Good day and welcome to the Amtech Systems Second Quarter 2020 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Erica Mannion of Sapphire Investor Relations. Thank you..

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 Whang, Chief Executive Officer; and Lisa Gibbs, Chief Financial Officer. After market today Amtech released its financial results for the second quarter of fiscal 2020.

The press release can be found in the company's Web site at amtechsystems.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.

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 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 effective overall market conditions, including the equity and credit markets and market acceptance, risk and capital allocation plans.

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 Whang, Chief Executive Officer..

Thank you, Erica. Given these extraordinary times, I want 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 are seeing impacts to our manufacturing and supply chain, the magnitude has very 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 Chinese New Year longer subsequent ramp up period.

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; it's affected our manufacturing operations.

While we are able to service the majority of customer demand from these facilities in the March quarter, we are cautious of the potential risks 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 [indiscernible], 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 uncertainties, we are monitoring the situation closely.

Checking through end market demand, the magnitude and timing of the impact have similarly been correlated to the regions which our customers are operating their facilities. In China, our customers have not 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 these regions has not stopped, and in fact, in some situations, like with our consumable products, we have seen a recent uptick in demand.

It is still too early to predict what the full impact 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 in the past few years, and long-term demand drivers for related applications remained robust.

Industry drivers including mobile devices, automation and IoT, industrial market, electric and autonomous vehicles in the automotive market and 5G in the telecom market remained compelling today, as they did six months ago. In the meantime, as a business, you must turn the focus on things we can control.

As an equipment company, the long fits for your service in the semiconductor market, demand volatility is not new to us. Our business today is more capable and resilient, 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 typical downturns.

Evidence of this can be seen in our second quarter results where despite experiencing a 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 a unique position in the broader equipment market, while our products together are levered to higher growth subsets of a broader semi market. We are also diversified across the semiconductor manufacturing process, the 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, develop a strong industry reputation for quality and are particularly well suited for silicon carbide, another compound semiconductor substrates.

Further along the manufacturing process, our horizontal fusion furnaces have been at the leading edge of innovation in the power semi market.

Most recently, the performance events of our clustered HTR diffusion furnace led to early adoption in the power semi industries 300 millimeter transition, allowing us to both capture the majority of demand to-date and become the tool of record in a number of tier one manufacturers.

Finally, the packaging and assembly stage process, our convection reflow ovens are recognized as a leader in the industry, particularly in high value applications for quality, performance and repeatability are favorite overprice, enjoy a diversified customer base that touches all key geographies.

As a result, while the majority of our product portfolio journey benefits from the same macro growth drivers within the power semi market, the timing of this typical peaks and troughs in demand for each individual product line tends to vary, helping to smooth out the overall volatility in our business.

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.

The best levers, 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 and areas that we believe will outgrow the overall semi market. 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 our global market and increase operating leverage to drive higher profits and maximize shareholder value in the years ahead. Now, I will turn the call over to Lisa Gibbs to give our second quarter financial results.

Lisa?.

Thank you, Michael. Net Revenue 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 to 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 shut down 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.

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 and our silicon carbide LED segments. As a reminder backlog includes customer orders that are expected to ship within the next 12 months.

Gross margins 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, with $5.4 million compared to $5.9 million in the preceding quarter and $5.8 million in the second quarter of fiscal 2019.

Sequentially and compared to the prior year quarter SG&A decreased due primarily to lower selling expenses on lower revenue, and no longer having [RTDs] [ph] 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 Tempress.

Looking at income tax expense on a year-to-date basis, we had a provision for the six months ending March 31, 2020 for continuing 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 a tax benefit received from our divestitures. Loss from continuing operations net of tax for the second quarter of fiscal 2020 was $500,000, or $0.04 per share.

This is compared to income of $1 million or $0.07 per share for the second quarter of fiscal 2019 and loss of $1.3 million or $0.09 per share in the preceding quarter.

We recognized a pre-tax loss from the sale of Tempress 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 the loss which can be carried over to future years.

Unrestricted cash and cash equivalents that are continuing operations at March 31, 2020 are $49.3 million compared to $52.7 million at December 31, 2019. As of March 31, 2020, approximately 14% of our unrestricted cash and cash equivalents in our continuing operations was held outside the United States, mostly in China.

Over the last couple of quarters, we have discussed our capital allocation plan 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 made for 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 the supply chain disruptions related to COVID-19.

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 right -- 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 strength in high growth areas [indiscernible] and still can provide.

By 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. Our outlook reflects the anticipated impacts as we understand them to-date.

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 $30 million to $60 million. Gross margin 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 P.R.

Hoffman to relocate to 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. The portion of Amtech results are denominated in RMB in 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 States dollar 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. [Operator Instructions] We will go ahead with our first question from Jeff Osborne of Cowen & Co. Please go ahead..

Couple of questions on my end.

In terms of the capacity expansion, Michael, I was wondering if you can talk about where you are with that?.

Hi, Jeff. Thanks for your question and your longtime 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 pandemic effects definitely hit the subcontractors pretty hard.

But, however, I can thankfully report the big sigh of relief that the building has completed and the move, we'll start mentioning at the end of this week..

It's good to hear.

And then, is there a way you can find, some of the benefits there besides the obvious additional space? Is there more automation or anything 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?.

Sure. First of all, it definitely impacts capacity, new work capacity constrained at our old and current location, especially during 2017, 2018, when the market grew greatly. In addition to the capacity expansion capabilities, the move in this larger facility will also help optimize our manufacturing flow in terms of the consumables and also machines.

So, especially in terms of machines, we now approximately almost tripled our manufacturing capacity. However, we will need to staff up our folks as demand picks up..

Got it.

And then, can you remind us, within the LED silicon carbide segment, what the mixes of consumables?.

Consumables, it's a range. I would say 70% of our revenues are consumable base..

Got it. 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 the M&A or other uses?.

Yes. I mean, we did have repurchases in the quarter of about $2 million. And we still have about $2 million left in the plan on it.

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 a part of capital allocation, but we're going to put it on hold for a little bit right now..

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?.

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 -- these people return to work and in a healthy way and have the demand and the orders to support bringing them back and getting them productive again..

[Operator Instructions] And we will take our next question from Craig Irwin of ROTH Capital Partners. Just go ahead..

Good evening. I hope you're all well and thanks for taking my question. So Michael, your backlog 19.6 million, it's actually still pretty healthy, and it's coming in there nicely. Despite this environment we are working through right now.

You have given guidance for a fairly soft quarter, but it seems like the customer activities 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 expansion of existing facilities? And if the situation of lockdown continues for a little bit more, would you expect to maybe build a backlog for execution once we get to sort of the other side of this mountain we're crossing..

Now 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 actively sustained our level of business during these uncertain times. Certainly we're definitely satisfied with that.

In terms of the capacity expansion, well, obviously we never get the exact date. We tend to see here that there's going to be a timing chip that we want to support. So as far as we know and what we've been told, the future plans have not been terminated, they're tuning on, but mainly because of the pandemic situation and uncertainty.

They're taking it slower..

Taking it slower. So that maybe the respond to that. So one of the tier one automotive OEMs, one of the largest automotive companies in the world, has put 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 shipping carbine 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, in the other silicon carbide producers that we follow pretty closely.

They're all proceeding with plans for fabs, when they get the 8 inch, maybe they'll build up 6 inch depending on how long 8 inch does. But they've shut up with third-party service providers out sourced at the et cetera.

Would you actually -- would you expect me to pull forward of some of these large programs to be something you would have visibility on or were more likely to get sort of just in time like orders, six months or three months prior to the execution on the CapEx..

So you have to remember Craig, that our focus is broad based not just silicon carbide, if you are a power semi somebody, if you are selling to these customers.

And I think on the last call, we also had a similar question on timing and -- at that time before the pandemic, we're looking at towards the end of this calendar year, right, so as a shift obviously that's going to happen because the pandemic. And without giving exact dates, just kind of a generalized response and [indiscernible].

Our proportion is with the best information [indiscernible] is going to be ordered some could be three, right, beyond what we had originally anticipated. However, no our backlog is a key indicator of the robustness of our customers and our product that speaks for itself.

So, I don't know the exact timing normally knows exact timing right now, right? For all the things for all of us, we're all riding the same boat. And think things could change the next week or next month. However, that doesn't diminish our long-term expectations and also our customers' long-term expectations on future growth..

Okay. And then last question for me is gross margin. You guys are actually looking at maintaining pretty strong gross margins despite the negative leverage, but declining revenue.

Can you maybe pop it through the mix there and what's helping you on the margin side?.

Sure, Craig. I mean, it's a combination of the product mix primarily. So we're seeing uptick in consumables and our silicon carbide segment, those are higher margins, as well as the type of products that shipped out of our semi segment.

We were starting -- we've just seen a little bit of a mix there towards some of our higher margin products, which would certainly help..

And what are those in that segment?.

Our pure MAC machines primarily in the semiconductor segment..

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..

Thank you for your time today and for your interest in Amtech. This concludes today's call..

And this concludes today's conference. We thank you for your participation. You may now disconnect your lines and have a wonderful day everyone..