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Executives

Ryan Blair - IR

Thomas Gutierrez - President and CEO

Rick Gaynor - CFO

Analysts

Thomas [Yay] - Bank of America Merrill Lynch

Satya Kumar - Credit Suisse

Amir Rozwadowski - Barclays

Jed Dorsheimer - Canaccord

Pavel Molchanov - Raymond James

Shawn Lockman - Piper Jaffray

Jeff Osborne - Stifel Nicolaus

GT Advanced Technologies (GTAT) CY2012/CY2013 Guidance Call December 18, 2012 8:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to GT Advanced Technologies’ guidance update call. [Operator instructions.] Now I will turn the call over to Ryan Blair of GT Advanced Technologies investor relationships. You may begin.

Ryan Blair

Thank you. As we begin, As we begin, I would like to remind everyone that certain statements made during this call may be forward-looking for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. We may discuss our expectations regarding future events. In particular, these may be forward-looking statements regarding estimated future financial results for calendar 2012 and beyond, factors likely to affect financial results and other forward-looking statements regarding market conditions, and factors which may affect the performance of each of our business segments.

In this connection, we direct your attention to the slide entitled Forward-Looking Statements and the final slide in the presentation accompanying this call. Important factors that could cause actual results to be different than our expectations are discussed in GT Advanced Technologies' filings with the Securities and Exchange Commission, including the statement under the heading Risk Factors in the company's quarterly report on Form 10-Q in the fiscal quarter ending September 29, 2012.

Statements made during this call should be evaluated in light of these important factors. GT Advanced Technologies is under no obligation to, and expressly disclaims, any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

A webcasted replay of today's presentation will be available for 90 days, beginning today at approximately 10:00 a.m. Eastern and can be accessed on the IR section of our website. An audio replay will also be available. Please refer to the company's website for details. In addition, following today's call, we will be posting a copy of our prepared remarks to our website. [Operator Instructions] And finally, during the Q&A session, we ask that you limit your questions to an initial question and one follow up.

With that, I will now turn the call over to Tom Gutierrez, president and CEO of GT Advanced Technologies.

Thomas Gutierrez

Good morning. With me today is Rick Gaynor, our chief financial officer. Today, we’ll provide you with updates on a number of fronts that relate to how the company expects to perform in the face of significant industry and macroeconomic challenges.

In general, the financial health of our customers in both the solar and LED industries has continued to deteriorate. Trade tensions with China have intensified, and access to capital has tightened. The combined effect of these developments, which has grown in magnitude over the last several months, had an unexpected impact on our business in the third quarter, and as we entered our fourth quarter created a high level of uncertainty as to how our business would develop through the balance of 2012 and 2013.

While we continue to take steps to better align our cost structure, business portfolio, and investment strategy to protect long term shareholder return, in the near term, we expect that the current situation of overcapacity, price-cost imbalance, and limited liquidity will continue to impact our customers and our financial performance through 2013 and potentially into 2014.

We’ll continue to diversify, and given the strength of our balance sheet, we remain committed to investments in new technology that we believe will drive the success of our customers and growth of the company. In 2013, we expect to operate as a smaller, leaner, yet profitable enterprise with an investment strategy balanced between the near and long term. Our focus will be the position the company for accelerated growth in 2014 and beyond.

Before moving on to guidance, I’ll provide some background on conditions in each of the markets we serve, and describe the assumptions that underpin our projections. We’ve continued to conduct extensive diligence to better understand how our customers’ businesses are likely to develop over the coming year.

In addition to the normal level of market analysis that we conduct, Rick and I have spent incremental time meeting with key sapphire customers in China, as well as with several leading banks in Asia, so that we could understand near term market dynamics and the lending environment more clearly.

The good news is that we believe our served markets will grow in the long run, and the opportunities for GT remain significant. Our targeted investments in next-generation solar technology, and our diversification efforts into new sapphire applications, as well as silicon carbide and gallium nitride, are ongoing, and we believe will be keys to our success.

The bad news is that current market conditions and access to capital in our served markets are very unlikely to improve over the next 12 months, and uncertainty still remains as to when a turnaround can be expected. We’ve assumed that these challenging conditions will prevail at least through the end of 2013.

Access to bank capital, which is important to any recovery, continues to be limited, but appears to be sector-specific, as Asian banks act to limit their exposure to the solar and LED sectors. In addition, private funding has become difficult to obtain.

Looking at the solar sector more specifically, we believe that many PV players are facing bankruptcy, as there is, in our opinion, no identifiable path to improved profitability absent adoption of new technology that drives costs down well below current levels. Positive announcements with respect to investments by the Chinese government to prop up the solar industry sound promising, but are largely directed at working capital and job preservation rather than new technology or funding to increase capacity.

Unfortunately, in our opinion, some of these government investments will serve to limit rationalization of the supply base versus truly solving the cost structure issues the industry has, while providing capital in the near term for new technology investments.

There is also a pervasive belief throughout the solar industry that import tariffs are inevitable in the EU and China, in addition to those already in place in the U.S. This has created an uncertain environment, causing some of our potential customers outside of Asia to postpone their capital investment plans until it is clear how these tariff structures will impact location choices.

Given these factors, we expect to see very limited investment in new multicrystalline capacity going forward. In fact, we now believe that we will deliver very little of the $140 million of DSS backlog on the books at the end of last quarter, $70 million of which we had previously identified as at risk. We expect to terminate and de-book the vast majority of the DSS backlog, and as a result we intend to write down most of the DSS inventory we have on hand.

While we see some limited opportunities to sell DSS technology outside of China, and will continue to provide aftermarket support to existing customers, we plan to stop any meaningful investment in the DSS sector of our PV business.

We now expect that the next round of significant expansion in the PV sector will not occur into 2014, and we continue to believe it will be driven by high efficiency, low cost N-type monocrystalline materials technology. Accordingly, we continue to believe our HiCz technology will be a critical part of the solution as the industry strives to improve cost per watt performance.

While our development of HiCz has continued to progress on schedule, and significant R&D is ongoing, we now expect that the N-type market will be slow to move to volume production levels given the current state of the overall PV industry and uncertainty related to the tariff situation.

Given these circumstances, our current working assumption, which is reflected in the guidance we will provide today, is that we will not recognize HiCz revenues in 2013. While our guidance does not assume any HiCz revenue to occur until 2014, in the event the PV market recovers more quickly than we are assuming, we would expect to be in a position to start shipping HiCz tools earlier than is assumed in our guidance.

Our HiCz facility in St. Louis is not complete, and we’ve been demonstrating our progress to prospective equipment customers. We have made excellent technical progress over the last quarter, and our degree of confidence in our technology is very high.

Given that we do not plan to operate a HiCz materials business on an ongoing basis, we are actively seeking a strategic partner that can take over the operation and drive development of N-type cell structures downstream. This will allow GT to focus on the development of the HiCz tool itself, without impacting our commitment to bring the HiCz technology to market in the most effective manner possible.

In our polysilicon business, although the market remains oversupplied, and it seems likely that the Chinese government will implement a polysilicon imports tariff, our polysilicon customers remain largely committed to their current expansion plans, albeit at a slower pace. This is driven by their strategy to reduce costs and improve their market positions.

While we do not expect meaningful new polysilicon reactor orders over the next 12 months, we continue to have a sizable pipeline of opportunities in the Middle East and Southeast Asia. We continue to expect that engineering orders related to these opportunities could convert in the first half of 2013, with potential follow-on reactor orders in 2014 for deliveries in 2015 and 2016.

Lastly, as it relates to the polysilicon business, the $37 million shipment of FBR hydrochlorination reactors that we identified as possibly slipping out of our fourth quarter will indeed shift into the first quarter of calendar year ’13. This is reflected in our guidance, which Rick will provide shortly.

In the sapphire segment of our business, near term conditions are also challenging. Although several of our ASF customers have continued to ship product into the LED market in recent months, and others have successfully diversified their business to include non-LED and industrial markets, overall LED market conditions remain challenging as witnessed by reports of LED device makers struggling to make a profit.

Consequently, sapphire demand has remained soft, and prices have remained at historically low levels. Several of our ASF customers, some of whom are exposed to solar, are finding it difficult to secure private funds from banks and key investors, and nearly all are being impacted by the current pricing environment.

Accordingly, our guidance for 2013 is built upon the assumption that delivery of our existing ASF backlog will be much slower than we had been assuming, with a corresponding increase in risk of cancellations. Having said that, two of our largest ASF customers are in the final stages of securing government funding. In fact, one of these customers has recently been visited by the president of China, and there is a possibility that they could receive incremental funding and be in a financial position to make a much bigger investment in calendar year ’13 than previously anticipated.

This potential upside is not reflected in the calendar year ’13 guidance that we are providing today. Cost remains a major driver for our ASF customers, and it is essential in today’s pricing environment that manufacturing costs continue to come down. While we expect prices to stabilize, we do not expect prices to improve.

Given this scenario, we’re working to accelerate the availability of ASF upgrades and productivity enhancements that will serve to lower costs further. These upgrades will include [unintelligible] system to drive higher performance, as well as lower consumables cost and process enhancements that will be critical. While accelerating the pace of new ASF upgrades will have a cost, we see this as a critical investment that will bolster our business and better position our ASF customers to operate profitably despite low market prices.

Our view is that the current slowdown in the LED sector is temporary, and that there are several catalysts that will spur future demand. We believe LED demand is likely to strengthen by the end of calendar year ’13 as adoption by the general lighting market accelerates and government regulations aimed at phasing out the use of incandescent lighting continue to be implemented. We also remain very optimistic about the emergence and development of new sapphire applications outside of the LED sector.

We continue to make good progress on driving the adoption of sapphire in cover and touchscreen applications and remain excited about those opportunities. Although we continue to expect that orders for ASF units that address the screen segments will begin to materialize in the second half of ’13, for the purposes of our guidance we have assumed that revenue will not ramp significantly into 2014.

We also believe that our recently acquired Hyperion implanter technology has significant potential in the cover and touchscreen market. We expect Hyperion will provide a path to cost reductions in the manufacturing of sapphire covers that will allow the use of sapphire at costs that rival current solutions while dramatically improving performance.

Before moving on to our specific guidance for Q4 and calendar year ’13, I’d like to comment on our growth strategy. Combined with our initiatives and the core business, we believe the acquisitions we have completed provide the company with significant potential to drive GT’s business through 2014 and beyond. Consequently, we intend to put our M&A program on hold, and focus on working with identified technology partners and utilizing our internal resources to address the opportunities we see ahead.

We remain focused on developing our silicon carbide furnace technology, and remain on track to introduce this to the market in early ’13. We expect that we will see modest silicon carbide orders in the second half of 2013, but have assumed that we’re not likely to recognize significant revenue into 2014.

With that, I’ll turn the call over to Rick.

Rick Gaynor

Thanks, Tom. Based on our recent market diligence, our current view on Q4 and full year 2012 is as follows. We expect revenue in the range of $95 million to $102 million for Q4. This assumes that December quarter revenue will be predominantly from the polysilicon business with very limited contribution from the DSS and ASF businesses. This also assumes that the $37 million FBR reactor order and backlog will not ship until Q1, 2013.

For the full calendar year ’12, we expect revenue in the range of $726 million to $733 million, with the revenue split by business for the year at approximately 62% for polysilicon, 31% from sapphire, and 7% from PV.

Given PV market conditions, we expect to write down the majority of our DSS inventory and take a charge related to this and other inventory related charges in the range of $80 million to $90 million. Excluding the effect of these charges, our gross margin range for Q4 is approximately 34% to 36%, bringing the current year 2012 gross margin range to 38% to 40%.

We are also evaluating potential impairment related to goodwill, long-lived assets, and other intangibles for the PV business that could impact the December quarter. Excluding the impact of these potential impairments, we expect opex to be in the range of $49 million to $51 million in Q4 and $151 million to $153 million in calendar year ’12, and R&D in the range of $23 million to $25 million in Q4 and $71 million to $73 million in calendar year ’12.

Capex is expected in the range of $5 million to $7 million in Q4 and $41 million to $43 million for the full year. And our effective tax rate for the full current year is expected to be 39%. We continue to expect an estimated weighted average diluted outstanding share count of approximately 121 million shares for the calendar year.

Our non-GAAP EPS range for Q4 is now a loss of $0.05 to a loss of $0.10, which brings our calendar year ’12 non-GAAP EPS range to $0.77 to $0.82. The non-GAAP EPS range excludes the impact related to the inventory charges and any potential charges related to goodwill, long-lived assets, or intangibles, as well as stock compensation, contingent consideration, amortization, M&A costs, and noncash interest expense. We believe our balance sheet at the end of calendar year ’12 will reflect over $400 million of cash and total debt of approximately $300 million.

And finally, based on our Q4 revenue assumptions, the removal of largely all DSS orders from backlog, and other backlog adjustments that we anticipate making between now and the end of the year, we expect to end the year with a backlog of approximately $1.2 billion.

Based on current market conditions, and uncertainty relative to delivery timing of certain orders in backlog, we believe that approximately 25% of this backlog is at risk. Most of this risk relates to ASF deliveries that we do not expect will be delivered within the next 18 months. We will provide further backlog segment and profile details when we report our Q4 results in February.

Moving on to our preliminary view of calendar year ’13, given the market and business dynamics Tom addressed earlier, we expect the following for next year: revenue in the range of $500 million to $600 million. Assuming the midpoint of our range, the split by business would be approximately 1% from the PV segment, 42% from the polysilicon segment, and 57% from sapphire.

Gross margin is expected in the range of 35% to 37%. Calendar year ’13 R&D is expected in the range of $75 million to $80 million. Total operating expenses are expected to be in the range of $152 million to $158 million, which compares to prior year opex of $151 million to $153 million. The calendar year ’13 opex range reflects the addition of approximately $16 million of expenditures to support new technology development programs such as Hyperion, silicon carbide, and gallium nitride.

We are able to add these targeted investments without significantly increasing our overall spending year over year because of the reductions we have made to our base operating costs. Our capex is expected to significantly decrease to approximately $11 million to $13 million in calendar year ’13, mostly directed at new technology investments. And non-GAAP EPS is expected in the range of $0.25 to $0.45, assuming a diluted outstanding share count of 124 million.

Based on our conservative view of new bookings and backlog roll off, we would assume that our cash position at the end of calendar year ’13 would be approximately $225 million to $275 million. We expect the second half of calendar year ’13 to be stronger than the first half.

As per our normal practice, when we report year end results in February, we intend to provide further detail on the quarterly flow of our business. And with that, I will turn the call back to Tom.

Tom Gutierrez

Thanks, Rick. Despite what’s likely to be a challenging near term period ahead in the markets that we serve, we continue to believe GT has a solid future. We expect to remain profitable in 2013, and resume growth in 2014.

We have sized the company and tailored our investment strategy to fit the current market environment. We have done so in a way that balances our short term and long term goals, ensuring the key investments to drive future growth are maintained, but taking decisive action to control and redirect our spending, exit the DSS business, and focus our current investments only in areas that we are confident will drive growth.

GT as a company has weathered previous downturns. We expect to exit this downturn as a stronger, more diversified company with market leading positions in several growth industries. With that, we’ll open up the call to questions.

Question-and-Answer Session

Operator

[Operator instructions.] And our first question comes from the line of Krish Sankar with Bank of America Merrill Lynch. Please proceed.

Thomas [Yay] - Bank of America Merrill Lynch

Hi, this is Thomas [Yay] calling in for Krish Sankar. In light of the termination and debooking of DSS backlog, and your decision to stop any meaningful investments, can you update us on any developments around discussions you have around any other strategic options you have for DSS, and what some of the factors might be in terms of impacting your decision over what to do with that business?

Thomas Gutierrez

Certainly we expect to work to convert as much of that inventory as possible to cash, although that’s not reflected in our cash forecast for the year. Other than that, I’m really not in a position to talk about discussions I might or might not be having relative to what we do with the DSS technology portfolio that we have, etc.

What we want to make clear is our belief that in order for the solar industry to solve its structural issues related to costs versus pricing, that multicrystalline technology is essentially out of running space. And that problem is not going to be solved by taking another 5% out of the cost of multicrystalline production. It’s going to require new technology for high efficiency, low-cost end type structures. And that’s what we’re going to focus in on.

Clearly we have valuable technology assets in DSS, and there might be people that are interested in that. But at the moment, there’s nothing to report other than we will drive to convert as much of that inventory to cash as possible.

Rick Gaynor

I think it’s important to remember too that this is not us backing away from the market because there’s any competitive factors. In terms of market share, there’s no market to share. This is not a case of us yielding the field to any competitors. There is just a lack of any activity in the DSS market right now, and as a result you’re going to see us making investments in it.

Thomas Gutierrez

And then the last point that I want to make clear, as our customers also listen to some of these calls, is we intend to continue to support our existing customers with aftermarket service and support and that kind of thing. It’s really focused on additional R&D or focused on additional selling resources that will pull back.

Thomas [Yay] - Bank of America Merrill Lynch

Just digging deeper into the liquidity issues, can you talk about if you’re seeing it increasingly affecting the LED sector? Is it broad-based among your customers? What factors do you see that could be leading indicators that might start improving down the line?

Thomas Gutierrez

Rick and I spent pretty extensive time with five or six different banks in Asia over the last month, and the banks in general, their balance sheets are solid, from what we heard. The issue is that most of them have a lot of exposure to solar, and some of them are concerned that they will create another problem like they did in solar and the LED sector.

And since there’s a lot of LED device makers that are struggling to make a profit, there is a concerted effort, shall we call it, to not expose their balance sheets to these weak segments until there’s signs of a recovery. We expect that the recovery will come first in the LED sector, but that the recovery in the solar sector will take an extended period of time, because it requires implementation of new technologies.

Operator

And our next question comes from the line of Satya Kumar with Credit Suisse. Please proceed.

Satya Kumar - Credit Suisse

I was wondering if you could clarify if you’re expecting any meaningful orders in Q4 to be recorded, and what the composition of the $1.2 billion backlog would be at the end of Q4 between the ASF and poly?

Thomas Gutierrez

We’ll provide more detail on the backlog composition when we do our call for the full fourth quarter, because, you know, there’s still several weeks left. But I would probably venture to say that other than the big DSS de-booking that we’re talking about, taking the DSS out of backlog, the composition of the backlog doesn’t really change substantially from last quarter.

Satya Kumar - Credit Suisse

Okay, so I can take the DSS off and take the revenue from poly and the balance is in the sapphire?

Thomas Gutierrez

That will give you the general ballpark.

Satya Kumar - Credit Suisse

Tom, I think the opportunity that we’re pretty interested about is clearly on the Hyperion side. I was wondering what updates, if any, you can give us on the progress made on integration with Twin Creeks. And at what point will you actually make the first exfoliate from a sapphire disc, so to speak, on the Hyperion? What technical milestones should we look forward to as we track your progress through the year?

Thomas Gutierrez

First, just to correct some terminology, we bought the assets of Twin Creeks. We actually didn’t buy the company. That’s an important point to be made. And the assets relate to the Hyperion technology. The team is integrated.

We’re moving fast now to put our test [plans] in place and to start experimenting with exfoliation in a variety of different areas. And we expect to make continuing progress through the year, but our target is generally to be in a position to have our first R&D samples and all that in the second half of this year.

We’re very excited about it. We think that it has the real potential of putting the sapphire solution into a cost ballpark that’s competitive with current solutions. And that’s pretty big.

Operator

And our next question comes from the line of Amir Rozwadowski with Barclays. Please proceed.

Amir Rozwadowski - Barclays

Tom, you painted a pretty candid picture in terms of your thought process around recovery in the solar sector, and when you expect it to come about. I was wondering, from a polysilicon perspective, clearly there is the overhang with respect to the potential tariffs, but we’ve also seen some news about people perhaps adding additional capacity in other geographies that haven’t typically housed capacity. I was wondering if you could give us some color around your opportunities around that.

Thomas Gutierrez

We’ve stated before that we have somewhere between $400 million and $500 million worth of pipeline opportunities for new reactor orders in the Middle East and Southeast Asia. Those remain intact.

What I wanted to sort of make clear in the call is that’s not going to add to 2013 revenue, or for that matter really to 2014 revenue. It helps our cash position. We’ve not assumed that those orders will come in 2013. But those are orders that give extended life to the business into 2015 and 2016. We’re in a very good position to win those orders, because of our technical position as well as the fact that in those regions we’re viewed as, essentially, the lone technology competitor in terms of the performance of our systems. So those are the big opportunities.

What we haven’t factored into any of our assumptions is the idea that if China really does put in aggressive tariffs, it will increase the cost of polysilicon to the wafer and cell manufacturers that are in China, which is counterproductive. But if that drives an investment cycle in China for new polysilicon opportunities, that’s not included in our view. We’ve taken a very conservative view as to what could happen in China if they choose to make additional investments. And we’re still the best solution in the marketplace, technically. So we still see a solid, well-behaving business for an extended period of time with some good opportunities.

Amir Rozwadowski - Barclays

And then you mentioned on your prepared remarks that you’re taking what I interpreted was sort of a step back with respect to M&A activity at the moment, and mentioned that you’re looking for current partners. Can you give us any color in terms of how your discussions with very strategic partners may have been going? Any color around that effect would be helpful.

Thomas Gutierrez

I think probably more detail, on a specific basis, I can’t give you. But I think in general, we have people that are interested in the St. Louis operation as an operating entity, which sort of provides us, then, with the opportunity to focus on the technology side of the business. We’ve made so much progress as a result of building the facility and getting it up and running on the advancement of the technology that our confidence has risen. So those are conversations about whether or not the asset that we have in St. Louis can be passed on to a strategic partner so that we can focus our expenditures on the R&D side.

As far as my comments about M&A, there are licensing opportunities that we’re working on that don’t require us to go out and acquire a technology. There’s a variety of technologies out there that would help us with the penetration of the gallium nitride and the penetration of the power electronics markets that we’ve targeted. And it could potentially even accelerate our silicon carbide business.

What we’re essentially saying is that in this environment, we would rather take our firepower and focus it on what we’ve got, and accelerating those technologies to market so that we can drive growth in 2014, than using it to bring incremental, potentially dilutive acquisitions. So we’re taking a step back. We think our opportunity basket is full, given what we’ve already acquired, and we’re going to focus on developing that.

Operator

And our next question comes from the line of Jed Dorsheimer with Canaccord. Please proceed.

Jed Dorsheimer - Canaccord

In the $315 million or so of the sapphire revenues that you expect in 2013, are you assuming any of that is for cover glass?

Thomas Gutierrez

We’ve assumed some, but we’re assuming that while the orders will come during the year - and we’re gaining confidence that that’s a fact - that most of the revenue will fall into 2014. So clearly, if you listen to our call, what we’re doing is rather than being optimistic and making mistakes in how we use our cash, or how we sort of drive the business. We’re going to take a conservative view of the year, and then to the extent that we’re surprised on the upside, that’s good for everybody.

But our assumption is, orders in the tail end of the year, most of the $350 million comes from the existing backlog that we have a good handle on. And then what we’ve said relative to risk is we’ve taken anything that’s out beyond 18 months, that we can’t, in our judgment, assume is going to deliver in the next 18 months and put it into our risk bucket, for the time being.

Those are not cancelled orders, those are still live orders, but our view is, in this environment, anything beyond 18 months is risky, other than polysilicon. Because the polysilicon backlog is solid beyond 18 months.

Jed Dorsheimer - Canaccord

And did you mention if you’re going to be cash flow positive next year? Or the expectation?

Thomas Gutierrez

We said we are going to end this year at $400 million. And then we said, assuming our rather dismal forecast of orders from next year, and the smaller revenue, that we expect to end the year somewhere between $225 million and $275 million of cash balance, by the end of the year. So that sort of gives you the answer to your question.

Jed Dorsheimer - Canaccord

Your commentary around banks’ unwillingness to lend over in China and the lack of available credit, have you factored in sort of the government transition and the shutdown of the China A shares, and the resumption of the equity capital markets in the springtime?

Thomas Gutierrez

No, we’ve taken, as I said, a rather dismal view of that. We even noted, we’ve got one of our customers who appears to have a very serious amount of cash coming in their direction. And as I said, was even visited by the president of China just recently. And we’ve taken that upside, and we’ve said, for the time being, we’re not going to count it in our projections. So we’ve taken an, I suppose, a less-risky view of when that availability of capital rebounds. To the extent that it rebounds sooner and equity markets open up, and that government funding happens, that provides upside.

Rick Gaynor

The general feedback we received was that liquidity is made available to the solar sector, but predominantly just to keep existing operations ongoing. But capital for expansion in this environment is really being shut off.

Operator

And our next question comes from Pavel Molchanov with Raymond James. Please proceed.

Pavel Molchanov - Raymond James

You mentioned that you’re a little bit more optimistic on poly than perhaps the other two sides of your business. But spot pricing right now I think is $16 or $17 a kilo. How does that compare to cash production cost? I know in the past you’ve said maybe $20 is what you’re targeting? And we seem to be below that right now.

Thomas Gutierrez

I think it depends on the producer, right? Different producers have different weighted average cash production costs, depending on what technology they’ve implemented. What we’ve said is that if you implement our SDR 600 technology, that cash costs for the people that we can provide the technology to is below $14 per kilogram.

And as you know, we’re about to introduce our SDR 1000, or 1000 kg-plus machine, and that will drive it further below $14. We think that there’s a lot of inventory conversion going on right now relative to prices down in the low teens, and that there’s not a lot of people that can make even cash money at that level.

So I guess my perspective is that prices will probably settle in the high teens, and that cash costs are below $14. But you’re going to see some rather unusual behavior for the next six to nine months as people find themselves either surviving or not. And in fact, in China, I’d say 60-70% of the producers in China are shut down at the moment, because they can’t make money at these levels.

Pavel Molchanov - Raymond James

And you guys probably saw last week the Chinese government putting an extra billion dollars into domestic solar installation, promising to upsize the target for domestic installation to something like 40 gigawatts by 2015. Obviously a lot of the Chinese solar stocks jumped on that news. Has that perhaps given a ray of hope to the PV guys, and/or some of the poly players? Or do you think it’s just not a needle-mover in the grand scheme of things.

Thomas Gutierrez

We look at it as a neutral to negative development. On the negative side, these investments are propping up players that, in a different environment, would go out of business, because they really can’t make money. But as I said in our prepared remarks, a lot of that investment is going to sustain employment levels and to sustain working capital needs. Nobody’s using that money to add capacity in any serious manner.

And the move toward increased installations on the home front, I think, is also intended to provide an outlet for that production into China itself, given that I think there’s an anticipation that external markets will become less and less viable as the tariff regimen throughout Europe and the U.S. is put in place.

One of the negative developments that really got negative very quickly, since our last quarterly call, is that once the tariffs that were announced in the U.S., I think everybody was hopeful that the European Union would take more constructive approach to tariffs, but it appears that it’s gotten even more aggressive. And the expectation that significant tariffs will be put in in Europe has grown.

And so as a result, it’s good news for the people themselves, for these companies in China that are struggling, because they’ll be able to continue to operate. But it won’t be in a profitable manner, and it will be strictly to sort of keep the employee levels up. And it will allow some people that should otherwise not continue to operate to operate. And that means less consolidation. So we don’t see it as a positive thing.

Operator

And our next question comes from the line of Shawn Lockman with Piper Jaffray. Please proceed.

Shawn Lockman - Piper Jaffray

I was wondering, as we look at your 2013 guidance, how should we think about profitability in the first half versus second half of next year?

Thomas Gutierrez

Well, the second half will be stronger, but we’re still finalizing the actual breakout of that revenue on a quarterly basis. And we’ll provide that shaping when we traditionally do, which is during our February earnings call.

Shawn Lockman - Piper Jaffray

And if we look at, then, just in terms of your gross margins and your 35% to 37% range, can you kind of tell us just the puts and takes of what could drive the higher end or lower end of that, just in terms of any inputs on pricing or other factors that might be impacting that?

Thomas Gutierrez

At this stage in the game, there’s so much leverage associated with volume that that’s really the key driver. We’ve taken such a conservative view of next year, at these volume levels, it really has an impact on absorption. And we don’t want to lose our ability to respond on an upside. And so while we’ve cut back quite a bit of investment and we’ve really skinnied ourselves up for the journey through 2013, we don’t want to put ourselves in a position where we get surprised on the upside, that we can’t respond. And so it’s really leverage on volume that’s going to drive gross margins.

Rick Gaynor

We think we’ve been quite pragmatic and realistic in terms of our pricing expectations for next year. So we don’t see a lot of movement on that. We really think it’s a volume equation for us next year.

Operator

And our next question comes from the line of Jeff Osborne with Stifel Nicolaus. Please proceed.

Jeff Osborne - Stifel Nicolaus

Tom, for next year should we think about the first half of the year being largely focused on the polysilicon segment given that push out from this year into next, and the back half of the year being more the sapphire exposure?

Thomas Gutierrez

Clearly I think the sapphire business will do better in the second half, as some of these other opportunities really start to ramp. But at the moment, I’d rather not give the shaping by segment for first half versus second half, because we’re still basically going through the analysis, and aren’t ready yet to speak to that.

Rick Gaynor

I think it’s fair to say that if you’re looking at the guidance we gave for Q4, and saying that predominantly the revenue is coming from polysilicon, if you’re asking if that continues, I think that would not be correct. We do expect to see meaningful sapphire revenues in the first half.

Jeff Osborne - Stifel Nicolaus

And then on the backlog, can you give us a sense of how much of the revenue expect for next year you have covered with deposits? Obviously that varies by segment, but in particular with the sapphire exposure that you’re forecasting to come in, how much of that has money down, so to speak?

Thomas Gutierrez

Without giving the number, which we’ll give, in general, I think, given our modest revenue expectations for next year, we’re in pretty good shape relative to our backlog and the coverage on our backlog. But I think we’ll provide more details on that in February.

Rick Gaynor

Overall, we do have deposits, as we typically have had, in both sapphire and the polysilicon businesses. Where we were running virtually naked on deposits was in the DSS business, and as you know we’ve effectively taken that completely out of our guidance.

Jeff Osborne - Stifel Nicolaus

On the ASF upgrade, when should we expect that? What is it, you’re going from 100 kg to 130 kg?

Thomas Gutierrez

We haven’t said specifically what it is, and so our point of view is, as you know, that we have a cost target to get down close to $2 per millimeter manufacturing cost. Our intent is to substantially accelerate that into the first half of the year. And we’ve kept the investment in place to do that.

And I think just in general, from our concluding remark standpoint, we probably had the opportunity to take operating costs down further, by not investing in gallium nitride, into silicon carbide, and some of the other things, and Hyperion, for example. And obviously we have the opportunity to say, well, life is what it is for our customers on the ASF side. But I think we’ve probably got $15 million to $20 million worth of focused investment driven in these new areas because I think this is a company that will invest during this downturn, unlike many that basically just completely pull back and stop buying pencils.

And so as a result of that, we’re pretty focused on making our customer succeed, which is what differentiates us from a lot of other people. We’re not just equipment players.

I believe that was the last question. I want to thank everybody for their participation this morning. While the news of what’s happening in the marketplace, which should come as no surprise to anybody, particularly in solar, is difficult, I think the message that we’re sending is we’re being cautious about our view for next year, but we are very, very optimistic about our opportunities as we move into 2014 and are keeping investment in place to make that happen.

And should we be wrong about the length of the downturn, we’re very well-positioned to take advantage of a quicker turnaround in the markets that we serve. But I think you’ve come to know us as a fairly conservative company, and one that’s weathered previous downturns, and we expect to do that again in a very positive manner.

So I want to thank everybody, and look forward to speaking to you individually. Thanks.

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Source: GT Advanced Technologies CEO Discusses CY2012/CY2013 Guidance (Transcript)

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