Summary of CC:
CORPORATE PARTICIPANTS
· Robert J. Lepofsky - Helix Technology Corporation, President & CEO
· Beverly L. Armell - Helix Technology Corporation, IR Director
· Jay Zager - Helix Technology Corporation, CFO
· Jim Gentilcore - Helix Technology Corporation, COO
OVERVIEW
HELX continues to make progress in its topline and bottom line, both meeting
expectations for 3Q03. Sales to semiconductor customers were slightly over 60%
of consolidated sales for 3Q03. HELX currently anticipates modest revenue growth
in 4Q03 in the range of 5-10% above 3Q03 levels. Q&A Focus: OEM customers, sales
patterns, and guidance.
FINANCIAL DATA
1. 3Q03 sales = $26m.
2. 3Q03 net loss = $9.1m.
3. 3Q03 orders = $26.7m.
PRESENTATION SUMMARY - 20 min
3Q03 Business Performance (R.L.)
1. 3Q03 Results:
1. HELX continues to make progress in its topline and bottom line, both
meeting expectations for 3Q03.
2. On slightly improved sequential revenues, co. reported significant
progress on its path to profitable operations.
3. Operating cash flow was positive.
4. Co. is now forecasting profitable operations and continued good
operating cash flow results beginning in 4Q03.
2. 3Q03 Business Review:
1. Having worked its way through three incredibly difficult years, co. is
pleased to be in a position to now be able to forecast its return to
profitability.
2. Accounting convention requires HELX to take a full valuation allowance
against its deferred tax asset at this time.
1. Creation of this evaluation reserve is reflected in co.'s tax
provision of $8.4m in 3Q03.
2. Without this charge, co. would have reported a loss of $0.02 per
share in 3Q03.
3. As HELX had forecasted during its last conference call, the unusual and
unfavorable product mix issues that limited co.'s performance in 2Q03 were in
fact a short-term phenomenon.
4. Transition to co.'s newer On-Board IS product line continues to go
well, as evidenced by the favorable mix of new 300mm product shipments, which is
outpacing legacy 300mm system shipments to its largest OEM account.
5. Transition of other OEM accounts to On-Board IS continued on plan in
3Q03.
1. This newer product platform is showing its superior performance
benefits in an expanding set of applications and process tools.
6. The higher than expected production startup costs that co. noted in
2Q03 have abated as planned in 3Q03, allowing HELX to generate its more normal
cost margin ratios.
7. Granville-Phillips vacuum instrumentation business remains on track.
8. HELX continues to work with customers with new products, specifically
targeted to increasing its market share in the semiconductor sector and
deepening its participation in non-semi markets such as the analytical
instrument sector.
9. HELX's global customer support business unit was co.'s strongest
sequential performance in 3Q03.
1. Offerings include spares, repairs, retrofits, upgrades,
e-diagnostics, and relationship-based support agreements.
2. This business reported excellent progress.
3. This strong performance is a reflective of both improved factory
utilization rates at co.'s customers' plant throughout the world and the
attractiveness of co.'s TrueBlue support agreements.
3. TrueBlue Support Agreements:
1. TrueBlue customer support agreements are less about fixing things that
break than they are about increasing the productivity of HELX's customers'
factories and reducing the overall cost of operations of semiconductor
production facilities throughout the world.
1. Both of these benefits are top priorities of customers regardless of
the type of product they are producing or the age of their tools.
2. Are also beneficial to HELX as well.
1. When co. set out to change the traditional business model for
customer support operations in this industry, HELX saw this new way of working
with its system users, the device makers themselves, as being more efficient and
more profitable for HELX.
2. HELX wanted to create a stream of revenue that had less cyclicality
than its product business while more closely aligning the ongoing cost of global
support with a continuous and growing stream of revenue.
3. Are gaining considerable traction, because they work for both co.'s
customers and for HELX.
4. Summary:
1. From co.'s comments in prior conference calls, HELX has been unwavering
in its commitment to converge on profitability and positive operating cash flow
with only small improvements on the revenue line.
2. While HELX has effectively managed its cost during this time, it has
also brought to market the product and service offerings that will be the basis
for important profitable growth trends as external business conditions in co.'s
principle served market improve.
3Q03 Financial Review (J.Z.)
1. 3Q03 Results:
1. Sales for 3Q03 were $26m, up about 6% from 2Q03 and about 5% lower than
3Q02.
2. Net loss for 3Q03 was $9.1m or $0.35 per share.
1. These results include a one-time charge, primarily to the
establishment of the full valuation allowance against co.'s deferred tax assets.
2. This adjustment, which was taken in accordance with FAS 109 and after
discussions with co.'s external auditors, was $8.6m or $0.33 per share.
3. Excluding this charge, co.'s net loss was $458,000 or slightly under
$0.02 per share vs. $1.4m or $0.05 per share loss in 2Q03.
3. Orders for 3Q03 were $26.7m, up about 7% from 2Q03.
4. Co.'s book-to-bill ratio was about 1.03.
2. Revenue Insight:
1. Sales to semiconductor customers were slightly over 60% of consolidated
sales for 3Q03 vs. about 65% in 2Q03.
2. Sales attributable to CTI-Cryogenics vacuum pump products were about
83% of the total.
3. Sales of Granville-Phillips vacuum measurement and controls
instrumentation products were about 17% of the total.
4. Co.'s global support business contributed about 41% of total revenues
vs. about 37% in 2Q and 33% in 1Q.
5. HELX is pleased by the market acceptance of its TrueBlue service
offerings as it signed several additional key customer contracts in 3Q03.
1. This business not only contributes to co.'s current quarter results,
but also gives co. a strong and growing revenue stream in subsequent quarters.
6. OEM sales, as a percent of revenue, were about 46% of total sales, down
slightly from 2Q03.
7. Sales to HELX's largest customer, including outsourcing partners, were
about 19% of co.'s business vs. about 26% in 2Q03.
3. Backlog & Margins:
1. Co. ended 3Q03 with a backlog of $7.2m, up from $6.5m in 2Q03.
2. Headcount at quarter-end was 521 people (including temporaries) vs. 513
people at the end of 2Q03.
3. During 3Q03, co. actually had a slight decline in its permanent
workforce, which was offset by increases in its temporary mfg. population.
4. GM in 3Q03 was $8.8m or 34.0% of sales, an improvement of 330 bp over
2Q03 levels. This improvement was due to:
1. A shift in the mix of co.'s products toward its newer higher margins
products.
2. A significant reduction in the startup costs for co.'s new major
platform launch as this product is moving at the full release mode.
3. Continued improvement in co.'s mfg. operations.
4. 3Q03 Expenses:
1. R&D expenditures for 3Q03 were $2.3m vs. $2.5m in 2Q03.
2. SG&A expenses for 3Q03 were $7.6m, essentially unchanged from 2Q03.
3. Total operating loss for 3Q03 was $1.1m, an improvement of $1.5m or 58%
from 2Q03.
4. The contribution to co.'s profits from its joint venture in Japan was
$161,000 vs. $309,000 in 2Q03.
1. This lower contribution was due primarily to a year-end adjustment in
the joint venture tax rates.
5. Net interest income was $229,000, a slight increase from 2Q03.
6. Net loss before taxes and charges was $680,000.
5. Balance Sheet:
1. At quarter-end, cash and investments totaled $66.3m, a decrease of
$1.6m from 2Q03.
2. During 3Q03, co. made $1.4m payment to its pension fund; had $400,000
in payments associated with co.'s previously announced restructuring actions;
and funded its dividend.
1. Excluding these items, cash flow from operations was in excess of
$1m.
3. 3Q03 was the second consecutive qtr. of positive cash flow from
operations and co. anticipates that this trend will continue for the foreseeable
future.
4. Customer receivables were $18.4m, an increase of about $1.5m from 2Q03,
reflecting primarily the higher level of sales.
5. DSO was 64 days, a slight increase from 62 days in 2Q03.
1. The increase in DSO was due to the monthly revenue skew in 3Q03.
6. Co. doesn't have any significant collection issues.
7. Inventory levels were $21.8m, a decline of about $800,000 from 2Q03.
8. HELX continues to focus on inventory mgt. and has now seen its
inventory turns improve to 3.1 turns, slightly improved over 2Q03.
9. Capex for 3Q03 was about $700,000 vs. $900,000 in 2Q03.
10. Capex spending for the full year should be slightly above $3m.
11. Depreciation was $1.5m in 3Q03 and should remain at that level in
4Q03.
12. On Friday, HELX's Board approved a quarterly dividend of $0.04 per
share, unchanged from 2Q03.
6. 4Q03 Insight:
1. HELX has seen for the past few months a gradual improvement in its
business and co. expects this trend to continue in 4Q03.
2. Co. currently anticipates modest revenue growth in 4Q03 in the range of
5-10% above 3Q03 levels.
3. HELX has been carefully managing its OPEX and will continue to do so in
4Q03.
4. Because co.'s FY ends on Dec. 31, HELX will have three extra business
days in 4Q03.
1. This will result in a modest increase in OPEX vs. 3Q03.
2. Despite this modest increase in expenses, co. currently expects to
return to profitability in 4Q03 and HELX will continue to generate positive cash
flow from operations in 4Q03.
Closing Comments (R.L.)
1. Market Position:
1. There is still both a fair amount of optimism in HELX's marketplace as
well as a lingering dose of skepticism.
1. The skepticism is a by-product of multiple dashed hopes for an
industry recovery that have occurred over the course of the last year.
2. The optimistic view is supported by excellent production levels,
particularly of leading edge devices, high semiconductor plant utilization
rates, and the proliferation of new products with increasing requirements for
high performance chips.
2. The successful implementation of fine line width 300mm production lines
fuels both the optimistic and pessimistic views of the near-term prospects for
the semiconductor capital equipment business, as people sort through the
longer-term implications, that highly productive 300mm tool sets might foretell
for this industry.
3. For now, the move to 300mm is clearly underway, the pace of business is
improving, and HELX remains generally bullish about its own prospects.
4. At HELX, while co. has not yet seen a sharp upturn in its business, it
has recorded incremental improvements in revenue throughout this year.
1. The progress has been slow, but steady.
5. In the closing weeks of 3Q03, co. was concerned that order bookings
from its major OEM accounts were slowing.
1. That trend reversed itself at quarter-end and order bookings have
been robust so far this qtr.
2. After this unexpected slowing of orders, revenues for September
turned out to be quite good.
6. Operating people at HELX have just completed their detailed
customer-by-customer analysis of the orders expected over the next 3-6 months.
1. While there is debate about precise timing of order placement, as of
today, things look reasonably good.
7. Most of HELX's major OEM accounts haven't yet held their conference
calls.
1. Co. will not be commenting today on its OEM customer build plans.
2. HELX prefers to defer that to the OEMs on this account.
8. It has been HELX's position for some time that the market demand for
chips would fully utilize available supply in late 2003 to early 2004.
1. As this scenario plays out, HELX believes that the device makers will
begin to accelerate their investment phase late in 4Q.
9. HELX feels that it has the right product portfolio, the right customer
relationships, and the right resources in place to take full advantage of an
upturn.
10. Based on the success that HELX has enjoyed throughout this year, co.
is particularly encouraged by the impact and rate of customer acceptance of its
product support initiatives.
11. With an improving topline and continued tight control on OPEX, product
costs, and cash, HELX is looking forward to delivering strong operating results
in the quarters ahead.
QUESTION AND ANSWER SUMMARY - 20 min
Q.1 You said that you think that the device makers are going to accelerate
their build plans towards the end of 4Q. From your own people at the
semiconductor makers, do you also sense that the OEM manufacturers see this as
well? (Theodore R. O'Neill - A. G. Edwards & Sons, Inc.)
A. (Robert Lepofsky) Absolutely.
Q.2 Can you talk about the mix of product shipments between 200mm and 300mm,
and how the breakdown has changed over the last qtr.? (Theodore R. O'Neill - A.
G. Edwards & Sons, Inc.)
A. (Robert Lepofsky) We tend not to put a precise number on 200mm and 300mm
in our calls, given the complexity of the various business units. I would
generally say that in the volume part of the product business, that transition
and mix continues to weigh towards 300mm solutions compared to 200mm solutions.
Q.3 Would you care to comment on how the business mix is between PVD and
implant? (Theodore R. O'Neill - A. G. Edwards & Sons, Inc.)
A. (Robert Lepofsky) In 1Q03, implant was quite strong. We and our implant
customers suggested that that wouldn't continue in 2Q03. They were optimistic
about stronger performance late in this calendar year, and that is exactly the
way things are playing out.
Q.4 Over the last couple of quarters or so, we've been talking about this
$2m per week run rate. I was just thinking that the next qtr. tends to have with
some of your major customers, one-week shutdowns at Thanksgiving, maybe a week
or two at Christmas time. I realize you're slightly ahead of this $2m per week
run rate. But shouldn't we be taking out a couple of those weeks for shutdowns
and in fact, you're doing even better than that? (Steven Pelayo - Morgan
Stanley)
A. (Jay Zager) As we prepare the guidance and look at our internal
forecasts, we're aware of potential shutdowns. From what we can see right now,
other than shutdowns around the Christmas holiday, we don't see any major
shutdowns. For us, the difference between $2m a qtr. and $2.1m or $2.2m adds
another $1m or so to the bottom line. So, we feel fairly confident right now
that the guidance we've given reflects what we expect our customers to be doing
and reflects their shutdown patterns.
Q.5 With the potential of one to three weeks of shutdown at major customers
you'll still be guiding up on revenues? (Steven Pelayo - Morgan Stanley)
A. (Jay Zager) We're hearing nothing like three weeks. The information we're
getting assumes normal shutdowns around the holidays.
A. (Robert Lepofsky) Understand that in 4Q, we're always appropriately
nervous about what will the year-end look like. We haven't heard anywhere from
our customers enough shutdown plans that would equal three weeks in the qtr. So,
we put that one aside. The second piece for us, and again it can go either way,
is that mix between shipments to OEMs and our activity in the fabs. If one
believes, as we currently believe, that utilization rates will remain high and
people will continue to be planning for higher output post Jan. 1. That suggests
that our services business can remain strong through the holiday weeks. But it
is clearly a risk factor within the quarter and one that we do watch closely.
But from where we sit today, we don't see this one being as bad as a year ago
for example, which was a tough quarter for us, where we lost effectively two
plus weeks.
Q.6 On this transition from kind of transaction-based to more longer-term
customer service commitment, how is that improving your visibility? Is this all
booked to one large contract, or is it still kind of a turns basis or
quasi-backlog of service in there? How does that improve your visibility? Is
there some way you can quantify and how it affects that? (Steven Pelayo - Morgan
Stanley)
A. (Jay Zager) Basically, these are contracts that range generally between
1-3 years and we book the revenues on a straight-line basis through the life of
the contract. So, the nice thing is at the end of the quarter, going into a
subsequent quarter, all these contracts that we have signed in the prior
quarter, on day one, is going to contribute to the current quarter results.
Q.7 We're hearing from some of the other subsystem suppliers that there has
been somewhat of a shift in tone from your major OEM customers from "beat you up
on price, do whatever you can," to "are we sure these guys are going to be ready
for the ramp?" Are you getting much of that type of inquiries or ramp readiness
preparation, that type of thing? (Steven Pelayo - Morgan Stanley)
A. (Jim Gentilcore) HELX has always been at the forefront of being ready for
the ramps regardless of the size. In this particular go-around, we've had some
discussions, but at this point, all of our major OEMs have satisfied themselves
that we are ready. Quite frankly, it doesn't look like they are going to be as
steep as they were before; so, it is easier for us to be ready. So, we are ready
for the ramps. Our OEM customers know that.
A. (Robert Lepofsky) Our customers acknowledge that the HELX product mfg.
model is different than most people in this industry. We start with that short
cycle mfg. process number one. We have done an excellent job with our supply
chain and our sub-tier suppliers being aligned with us. We continue to do an
excellent job managing the availability of the work force. It is different than
a lot of people who talk about temporary people, but the problem that they
experience is the ability to attract and train the temporary work force. Our
temporary work force is available and trained, because we work with those people
even when they are not here and tend to bring back the same individuals that we
had previously. So, we have a very short cycle time on ramping the factory on
the labor side, materials are in good shape, and that gives our OEM customers a
high degree of comfort. Unfortunately, sometimes they take advantage of that
high degree of comfort and wait even longer to place their orders with us, but
again
, we are used to that. As we have said in previous calls, that leaves us in the
situation where our revenues more closely are aligned with our customers'
revenues than our customers' orders. The pricing environment has remained fairly
stable for us. Our customers, the OEM accounts remain under intense pressure for
the price of their products. They continue to work with, rather than in the beat
the price mode, the issue of transitioning our newer platforms that deliver more
performance at lower cost to them as our pathway to solving their problems.
Better margins for us as well.
Q.8 Would you characterize the pressure from your OEM accounts that the
semiconductor people are more aggressive than your other customers in the OEM?
(Mark S. Miller - Hoefer & Arnett)
A. (Robert Lepofsky) Yes. Well, we have a smile on our face. It's a tough
world we live in. We don't whimper about it. We accept it as a reality, but it's
a tough market, and probably tougher than other markets that we are peripherally
involved in.
Q.9 On GM improvement, you gave us some product mix possibilities. Product
mix, are you including the increased global support you're seeing, revenues? Is
that also contributing to the better margins? Is that part of the product mix?
(Mark S. Miller - Hoefer & Arnett)
A. (Jay Zager) Yes, I mean there are two things going on. Within our basic
CTI core products, as we've indicated on several calls, our new products have
better margins than the legacy 300mm products they replaced. So, as we indicated
in 2Q, there was more of a shift to the legacy products than we would have
expected. In 3Q, that returned to more of a normal pace. With respect to the
service business, we're blessed with the fact that our service business in
general tends to have GMs that are equal to or some in cases slightly above the
product business. So, we also get the benefit to some extent from the increased
contribution of the service business.
Q.10 You had mentioned you were making some progress that Granville-Phillips
had introduced some new products, but your revenues kind of dipped down a little
from Granville-Phillips. I'm just wondering about the traction of some of these
new products you introduced in Granville-Phillips? (Mark S. Miller - Hoefer &
Arnett)
A. (Jim Gentilcore) What we said last time is that Granville-Phillips' new
products are very specific to certain new tools that are just in introduction
now. So, one particular tool was a little slower start than we had hoped for and
that showed up on the Granville-Phillips product side. But generally speaking,
the new product that we talked about last time is in evaluation on all of our
targeted OEM customers. It's just a little bit more sensitive to the volumes of
those new tools. We would expect to see continued modest improvement in that.
Q.11 Looking at your breakeven, it seems that you're still very close to
that target of about $27m. Looking through the 4Q03 and again next year, with
some of these mix changes with On-Board IS in particular, will you be able to
keep your breakeven at these current levels as you ramp revenues? Could you give
us a little qualification of the upgrades to tools now that the fabs are full;
typically at this time of the cycle, your customers look to extend the
productivity or the performance capability, and where is the opportunity in your
services business from here? (Ali Irani - CIBC World Markets)
A. (Jay Zager) With respect to the breakeven, we've been fairly consistent
that our breakeven as a co. is about $27m. It actually drifts up a little bit in
4Q, because we have three additional working days. With respect to next year and
going forward, we would expect to break even to remain relatively consistent.
Having said that, as an example, we haven't taken salary actions increases in
the last year or so, and as the business returns, we would expect that we would
be taking a hard look at that. So, we might make very conscious decisions to
move the breakeven up slightly to reflect aspects like that. But in general, in
terms of pricing pressure in the marketplace, we will continue to strive for
mfg. efficiencies and strive to keep our GM moving upward by offsetting any
pricing pressure through improvements in the mfg. operations line.
A. (Robert Lepofsky) Unlike many of our peers, we didn't take any weeks out
of the qtr., weeks without pay, these kinds of short-term fixes that we are
going to now have to layer in. So, the only issue in terms of increase in
breakeven will come from resumption of normal payroll increases as we get back
to profitability. Those obviously will be spread through the year. Then,
appropriate expansion where necessary to support growing aspects of our
business. So, that is the breakeven piece. With regard to your second question
on tool upgrades, yes, you are absolutely right. This is a time when upgrades
are in the minds of customers and part of the performance of the global support
unit was strong performance in the upgrades as well as relationship based. As a
matter of fact, every element of our services unit did increase in the quarter
and that is directly attributable to the activity level within the fabs.
Q.12 On the services side, do you have visibility at this point on a time
frame within which, let's say 12-24 months, the TrueBlue part of your services
business would actually represent 10% of your revenues? It seems like it is just
getting closer and closer. (Ali Irani - CIBC World Markets)
A. (Robert Lepofsky) That is certainly well within our vision. Again, the
nice part about the services business is each qtr. with the new contracts, they
layer on a flow of revenue on top of the flow that you had in the previous
quarter. So, it is a layering activity and when we look at the expansion of the
business, both in terms of customer, tools covered, and equipment covered, that
is absolutely the direction that we are going. So, you can look at our TrueBlue
service agreements as being basically a foundation platform that will allow us
to grow the business and have an increasing impact of this revised business
model.
A. (Jay Zager) These service contracts really will grow from literally two
dimensions. Number one, as we have indicated, we are continuing each qtr. to
sign up more and more fabs to participate. But the second thing is within the
existing contract base, we are always looking for additional revenue streams,
additional offerings, and additional support capabilities. So, part of the
ongoing discussion with our existing service contract people is really to look
at how we can provide more services under the TrueBlue umbrella.
A. (Jim Gentilcore) Once the original contract is in place, the kind of
starting friction, if you will, is overcome and then, the way we grow on that is
by adding products to it. It is a lot easier and a lot less resistant.
Q.13 Would you expect the joint venture profits to improve in 4Q03? (Stuart
Muter - Adams, Harkness, & Hill)
A. (Jay Zager) Yes. Basically, we have been modeling that at about $300,000
a qtr. or so and the reduction in 3Q03 was due to the tax rate. But moving
forward in 4Q03, that should return to more historic levels.
Q.14 Back to the discussion on the Micro-Ion Plus gauge, would you expect
the evaluations at your major OEMs to be complete by the end of the year?
(Stuart Muter - Adams, Harkness, & Hill)
A. (Robert Lepofsky) We have a number of customers. It certainly is possible
that evaluations at more than one could be complete this year. But it is an
ongoing process. So, this isn't an all or nothing where we are betting on one
particular evaluation on one particular tool. It is much broader than that.
Q.15 In general, what are you seeing from your data storage customers? Are
things improving? (Stuart Muter - Adams, Harkness, & Hill)
A. (James Gentilcore) Yes, we are seeing an improvement. Our customer base
is not obviously a significant part of our total compared to semiconductor or
flat panel. But clearly, as they are trying to debottleneck their production
facilities, we do see orders coming for a lot of our products both
Granville-Phillips and CTI products to do that. Some of our service agreements
are also with the data storage customers that are just trying to wring more
productivity out of their factories. |
