Amtech Systems, Inc. (ASYS) on Q2 2022 Results - Earnings Call Transcript
Erica Mannion : Good afternoon, and thank you for joining us for Amtech Systems' Fiscal Second Quarter 2022 Conference Call. With me on the call today are Michael Whang, Chief Executive Officer; Lisa Gibbs, Chief Financial Officer; and Paul Lancaster, Amtech's Vice President of Sales and Customer Service. After close of market today, Amtech released its financial results for the fiscal second quarter of 2022. The earnings release is posted on the company's website at www.amtechsystems.com in the investors section. Before we begin, I'd like to remind everyone that the safe harbor disclaimer in our public filings covers this call and our webcast. Some of the comments to be made during the call today will contain forward-looking statements and assumptions that are subject to risks and uncertainties, including, but not limited to, those contained in our SEC filings, all of which are posted within the Investors section of our corporate website. The company assumes no obligation to update any such forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of today. These 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 the technologies used by customers and competitors; change in volatility and demand for our 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 risks; ongoing logistics, supply chain and labor challenges; capital allocation plans; and the worldwide COVID-19 pandemic. Other risk factors are detailed in the company's SEC filings, including its Form 10-K and Forms 10-Q. I will now turn the call over to Mike Whang, Chief Executive Officer.
Mike Whang: Thank you, Erica, and everyone else for joining us today. I would like to start off by thanking our global team for their extraordinary efforts. We have been navigating through several challenges on an unparalleled scale of the past couple of years. No doubt, the experience has increased our resiliency and furthered our commitment to all of our stakeholders. I also want to let all of our Shanghai employees know that our thoughts are with them and their families. We will overcome this challenge together as we have in prior storms. Stay strong. Moving on, the robust demand for our products continued in the second quarter with bookings of $33.7 million, up 4% over a strong second quarter in 2021. Backlog of $53.6 million, up 102% year-over-year and a revenue of $28.6 million, up 44% year-over-year, representing yet another record over the past three years. As many of you are aware, at the end of the second quarter, the Chinese government mandated a COVID lockdown throughout the Shanghai area. While this lockdown had limited impact on our second quarter results, given the robust overall demand environment, our manufacturing operation in Shanghai has remained closed since the mandated closure, which in effect will have an impact on our third quarter results. Our Shanghai factory producing our advanced packaging and SMT products has represented approximately half our revenues, depending on product mix over the past four quarters. On May 5, with support from our key customers, we have received notice that we have been cleared by the Chinese government for reopening. There are several steps and submissions required before being permitted to reopen, and we will be limited in the number of workers allowed into our factory upon such reopening. As of today, we could have the factory reopen in the next few weeks, with the government allowing approximately 10% to 15% of our workforce to return. We continue to expect limited shipments out of Shanghai in fiscal Q3 due to staffing, shipping and supply chain limitations and the possibility of rolling closures if COVID numbers increase. Unfortunately, due to the extraordinary nature of the situation and the uncertainty of both the timing of a full reopening of our facility and the reopening of our customers and suppliers, disruptions are likely to last beyond the third quarter. Once our factory fully reopens and the local supply chain returns to normal, we will take advantage of our larger capacity to quickly ramp our production to serve the growing backlog. Despite this closure, demand in the market, including from our Chinese customers remain strong. Our customers understand that we are not alone in this situation and our larger strategic customers wrote letters of support our application to reopen. To date, no customers have canceled orders. In fact, we continue to receive sizable new orders even during the closure. Looking beyond these near-term uncertainties, we strongly believe our leadership in select growth markets with exposure to several secular tailwinds, creates significant opportunities to drive increased profitability and shareholder value as demand accelerates, and we realize the operating leverage built into our current business model. I will now turn the call over to Paul to go into more details on our end markets. Paul?
Paul Lancaster: Thank you, Michael. Expanding further on the demand environment, we continue to see strong interest in the market for capacity expansion initiatives, both for advanced packaging as well as SMT applications. In the second quarter, for example, we booked a $4.7 million order for advanced packaging products. As we mentioned last quarter and to place this level of demand in context, and prior buying cycles, our backlog for the semiconductor segment was typically fulfilled over one to two quarters. With the combination of higher demand and longer lead times from our suppliers, our current backlog is extending into the second fiscal quarter of 2023. Moving on to our material and substrates segment. In the second quarter, we saw bookings increase nearly 100% year-over-year and gross margin for this segment improved to 48%, driven by increasing strength in our consumable products as our customers continue to expand manufacturing capacity. Within the silicon carbide wafer market specifically, we have seen increases in consumable demand, which aligns with the broader market commentary related to rising device output. While still early in the long-awaited multiyear ramp of wafer manufacturing capacity, industry demand continues to strengthen, driven by increasing awareness of the benefits of silicon carbide over traditional silicon in applications, including electric vehicles, renewable energy, communication and high-voltage industrial applications. With the sheer magnitude of potential end market demand in the coming years, interest in the market continues to increase with several newer entrants looking to qualify manufacturing processes, including our specialized templates and products. Given our long history in the market and the significant cost of ownership benefits of our consumable products, we are seeing a broadening of discussions with players throughout the industry. Related to capital equipment, we continue to have good dialogue with both existing and potential new customers executing in initial phases of wafer capacity expansions. However, component shortages are extending lead times across the industry. For instance, equipment providers for complementary wafer manufacturing steps are currently quoting lead times of up to 18 months, which may limit the pace of new capacity expansion and timing of orders for our products. With that said, given our established market-leading position in consumables to new machine platforms to expand our existing machine product line and recently completed capacity expansion investments, we remain as excited as ever as the mid-to long-term opportunities in front of us come into focus. While we are encouraged by heightened demand across all our served markets, we remain cautious about the ongoing market uncertainties such as the Shanghai lockdown, which are difficult to predict. Beyond this specific headwind impacting the third quarter, industry-wide challenges such as supply chain constraints, inflation, increases in freight cost and availability, coupled with labor costs, continued to impact our business and require ongoing management and vigilance. I'll now turn the call over to Lisa.
Lisa Gibbs: Thank you, Paul. Net revenues increased 5% sequentially and 44% from the second quarter of fiscal 2021, with the sequential increase primarily attributable to strong shipments of our advanced packaging equipment and the increase from the prior year quarter due to higher shipments across all of our product lines. Gross margin increased sequentially and from the second quarter of fiscal 2021, primarily due to a more favorable product mix. Selling, general and administrative, SG&A, expenses decreased $0.2 million on a sequential basis primarily due to lower shipping and logistics costs, partially offset by increased employee-related expenses. SG&A increased $2.1 million compared to the prior year period due primarily to $0.6 million and higher commissions on higher sales, $0.6 million in employee-related expenses, $0.4 million in higher shipping expenses driven by higher revenues and increased shipping rates and $0.2 million and added SG&A from our acquisition of Intersurface Dynamics in March 2021. Operating income was $2.6 million compared to operating income of $1.2 million in the first quarter of fiscal 2022 and operating income of $0.2 million in the same prior year period. Income tax provision was $0.7 million for the three months ended March 31, 2022, compared to $0.2 million in the preceding quarter and $0.5 million in the same prior year period. Net income for the second quarter of fiscal 2022 was $2 million or $0.14 per share. This compares to net income of $1 million or $0.07 per share for the preceding quarter and net loss of $0.2 million or $0.02 per share for the second quarter of fiscal 2021. Unrestricted cash and cash equivalents at March 31, 2022, were $27.9 million compared to $32.2 million at December 31, 2021. Approximately 77% of our cash is held in the United States. We used $1.4 million during the quarter for the repurchase of 143,430 shares of our common stock. $3.6 million remains available for repurchases under our current authorization. Turning to the sale-leaseback agreement that we announced in 8-K on April 28, 2022, our subsidiary, BTU International, entered into a purchase and sale agreement with a third party for the sale of their headquarters in Billerica, Massachusetts. The sale price for the property is $21.5 million, $500,000 of which was paid as a non-refundable deposit with the remainder due at closing. We expect to close in June and closing is subject to the execution of a leaseback of the premises. Terms of the leaseback are expected to include a base rent of $1.5 million per year in an absolute triple net lease for a two-year term. The Billerica building did not suit our needs and was aged and energy inefficient. During the leaseback period, we will conduct a search and eventually relocate to another building that better suits our Billerica operations. Assuming a June closing, we expect to recognize a gain on this transaction in our fiscal third quarter ending June 30, 2022, of approximately $11 million to $12 million net of tax. We believe we will be able to utilize our net operating losses from a tax perspective, subject to an 80% federal limitation. Additionally, we expect a net cash inflow of approximately $15 million to $16 million after settling the outstanding mortgage and related sales expenses. With this transaction, we are very pleased to take advantage of a strong real estate market to unlock valuable capital in our business. As we have stated in the past, we have an objective to grow our revenue and expand our operations through strategic acquisitions while at the same time, pursuing organic growth. With the enhanced financial flexibility generated by this transaction, management and our Board of Directors will continue to evaluate various capital allocation priorities, including M&A, operational and other opportunities that will drive long-term value creation for our shareholders. Now turning to our outlook. Due to the uncertainty surrounding the local government's policies on COVID shutdowns, we are assuming a slow ramp to reopen our factory in Shanghai, which has represented approximately half our revenues, depending on product mix over the past four quarters. Therefore, this outlook assumes very few shipments out of Shanghai through June 30, 2022. For the quarter ending June 30, 2022, our fiscal third quarter, revenues are expected to be in the range of $14 million to $16 million. Gross margin for the quarter ending June 30, 2022, is expected to be in the upper 20% range with negative operating margin. This outlook excludes the gain that will be recognized from the sale leaseback transaction, which is expected to close in June. The company's outlook reflects the anticipated ongoing closure of our Shanghai factory and logistical impacts and the related delays for good ship to and from China. Actual results may differ materially in the weeks and months ahead. Additionally, the semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Operating results can be significantly impacted positively or negatively by the timing of orders, system shipments, increasing shipping and logistical costs and the financial results of semiconductor manufacturers. A portion of Amtech's results is denominated in RMBs, a Chinese currency. The outlook provided 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 States dollar could cause actual results to differ from expectations. Now let's turn the call over to the operator for questions. Operator?
Operator: Our first question today comes from Craig Irwin with ROTH Capital Partners.
Andrew Scutt: This is Andrew on for Craig. A bit of a two-parter here. You guys had really strong gross margins in the quarter ahead of where you guided to. So can you provide a little bit more color on the puts and takes in each line of business? And secondly, kind of talk to any initiatives you guys have taken to combat the supply chain issues, whether it be through sourcing or shipping out end products. That's all for me.
Operator: And again, your line is open. Please go ahead with your response.
Lisa Gibbs: Andrew from ROTH, I was in the middle of answering your question when I think we got cut off. Are you still there?
Andrew Scutt: I am.
Lisa Gibbs: So I believe your question was around the stronger gross margin performance. It really is attributable to product mix, and that is exactly the reason that we talk about quite a bit. We saw some very strong performance from our material and substrates segment in our consumables area, which drives a higher gross margin profile, so that was a big contributor.
Operator: And we'll go ahead and take our next question from Jeff Osborne with Cowen and Company.
Jeff Osborne: I think Andrew also had a second part to his question on the -- what you're doing around logistics and sourcing. So I don't know if you want to answer that first or -- I had several as well.
Lisa Gibbs: I think we missed that entire question. So if you recall it, I'd love for you to repeat it, Jeff.
Jeff Osborne: Yes. I think the ROTH analysts -- and he can hop back in the queue, but I think he was trying to understand what you're doing around logistics, both for inbound and outbound freight and handling the supply chain shortages.
Paul Lancaster: Jeff, this is Paul Lancaster. I'll answer that question for ROTH. Yes, so that's a little challenging right now with just in general supply chain. I mean we've really focused and we're pretty diligent about trying to secure and get away from sole-source supply chain issues. As it relates to Shanghai, once we do open, we really don't know what that's going to look like. I mean the port is congested. We're working closely with our customers as we prioritize shipments. And a lot of times, the input terms are such that the customers need to arrange that freight. So -- all we're doing is we're preparing as best as we can given the unknown circumstances of how this is going to proceed once the reopening does occur.
Jeff Osborne: And maybe because I had a line of question along that same topic. That's why I brought it up for him as well. But remind me on the revenue recognition, do you record when it shows up that support? Or does it need to be accepted upon delivery into wherever it's going?
Paul Lancaster: It's when the title transfers. So once the title transfers ownership goes to the customer in terms of like ex works, then we recognize revenue at that point.
Jeff Osborne: And then typically, how much of the -- you mentioned 50% of revenue had come from the facility there in . How much of that output stays in China versus exported to other locations?
Mike Whang: Jeff, this is Mike. That varies depending on season and also product mix. We see more of the Shanghai manufacture product ship outside of China now with strong again for the U.S. markets sets and
Jeff Osborne: And then maybe the last question for me on the shipping -- or sorry, on Shanghai is how productive realistically can 10% to 15% of the staff be, A? And then B, what levels of assurance do you have that people that have been locked down for a month or longer will come back? Is this an opportunity like you've seen in other locations? Yes, go ahead.
Mike Whang: I'll start off on that one, Jeff. What I've seen over the years is that our Shanghai and China-based team are just absolutely tremendous. I don't have to worry about them not wanting to work. They're actually chomping at the bits right now although a little bit being stir-crazy being locked in, in their apartments, these high-rise apartments for more than a month. So that is not a concern that I have in one fashion or another. Now in terms of productivity, it all depends on who we can get. Yes, of course, if we get -- I'm being a little humorous here. Those are still office workers, and we got our ship stuff, they might not be as productive. But we do have our list and that list is being bedded and we have a good deal of confidence that the initial vanguard of employees will come in will set a stage for the reopening of the factory.
Lisa Gibbs: Jeff, I'll just add as well. The tariff environment and COVID and all of those factors have had a dramatic impact on our business, and we've managed through all of that. Clearly, this is another extraordinary event, but obviously, it's bringing to the forefront, having alternative manufacturing locations, and that's something that we have been looking at and obviously urgently continue to look at. The supply chain in China is so strong, and it's difficult to find other locations that have that similar supply chain. But it's apparent to us and I think many other companies that having those alternative locations is quite important in our business. So that's absolutely on our radar.
Jeff Osborne: Lisa. Maybe we could switch gears to the silicon carbide side. The order strength at $5.7 million, up nicely both year-on-year and sequentially. Is that all -- your prepared remarks were, I think, more rearward booking as it related to the strength in the quarter on both margin and revenue on consumables. But on the order side, is there any portion of that or a majority of it, new tool sets? Or is that all consumables as well?
Paul Lancaster: Jeff, this is Paul. No, that was primarily driven by the consumable side of the business. So what we're starting to see is a pretty strong demand cycle that's fairly continuous for our template business, which is one of our primary consumables and some of the carrier businesses as well. So we're just seeing just an elevation across the board of that demand for those consumables.
Jeff Osborne: And I think, Paul, you mentioned in the prepared remarks, new entrants into the space. What were you -- or maybe I misheard that, but what were you referring to there around quoting activities in the pipeline?
Paul Lancaster: We're talking about new entrants into the compound semiconductor space. So with the forecast, obviously, being where they are, it is attracting new manufacturers trying to ramp up and expand their silicon carbide specifically manufacturing, wafering capacity.
Jeff Osborne: And then you alluded to some other tools in the sort of wafer supply chain that are ancillary to you around the hoop, so to speak, that you don't provide that have longer lead times and that is impacting you. Is that more on the crystal growth side? Or is there some other tool set, maybe just expand upon that? That was my final question.
Paul Lancaster: Yes. I mean, it would be for tool sets or just ahead of our tool sets, like wire saws and things of that nature, edge grinding tools, things that are used once the bull is produced and they got to edge grind it, then they got to slice it. So some of those complementary steps or tools used in those complementary steps are extended out in some cases, 18 months.
Operator: And our next question will come from Mark Miller with The Benchmark Company.
Mark Miller: I was just wondering if you could kind of try to quantify in terms of higher costs for components or inability to ship tools you thought you could ship the impact of the component supply constraints.
Lisa Gibbs: Well, we're certainly seeing rising material costs in our business, a rising labor costs where possible. We're trying to pass those costs on to our customers. That's not always possible. So we're looking for other areas in our business where we can have some offsetting cost decreases, but it's certainly a challenging environment. Clearly, having robust consumable business this quarter, helped tremendously. So we'll continue to look for that diversified product mix to help our profitability.
Mark Miller: I think you indicated that some of the -- you've gotten clearance to reopen, but it's a gradual reopen and the new restrictions allow 15% of employees allowed back. Any idea when you'll be allowed to have 100% of your employees back into your fabs?
Lisa Gibbs: We don't have any visibility to that at this point. Certainly, we can listen to our employees and things that are heard out there, but the reality is that within the walls of the Chinese government, the local government, and we don't have visibility to that right now.
Mark Miller: With the sale of the headquarters of BTU International and the resulting cash inflow and you're building a nice cash position, what is your capital allocation, especially at these higher cash positions. What is your focus?
Lisa Gibbs: Well, our focus continues to be growth. That's our strategy is to grow both with our -- organically with product development, driving our products into markets. Paul talked about new entrants, organic growth, growth through acquisition. We did a small acquisition about a year ago, a tuck-in. We continue to look for good opportunities to augment our business and fuel that growth. That's a very key priority for us. We'll continue to look at capacity and share repurchases. We've been doing that as well. That's all part of a broader plan that we discussed with our Board quite frequently.
Mark Miller: Any thoughts of relocating some of the business out of China?
Lisa Gibbs: China is such a great location for us. We have a tremendous workforce there. They moved last year into their new building during peak production and never missed a beat. It really is a great facility and a great employee base for us. But clearly, with what's happening here in this environment, we've dealt with tariffs and COVID and now this closure, we have to look at our business continuity plans and alternative sites, and that is something that we are urgently reviewing at this time.
Operator: And our next question will go back to Jeff Osborne with Cowen and Company.
Jeff Osborne: Sorry for the follow-up question. But just in the history that you folks have been in consumables for silicon carbide, I'm curious, the strength this quarter, I assume, is because of the ramp-up in wafer starts and yield improvement. Should we think of this as sort of a new run rate? Obviously, the order strength was there, but I'm just curious, is there any seasonality or lumpiness where people would buy this and put it on the shelves for inventory on the consumable side? Or is it more feeding one hand to the other systematically and this is sort of a new run rate that you'll be at for a while?
Mike Whang: That seems like a loaded question. Well, I can either confirm or deny, but humor aside, this most certainly could be a new norm for us. We have a very unique, highly competitive solution in our consumables that addresses the silicon carbide. And it took a while to gain traction. And we've seen over the past few months that now is getting a lot more attention from our established customers and also some new entrants. These consumables are higher ASP and higher margins than our standard consumables. And the demand seems to be opening up now. So we are finally realizing -- start finally realizing the fruits of our labors on that front.
Jeff Osborne: And maybe just very quickly, as wafer diameters get larger, does that play into your hands at all from a competitive stance or not necessarily?
Mike Whang: Not necessarily. Whatever future wafer size will be, we can definitely adapt to that. And we've also tested some from 8-inch wafers on this new or not new, but just this highly competitive specific consumable.
Operator: Thank you. And that does conclude the question-and-answer session and conclude today's conference. We do thank you for your participation. Have an excellent day.
