. I’m doing that every quarter.

Oh I’m sorry, but the time of that call?

[indiscernible] German time, but I don’t have that with me because usually we cannot access directly to their call, but we can access it to their replay.

And it appears there are no further questions, therefore I’d like to turn the call back over to Mr. Couillaud for any closing or additional comments.

Well I was expecting that we would have more questions on [indiscernible] but I would assume that everybody is busy with the current situation in the marketplace, so I think everybody and the next time John Ambroseo will present the figures for the company and you will have a different accent, and he’s a person that will be maybe easier to understand. So thank everybody and talk to you next quarter.

And ladies and gentlemen this does conclude our conference today, we do thank you for your participation, you may disconnect at this time.