Good day, ladies and gentlemen, and welcome to the Advanced Energy Industries Q4 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks we will host a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call maybe recorded for replay purposes. It is now my pleasure to hand the conference to Mr. Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Sir, you may begin.

Thank you, operator. Good morning, everyone. Welcome to Advanced Energy’s fourth quarter 2018 earnings conference call. With me today are Yuval Wasserman, our President and CEO; Paul Oldham, our Executive Vice President and CFO; and Brian Smith, our Director of Investor Relations. Before we begin, I would like to mention that AE will be participating at Morgan Stanley GMT conference in February. The Susquehanna Technology conference and the Wells [ph] Conference both in March. As other events occurred, we will make additional announcement. And now let me remind you that today’s conference call contains forward-looking statements including the company’s current view of its industry, performance, products, applications and business outlook. These statements are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks and uncertainties is contained in our filings with the SEC. All forward-looking statements are based on management’s estimates, projections and assumptions as of today February 05, 2019, and the company assumes no obligation to update them. Aspirational goals and targets discussed on this conference call or in the presentation material should not be interpreted in any respect as guidance. Today’s call also includes non-GAAP adjusted financial measures, which exclude the effects of discontinued operations, stock compensation expenses, amortization of intangibles, restructuring charges, acquisition-related costs and other one-time items. Reconciliation between GAAP and non-GAAP measures are contained in yesterday’s earnings release, which is available on our Investor Relations page of our website. We’ll be referring to earnings slides posted on the investor section of our website as well. With that, let me pass the call to Advanced Energy’s President and CEO, Yuval Wasserman. Yuval?

Thank you, Edwin. Good morning, everyone, and thank you for joining us for our fourth quarter earnings conference call. In the fourth quarter, we continue to execute on our strategic to grow and strengthen the company, while feeling the impact of cyclical weakness in semiconductor and the expected seasonal slowdown in our industrial market. Year-over-year Q4 revenues were down 14% with solid growth in both industrial and service including the addition of LumaSense partially offsetting the decline in semi. Financially, we delivered solid profitability in cash flow even on lower revenues, while accelerating investments in new products and technologies and starting the process of diversifying our operational footprint. Despite the significant second half decline in semiconductor market, for 2018 we grew 7% year-over-year, delivered non-GAAP operating margins of over 27% and maintain solid operating cash flow highlighting the resilience of our operating model. In semiconductors, the capital spending environment has been negatively affected by several global factors including slowing growth in end market demand for semiconductor devices, digestion of equipment capacity and uncertainty around trade policies and global economic growth. Our business is further impacted by inventory reductions in both semiconductor devices and finished goods inventory at our customers. The impact of lower demand was broad- based has been mostly out of our core etch and deposition application. Despite the challenging environment we see customers pursuing new and enabling technologies that will shape the future of our market. As a result, we have accelerated our investment in new RF products and technologies and believe there are opportunities to aggressively pursue share gains and expand their offering in these critical areas. During the quarter we shipped multiple new evaluation products to five leading OEM customers targeting various new incremental revenue opportunities. These investments support our customers accelerated roadmaps while expanding our…

Thank you, Yuval, and good morning, everyone. In the fourth quarter we continue to feel the impact of cyclical weakness in semiconductor, combined with the seasonal slowdown in our industrial market. Despite the challenging environment, our fourth quarter revenue came in near the mid-point of our guidance range. Our non-GAAP EPS results impacted by slightly lower gross margins and higher expenses resulting from our decision to accelerate certain R&D investments partially offset by a lower tax rate for the quarter. Total revenue was $154.2 million, down 10.9% from last quarter and 14% from a year ago. Our service business generated record revenue in Q4 partially offsetting the decline at semi and industrial. Despite the decline in Q4 full year 2018 revenues were up 7.1% to $719 million with semi down 4% and industrial growing 43%. Our total revenue growth, despite the decline in the semiconductor environment reflects this success to-date and importance of our diversification strategy. For the year, our adjusted operating margin was 27.2% and we generated operating cash flow of $151.4 million. Looking at sales by market, semiconductor revenue in the quarter was $83.5 million, down 13.4% from last quarter and 32.4% year-over-year. During the quarter our customers reduced ordering of our power product as industry demand decelerated and as they reduced their finished goods inventories. Although visibility is limited, we expect the further step down in market activity in Q1 which we believe could continue to the first half. Industrial technologies revenue declined 14.3% from the third quarter to $41.6 million primarily as a result of a significant thin film, solar shipment in Q3 that did not repeat in Q4 and the expected seasonal slowdown. Year-over-year revenues grew 35.8% due to our recent acquisitions, which provide us additional platforms for growth going forward year. For the full…

Thank you, sir. [Operator Instructions] And our first question will come from the line of Mehdi Hosseini with Susquehanna. Your line is now open.

Yes. Thanks for taking my question. Couple of follow-ups. Yuval, if I were to look at your Q1 semiconductor commentary and guide, it suggests quarterly revenue of 70 million to 72 million. Should we assume this is reflecting the kind of maintenance inventory at your OEM customer and also maintenance CapEx by semiconductor manufacturers? Or if you want to answer it differently it would be great?

Well, we can assume that it remain at that level.

Okay. So when you talk about the first half week, you would have a double-digit decline in Q1 and it would go sideways. That's where we talk about the weakness?

Yes. Maybe we don’t forecast Q2, but in general we believe that we saw that most of the change happened over the last four weeks. We saw a set of setting or correction in the business last quarter, right?

Sure.

And we believe that right now we are pretty much at what we think is the trough for us.

Okay. All right. And then just one quick follow-up on the semi, over the past couple of years 2016 through 2018, AE benefited from a capacity at memory manufacturers, both DRAM and then some investment technology migration under the foundry logic. Looking forward I see wafer capacity at a minimum and more focus on technology migration. Does that change the dynamics for your semiconductor business? Or am I just not getting it right. Any color would be great here?

Sure. I think you’re right. And there is a significant core right now across the wafer fabricated industry to invest in next-generation technology when it comes to new products and processes and materials. That benefit us tremendously and that’s one of the reasons we have invested significantly in technology development and the product development over the last Q4 and we’ll continue to invest especially in RF technology in pursuing significant pool for customers that are designing the next generation tools with our technology. This is an exciting time for us, that it’s an opportunity during the slowdown in industry to invest and accelerating our product development, the technology. As we mentioned in the prepared remarks, we’re shipping products that are going to fabs right now for next-generation technology applications. Of course, a very broad space of applications, from etch, deposition ALD, ALE and so forth and so on, and our technology has been recognized as enabling. And for that reason and to accommodate the strong demand we get from OEMs around the world for our technology we continue to invest and accelerate the investment in product development.

Would those new products lead to revenue multiplier as we go through technology migration? Or do we need to wait for wafer capacity at part of a story to come in?

We expect as you know the adoption of new technology, the industry can run between 18 months to 24 months or even 36 months to high volume in the factory. Some of our new technologies are in early stage. Pilot productions in fabs, we expect that to ramp. We expect to exit this year with a stronger market position and with much higher opportunity for incremental revenue creation. Some of these design wins will realize in mass production will drive tens of millions of dollars of incremental revenue.

Thanks for detail color.

Thank you. And our next question will come from line of Krish Sankar with Cowen & Company. Your line is now open.

Hi. This is Rob Mertens on behalf of Krish. Thank you for taking my question. If I look to your March guide, the revenues levels are around what you haven't seen since maybe the end of 2015, early 2017 where earnings came in at around the dollar. I know you gave some color in terms of the OpEx and the gross margins for the quarter for your EPS guide. We’re sort of looking now towards later part of the year, are you expecting the margins to improve little bit? And also would sort of level of revenue do you need to decline so it will be a breakeven levels?

Yes. It’s a great question Rob. I think the first thing that I would note is that if you look at our revenues they are down at those levels as you mentioned late 2016. But if you actually look at the mix of revenues you could argue that our semi business is actually down lower than that, and its been offset by acquisitions that we made in the last five quarters we’ve acquired four companies and they bring some – I’m sorry, six companies and they bring some cost structure with them. And so what you’ve seen is this we’ve added new businesses that are at same operating model then you see an impact on earnings -- on earnings right now. Now, looking forward those platforms give us – those new companies give us a platform for greater growth and in fact are contributing to earnings today. And so I guess the simple way of saying, it could be worst if we hadn’t sort of diversified the company the way that we have. As you’ve all mentioned, we’re very excited about what happening in semi despite the difficult revenue environment. There’s a lot of investment technology and we believe we’ll be at well positioned if that market recovers. And our diversification strategy, we think has paid dividend. Now from a profitability perspective, we still have a very solid model. We believe at our Q1 guide we still be solid profitable and generate cash. And if you look at just broadly at a breakeven point, we could see revenues drop into the very low $100 million range before we’d around breakeven. And certainly if you saw that occur, there’s other actions that we can take as a company to ensure the financials. So we think this continues to be a time to take advantage of the environment to position ourselves to be a stronger company as we exit this downturn that we’re in today. Now, it also say that we saw that we did take some restructuring cost this quarter and those will be implemented over the course of the year. We think that’s about $10 million in annualized savings. A large part that actually was funding these investments in R&D and the other natural mid-year cost we’d see temporary measures and those types of things. But overall, we would expect be able to keep expenses about flat even on growing sales. And we could see a little bit of margin improvement. Although as we mentioned, there's probably – there’s going to be some modest investment to continue diversify our manufacturing footprint. So net-net we think there’s still a lot of room in the model. We think it’s a robust model and we think we’ll be position stronger as the market in semi ultimately recovers.

Great. Thank you. That’s helpful. And just I guess one follow-up around your LumaSense business. So I’m just looking at the model, it looks you guided 13% or so this quarter and semi revenue around like 10 million or so coming from industrial and little bit from this service. If I'm backing out of this it seems like industrial is down quite a bit quarter-over-quarter. I know it sounds like the solar business is a big reason there. But looking forward is that a business you're expecting to recover at a certain time? Or is it more of a lumpy business that you have lower visibility in?

Yes. Good question. We actually guided our industrial business to be down sequentially. In Q4, because seasonally it’s a low quarter. In fact, with even a little lower, and if you look at that revenue mix industrial was actually a little below what we thought and semi was about oddly enough. And there’s little bit lower industrial was exactly that, it was -- in software business from the solar PV area. And remember we had a large order, large revenue of solar PV in Q3 which sort of aggravated the compare. The solar was off a little bit, and China was also off a little bit to this just more broadly. But sequentially we expect industrial will grow in Q1, because seasonally and you know part of the shortfall in Q4 industrial was delayed in shipments of some products into those markets. So we continue to believe industrial will grow in the mid-teens range overall, and it will be up sequentially in Q1. That had been the fastest growing section of the company, if you look at that annual basis.

Okay, great. Thank you so much thank you.

Thank you. And our next question will come from the line of Tom Diffely with D.A. Davidson. Your line is now open.

Yes good morning. First a clarification. When you look at your forecast for a little step down here in the first quarter, is that driven solely by just the end markets, the malaise in the end markets or is there a little bit of inventory OEM inventory correction in there as well?

It’s both, Tom. It’s both the end market, but also the drawdown of inventories.

Okay. And then basically you said before that just finished goods working through the system.

Correct.

Okay. And then Paul when you look at the R&D, the increased spending. Do you view that as mainly project based, or is this kind of a new normal where your goal is just to be a little more active on the new product development going forward.

Yes, I’d say it’s more of a new normal. We’ve done a careful review of our R&D projects and look to where the opportunities are and its evolvement and we’re seeing a lot of pull from our customers, the things that can have an impact in the relatively near term not the three year out term and the sort of more one to two year out term. And if you look at when the semi industry could recover, which we don’t know, we think it makes sense to make continue to make these investments at this time. So I wouldn’t count on R&D dropping back down, I think around this level is the right level. Now I don’t think we need to grow it. We made a step up in investment here and we’ll continue add investment that it’s going to. I would say roughly in this range is the right way to think of it.

We’re right now. Tom will right now budgeted in terms of R&D investment at the level that will allow us to continue to accelerate our R&D and product development in conjunction with our key customers roadmaps, and also in alignment with new customers around the world that are approaching us right now to use our technology for their next generation devices. We just have a tremendous amount of opportunities related to new design wins that we want to make sure that we fund properly.

Yes. That makes sense. And then I guess when you look at all the crosscurrents in the industry over the last several months, has there been a meaningful change in the utilization rate of your tools in the field that might ultimately impact the service over the next few quarters?

We don’t think so, no.

Okay. And then just finally, when you look at all that’s happened over the last six, nine months. Has anything changed your long term view of the potential this industry or potential advanced energy in the industry.

Not at all. We are as we said repeatedly, the underlying demand in the industry are strong. We are in a period of digestion. In our opinion, many of the players in the industry right now are using this period of the -- of suggestion to accelerate the development of new products and new technologies. If you look at you know the industry is moving to much more complex structures, new materials and new processes, all these require new product architecture. And with that, new power delivery architectures and we are the supplier that you know companies approach to, to deliver those technologies.

Great. Thanks for your time.

Thanks, Tom.

Thank you. And our next question will come from the line of Patrick Ho with Stifel. Your line is now open.

Hi, good morning. This is actually Brian Chin calling in for Patrick. Thanks so much for letting us ask a few questions. First, question about the manufacturing. I think you mentioned that you’re going to pursue some initiatives to bring up some manufacturing in Southeast Asia. I’m curious how much of that is desire to diversify away from Shenzhen in terms of the process power business. And how much of that is related to, I think you had to – you’re going to have to relocate some of that capacity anyways next year? Is it kind of the natural order of that, I mean that’s my first question?

So I think that the planning, the evaluation of our operational footprint that we started funding in Q4 aims at addressing business continuity. Allow us to have flexibility to move products from a major hub to more than just one factory and also to address cost. So it’s all of the above. It’s a project that will take some time and we believe that long term it will be cost neutral in terms of the investment. It’s a very low capital intensity project. As you know we just filed assembly and test. It’s more about diversifying the location of origin of our products. You want to add anything to that, Paul?

Yes, and you’re right. We do, we -- our lease is expiring in Shenzhen. We do have an extension to that actually for about a year, which gives us a nice window to also just balance our information. Yuval said, there will be a little bit of insurance cost that would be incremental. But once, in place our total cost would be neutral or lower, because we’ll have a balance between these factories, it’s not just adding a second factory, it’s balancing that amongst two to diversify all of them, really give us more flexibility going forward.

So long term, long term, we are going to be relying on more than one factory.

Got it. And I’m sure it makes sense. You know when business is slower to do these sorts of things, and when things are kind of wrapped up. Right. So another question. I appreciate all the detail on the new evaluations and certainly some breath there in terms of product and customers. You know that being said, would you put NAND and dielectric applications towards the front in terms of what could contribute sooner versus later?

I’m sorry, could you repeat the question?

Yes. So you talked about like I think five new customer evaluations. You know sort of breath in terms of the products, applications that are under evaluation. I’m curious, of those evaluations; do you think the ones that could come to fruition sooner would be on the NAND side and dielectric in nature?

It’s -- thank you. It’s across the board, is both NAND DRAM and logic and foundry, all across the board. Look, the industry is moving towards much more complex structures and also new materials. These new materials require different ways of deposition and Etch processes. And the -- in NAND for example, the increasing number of layers in the stack create unique challenges related to material processes that require a totally different approach in terms of the deposition and Etch processes that eventually require a different power distribution strategy, because RF power is the enabler of these processes.

The other thing I’ll mention Brian is if you look at our -- at our platform, we addressed all areas of deposition and Etch. And as you’ve all said, we’re now expanding into other content around the chamber. And historically, NAND, DRAM and Logic if you look at the last four quarters five quarters, have been about a third each. And so as we see investments shift more towards foundry or logic we’re participating in that. And so our business will shift a little bit with the timing of those investments as well, because we play broadly in all those applications.

One more comment. The adoption of EUV for 5 nanometer logic devices will require ALV and ALE processes. And we are a key supplier for those applications.

Thanks. Appreciate all the detail, one last question from us. From a capital allocation standpoint, I think based on what’s authorized that you bought back a similar amount of stock here in Q1 that you did in [Indiscernible] you might -- you might exhaust your current repurchase. And you talked about continuing to look at strategic acquisitions potential as well. So just kind of curious how you’re thinking about capital allocation moving forward?

Yes, Brian. Our fundamental philosophy hasn’t changed, and that is to allocate the majority of our available capital 70% to growing the company through acquisitions and then to be opportunistic with our share repurchase and that’s our strategy. And as we said we’re open to both, continued small tuck-ins or medium tuck-ins as in the case of LumaSense but also larger opportunities that makes sense. And we have capacity to do that. Then relative to the share repurchase, the board meets regularly, quarterly and reviews it every quarter and as we’ve consumed the kind of deal authorization we have regularly we kind of refresh that. So I wouldn’t anticipate anything different going forward.

Great. Thank you.

Thank you. And our next question will come from a line of Pavel Molchanov with Raymond James. Your line is now open.

Thanks for taking the question guys. On the M&A front, you’ve been pursuing industrial focus for many years now, but obviously given the pressures and the semi cap value chain, I imagine that a lot of the middle market players are feeling the pain, in fact more pain than you guys are. It is now perhaps the time to consider bulking up in some additional semi cap opportunities, or do you think it’s, it’s still too early.

Thanks, Pavel for the question. Yes indeed, our strategy had been to diversify the company and accelerate the diversification by acquiring companies from new markets and verticals to accelerate our entry into those markets. Some of these acquired companies have also a sunny content in them. For example, LumaSense, LumaSense is 75% industrial, 25% semi when we acquire the company. As we look at the semi world, being a pure play, power leading company, and then be a leader in the critical parts supplies that go into these applications, the number of potential like targets incentive for us is almost zero especially if you consider antitrust, right. So, so most likely acquiring a partial buy -- in a supplier to the semi industry will be a either non-risk or for cannibalization, but also risk of antitrust challenges related to that other components that go into the semi industry usually are not enabling components, and some of them are commodity products, which carry fairly low margins and different selling cycle and little effort in engineering. So for that reason, we look at semi targets very opportunistically. We look at industrial targets very strategically.

Okay. That’s helpful. I remember this. This topic was also discussed on the last quarter call and I think your comments about your cash flow break even, probably lend themselves to ask the question again. Any updated thoughts on initiation of a dividend, as a way of perhaps kind of accentuating of return of capital to shareholders?

Yes, it’s a good question, thanks Pavel. We do regularly review our capital allocation strategy including its discussion of the dividend. At this point, the strategy remains the same, which is to use our opportunity to sell repurchase plan as this method of choice to turn a value to shareholders.

All right. Appreciate it guys.

Thank you. And our next question will come from the line of Quinn Bolton with Needham and Company. Your line is now open.

Hi, Yuval and Paul, thanks for letting me ask a few questions. Just wanted to follow up on Tom’s question about inventory correction versus sort of the slower demand environment and wondering if you might be able to give us some sense how much of the lower revenue in March, it’s coming from inventory drawdowns versus just the overall level of lower demand.

Yes it’s a good question and a tough one to answer. Obviously we don’t have perfect visibility into our customer’s plans and what they see. But, but clearly the market activity as you’ve seen planned in the last three or four weeks on all of our customers and peers have kind of reset at a lower level. And to some degree, it’s related. If this business is lower, then it will take longer to work through the inventory. So there’s some element of that too. But fundamentally, the inventory is an area that we expected to be drawn down and continued to be impacted related to that. And we said in our prepared remarks, remarks that we expect these kind of condition to persist through the first half, and then we’ll see how things go from there.

I guess it’s sort of a follow up Paul on that. Yes, I think LAM on their call talked about WFE and 19 being front end loaded some of the other OEMs have talked about more of a back-end low. Do you guys have any thoughts, as you looked out; speak to your customers or what just the overall shape of WFE will be in 2019? I guess the question is, if WFE trends down in the second half, does that exacerbate the inventory drawdown that you’re currently seeing?

So it’s a great question, and the answer is different from different OEM. Different OEMs, different have different exposures to end markets and their commentary about the business for the second half of the year is affected by a view of the market they serve primarily. And without going into details, some OEMs are more memory centric, some OEMs are more logic and foundry centric, and they see different view of the rest of the year when you talk to them or when you read the commentary. In general, we don’t believe that the visibility is good enough to even call the second half. We believe that we are right now operating in the what I call a target rich environment for us when it comes to design wins and take advantage of the kind of slowdown in the industry when everybody’s focusing on an accelerating product development to basically be fully aligned with the customers to make sure that we help them go to market earlier, as everybody’s anticipating the resumption of growth, both in capacity and also in technology nodes as we exit from this downturn.

Great. Then last question for me. Just wondering if you might be able to level set us on the timing of your long term model of 550 to 615 in EPS. How dependent is that on a recovery in WFE spending? How dependent it is on your improved share position exiting in 2019 or other factors?

So obviously the timing of the recovery and semi will impact the timing of that profile of growth. But at the same time, we are very acquisitive, and we are pursuing a pipeline to target acquisitions that may help us accelerate that, despite of the semi cycle. So it’s a combination of the M&A activity and the maturity of those targets, and the recovery of semi. We are very confident and stay behind our strategic aspiration goals. And again as we said earlier, right now, it seems like we are in a kind of a low position in the semi. But we believe that it’s just you know a temporary situation and we expect to see that recovery with a much stronger market position and much stronger footprint around the world.

Great. Thanks for letting me ask those questions.

Thank you. And I’m showing no further questions at this time. So now it is my pleasure to hand the conference back over to Yuval Wasserman for any closing comments or remarks.

Thanks everybody for joining us today. As I mentioned earlier, we view this period right now as an exciting period for us to rejuvenate, to invest, and to develop and accelerate the launch of our new products and technologies to the market. We are being right now adopted by multiple OEMs around the world into their new process tools. Obviously, the decline in Q1 is driven by the market dynamic as we explained. Just to note, if you look at product, products that go into the semi market, our decline between from Q4 to Q1 is in line with our peer companies and in some cases we are in a better position. So we are looking forward to a fruitful year in terms of investment, and strategic investment. And we are ready to come out of this downturn much stronger with new products and technologies. Thank you and we look forward to seeing you in the next few months.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.