Coherent Corp (COHR) 2008 Q2 法說會逐字稿

Welcome to the Coherent second quarter 2008 financial earnings result conference call hosted by Coherent. At this time, all participants are in listen only mode. At the conclusion of our prepared remarks we will conduct a question and answer session. (OPERATOR INSTRUCTIONS). As a reminder today's call is being recorded. Now I'd like to introduce your host for today's call, the Chief Financial Officer of Coherent, Helene Simonet. Please go ahead.

Thank you, Audrey. Good afternoon, and welcome to our fiscal 2008 second quarter conference call. On today's call, I will provide financial information and John Ambroseo our President and CEO will provide a business overview. As a reminder, any guidance and any statements in today's conference call pertaining to future plans, events or performance are forward-looking statements that involve risks and uncertainties and actual results may differ significantly. We encourage you to refer to the risk disclosures described in the company's reports on forms 10-K, 10-Q and 8-K as applicable and as filed from time to time with the company. These forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act. The full text of today's prepared remarks, which will include references to historical bookings and sales by market will be made available through the Coherent investor relations website. The replay of the webcast will be made available for approximately 90 days following the call.

We reported second quarter revenues of $155.9 million, and net income of $6.1 million, or $0.19 per diluted share. Excluding the charges related to the stock option restatement and litigation, the quarterly stock compensation expense, and a onetime tax charge in connection with dividends from one of our European subsidiaries, the pro forma net income for the second closure of fiscal 2008 was $12.8 million, or $0.40 per diluted share compared to a pro forma net income of $0.30 per diluted share last quarter, and a pro forma net income of $0.39 per diluted share for the second quarter of fiscal 2007. During the quarter, we completed the Dutch tender offer and repurchased almost 8 million shares, or 25% of our outstanding shares. The repurchase has no impact on the second quarter earnings, since the tender closed late in the quarter. Our adjusted EBITDA percentage for the second quarter was 14.3%, a nice expansion from the first quarter's 12.4%.

In support of our long term adjusted EBITDA goal of 19% to 20% we just launched one of our key footprint projects. In addition to outsourcing the Auburn optics manufacturing as announced last week, we are also outsourcing or transferring to other Coherent locations, all other activities currently performed in our Auburn, California, facility. We plan on the exiting the Auburn facility no later than the end of the second quarter of fiscal 2009. The expected annual run rate savings of the entire project is in the range of $3.5 million to $4.5 million, of which approximately 40% will be deflected in gross profits, 20% as a reduction of R&D expense and the remaining 40%will result in the reduction of SG&A expenses. Implementation costs are estimated to be about $6 million, and will be incurred over the next three to four quarters. Upon completion of the project, we anticipate a head count reduction of about 130. We expect the Auburn exit program to contribute approximately 0.5% through our long term adjusted EBITDA goal.

Net sales for the second quarter grew 8.1% sequentially and increased 2.5% from the same quarter a year ago. From a market perspective, we saw the strongest performance in microelectronics, resulting in a 9% growth compared to Q2 2007, and 20% growth compared to last quarter which is mainly the result of increased revenue in the Advanced packaging and solar cell manufacturing application. OEM components and instrumentation grew approximately 1% year over year, and 5% sequentially. In both cases, the growth is primarily the result of increased opthalmic reflective laser business, partially offset by the divestiture of the imaging optic business when comparing to the second quarter of fiscal 2007. The scientific market grew 2.5% sequentially, and 1% compared to last year, mainly due to strong sales for pumping applications across our international region. The decrease in materials processing market of 4.6% sequentially, and 7.2% compared to last year is primarily the result of lower shipments for marketing and applications.

The company's sales by significant application for the second quarter as follows. Scientific, 30.9. Microelectronic, 58.6, material processing, 23.4. OEM components and instrumentation, 43.0, for a total of $165.9 million. The second quarter gross profits were $67.1million, or 43% of sales. On a pro-forma basis, excluding stock compensation costs, gross profit of 43.5% compares to a first quarter gross profit of 42.2%. The sequential increase of 1.3 points is the primarily the result of favorable product and market mix, lower warranty charges, and better leverage from increased sales volume. Unlike the previous quarter, the recent strengthening of the yen against the dollar mitigates the negative exposure from a strong euro.

When comparing to the second quarter a year ago, pro forma gross profit increased from 42.8% to 43.5%. This increase was predominantly related to favorable product and market mix, partially offset by the negative impact of a strong euro and slightly higher inventory provisions. Stock compensation charges for the quarter, including portion charged to cost of sales amounted to $4.9 million. This is significantly higher than our expected run rate as the company agreed to reimburse our employees for the tax penalties associated with the exercise of certain discounted options. There will be an additional longtime stock compensation charge of approximately $1.8 million during the third quarter of fiscal 2008, a we are in the process of curing certain outstanding discounted options to comply with regulations. Thereafter, a more normalized stock compensation run rate including the portion charged to cost of sales is likely to be in the range of $2.5 million per quarter.

Total operating expenses for the quarter, excluding intangible amortization of $2.2 million, and the charges related to the historical financial restatement and mitigation of $2.5 million, and excluding stock compensation charges of $4.2 million, was $62.3 million, or 32.1% of sales. This compares to 34.7% in the first quarter of fiscal 2008, and 32.1% in the second quarter of fiscal 2007. Our cash and cash equivalents balance for the quarter was $184.6 million, representing a sequential increase of approximately $24 million, after taking into account the cash outflow associated with the repurchase of 8 million shares for approximately $228 million. Cash flow from operations was $15.2 million, inventory days stood at 67 days, down from 70 days at the end of the first quarter of fiscal 2007. Accounts receivable vehicles stood at 65 days compared to 61 days last quarter, primarily due to solid revenue growth and the regional mix shifts toward Asia. Capital spending for the quarter was $4.5 million, or 2.9% of sales bringing the year to date capitol spending to approximately $9.2 million, or 3.1% of sales.

The guidance for the third quarter is as follows. We project our third quarter sales to be in the range of 156 to $159 million. We expect pro forma gross profits to be in the range of 43 to 44%. GAAP gross profit will include stock compensation charges and restructuring costs of approximately $0.6 million, and $1 million respectively. Pro-forma R&D spending is projected to be approximately 12% of sales. In addition, third quarter stock compensation charge is estimated to be $0.8 million. Pro-forma SG&A expenses are estimated to be in a range of 21 to 21.5% of sales. GAAP

SG&A expenses will include stock compensation charges and Auburn restructuring costs of approximately $2.7 million, and $0.4 million respectively. Intangible amortization costs are planned to remain about $2.2 million. Other income is projected to be 1% of sales, reflecting reduced interest income following the repurchase of shares. We estimate the reduction in interest income, coupled with lower diluted shares outstanding, will result in approximately 90% pro forma earnings per share accretion. Pro forma annual tax rate is projected to be approximately 35%. Capitol spending for the full fiscal 2008 is anticipated to be approximately 4% of sales. I will now turn over the call over to John Ambroseo, our President and CEO.

Thanks, Helene, good afternoon everyone, and welcome to our second fiscal quarter conference call. As you already heard, the second quarter was chock full of action for us. We were very happy to deliver on our commitment of a substantial share repurchase. The successful completion of the Dutch tender, resulting in approximately a 25% reduction in the number of outstanding shares was terrific. We remain committed to our long-term EBITDA goal and have taken several steps to achieve it. Our decision to outsource optics manufacturing and exit the Auburn facility creates meaningful cost savings. We have also released our second new product platform in the last six months. We continue to believe that the share count reduction coupled with top line growth, and achievement of our EBITDA goal will provide a compelling return for our shareholders.

Orders in the second fiscal quarter totaled $148.6 million, which were down 4.1% from the prior quarter, and 2.2% versus the prior year period. The book to bill for the quarter was 0.95. Orders of $29.9 million in the scientific market decreased 3.3% sequentially and increased 33.2% versus the prior year period. While the market share and order stream for Chameleon remains solid, the second fiscal quarter was marked by a surge in demand for high performance amplifiers. This was due in part to product enhancements, which address customer needs as well as the release of funding. During last quarter's conference call, I discussed the release of the Mantis, an ultrafast laser that incorporates a high power OPS pump laser. I am pleased to report the order rate is meeting our expectations and product has begun to ship.

Orders of $45 million for instrumentation and OEM components were down 5.4% from the prior quarter and 21.9% versus the record set in the prior year period. As a reminder, the prior year period included $4.7 million of orders of the thermal imaging optics, a market which we have exited and several annual orders for bioinstrumentation and medical OEM accounts. Orders for instrumentation applications were up slightly on a sequential basis, but off from last year's record-setting quarter. Orders for medical OEMs were lower following an all-time high set in the first fiscal quarter. Nonetheless, market remains very active. We receive very good bookings from our practice surgery customers due in part to ongoing product portfolio consolidation.

In the photo coagulation market, we have secured another major account for the OPSL 577 laser. We look forward to having all these accounts receive FDA approval. I have also previously reported on our renewed interest in CO2 based skin resurfacing. This has resulted in a meaningful unit volume for our gem series laser whose overall performance characteristics provide the best patient s experience. Bookings from Microelectronics of $49.2 million decreased 8.7% sequentially and increased 16.8% versus the prior year period. Orders from semicap applications remains soft due to the downturn in the industry. While we continue to focus on market share gains, we do not expect any appreciable impact before the end of the calendar year. Demand for lasers used in drilling was very good, from cellphones manufacturing and IC substrate packaging. We are delighted with this outcome but we realize these markets are strongly influenced by consumer spending. As such, we are closely tracking macroeconomic indicators.

Bookings from laser direct imaging slowed, which is reflective of the current market conditions. The long-term key to this market is the dollar per watt and we are aggressively pursuing new product architectures to support this goal. For the past few quarters, flat panel display manufacturers have made processing improvements to increase yields. With capacity absorption maximized, we have received orders from three additional laser systems. Each will be used for SLS processing of TFT and AM OLED panels and be equipped with an LSX 315-C excimer light source and our line-beam delivery optics.

The solar market has been getting plenty of press, especially with oil prices at record highs. We have seen a steady increase in solar applications with the business doubling each of the last two fiscal years. Solar bookings were up strongly in Q2, and the year-to-date total has already matched the whole of fiscal 2007. Given the industry trend, this growth is likely to be sustained throughout this fiscal year and beyond. It is also noteworthy that we are providing ultraviolet, visible and infrared light sources to this market for a variety of applications in thin film and crystalline silicon processing.

During our first quarter conference call, I made some comments about silicon simulation including the pending release of a new fiber laser platform. At this week's Japan Laser Expo in Yokohama, we formally launched the Talisker laser system. It is the first in a series of lasers based on an ultrafast fiber oscillator that has been designed and built to Telecordia standards. In the Talisker, the ultra fast oscillator is mated with a high-power amplifier to produce energetic, short pulses of light resulting in high peak power output. Customer tests have demonstrated several important results including a negligible heat affected zones or haze and the ability to eliminate certain post machine processes such as the post scribe plasma processing in the case of silicon scribing. Customer interest in Talisker is strong for a wide variety of Microelectronics applications, including solar cell manufacturing and precision glass scribing for the latest handheld devices. By applying subsystems from other products within our portfolio, the Talisker is the only laser of its type available in infrared, visible and ultraviolet configurations. Customers have already begun to place orders and revenue shipments will commence in Q3.

Materials processing orders of $24.5 million increased 8.9% sequentially and decrease 17.4% versus the all-time high established in the prior year period. The materials processing market is in a very dynamic state. Consumer sentiment in the U.S. has impacted imports, causing orders for new production equipment to weaken. We have seen evidence of this in China. On the flip side, demand from the Chinese, domestic and European markets has remained strong. Partially offsetting the softness in the U.S. Given the regional interdependencies and unclear outlook, we expect customers to adopt a more conservative posture especially on inventory. Marketing grading applications continue to be our prime targets, specialty marking of glass, diamonds and ID cards performed exceptionally well.

On the product front, our recently released E seres CO2 platform is performing well. The integrated design and cost of ownership model have resonated with the customer base. We are receiving first time and repeat orders for this product. We are also seeing increasing demand for our Matrix Series laser platform. We are pleased with our second quarter results, especially amid the current macroeconomic turbulence and maintain a cautiously optimistic outlook given the diversity of our end markets and the strength of our backlog. We will continue to move with all deliberate speed on our product roadmaps and structural changes to achieve our long-term EBITDA target.

I would also like to extend an invitation to visit us at the Conference On Lasers and Electro Optics, or CLEO to be held from May 6 to the 8th of the San Jose Convention center. We are hosting an investor tour on Wednesday, May 7th at 10 am. We will meet at Coherent's boost number 1740. To register for the tour, please visit the investor relations tab at www.coherent.com. I will now turn the call back over to Audrey to begin the Q&A session.

(OPERATOR INSTRUCTIONS). We will take our first question from John Harmon.

Good afternoon.

Hi.

Congratulations eating your guidance. A couple quick questions. Helene, what number do you compete for your pro forma EBITDA margin in in in the quarter?

Repeat, John?

What number did you get for your pro forma EBITDA margin?

For the second quarter? 14.3%.

Thank you. To make sure my model is in line, could you give me a rough figure for share count in Q3?

In Q3, what you could do is take diluted shares outstanding for the second quarter, and certainly subtract the almost 8 million, and depending on what the stock price will do, you have to add a little bit to it. It comes out to about $24.2 million roughly.

Okay, thank you. Helene, in your remarks, you mentioned a non-GAAP EBITDA target margin range of 19% to 20%.

I misspoke. It should have been 19% to 23%.

Thank you.

No change.

One question and I would get back in the queue. The expense for your stock option investigation, are you done with that or will that still linger around for a while?

The portion related to the historical financial restatement is completed.

Okay, thank you very much.

Next, we will hear from Mark Miller.

Let me add my congratulations on a good result.

If we may, Helene Simonet was trying to complete her answer to your last question. She should get that out before you go into yours.

I was saying of a portion related to the restatement is completed. The portion of litigation has not been closed yet.

Thanks, Mark, go ahead.

The solar business is starting to bloom. What are we talking about, a magnitude of orders in terms of the quarter? 5 million? 10 million? That range?

We don't release the detailed numbers on that, Mark I am sorry.

Okay. Can you give us a little more in terms of the fiber business? Are you looking at a specific niche for the business? Some people are in a very high power, other people are more in the scribing area, are you going after the fine prescription scribing applications?

The product we announced this weekend in Japan, the Talisker, is our first formal fiber laser offering. It is -- We would qualify it or categorize it as a specialty laser because it does produce a short pulse output and the intention there is to be applicable to micro machine applications where the short pulse characteristics really provide a much finer quality process. We are looking right now, at some of these specialty applications but certainly we wouldn't restrict ourselves to that in the future.

Thank you.

(OPERATOR INSTRUCTIONS). Next we will hear from Jiwon Lee of Sidoti & Company. (OPERATOR INSTRUCTIONS). We will hear from Sid Parakh.

Can you hear me?

Yes, we can.

One thing I wanted to get back to as we talked about the Excel acquisition and you were appealing in the German FTC. Based on what I heard last, you were expecting to hear back sometime in late 2007. Is there any news on that front?

We are continuing with the appeal process and there is nothing new to report at this moment.

Could you give us any sense of time line as to when you might hear something?

As I think I mentioned during a previous call, Sid, we are in the process of discussing the standing of the case. The FCO has taken one position, we have taken another and the court is adjudicating on that right now. We expect to hear something from them, I think in probably a month's time or so as to whether or not the appeal will have standing.

Okay. Helene, can you -- Maybe I missed the early part of the call but could you talk about how much the Auburn reorganization is going to help EBITDA numbers?

Yes. It will add approximately 0.5% to our EBITDA.

Okay. Assuming where we are today, 14.3, and you add the 0.5 that gets you closer to 15, there are still four to eight percentage points to go. Is it more a similar kind of restructuring? Can you give us any color?

As we previously mentioned, there are a number of factors that will contribute to the EBITDA material cost reduction. Higher product reliability, resulting in lower warranty rates. We are trying to push our industry leading standards even higher. There will be some restructuring as the case in Auburn will contribute to that. And the platform designs that we have been highlighting also contribute to it. There is not one of thing that drives it, there are several factors going to drive it.

As far as macro economically, what do you see in the market base? This quarter turned out pretty good based on your guidance. Do you see a resurgence in orders for the next couple quarters or is it pretty much the weak condition you are operating in today?

We don't give guidance on bookings and I am not going to start doing that here. I think it is fair to say given the diverse geography that we participate in, we are somewhat unusual for many of the other folks in the industry in that we have roughly a third of our business in each of the major geographic territories. We are seeing mixed things. In the U.S. we're seeing some concerns from customers. That has been widely reported. Both on the capital equipment side as well as the consumer side, we are seeing strength in Europe and we are seeing good performance in domestic markets in Asia.

Is the third affair an estimate of this quarter's revenues for geography?

This split has been fairly consistent over the past few quarters. I can't tell you if it is going to change dramatically in any of the territories, but that would be a good rule of thumb, just for estimates.

That is all I had, thanks.

Next question will come from Jiwon Lee of Sidoti & Company.

Can you hear me now?

Are we doing a Verizon commercial?

Good. The Auburn campus restructuring project, ultimately there will be up to $4.5 million of benefits. Any sense as to how that could be split over time?

Over time? The guidance that Helene gave was that would be the run rate when the project is completed and we have targeted being done with the project no later than the end of March. I will turn it over to Helene to comment.

You can assume that will start kicking in in second half of fiscal 2009. The second half.

That is fair enough. Getting back to this litigation expenses, any sense as to the progress from that end? Or what we should be expecting on that front in terms of expenses going forward?

I hope you can understand this is an active process right now and we can't comment on it.

Fair enough. That's all for me.

Thank you.

We will hear from John Harmon.

Hi again. Just a couple questions about Auburn, first of all. The piece of business that you're outsourcing, is that your last remaining operations in Auburn? I know you sold the building. Will you be completely out when this is done?

That is what we have announced. It's optics manufacturing and several other functions, those functions will either move to other Coherent locations or they will be themselves outsourced.

And Helene, are you going to take a restructuring charge in one piece up front or during the time you're getting out of the business?

It will be expensed during the transition time, so we announced that we had about $6 million expenses. I believe if you look at the Q3 guidance, we have about $1.4 million of that during the third quarter and I will tell you later on in which quarters we have those expenses.

Thank you. I don't know if you have it handy but one figure I don't believe you gave was year over year revenue growth excluding divested businesses, UK business.

It is 5.5 if you exclude divestiture of CIOL.

Thank you very much.

That does conclude the question and answer session. I will turn the conference back over to John Ambroseo.

I would like to thank everyone for their participation. If you have an opportunity to visit us at the CLIO show we would be happy to host you at the tour. Thank you very much and we will speak to you in three months.

That completes the conference call, thank you for your participation, have a wonderful day.