Good day and welcome to the Amtech Systems Fiscal First Quarter 2023 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the call over to Erica Mannion of Sapphire Investor Relations..

Good afternoon and thank you for joining us for Amtech Systems’ fiscal first quarter 2023 conference call. With me on the call today are Michael Whang, Chief Executive Officer; Lisa Gibbs, Chief Financial Officer; and Paul Lancaster, Vice President of Sales and Customer Service.

After close of market today, Amtech released its financial results for the fiscal first quarter of 2023. 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 today’s call 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 technologies used by customers and competitors; change in volatility and the 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; the worldwide COVID-19 pandemic, and our ability to effectively integrate our acquisition of Entrepix Inc., which we acquired in January 2023.

Other risk factors are detailed in our SEC filings, including our Form 10-K and Forms 10-Q. I will now turn the call over to Michael Whang, Chief Executive Officer..

Thank you, Erica and everyone for joining us today. In the fourth quarter, we generated $21.6 million in revenue representing a year-over-year decrease of 19%.

As we discussed last quarter, driving this expected decrease was the softening of demand in our both advanced packaging and SMT products following two strong years of capacity expansion and as customers are currently evaluating capital spending projects, due to the changing market conditions.

Helping offset this, we continued to see very strong demand for our high temperature belt furnaces for EV applications. Overall, we remain excited and steadfast about our long-term opportunities across all of our businesses.

Within the semi division, while we are currently transitioning through a downturn in the spending cycle for some of our products, our competitive position in the industry remains strong which creates an opportunity to capture additional upside in the next investment cycle.

Fortunately, we are currently experiencing a record surge in demand for high temperature built furnaces with EV applications as a driving force. While still early, repeat orders like the recent press release today makes us optimistic regarding the scale of the opportunity ahead.

Adding to this EV tailwind, we continue to see strong demand for silicon carbide consumable products as the industry undergoes this multiyear capacity expansion cycle. Turning to our strategic growth initiatives, three weeks ago, we announced the acquisition of Entrepix, a globally recognized expert in CMP and wafer cleaning.

With the addition of Entrepix, Amtech now offers one of the industry’s broadest sets of substrate processing solutions, providing robust cross-selling opportunities across the combined customer bases. To provide additional perspective, I’d like to take a moment to discuss Entrepix’s business in greater detail.

Starting with the engineered products, these are upgrades, obsolescence and replacement parts developed by Entrepix for the most popular 200-millimeter and below CMP systems and cleaners and together represents roughly half of the business on an LTM basis.

Utilizing Entrepix’s engineered products, customers are able to maintain their existing CMP and cleaning tools and ensure they are operating at peak performance.

As the OEMs for these legacy tools tend to focus on 300-millimeter platforms and are often not well resourced to support 200-millimeter and below tools in high volume, Entrepix fulfills the need for customers and OEMs alike.

In fact, given the improved performance, reliability and lower operating costs created by replacing legacy parts with Entrepix’s modernized engineered products, many OEMs have become both customers and a referral source. The very large installed base of these tools in the market, the replacement and upgrade opportunities are very robust.

Drawing from these advancements and experience, Entrepix has additionally become the OEM for the new on-track double-sided scrubber, the most cost-effective wafer cleaning system for wafers from 100 to 200 millimeter, which is very well suited for many applications, including compound semiconductor materials like silicon carbide and gallium nitrite.

Given the wafer size and volumes of these applications relative to the scale and volume of 300-millimeter silicon processes, many cleaning tools on the market today are ill suited to meet the specific demands and needs of the compound semiconductor processes.

As a result, there has been a strong demand in the market for new on-track double-sided scrubber, driven in large part by the investments in silicon and silicon carbide front-end manufacturing. In addition to the equipment and engineered products, Entrepix also provides field service and training as well as CMP foundry services.

Field service and training enables Entrepix to maintain in-depth contact with customers, creating stickiness and promoting the sales of engineered products, the on-track double-sided scrubbers and other products and services from Entrepix.

CMP foundry services in turn provides Entrepix a unique perspective of being both the end user and supplier further enhancing the quality and efficacy of the CMP-related products, processes and services provided. Additionally, the CMP foundry has been qualified by several leading IDMs and foundries to backfill their existing capacity.

As we look ahead to the opportunities for Entrepix as part of Amtech Group, we see meaningful synergy potential. On the customer front, overlap with existing customers allows us to further cement our relationships in the substrate market while expanding our process into the device manufacturing market.

Similarly, in areas with no current customer overlap, several cross-selling opportunities exist. Lastly, while Entrepix has built a solid foundation in the U.S., international expansion has been an area of focus as the company scales.

Leveraging the footprint and channel and resources Amtech has established overseas, we believe Entrepix can cost effectively accelerate these expansion efforts. Our company share a culture of technical leadership, combined with deep domain expertise and unparalleled customer service.

Macro themes of EV adoption and compound semiconductor proliferation are driving growth across the entire portfolio. As existing and future customers make the necessary capacity investments to address these opportunities, we expect to strongly benefit in the years ahead given our respective position in the market.

In closing, we are very confident that our strategy to align our divisions to high-growth megatrend markets such as EV and the greater pursuit of energy efficiency is gaining traction.

We believe that a strategic alignment to megatrend growth areas across multiple product and customer touch points creates a strong and durable foundation for value creation in the coming years. I will now turn over the call to Paul Lancaster to go into more detail on our end markets..

Thank you, Michael. Expanding further on the demand environment as anticipated, in the first quarter, we experienced a softness in our orders for the advanced packaging in SMT products, which is continuing into the second quarter.

Additionally, due to the timing of order shipments at the end of the quarter, a portion of revenue expected in Q1 moved to Q2. These products have since shipped and are reflected in our guidance for Q2.

Barring further deterioration in the macro environment, which may impact customer spending plans, we expect Q1 to represent the trough in new orders for these products.

At this stage, however, it’s difficult to predict the timing and shape of a recovery given the macro outlook as it relates to the impact changing market conditions may have on semiconductor demand.

That said, we continue to see healthy mid to long-term interest as the industry moves further towards advanced packaging architectures and as the complexity and sophistication of surface mount process increases. In such applications, thermal uniformity and repeatability is of paramount importance when choosing a reflow of it.

And we have demonstrated our PYRAMAX product line is capable of delivering against these strenuous requirements. As a result, we have become the tool of record for many of the leading OSATs as well as leading fabs looking to incorporate advanced packaging capabilities.

We believe we are well positioned once capacity investment resumes since we are levered to the highest growth areas in the market. As it relates to our high temp belt furnaces, which are manufactured here in the United States, we again saw strong demand this quarter from EV applications.

Specifically, our customer in this market are leading automotive suppliers, which manufacture components and subassemblies for EVs, such as sensors, battery cooling assemblies and power module substrates amongst others.

Similar to the SMT market as the complexity of these assemblies grow and due to the strict safety requirements for automotive application, consistent and uniform thermal processing is critical.

Evidenced by the repeat orders we continue to receive from existing customers as well as interest from and dialogue with potential new customers, we believe there remains a large opportunity ahead of us.

Additionally, we continue to see a robust forecast for our horizontal diffusion product line for both 200-millimeter and 300-millimeter applications. Some of which are slated for supporting silicon carbide production.

With our current and growing backlog of high-tech furnaces, predominantly due to EV-related demand, we are taking steps to improve our manufacturing operations to increase both capacity and profitability through greater efficiencies and operating leverage.

By utilizing outsourced manufacturing for certain subassemblies and adjusting our supply chain to support this growth, our goal is to ramp capacity in 2023 to better serve our current backlog and reduce lead times for new orders while improving the contribution margins of these products.

Within our Materials and Substrate segment, we continue to see healthy demand for our consumable products, including those for silicon carbide applications.

As we discussed previously, with the silicon carbide portion of our consumable business up over 100% year-over-year, we anticipated a stabilization of consumable demand as existing wafer capacity is fully utilized and before the next phase of wafer capacity expansion has brought online.

This is progressing as expected, with demand likely to remain at current levels until anticipated additional capacity is brought online towards the end of this calendar year.

Specific to silicon carbide consumables, it is important to note that Amtech has been a leader in this market for many years with existing relationships across both industry leaders and newer entrants.

As a result, growth-in-demand for our consumable products tend to follow that of overall wafer capacity in the industry, which is undergoing a phased multiyear expansion cycle.

While there are several companies looking to either grow existing capacity or enter the market, the pace of wafer capacity additions is often longer than that of traditional silicon, and it will take time for each of their contributions to grow the market as a whole.

Taking together, the near-term demand for our products, namely high temp belt furnaces and silicon carbide consumables remains very robust. While over the mid to long-term, we believe we are well positioned to participate in the growth of both silicon carbide and semiconductor industries when capacity investment cycles return.

I’ll now turn the call over to Lisa to review our financial results..

Thank you, Paul. Net revenues were $21.6 million, decreasing 33% sequentially and 19% from the first quarter of fiscal 2022. The decrease is primarily attributable to lower shipments of our semiconductor and polishing equipment, partially offset by an increase in consumable shipments compared to the prior year quarter.

Gross margin in our material and substrate segment decreased primarily due to changes in product mix. On a consolidated basis, gross margin was relatively consistent among periods.

Selling, general and administrative expenses increased $1.9 million on a sequential basis and $2.1 million compared to the prior year period due primarily to $1.4 million in acquisition costs as well as higher consulting and ERP expenses.

Operating loss was $2.7 million compared to operating income of $3.9 million in the fourth quarter of fiscal 2022 and operating income of $1.2 million in the same prior year period. Net loss for the first quarter of fiscal 2023 was $2.7 million or $0.20 per share.

This compares to net income of $4.2 million or $0.30 per share for the preceding quarter and net income of $1 million or $0.07 per share for the first quarter of fiscal 2022. Unrestricted cash and cash equivalents at December 31, 2022, were $44.5 million compared to $46.9 million at September 30, 2022.

Approximately 83% of our cash balance as of December 31, 2022, is held in the United States. Looking ahead, our cash balance – cash position will be materially lower with our acquisition of Entrepix. We used a term loan of $12 million plus cash from our balance sheet to fund the $35 million purchase price.

Additionally, we now have access to an $8 million revolving line of credit for our working capital needs. In the coming days, weeks and months, we will be working with Entrepix to leverage the synergies that are key to our success, which are focused on growth and customers.

We expect that any cost synergies or reductions that we identify will be reinvested back into the business.

Additionally, with Entrepix operating at two locations in Phoenix and one not far from our corporate office, we will evaluate synergies in our real estate footprint, which could include making use of part of our corporate building for additional production or storage capacity or back office space.

As a reminder and as indicated in our Form 8-K filing on January 17, 2023, the historical financial statements of Entrepix will be filed as an amendment to the 8-K by April 3, 2023. As it relates to the rest of our business, we continue to make focused investments to fuel our future growth.

As Paul discussed, we are making targeted investments in labor and capacity and are partnering with contract manufacturers to both decrease our lead times and to improve our operating performance.

We expect these investments to have a negative effect on operating margin in the near-term, but we believe they are warranted to support the opportunity ahead. Now turning to our outlook. For the quarter ending March 31, 2023, our second fiscal quarter, which includes the contribution from Entrepix.

Revenues are expected to be in the range of $30 million to $32 million, with operating margin in the low single digits, excluding approximately $1.1 million in acquisition-related costs.

The company’s outlook reflects the ongoing logistical impacts and a related delay for good ship to and from China as well as supply chain delays, we are experiencing in our operation. 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 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 I will turn the call over to the operator for questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Craig Irwin with ROTH Capital Partners. Please proceed with your question..

Hi, good evening. Thank you for taking my questions. I wanted to start off with the $8 million booking that you guys had for high-volume thermal systems for the EV supply chain.

Can you maybe talk about how many furnaces this might be? And if this is for a silicon carbide application or a silicon application, I am kind of guessing that it silicon carbide.

But – and then if you could give us geographic color, North America, Europe or maybe Asia?.

Hi, Greg, thanks for joining us and ask the question. I’ll lead off with that question, and I’ll turn it over to Paul. In terms of number of systems, it’s around 8%, and the application varies from silicon carbide and also battery cooling modules and other substrate assembly. So it’s a pretty broad spectrum..

Okay. So then this is multiple customers. This is not just one individual mega facility. This is probably multiple customers that are adopting cutting-edge product that, I guess, Bruce’s offering, if I’m correct..

Yes. So Craig, these are our high temp belt furnaces, and they are across, as you said, several customers located not only in Asia, but also Europe and here in the U.S. or North America. So these are not Bruce’s horizontal diffusion furnaces.

These are custom thermal in line furnaces used for heat treating and brazing applications, direct bond copper applications, all of these end applications for power electronics supporting EV production. So that kind of gives you a flavor of what we’re shipping in that – in those categories..

Thank you for that. So, one of the most exciting companies in the silicon carbide space finally announced a second mega facility. This one is going to be built in Germany, and there is wide expectation from investors that there is going to be a third facility for that same company here in the U.S.

Obviously, several other companies have expressed that they will be in the silicon carbide market in a similar way in the future.

Can you talk about the necessary lead times if someone wants to have the facility up and running in 2027, when would they be likely to order equipment from you? And do you see much in the way of competition for Bruce’s offering into the silicon carbide market?.

There are definitely competitors across all of our product lines, Craig. But as you know, and our strong belief is we definitely hold leadership positions in multiple product segments, whether it’s Bruce horizontal diffusion furnaces or the BTU in-line belt furnaces and then the Hofman consumables.

Typically, lead times will vary depending on the actual products, consumables can be a matter of weeks. And then when you get into the actual toolsets, it can range anywhere from 12 months to 18 months, some of them – like some of our competitors is even longer.

So, they will need to start placing tools set orders to start their phase testing and validation at least 2 years ahead to be safe, if the current supply chain condition that exists throughout the world continues. But we are seeing some signs of that improving, little bit by a little bit even for us.

And also, as Paul mentioned, we are very cognizant of that, and that is a risk for our growth, especially in the EV space. And so we are definitely taking action. We saw that last year. And in order to reduce our lead times and also expand our capacity and improve our operating leverage..

Thank you for that. So, the next thing I wanted to ask about is Entrepix. First, I guess I should start with congratulations. It looks like a really interesting asset to tuck into your existing resources.

Can you maybe describe for us the customer overlap at Entrepix with the traditional Amtech customer base? Is there a minor amount of overlap, or is this something where the sales force knew many of the same customers that you were already calling on? And do you see opportunities for synergy on the engineering side, given a focus similar to some of your other businesses where you have not only capital equipment, but services and engineered products that I guess are consumable that serve different areas of the same business..

Absolutely, Craig. So, we do see definitely a large overlap of existing customers, very familiar names, right, across silicon front end and also our silicon carbide substrates side of the market. The names will be different. But in terms of the actual customers, there is a strong overlap.

And with that, there are very strong synergies across wafering and then also on the fab side that we will definitely leverage and also explore new opportunities that we didn’t have before. So, I am very excited with the internal synergies and also the greater depth and product suites and service suites that we can offer in the near and long-term..

Excellent. Then last question, if I may. You guys have been really proactive in supply chain management and pretty transparent about some of the short-term changes in I guess what can be cyclical businesses.

Are there any updates maybe you can share with us about issues that resolved over the last couple of months, things that give you the confidence to give us the solid guidance that you shared today?.

Hi Craig, yes. So, what we have done, and we announced that we hired Louis Golato as a VP of Operations last year. And at this time, we are implementing and adjusting our supply chain to support this growth that we are seeing, especially in our high temp belt furnaces, which are manufactured here in the U.S.

I think the supply chain is somewhat fragile. We saw that. We had to make adjustments in some cases, terminating certain suppliers, adding suppliers where there was a single source issue. And I think we are going to start to see that come to fruition here towards the end of this year, we will be able to turn that backlog at greater efficiency..

Understood. Well, congratulations on the progress here and I will hop back in the queue. Thank you..

Thanks Craig..

Thank you, Craig..

Our next question comes from the line of Mark Miller with The Benchmark Company. Please proceed with your question..

Yes, I want to congratulate you on the order for the belt furnaces.

Can you give a little insight about the margin of these belt furnaces? Are they above or below corporate – recent corporate margins?.

Hi Mark. We have talked previously about product mix and how it can affect our gross margins. And certainly, our product mix here with the belt furnace and the BDF is part of some of the improvements we are trying to make in our longer term results.

And so it’s – when we don’t mix in the products out of Shanghai, you see that in our margins where we are in the 30s. And so these products are around there in the 30s, and we certainly would like to see some improvement as we work on these various initiatives that we discussed..

In terms of your overall backlog, how does that compare with your recent margins? Are margins in the backlog of the equipment and consumables going to be an improvement, or is it going to be kind of flattish in terms of the margin…?.

I would say at this point, again, with the softness we are seeing out of Shanghai and our factory there, I think flattish is a good estimate..

OpEx in the second quarter, you are expecting flat OpEx or any increases or decreases?.

We mentioned in the guidance the acquisition costs. So, that’s certainly going to be an increase. We are going to have some other targeted increases based on some of the initiatives that we are undertaking, like with contract manufacturing and some other things.

So, we are also going to be looking at some expense control procedures and some other things that we can do. But I think we will see some increase in the coming couple of quarters..

You indicated there was some shifting of sales into the second quarter.

Can you quantify that?.

Off the top of my head, honestly, Mark, I don’t have the exact number in front of me. But we guided – we came in a little bit lower than we had anticipated in our guidance. I think we still hit right about consensus. So, certainly, we would have liked to have been on the higher range of our guidance there of $21 million to $23 million..

And finally, did you indicate you expect the second quarter to be the trial quarter for this year?.

Hi Mark, this is Paul Lancaster. Yes, I did make that comment. I mean now it’s related to our advanced packaging and SMT products. We have seen a continued weakness there, primarily in Asia as that semiconductor demand has dropped off for us. And so we consider this to sort of be the bottom of where we are going to see that business going..

Thank you..

Thanks Mark..

[Operator Instructions] Our next question comes from the line of Kevin Garrigan with WestPark Capital. Please proceed with your question..

Hi, everyone. Great speaking with you again, and let me echo my congrats on the Entrepix acquisition. Just a few quick questions on my end. For the first one, and it’s kind of a multipart question.

The Entrepix acquisition, does the acquisition help with converting your backlog more quickly to capture EV revenues, or is it kind of more about expanding your product portfolio and revenue streams, or is it a little bit of both? And then secondly, I think the Intersurface Dynamics was your last acquisition.

So, what lessons have you learned from that acquisition that you can apply to this one?.

Hi Kevin, this is Mike. Thanks for joining us and for your questions. So, the first part of your question, your question is the Entrepix acquisition will not have with the backlog that we have now related to EV. That will be handled by the operational improvement plans that we are undertaking right now.

And hopefully, we will start seeing some of the fruits of that towards the end of our fiscal year. Regarding Entrepix and IDI and PR Hoffman, definitely there was always improvement opportunities. And I view Entrepix as a couple of value adds. It expands our market size.

We can touch different segments of the market that we have not been able to since we disposed of our European divisions 2 years ago. And also, it provides or acts as a force multiplier for our existing PR Hoffman and IDI divisions.

Entrepix brings in more than a decade’s worth of CMP process and technology experience, they know polishing very well, although it’s more on front end, but CMP in my eyes is very similar regardless of the toolset.

And more importantly, due to their inherent capabilities from their CMP foundry and also their engineered products, those will also be a combination of a force multiplier and also provide greater access to markets that we have not been able to touch before..

Okay. Great. That makes a lot of sense. Thank you for that.

And then just quickly, Lisa, I know you touched on it in your prepared remarks and in a previous question, and I know I asked you this last quarter, but after acquiring Entrepix and kind of checking off one of the boxes, any change to your focus in terms of capital allocation? And can you kind of remind us what the focus is for 2023?.

Great question. It’s evolving, obviously, as we took a good chunk of cash off of our balance sheet, and we are – we have re-forecasted our cash. We are going to be looking closely at how and when we want to tap into that revolving line of credit. We did renew our share repurchase program at our Board meeting yesterday.

We continued to look at key investments in our business. So, I would say right now, we are digesting the loan facility and our cash flows, and we will continue to evaluate capital allocation on each of our Board meetings and then discussing that thoroughly..

Perfect. Great. Thank you. That’s all for me. I will hop back in the queue. Thanks everyone..

Thank you..

Thank you..

There are no further questions in the queue. I would like to hand the call back over to Lisa Gibbs for closing remarks..

Thank you for your time today, and thank you for your interest in Amtech. This concludes today’s call..

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day..