Good day, ladies and gentlemen, and welcome to the Advanced Energy Industries Fourth Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I will now turn the call over to your host, Annie Leschin, Investor Relations. Please go ahead.

Thank you, operator and good morning everyone. Thank you for joining us today for our fourth quarter 2014 earnings conference call. With me on today’s call are Yuval Wasserman, President and CEO; and Danny Herron, Executive Vice President and CFO. By now you should have received a copy of the earnings release that was issued yesterday evening. For a copy of this release, please visit our website at advancedenergy.com or call us directly at 970-407-4670. Before I review the save harbor, I’d like to mention that during the first quarter, Advanced Energy will be participating at the Goldman Sachs Technology and Internet Conference on February 10 in San Francisco and at the Bank of America-Merrill Lynch Small and Midcap Conference in Boston on March 17. As other events come up we will make additional announcements. We’ll also be hosting and webcasting our Analyst Day on February 26 in New York. Now, I’d like to remind everyone that except for the historical financial information contained herein, the matters discussed on this call contains certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believe, expect, plans, objectives, estimates, anticipates, intends, targets, goals or the like should be viewed as forward-looking and uncertain. Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the industries we serve; the timing of orders received from our customers, and unanticipated changes in our estimates, reserves or allowances, as well as other factors listed in our press release. These and other risks are described in Forms 10-Q, 10-K and other forms filed with the SEC. In addition, we assume no obligation to update the information that we provided you during this call, including our guidance provided today and in our press release. Guidance will not be updated after today’s call until our next scheduled quarterly financial release. And now, I’d like to turn the call over to Yuval Wasserman. Yuval?

Thank you, Annie, and good morning everyone and thank you for joining us for our fourth quarter conference call. My first quarter as CEO has been busy and productive one as we strive toward our goals of growth, profitability and shareholder value. We remain committed to leveraging and optimizing our product lines, building on our global organization, and further improving our world-class manufacturing platform. As you know, in the fourth quarter, we conducted our annual strategic planning process including an extensive product line review. Having looked critically at our entire business, we’re more convinced that ever of our opportunities ahead for our industry-leading power conversion technology and the number of potential avenues through which we can best determine where our investment can have the greatest potential return. Our strategy to stay close to our customers at the early stage of their product development cycles continues to result in market share gains and strong long term relationship. Our recent acquisitions have enabled us to enter adjacent applications including high voltage and power control modules which are contributing significantly to our ability to diversify in right out the various cycles of our business while extending our total addressable market. On the other hand, our solar inverter business continues to face challenges that are impacting our business model, profitability and the ability to increase shareholder value. As a result, we announced in December that we have begun the process of pursuing strategic alternative because we do not believe that we can continue to run the inverter business in its current form. While we are working through process, we’re taking steps to drive initiatives across the business to improve profitability. Having recently hired an advisor, we’re currently in the midst of looking at various options before us. Therefore, we’re not able to discuss any…

Thank you, Yuval. In today’s call, I will refer to both GAAP and non-GAAP results. As a reminder, non- GAAP measures exclude the impact of acquisition-related costs, stock-based compensation, amortization of intangibles, other non-recurring tax items, and executive severance. A reconciliation of non-GAAP income from operations and per-share earnings is provided in the press release table. I’ll be referring to the earnings slides posted on our website this morning. Let me begin with some commentary on our full year results on slide 13. 2014 was a tale of two different businesses, while total sales grew 6.6% to $583 million compared to $547 million in 2013, the performance of our product lines varied. Sales from our precision power group rose significantly, up 22% to $362 million from $297 million last year, while solar inverter revenues declined 11.5% to $221 million from $250 million last year. During the year, we deployed a total of $57 million in cash for three acquisition, AEG Power Control Modules, HiTek Power Group and UltraVolt to expand our precision power product lines to include high voltage and power control modules. Total net income increased 46% to $47 million for the year or $1.14 per diluted share compared to $32 million or $0.79 per diluted share in 2013. In total, we generated $75 million in cash from operations for the year. Now turning to the fourth quarter results on slide 14, we had a strong quarter with total revenues of $152 million, an increase of $10 million from the previous quarter and flat with the same period a year ago. Strong performance was driven by a record quarter in sales to our semiconductor applications and a healthy recovery in sales of our industrial applications, which partially offset the decline in solar inverters. Non-GAAP adjusted net income was $20.6…

[Operator Instructions] Our first question comes from Joe Maxa with Dougherty.

Congratulations on a nice quarter. Wanted to ask a little more on the semi side, you highlighted a number areas where you’re having success, growth in the last couple of years has been pretty strong, over 30%, can you give us an idea – I know you’re not giving guidance for the full year, I think you’ll still see double digit plus growth in semi in 2015?

To put more color behind the growth, the growth year over year that was fairly strong is a combination of a few contributors. Number one, the market demand in general, the second contributor is market share gain. And we have reported recently on significant gains that we have made during the last year driven by our new series RF power supplies, significantly the introduction of a new power supply that we did not have before, the 2 megahertz. These products are really essential for etch applications. As you know, etch is becoming a fast growing application in semi due to the 3D devices and the need for additional CVD and etch applications for [indiscernible] dual and quadruple patterning. So that’s drove the additional growth. But also in 2014, we acquired high voltage companies and one of them brought with it a component of semiconductor high voltage application, specifically around implantation. In the past, we never had an implantation content or high voltage content in the semi portfolio, now we do and that was the other piece of growth that added to the 33% we talk about.

Right. And do you have those programs where you continue to expect growth in 2015, just wanted to get a little color on all these projects that you haven’t designed...?

Listening to our customers and listening to the forecasters and keeping our ear really close to the market, the expectation is that 2015 will be a growth year in semi, capital equipment. Obviously a lot depends on decisions like fab 2, et cetera. We expect to grow better than the market does. And if you listen to the outside third party analyst and forecasters, there is an expectation for some growth in 2015.

Right, exactly, okay. And I just have one other question on the industrial side, I just want to look at linearity of that business, it does seem you had revenue intake stronger in Q2 and Q4 versus Q3 and I think maybe an acquisition in Q1, but can you give us any color, should we expect similar type linearity going forward in that product line for that business segment?

Not really. The industrial world is more fragmented in semi, in lumpy, strongly dependent on GDP growth on macro-economical forces, hence my comment from my prepared remarks about pressure we see right now in Europe and China when it comes to general investment in industrial markets. So I’d look at the industrial market in general as lumpy and seasonal and strongly dependent upon macro-economical growth rate.

Right. And lastly I’ll jump on the solar side, the solar inverter side, where do you think you can bring the profitability level to, or maybe a breakeven level, I know you talked about a lot of cost reductions and you took a write down here in the last quarter, I mean, where would solar have to be in order for you to breakeven?

Joe, obviously in the market dynamics that are out there today, margins are very depressed, so it’s harder to project a breakeven given the current market conditions that are out there. Obviously, a lot of people think that they’re going to turn more positive as the year goes on, so we would hope towards the later part of the year that we’d be back to close to breakeven, but you never know. And all depends on these market conditions that we’re seeing.

Right, understood. Okay, I’ll jump back in the queue. Thank you.

Our next question comes from Jim Covello with Goldman Sachs.

Great guys, good morning. Thanks for taking the question, I appreciate it. I guess first question today is on the solar topic, in your mind, what is the right kind of timeframe for you or us to be thinking about the resolution of the restructuring a strategic activity, do you think that’s something that’ll be wrapped up in a quarter or two, or should we be thinking more on the three to five quarter timeframe in terms of some resolution on the restructuring a strategic be?

Jim, we’re going through a structure process and having engaged an advisor we follow a very structured process. And as you know, these things take time and they take a specific course and we have choices. We’re looking right now at those choices and we let the process run its course. I can’t give you a specific deadline or a timeline, obviously this is a high area of focus for us and we invest a lot of energy and attention to it. We will obviously inform the stakeholders where we’re at when we’re ready to release information about it. We’re trying to be careful not to cause any disruption or decrease value by prematurely release information while the process run its course.

That’s helpful, thank you. If I could follow up on your commentary on the semi market, I appreciate the prospect of your offering there, it sounds like whenever the customers are done digesting the current wave of significant shipments that they took in the current environment, it sounds like etch would be the segment that you’d be extracting the drive, the renewed activity whenever that happens over the course of 2015, so is that’s the biggest segment and then what might be the next bigger segment after that?

Well, we’re right now within the semi world and applications, we’re very diversified especially now that we’ve added applications like ion implantation et cetera. But to the point you raised, obviously etch and PECVD are two areas that the industry expect to see growing faster than average for obvious reasons driven by the applications that the industry is migrating towards.

Very helpful, thank you so much and good luck.

Our next question comes from Edwin Mok with Needham & Company.

Kind of sticking with the semi cap side, I remember last year you guys also had the same digestion [indiscernible] first quarter of this year, 2014 you had the same digestion, right, and business eventually bounced back on the back half, right, is this – and the inventory that customers are working through right now, are you seeing similar trend than what you’ve seen early on this year, earlier on 2014?

I’m not sure if it has to do with levels of inventory of our customers, Edwin. What I can tell you is that we saw a significant demand towards the second half of Q4 driven by our customers need to get critical components for their front-end loaded Q1 shipment. We’re not sure if this is tied or linked to Chinese New Year for example in Q1. What I can tell you that we saw a significant drive to pull inventory or to pull part towards the second half of Q4 more than the forecast we had initially. And that’s basically driven by our customers pulling parts earlier.

I see. So that sounds like growth upside, that’s helpful. And then on the industrial side, you mentioned some wins or success in auto for advance coding market, anywhere you can size that opportunity and how do you think about growth on that area in this year?

It’s a great question. Obviously, we’re just starting engaging with the automotive industry specifically for headlight coding about 18 months ago or so and we continue to grow in this area as the quality of the films and the optical coating that is required for more advanced headlights is becoming more challenging. Our advanced technology allows our customers to provide better quality films and to be ahead of the technology requirements as the industry moves to LED lighting. When it comes to sizing the market and growth, during the analyst day, we will share with you more details about the industrial markets we’re looking at, the size of the markets, which applications we’re going after, there’ll be a great opportunity to shed more light not about the size and target markets, but what strategy we’ll pursue to penetrate those markets.

Okay, that’s fair. And then on the inverter side of the business, you guys had some write down this quarter of the 600 volt product. Is there any catch up sale that the customer might have to buyout these end of life product that we should expect this quarter?

Edwin, as Yuval mentioned in his remarks, after the strategic review of the product lines, there were a couple of the central inverter product lines that just didn’t fit today’s market place and that’s what the write off was about. We still have a very nice central inverter product that sells and we also have the 3 TL, but some of the older generation central products just don’t fit today’s market place.

So those are older product we don’t expect to have any catch up sale that could happen?

No, not at this point.

I see. And then lastly just on the margin front, if I look at the operating margin for the inverter business, actually excluding the write downs still coming down, right, do you see after this write down of this legacy product, do you see that stabilizing to expect even more headwinds or is it seasonal for weaker first quarter, any kind of color you can provide there?

Edwin, as you know, we’ve been moving production to Shenzhen to locally source parts in Asia to reduce our cost and all those actions are still ongoing, it’s just because of the drastic slowdown in the industry, the inventory hasn’t flowed through the system yet. So we do have positive improvements planned in our solar business as we go forward and some of the inventory goes through the system.

I see. Sorry, I’d squeeze one last in. Based on the losses in your inverter business, how of that is coming from corporate overhead that has caught share between the two business [indiscernible] basically you report operating profit in both inverter and precision power business, right, and then you don’t have any overhead costs that you’re reporting, right, so how much of the inverter operating loss is corporate overhead versus the base business, any color you can provide there.

Well, let me sort of answer it this way, I’ll go back to something I think I said last year in the first quarter, the second quarter. If solar was breaking even, it’s worth about $0.20 or $0.25 a share to our shareholders. So that would suggest that it’s covering $8 million to $10 million of corporate costs that wouldn’t go away if solar went away. Hopefully that gives you the answer you’re looking for.

Extremely helpful. Thank you.

Our next question comes from Krish Sankar with Bank of America Merrill Lynch.

Thank you and good morning everyone. It’s Andrew Hughes on for Krish. Yuval, I think you touched on this a little bit, but could you elaborate on what kind of lead times you’re currently seeing from some of your semiconductor OEM customers?

It’s a good question because with some of the leading OEMs, we have just in time agreement. So they pull product when they need them. So actual lead time in terms of delivering product after see them is not a major parameter. These just in time agreement allow us to better plan our finished good inventories, allow our customers to have an immediate product when they need it. And that’s the way we operate. So when we talk about lead times in our business, it’s mainly for the general population of customers that buy based on purchase orders rather than long term contract.

And I know the inverter business has shifted largely into China in terms of where your products ship for, is that true for the rest of the business at this point, in particular the thin film products that are coming out of China at this point?

Absolutely. If you look at our Precision Power products portfolio, I’d say 97% of the product is made in China, in Shenzhen factory.

Great, thanks guys.

Our next question comes from Pavel Molchanov with Raymond James.

Can you just talk in general terms for both of the business segments what the impact of the strong dollar is?

Obviously Pavel most of our solar business is US-based and there are some European, so obviously the euro decline has hurt the top line in the translation. Most of our other products though have not been impacted that much, some of the PCM business in Europe, for the most part our products are coming to the US, for our major OEM customers and they are turned around and shipping them back to the fabs in Asia.

Okay, understood. And then as far as future M&A activity goes, recognizing this is part of your strategic review presumably, in the past you’ve talked about four to six times EBITDA and now that you’re looking perhaps a little more broadly at acquisition targets, is that still the right range or are you expanding that to potentially some more extensive valuations?

Well, I think it always depends on the target and what their expectations are. If you look over the last three years, the five different acquisitions we’ve done, they’ve all been at different multiple ranges. So it’s real hard to put a general number on that. It does appear to me that valuations are little bit richer today than maybe they were two years ago, so I think there is some, I’ll call it inflationary creep that’s occurring. But it’s really dependent on the targets that we’re looking at.

Appreciate it.

Our next question comes from Mehdi Hosseini with SIG.

First one has to do with operating profit for the thin film at 29% for the December quarter, it seems like it’s a two, three-year high, and to that end, how should I think about the trend into 2015 and beyond Q1, do you have additional plans that could help improve these kinds of a margin profile or should we assume to the high 20 is the best you could do in this segment? And I have a follow up.

If you go back to our analyst day presentation of last year, we showed the models in thin film, and I think at that time we had a $80 million midstream number and about 25% op income. If you do the math that I suggested at last year’s analyst day and you go up to the revenue that we have for the quarter, you come just about dead on to the 29.5% to 30% we were for the quarter. So the real message is the model works. We’ve been very successful in keeping our cost constant and as we get additional revenue the gross margin is pretty much coming to the bottom line. So if revenue continue to grow and we held our cost in line, then the model will continue to improve. Obviously that works the other way too, but the real key is, as you know over the last several years, we’ve taken a lot of cost out of the business, we’ve better utilized our Shenzhen factory, and we have a very profitable business at these revenue levels.

And you’ve had a number of acquisitions and you’ve gone through cost synergies, and I’m just trying to better understand your model looking forward. So to that end, should we assume that if revenue grows, your operating margin for this segment is going to exceed 30%?

Mehdi, it would certainly continue to go up. If the cost stay constant and you saw revenue that’s got something north of your current operating income percentage, that income percentage is going to continue to grow as revenue grows. But you’ll have to model that to what you’re comfortable with on those assumptions. But we’re comfortable keeping our cost in check.

Got it. And then on the solar business, what was the sequential change in megawatt shipment and any color on magnitude of ASP pressure?

I’d have to get back to you on the megawatt shipped, because that’s not – our main focus is trying to be profitable, so it’s not about how big the shipments are, but I can get back to you with the number on that.

Okay, sounds good. Thank you.

[Operator Instructions] Our next question comes from Jairam Nathan with Sidoti.

Good morning. Given the announcement that you made on the solar inverter side, are you seeing any changes in your customer behavior and are you looking at this as an uncertainty and wouldn’t it be better to just take a decision earlier as soon as possible?

Good question. So obviously we engage with our customers, we talk to our customers for the announcement. We see basically mixed feedback, some of our large customers continue to place orders and continue to be committed to the design of our products. We have uniquely designed utility scale inverter which is bipolar. A lot of our customers are committed to this technology because of the harvest and the efficiency that this technology delivers. And these customers continue to give us forecast and continue to place orders. We have customers for our 3 TL inverters in Europe and North America that wanted to make sure that the product will be available and the product will be available in the future. And we continue to see orders being placed. We have not seen any impact on revenue of Q1, the projected revenue for Q1 as a result of the press release. The press release was issued because we have a policy of being transparent and when we make decisions, strategic decisions, we’d rather make the announcement rather than have the street and the rumor mill work and create more uncertainty and doubt. So that was the main motivation behind going public with what we’re trying to do. Again, we did not see any negative impact on the forecast of Q1.

And my other question was kind of on the tax rate, I know that you mentioned solar losses have benefited you. But on a semi-only basis, structurally do you still see a 10%, 11% kind of tax rate is sustainable?

If it was just Precision Power group and given where their profits come from various countries, you would be safe to model in I’d say 12% to 15% range. It’s a wide range, but it really depends on where the profits come, from what country, so we have a multitude of tax rates we deal with.

Thank you.

I’m showing no further questions. I will now turn the call back over to Yuval Wasserman for closing remarks.

Well, thank you everyone for attending our call. We appreciate the questions and your interest. I’m looking forward to seeing you at our analyst day on February 26 in New York. Thanks and have a nice day.

Thank you. Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and everyone have a great day.