Amtech Systems (NASDAQ:ASYS) Q2 2020 Earnings Call

0:00 Welcome to the Amtech Systems Second Quarter 2020 Earnings Conference Call. Please note that this event is not being recorded. I would now like to turn the conference over to Erica Mannion of Sapphire Investor Relations. Thank you.

0:16 Good afternoon and thank you for joining us for Amtech Systems Second Quarter Fiscal Year 2020 Conference Call. With me on the call today are Michael Wang, Chief Executive Officer, and Lisa Gibbs, Chief Financial Officer. After Market Today, Antec released its financial results for the second quarter of fiscal 2020. The press release can be found on the company's website at antecsystems.com. During today's call, management will make forward-looking statements. All such forward-looking statements are based on information available as of this date, and the company assumes no obligation to update any forward-looking statements. The statements are not a guarantee of future performance and actual results could differ materially from current expectations. Among the important factors which could cause actual results to differ materially from those in the forward-looking statements are changes in technologies used by customers and competitors, change in volatility and the demand for products, the effect of changing worldwide political and economic conditions, including trade sanctions, the effect of overall market conditions, including the equity and credit markets and market acceptance risk, and capital allocation plans.

1:29 Other risk factors are detailed in the company's filings with the SEC, including our Form 10-K and Form 10-Q. I will now turn the call over to Michael Wang, Chief Executive Officer.

1:43 Thank you, Erica. Given these extraordinary times, I wanted to start out with an update on how the COVID-19 pandemic is impacting our business. I am thankful to report our employees remain healthy and safe, and we are grateful for their diligent efforts and those of our suppliers to help us maintain the high level of service our customers have come to expect from Amtech. While we have seen impacts to our manufacturing and supply chain, the magnitude has varied dependent on geography and the measures taken by local authorities. Within China, as we discussed in our last call, we experienced headwinds in early February due to a combination of both the extended Chinese New Year, longer subsequent ramp-up period.

2:34 By the end of the March quarter, however, we saw activity return to near normalized levels both at our own manufacturing location as well as those of our supply chain partners. Within the U.S., The impacts from the pandemic began in late March, primarily resulting from the shelter-in-place restrictions imposed in both Pennsylvania and Massachusetts, which affected our manufacturing operations. While we were able to service the majority of customer demand from these facilities in the March quarter, we are cautious of the potential risk that may arise in the June quarter. At this stage, we have furloughed a portion of our staff and are creating a return to work plan for the coming weeks, including social distancing, shift work assignments, and thorough cleaning of high traffic surfaces, to name a few. It is our expectation the actions we are taking, together with the easing of local restrictions in the coming months, will help us meet our guidance range in the third quarter. However, given the risks and uncertainty, we are monitoring the situation closely.

3:47 Shifting to end market demand, the magnitude and timing of the impact has similarly been correlated to the regions in which our customers are operating their facilities. In China, our customers have now had time to assess the impact of COVID-19 on their business and as a result are in a better position to move forward with capital projects. In the U.S. and Europe, Our customers' long-term capacity expansion goals remain in place. However, there is greater uncertainty on the near-term timing. With that said, order activity in this region has not stopped and, in fact, in some situations, like with our consumable products, we have seen a recent uptick in demand.

4:37 It is still early to predict what the full impact of the pandemic will be on our business at this stage. We expect demand for our products will move out from a timeline perspective versus experiencing wholesale cancellations. The power semiconductor and silicon carbide markets have experienced a high level of growth the past few years, and long-term demand drivers for related applications remain robust. Industry drivers, including mobile devices, automation and ILP in the industrial market, and autonomous vehicles in the automotive market and 5G in the telecom market remain compelling today as they did six months ago. In the meantime, as a business, we must continue to focus on things we can control. As an equipment company with a long history of servicing the semiconductor market, demand volatility is not new to us.

5:35 Our business today is more capable and resilient to navigate times of uncertainty like those we now find ourselves in. Each of our current product families is supported by an operating structure that has time and again proven its ability to drive profits in periods of robust demand and mitigate losses in cyclical downturns. Evidence of this can be seen in our second quarter results, where despite experiencing the softest top line results in recent memory, we were able to deliver gross margins of 37% with a nominal net loss. Part of this success comes from our unique position in the broader equipment market.

6:20 While our products together are levered to higher growth subsets of the broader semi-market, we are also diversified across the semiconductor manufacturing process with process steps that each have their own purchasing cycles. At the start of the manufacturing process, which typically begins at the substrate level, our market leading lapping and polishing products have developed a strong industry reputation for quality and are particularly well-suited for silicon carbide and other compound semiconductor substrates. Further along in the manufacturing process, our horizontal diffusion furnaces have been at the leading edge of innovation in the power semi-market. Most recently, the performance advantage of our clustered HDR diffusion furnace led to early adoption in the power semi-industry's 300-millimeter transition.

7:09 allowing us to both capture the majority of demand to date and become the tool of record in a number of Tier 1 manufacturers. Finally, in the packaging and assembly stage of the process, our convection reflow ovens are recognized as a leader in the industry, particularly in high-value applications where quality, performance, and repeatability are favored over price and enjoy a diversified customer base that touches all key geographies. As a result, While the majority of our product portfolio generally benefits from the same macro growth drivers within the Power 70 market, the timing of the cyclical peaks and troughs in demand for each individual product line tends to vary, helping to smooth out the overall volatility in our business.

7:56 Taken together as a company, we have well-recognized brands, great products, distinguished technologies, dedicated, talented employees, and best-in-class service capabilities to support our diverse global customer base of market leaders. To best leverage the solid foundation, we are also making the necessary investments to support our customers and capture the growth ahead. We remain committed to the initiatives we have discussed on prior calls, namely new product development to drive organic revenue growth and continuous operational improvement as we invest in capacity expansion, people, technologies and Management Systems. In addition, we continue to evaluate strategic acquisitions to expand our product and technology portfolio and build upon our strengths in areas that we believe will outgrow the overall semi-market.

8:51 While we cannot control what happens with near-term demand, we remain as excited as ever with the long-term opportunities ahead of us. With the actions we are taking, we strongly believe we can emerge from these uncertain times in a position to outgrow the market and increase operating leverage to drive higher profits and maximize shareholder value in the years ahead. And now I turn the call over to Lisa Gibbs to review our second quarter financial results. Lisa?

9:21 Thank you, Michael. Net revenues decreased 30% both sequentially and compared with the second quarter of fiscal 2019 to $14.5 million. Semiconductor revenue in fiscal Q2 2020 decreased due to COVID-19 impacts within China, where our Shanghai facility was affected by the extended Chinese New Year, the phased return to work process, and associated production ramp-up. Silicon carbide LED revenue decreased compared to the same prior year period, primarily due to delayed shipments at the end of the quarter resulting from COVID-19 statewide shutdown orders in Pennsylvania. At March 31, 2020, our total backlog was $19.6 million, an increase from a backlog of $13.4 million at December 31, 2019.

10:12 The increase is due primarily to the announced new order for our semi-compliant, fully automated, 300-millimeter clustered HTR diffusion furnace, and increases in orders for consumables in our silicon carbide LED segment. As a reminder, backlog includes customer orders that are expected to ship within the next 12 months. Gross margin decreased in the second quarter of fiscal 2020, both sequentially and compared to the prior year quarter, primarily due to the lower revenue levels in the quarter and a less favorable product mix. Selling General and Administrative Expense, or SG&A, in the second quarter of fiscal 2020 was $5.4 million compared to $5.9 million in the preceding quarter and $5.8 million in the second quarter of fiscal 2019.

11:02 Sequentially and compared to the prior year quarter, SG&A decreased due primarily to lower selling expenses on lower revenue and no longer having R2D's SG&A included in our results. The decrease in SG&A compared to the prior year quarter was partially offset by higher legal fees in the current fiscal quarter relating to the divestiture of TMPRS. Looking at income tax expense on a year-to-date basis, we had a provision for the six months ending March 31, 2020 for continued operations of $207,000 compared to $914,000 in the same period of fiscal 2019. The provision for Fiscal 2020 represents taxes primarily in our foreign jurisdictions. We were able to offset our U.S. federal income taxes due with the tax benefit receipt from our divestitures.

11:54 Loss from continued operations net of tax for the second quarter of Fiscal 2020 was $500,000 or 4 cents per share. This is compared to income of $1 million or 7 cents per share for the second quarter of Fiscal 2019 and loss of $1.3 million or 9 cents per share in the preceding quarter. We recognized a pre-tax loss from the sale of Tempris of approximately $10.9 million of which $7.2 million was the recognition of previously recorded accumulated foreign currency translation losses. We also recognized a significant tax benefit relating to this loss which can be carried over to future years. Unrestricted cash and cash equivalents at our continued operations at March 31, 2020 were $49.3 million, compared to $52.7 million at December 31, 2019.

12:50 As of March 31, 2020, approximately 14% of our unrestricted cash and cash equivalents at our continued operations was held outside the United States, mostly in China. Over the last couple of quarters, we have discussed our capital allocation plans to drive profitable growth. Year to date for fiscal 2020, we have invested approximately $1.5 million in R&D and approximately $350,000 in capital expenditures. In light of the COVID-19 challenges, we are scrutinizing our planned investments and may defer certain projects. However, as Michael indicated, we will continue to invest in our business to support and fuel our future growth. Additionally, some of our R&D spending will shift into fiscal 2021 due to supply chain disruptions related to COVID-19.

13:41 We anticipate our investments for the second half of 2020 to be approximately $3 million, with a similar weight towards R&D as we see in the first half of the year. We believe we have the balance sheet strength to navigate the current environment, support our business operations, and maintain the key investments that will support future growth. We will also continue to carefully manage our operating expenses. Lastly, we will continue to pursue strategic M&A opportunities at the right price to enhance our technologies, product portfolio, and capabilities to build upon our strengths in the high growth areas in semi and silicon carbide. Now turning to our outlook, as we have discussed, we do want to caution investors that we expect COVID-19 to have an impact on our third quarter results.

14:29 Our outlook reflects the anticipated impacts as we understand them today. However, given how fluid the situation is both for our own business as well as for that of our customers and supply chain, we would like to remind investors that actual results may differ materially in the weeks and months ahead. For the quarter ending June 30, 2020, our third fiscal quarter, revenues are expected to be in the range of $13 million to $60 million. for the quarter ending June 30, 2020 is expected to be in the mid to upper 30% range with operating margin negative, primarily due to one-time moving costs for PR Hoffman to relocate their new building and an increase in R&D related to new product development. The semiconductor equipment industry is cyclical and inherently impacted by changes in market demand. Additionally, operating results can be significantly impacted positively or negatively by the timing of orders, system shipments, and the financial results of semiconductor manufacturers.

15:29 A portion of Amtrak's results are denominated in RMBs, a Chinese currency. The outlook provided in this press release is based on an assumed exchange rate between the United States dollar and the RMB. Changes in the value of the RMB in relation to the United and Dave Saller could cause actual results to differ from expectations. Now let's turn the call over to the operator for questions. Operator? Thank you very much. Ladies and gentlemen, if you have a question, please press star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned to off to allow your signal to reach your equipment. Again, press star 1 to ask a question and we will pause for just a moment to allow everyone an opportunity to signal for questions.

16:24 Again, ladies and gentlemen, it's star one for questions. One moment, please. We'll go ahead with our first question from Jeff Osborne of Cohen and Koch.

16:35 Please go ahead. Good afternoon. I hope you guys are well. A couple questions on my end. In terms of the capacity expansion, Michael, I was wondering if you can talk about where you are with that.

16:51 Hi, Jeff, and thanks for your questions and your long-time support. So I'm happy to report that we have started or will start moving at the end of this week. So there has been a number of delays, almost like a Murphy's Law type project, mainly due to weather and the pandemic effects definitely hit the subcontractors pretty hard. But however, I can thankfully report with a big sigh of relief that the building is completed and the move will start commencing at the end of this week.

17:30 That's good to hear. Is there a way you can frame some of the benefits there besides the obvious additional space? Is there more automation or anything that has a margin impact or quantify the throughput per year in terms of the number of machines? that you can build relative to the eventual demand of silicon carbide as that grows over the next few years?

17:52 Sure. First of all, it definitely impacts capacity. We were capacity constrained at our old and current location, especially during 2017, 2018 when the market grew greatly. In addition to the capacity and others. The move in this larger facility will also help optimize our manufacturing flow in terms of the consumables and also machines. Especially in terms of machines, we can now approximately almost triple our manufacturing capacity.

18:42 However, we will need to staff up our folks at the band Picks Up.

18:51 Got it. And then can you remind us, you know, within the LED silicon carbide, you know, segment, what the mix is of consumables?

19:01 Consumables, it's a range. I would say between 60% or 70% of our revenues are consumable, basically. Got it.

19:15 And then maybe for Lisa, if I'm reading it right, although I don't remember last quarter, if it was this quarter or last, but on the cash flow statement, it looks like you bought back some stock. If that was during the quarter, is that a sign that perhaps you're allocating capital to that relative to M&A or other uses?

19:34 Yeah, I mean we did have repurchases in the quarter of about $2 million and we still have about $2 million left in the plan. It's certainly part of our capital allocation strategy when it makes sense to do, but right now we've decided to defer those remaining repurchases until we see really what the environment shakes out with COVID and all of the other kind of unknown factors that we have right now. So it's part of capital allocation, but we're going to put it on hold for a little bit right now.

20:08 Got it. And then my last question for you, Lisa, is on the furloughs. Is there any cash charges that we need to be modeling for the upcoming quarter or any one-time OPEX impact as people start back up?

20:22 I think right now that remains to be seen. We don't have any expectations of that right now. We certainly hope that we can see these people return to work in a healthy way and have the demand and the orders to support bringing them back and getting them productive again.

20:43 Got it. Thank you so much. Okay. Thank you, Jeff. And we will now for more questions. If you have a question, please press star 1 on your telephone keypad. Again, star 1 for questions, please. And we will take our next question from Craig Irwin of Ross Capital Partners. Please go ahead.

21:07 Good evening. I hope you're all well, and thanks for taking my question. So, Michael... Hi, Lisa. Hi. Your backlog, $19.6 million, is actually still pretty healthy and it's hung in there nicely. Despite this environment we're working through right now, you have given guidance for a fairly soft quarter, but it seems like the customer activity is still maybe not as significantly impacted as the overall ability to execute right now. Can you maybe... talk a little bit about the tempo of customer interactions for new facilities that are being considered or adjustments or changes or expansions of existing facilities. And if the situation of lockdown continues for a little bit more, would you expect to maybe build backlog for execution once we get to the other side of this mountain we're crossing.

22:22 Hi, Craig. Thanks for joining us. In terms of what we see from our customers, we maintain healthy dialogue with our customers. Fortunately, a great number of our customers are considered in that essential critical infrastructure group that has effectively sustained our level of business during these uncertain times, certainly we're definitely satisfied with that. In terms of their capacity expansion, while obviously we never get the exact date, we tend to see and hear that there's going to be a timing shift of at least one to two quarters. So as far as Reno and what we've been told, the future plans have not been terminated. They're continuing on, but mainly because of the pandemic situation and uncertainty, they're taking it slower.

23:31 Taking it slower. So maybe you could respond to this. So one of the Tier 1 automotive OEMs, one of the largest automotive companies in the world, has pulled forward their plans in electric vehicles by a year. So over the next couple of years, they plan to be in full scale adoption of silicon carbide with multiple EVs on the road versus hybrids on the road today. That seems to maybe be in contrast to what you're sharing right now. The other silicon carbide producers that we follow pretty closely, they're all proceeding with plans for you know, FABs when they get to 8-inch, and maybe they'll build out 6-inch depending on how long 8-inch takes, but they're set up with third-party service providers, outsource, et cetera.

24:32 Would you actually, would you expect maybe to pull forward of some of these large programs to be something you would have visibility on? or we're more likely to get sort of just-in-time-like orders, you know, six months or three months prior to the execution on the CapEx.

24:54 So you have to remember, Craig, that our focus is broad-based, not just silicon carbide. We are a power-extended company. We do have silicon customers. And I think on the last call, you know, We also received a similar question on timing and at that time, before the pandemic, we were looking at towards the end of this calendar year. So there's a shift obviously out that's going to happen because of the pandemic. And without getting exact dates, just kind of a generalized response and visibility, Our prediction is, with the best information we have today, it's going to be one, two, three quarters, some could be three, right, beyond what we had originally anticipated.

25:54 However, our backlog is a key indicator of the robustness of our customers and our products. That speaks for itself. I don't know exact timing. No one really knows exact timing right now, right? We're all in the same storm, all of us, but we're all riding different boats, right? And things could change the next weeks, next months. However, that doesn't diminish our long-term expectations and also our customers' long-term expectations on future growth.

26:40 Okay, and then last question for me is gross margins. You guys are actually looking at maintaining pretty strong gross margins despite the negative leverage of declining revenue. Can you maybe talk us through the mix there and, you know, what's helping you on the margin side?

26:59 Sure, Craig. I mean, it's a combination of, you know, the product mix primarily. So, you know, we're seeing an uptick in consumables in our silicon carbide segment. Those are higher margins. As well as the type of products that ship out of our semi-segment, we're starting – we've just seen a little bit of a mix there for some of our higher margin products, which would certainly help.

27:25 And what are those in that segment?

27:29 are Puramax machines primarily in the semiconductor segment.

27:34 Excellent. Thanks for taking my question.

27:37 All right. Thank you. And we have no further questions at this time. I'd like to hand it back over to Ms. Lisa Gibbs for any additional or closing remarks.

27:48 Thank you for your time today and for your interest in Amtet. This concludes today's call. This concludes today's conference. We thank you for your participation. You may now disconnect your lines and have a wonderful day, everyone.