Coherent Corp (COHR) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Coherent Q2 '09 earnings conference call hosted by Coherent Inc. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce Ms. Helene Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Thank you. Good afternoon. Welcome to our fiscal 2009 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 guidance 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 by the Company. The full text of today's prepared remarks which will include references to historical bookings and sales by markets will be made available through the Coherent investor relations website. A replay of the webcast will be made available for approximately 90 days following the call.

We reported second quarter revenues of $105.4 million and a GAAP loss $9.1 million $0.38 per share. On a pro forma basis second quarter net income was $0.3 million or $0.01 per share. The GAAP to pro forma pre tax reconciliation item includes $5 million restructuring costs resulting from our previously announced manufacturing and head count reduction efforts. $2.4 million stock-related compensation expenses and $0.4 million litigation charges resulting from the internal historical option investigation.

In addition the second quarter includes a noncash tax expense of $2.7 million resulting from a recent change in the California tax laws. Our adjusted EBITDA percentage for the second quarter was 7.4% compared to 14.3% in the second quarter of fiscal 2008. Cash flow from operations was almost $17 million compared to $15.6 million a year ago. Our head count at the end of the second quarter stood at 1,837 which reflects a reduction of 411 people or 18% when compared to the head count a year ago.

We are managing costs carefully and we continue to implement mandatory time off or shorter work weeks across our region to better align expenses with current customer demands. We are executing well against our footprint reduction programs at the end of March as originally planned. We completed the closure of the Auburn, California, facility and we are on track to close the Munich facility before the end of the third quarter.

Net sales for the second quarter declined 15.2% sequentially and 32.4% from the same quarter a year ago. From a market perspective the scientific business grew in the high single digits relative to the comparable period. While the other three markets experienced year over year sequential declines ranging from 9% to 56%. This quarter scientific market sales represented more than 30% of the total revenues compared to approximately 20% a year ago.

The microelectronics market in particular showed a steep drop in both systems and service revenues which is consistent across the industry due to the general overcapacity and low factory utilization. The OEM components and instrumentation market was mostly impacted by lower medical revenues as more customers postponed elective procedures. On a regional level we see no major shifts, on a trailing 12-month basis US represents 33% of the total volume, Asia 32%, Europe 28%, and other countries 7%.

The sales by significant market application are as follows. Scientific 32.9. Microelectronics 25.7. Material processing 15.9. OEM components and instrumentation 30.9. For a total of $105.4 million.

The second quarter gross profit was $39.6 million or 37.6% of sales. On a pro forma basis excluding $3.2 million of restructuring costs and $0.2 million stock compensation charges gross profit was 14.7%. The decrease in pro forma growth profit of 43.5% a year ago was primarily due to higher inventory provision charges, lower volumes and a mixed shift from our -- mixed shift from our highest gross margin application markets through the scientific markets. These negative factors were partially offset by the favorable impact of a weaker euro, the benefits of reduced workforce and certain other cost control measures. As a reference, the second quarter pro forma manufacturing labor and overhead spending increased $9 million or 23% when compared to the same quarter a year ago.

Peer's expenses of $45.5 million includes restructuring costs, stock compensation and litigation charges for a combined total of $4.5 million resulting in pro forma expenses of $41 million. This represents a reduction of approximately $11 million or 22% when compared to the spending of the second quarter last year. The expense reduction is mainly the result of previously announced head count reduction, lower head counts related spending, benefits from the Auburn and Munich closures and general cost containment measures combined with the favorable impact from a weaker euro.

Our cash and cash equivalent balance for the quarter was approximately $207 million representing a sequential increase of $7 million. Cash flow from operations for the quarter was approximately $70 million net of restructuring cash outflow of roughly $4 million. Accounts receivable DSO remains at 69 days when comparing to the previous quarter. Inventory levels are slightly down and include approximately $7.5 million buffer stocks to mitigate the risks associated with the multiple manufacturing consolidations and process. Capital spending for the quarter was $5.2 million or 5% of sales and a significant portion of this spending relates to the footprint consolidation projects.

We now focus on the guidance. Given the uncertainty in the market and lack of visibility we decided not to provide detailed guidance. But based on the most recent bookings we anticipate the revenues in the third quarter to be in the range of $90 million to $100 million. Our [period] expenses are under control but the lack of visibility in product and market mix makes it difficult to project gross margins. We do anticipate that pro forma margins will further decline as scientific represented 33% of our second quarter bookings. In addition during the next couple of quarters we will burn off inventory that was built in the past six to nine months at somewhat higher costs.

Stock compensation charges for the third quarter are projected to be in the range of $1.5 million of which $0.2 million relates to cost of sales. $0.2 million to R&D and $1.1 million SG&A. The third quarter restructuring costs are estimated to be in the range of $5 million of which $2.7 million will be recorded in cost of sales. $1.4 million in R&D and $0.9 million SG&A.

We continue to stay focused on executing against our commitments and footprint consolidation programs. As mentioned earlier we already reduced pro forma expenses including manufacturing, labor and overhead by $20 million when comparing to the second quarter a year ago. A sizeable portion of this will contribute to the leverage we are looking for when the markets recover. I will now turn over the call to John Ambroseo, our President and CEO.

Thanks, Helene. Good afternoon, everyone. Welcome to our second fiscal quarter conference call. It is clear that the business environment remains challenging. Various markets are experiencing sluggish end user demand, customers are closely managing cash and vendors like Coherent are striving to balance near term financials with long-term growth and market position. Despite these realities the dialogue with customers is changing. We are seeing reengagement on new applications and products. In the US there is optimism within the scientific and instrumentation markets that funding from the federal stimulus package will drive demand. Infrastructure investments and changes to government policies in China should improve domestic demand and exports. While these are positive signals we expect it will take a few quarters for the benefits to work their way into the order stream.

Orders in the first fiscal quarter totaled $93.8 million which were down 9.2% sequentially and 36.8% versus the prior year period. The book to bill ratio for the quarter was 0.89. Orders of $31.4 million in the scientific market were up 1.6% from the prior quarter and 5.2% versus the prior year period. The scientific market continues to perform well as basic R&D has largely been unaffected by the economic downturn. Researchers are optimistic about the near term future as benefits from the US and international stimulus packages are beginning to flow. For example, both the National Institutes of Health and the National Science Foundation here in the United States expect to see double digit gains in funding. This has led to a significant increase in grant applications which should create new business opportunities as early as the quarter ending October 3, of 2009.

Our product portfolio remains well positioned with recently released products like Chameleon Vision and the Lever HE amplifier gaining solid traction among users. We plan to introduce several new products over the next few months that offer new and enhanced capabilities for researchers. These will include extensions of our UltraFast and OPS product lines.

Competitive behavior in the scientific market is largely unchanged. Customers continue to value performance and sustainability while some competitors seem determined to self-destruct on pricing. Based upon internal numbers we believe we have gained market share while improving our gross margins in this market. Orders of $21.3 million for instrumentation and OEM components were down 22.4% from the prior quarter and 52.7% versus the prior year period. There is continuing pressure in the medical OEM market due to a reduction in discretionary spending. We are seeing a general trend amongst integrators towards reducing safety stock to conserve cash. Based on internal projections we believe many customers are at or near the bottom of this curve. This should translate into replenishment orders in the June or more likely the September quarter.

Instrumentation orders have been holding up but they are now feeling the impact of decreased spending from clinical users. Our customers are moving quickly to reduce their inventory levels as they await the benefits of the US stimulus package. While the market works its way to eventual recovery we are focusing on optimizing our product portfolio. We have introduced a new version of our OPSL platform that produces red output and a new creation of high brightness, red, green, blue output. The light show industry has adopted this device which is part of our Taipan series. We expect light show bookings to increase upwards of 60% in fiscal 2009.

Bookings from microelectronics of $27.3 million decreased 14.5% sequentially and 44.5% versus the prior year period. Orders from Semicap applications weakened as fab utilization rates dropped. Even service orders are being squeezed as many fabs are cannibalizing spares from one line to keep others running. We believe that some customers have or are close to depleting safety stocks leading to limited spot orders. Advanced packaging customers are having experiences similar to those in Semicap. Although there was significant emphasis on next generation technologies. Customers are stressing needs to increase throughput which typically correlates with higher power lasers. As well as the ability to process new and thinner materials. Orders of flat panel display manufacturing doubled from the prior quarter due to bookings with three new LTPS and annealing systems. All three will be used in LTD production from mobile touch screen displays for smart phones. This is the one segment of the FPD market forecasted to grow in 2009.

Bookings for solar cell on manufacturing were sequentially lower in Q2 following an all-time high in the first quarter. The credit crunch has slowed solar expansion but our year to date bookings are still 16% higher than the same period in fiscal 2008. While credit worries could lead to a choppy market for several quarters we are finding that crystal and silicon manufacturers are focusing on conversion efficiency rather than capacity expansions. This should be a good opportunity for us since lasers have proven useful in increasing efficiency.

Material processing orders of $13.8 million increased 6.2% sequentially and decreased 43.7% versus the prior year period. The sequential improvement was predominantly due to a one-time multiunit upgrade of a customer's installed base. The materials processing market has largely been dependent on European and Chinese markets over the past few years. While economic conditions in Europe show little sign of recovery customers in China are reengaging in the sales process. The discussions cover a wide range of applications through low power marking to high power cutting. The renewed confidence apparently stems from the Chinese economic stimulus package.

While the debate will rage as to when and how the materials processing market will recover, we believe the long-term key is improving the dollars per watt ratio across all wavelengths. We plan to introduce new products as well as describe emerging technologies at Lasers 2009 in Munich that emphasize the cost of ownership equation. In addition to Laser 2009 in Munich Coherent will also participate in a conference on lasers and electro-optics or CLEO in Baltimore during the week of June the 1st. Several new solutions will be on display at both shows. Over the next few weeks Helene and I will be participating in several investor events including the KeyBanc conference in Boston on June 2, the UBS conference in New York on June 9, and a banking conference affiliated with the world of photonics in Munich on June 16. Our presentation materials will be available next week under the investor tab on Coherent's website. I'll now turn the call back for the question-and-answer

Sure. (Operator Instructions) Your first question comes from the line of Ajit Pai with Thomas Weisel Partners. Please proceed.

Good afternoon.

Good afternoon.

A couple of quick questions. I think the first one is about your SG&A expenses. While you have been talking about some pretty good cost cutting across the board why have your SG&A expenses on a sequential basis gone up as materially as they have?

Ajit, this is Helene. You may recall that in the first quarter we did highlight that because of certain accounting for deferred compensation plans we have the offset into OIE. You will notice that our OIE was high as well. So if you adjust it there was about $6.5 million that you really should add to SG&A and then deduct from the OIE. So you need to adjust your pro forma SG&A which was $21.4 million, I believe. You add back $6.5 million and then compare it to the Q2 numbers.

When you're looking at the Q2 number everything that you have called out, like all the one times that you've called out, are included in that to the $24.5 million $14.5 million are sort of the clean pro forma numbers? There's nothing out there that was one time in nature?

In Q2 the $14.5 million R&D and the $24.5 million are pro forma numbers.

Okay, got it. And then when you're looking at the impact of some of the cost cutting both on the COGS side as well as -- and not including the sort of higher costs inventory that you are saying might take some time to be worked off, is the full impact of the cost cutting that you are taking at the beginning of the quarter, is it fully reflected or will the June quarter show better sort of -- lower cost structure?

I think what we said is that we would continue to drive shorter work weeks and monitor our costs to kind of adjust a little bit for the recent demands. However, the majority of our head count reductions that we did in September, November and some in February the majority of that have been recycled. The last cost cutting there is probably a one-month difference that will be incremental benefits.

Got it. And when you look at the June quarter would it be fair to assume that since your revenue levels are down I'm just trying to get an idea of how much is variable expense costs and how much is more fixed? Would it be fair to assume that your gross margins and as well as your expenses should be down materially just given that you're guiding down materially on the revenue side?

I think we already have taken head count down 411 people when you compare to a year ago. So if your question are we going to reduce head counts further at this point in time--.

No, the hard numbers. Actually, the expense number -- if you had $105.4 million in revenues in this quarter. You're guiding to 90 million to $100 million for the June quarter. So your gross margins, et cetera, I'm trying to get an idea of how much is fixed and how much is variable? Is the fixed component maybe get a little bit more modest benefit, but should the gross margins decline for the next June quarter at the low end of the revenue and at the high end of the revenue estimate and also on the expense side in your sales and marketing? There's variable and there's fixed related to head count as well as commissions. Could you give us some indication as to if you're lower on the revenue side for the June quarter would be expensed, the hard expense line, would that go down proportionate to sales for modeling purposes?

From a period expense point of view the only change we see versus the second quarter is somewhat the incremental amount of the benefit that we haven't seen yet in the second quarter from the head count reductions and we will see some benefit rolling through from increments benefits from the Auburn closure because we closed that office at the end of the quarter. There are some fixed costs that will come out of the period expenses.

From a gross margin point of view, as I indicated it is very hard to give you a sense of the margin depending on the mix. There is significant change in mix even within the markets, the products within the markets. So it is very hard to tell you but I did indicate that it will be lower than the second quarter. The pro forma gross margins will be lower than the second quarter due to the mix, product mix, and expense of inventory.

Got it. And then the last question just looking at the quality of your backlog you are down to $93.8 million in backlog which is the same levels as early in I think 2002. So the backlog, do you expect that to decline further? What is the mix of that -- of the quality of that backlog. Were there a significant amount of cancellations during the March quarter?

Ajit, I think you mixed up the bookings and the backlog. The bookings was the $93.8 million number. The backlog was--.

I'm sorry, you're right. The bookings rate.

Yes, 146. And we typically do a good scrub of our backlogs on a monthly basis and so at this point in time we feel very comfortable with our backlog because we scrub it very, very good. I'll let John comment on your second portion of the question.

If you would repeat the second part of the question.

Which is just looking at the number of cancellations and whether you're seeing some qualitative input on cancellations that you're seeing?

So in past quarters if we have had a meaningful cancellation we have called that out. I don't believe that there was anything substantial in the quarter perhaps a couple, $3 million in the most recent quarter. Anything beyond that or anything substantial we would have called out. As Helene mentioned we are staying very close to customers right now. We are trying to track to the best of our ability what their inventory levels are as well as their demand profile. Not only to manage our factory loading here but also to make sure that we understand fully the strength of that backlog.

Got it. And the $145.9 million that you had at the end of last year. When is that shippable? Is it a six-month rule that you use? What is the rule?

It is 12 months. It has to have a customer-generated PO and a customer-generated call-off date.

Got it. Thank you.

(Operator Instructions) And your next question comes from the line of Jiwon Lee with Sidoti & Company. Please proceed.

Thanks. Good afternoon.

Hi.

I just wanted to kind of get back to your sales guidance for the June quarter a little bit. How are the orders trending so far? Did I hear you correctly, the scientific orders are hanging in but the rest of the markets are down and if so which market are you seeing particular weakness right now?

The comments that I made about -- around orders reflected the dynamics in the March quarter. None of those comments were tied to what we have seen from the beginning of April until now. As an overarching theme as I mentioned the dialogue is improving. It hasn't yet translated into any significant change in the order stream but it is the first step in a recovery.

Okay. Well, that's somewhat helpful. John, a little while ago along with this restructuring initiative you have also studied this outsourcing initiative. Where we are in terms of that initiative, how much of the production is now done elsewhere with a contractor? If you can help out a little bit on that?

So we have moved the bulk of what we used to do in Auburn has been moved to a contract manufacturer. That was virtually all of our optics for laser production. We have also started to selectively move certain laser assemblies all the way through a full laser build to a contract manufacturer. Jiwon, I don't have a good number to give you in terms of what the percentage is. I will look that up and will make that generally available at a future point. But if you look at some of these projects. I mean, with the Auburn project, as an example, that involved moving I think close to 2000 parts. So it is a pretty significant undertaking that was completed on time and without any hiccups in terms of the supply chain.

In terms of your residual structuring was the (inaudible) outside of Finland is there anything left?

There is some small expense associated with the consolidation of our St. Louis facility which is where we do direct diode systems and that will be coming to Santa Clara as previously announced but that is a relatively small move and then there is some nominal costs associated with the exit of the facility that we have in San Jose and that's also being brought into the Santa Clara headquarters.

Knowing all of your demand dynamics now, you're highlighting pretty cautious sort of order uptick a few quarters out and you have previously put out these EBITDA margin exiting fiscal 2011. Knowing of your demand dynamics now and understanding the new cost structure is there sort of a new EBITDA or the margin goal that we should be aware of?

We are in the process I think as many companies are in starting our 2009 annual planning process and that typically takes us through the -- I'm sorry, 2010 annual planning process and that will take us through a part of the summer. So I would venture to guess that probably not in the July call but more likely the end of your call that we would be able to provide some visibility if the market has stabilized or starting to improve because as we have mentioned a number of times in the past the ultimate EBITDA numbers are going to be tied to mix and revenue. The components that we wanted to put in place in order to support that EBITDA expansion are done or are being done so it is really a mix in revenue piece and we are not through the 2010 planning process yet.

That's fair. Lastly for Helene. The other income you have shown lower sales. Is that because of the employee compensation plan and move to the stock?

Some of the compensation planning was involved in that one as well and we did have some exchange losses this quarter.

That's helpful. Thank you.

Your next question comes from the line of Mark Douglass with Longbow Research.

Good afternoon, everyone. Sounds to me like you've got California taxes there. Just horrendous. So speaking of taxes, then. Let's assume you're around with the sales guidance you gave, maybe around break even again on a pro forma basis, maybe a little better. What expectations do you have for taxes? Do you think you'll see more expenses again or possibly even credits?

The tax rate is going to be a function of, of course, in which geographies we make a loss or have a profit. For this purpose, Mark, I would just use the rates that we have always communicated our pro forma rates ranging from 30% to 33%. The one adjustment we talked about, the $2.7 million is really a one-time non-cash adjustment. So it is not something that we would do again next quarter. I am not aware of any law changes as of today that would drive a change.

That's not going to permanently -- you don't expect it to permanently change your tax rate, then?

This is a valuation allowance against deferred tax assets.

Okay. You mentioned that there's a large uptick in proposals being generated by the increased R&D budgets, specifically NSF and NIH. Any idea -- it might be hard to gauge -- any idea how much of these would be directly applicable to lasers or are we looking at this just based on historical numbers you can assume there is going to be some sort of windfall that you might expect should a lot of these similar proposals get funded?

I can't tell you that I have looked at the budgets or the budget proposals in gory detail. One would have to assume if there is an increase in funding and it is applied uniformly across the market that is going to lead to an uptick in funding for photonics in general. There aren't specific programs that we can point to and say this one is earmarked specifically for photonic and it's valued at X.

You don't know of any substantial types of research that's going to drive much higher sales for laser X versus laser Y or?

The numbers I have heard are somewhere in I think the 20 or 25% increase in NIH funding and I believe it is almost double that for NSF.

Okay. And then right now you said the materials processing. Was it the sales or the orders? Was it sales in the quarter that had the multiunit upgrade?

That was orders.

That was orders?

Yes.

Okay. We would expect those to fall over across a few quarters or the next quarter?

Ship, you mean?

Yes.

I would think that a chunk of them will ship in the current quarter then probably the remainder in the September quarter but again we will have to research that in detail to make sure that that's an accurate statement.

Okay. Fair enough. I think that's it for me. Thank you.

And at this time we have no further questions in the queue. So I will now turn the call back over to John Ambroseo for any additional or closing remarks.

We would like to thank all of you for participating in today's call and if you find yourselves in Baltimore for CLEO or in Munich for the Laser show please feel free to stop by. We would be happy to give you a tour of the booth. As well as we look forward to seeing a number of you at these upcoming conferences. Thanks very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.