Advanced Energy Industries' CEO Hosts Acquisition of REFUsol Conference (Transcript)

Apr. 9.13 | About: Advanced Energy (AEIS)

Advanced Energy Industries, Inc. (NASDAQ:AEIS)

Acquisition of REFUsol Conference

April 09, 2013 9:00 am ET

Executives

Annie Leschin

Garry W. Rogerson - Chief Executive Officer and Director

Danny C. Herron - Chief Financial Officer and Executive Vice President

Gordon B. Tredger - President of Solar Energy Business Unit

Analysts

Thomas Yeh - BofA Merrill Lynch, Research Division

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Edwin Mok - Needham & Company, LLC, Research Division

Shahriar Pourreza - Citigroup Inc, Research Division

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Advanced Energy Conference Call. My name is Theresa, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to your host, Ms. Annie Leschin of Investor Relations. Please proceed.

Annie Leschin

Thank you, operator, and good morning, everyone. Thank you for joining us on this conference call announcing Advanced Energy's acquisition of REFUsol, one of the leading PV solar inverter manufacturers. On today's call, Garry Rogerson, Chief Executive Officer; and Danny Herron, Executive Vice President and CFO, both of them will be providing prepared remarks. Gordon Tredger will also be joining us as President of AE's Solar Energy business and available during the Q&A portion. A press release with information on today's announcement can be found on our website at www.advanced-energy.com.

We have prepared slides to accompany this call, which are also available on the Advanced Energy Investor Relations website. Additionally, a replay of this conference call will be available later today on the Advanced Energy Investor Relations website.

The presentation and the matters that will be discussed today include forward-looking statements that are subject to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, including the expected benefits of the acquisition to Advanced Energy, such as the expanded product portfolio targeting commercial markets and other geographies worldwide and plans regarding the integration of REFUsol, including statements around revenue, accretion and synergy expectations, earnings targets, aspirational goals and expectations relating to the earn-out under this acquisition agreement and timeframe. These forward-looking statements are only predictions and may differ materially from actual events or results due to a variety of factors, including, among other things, the potential impact on REFUsol's business due to the uncertainty around the acquisition, the retention of REFUsol employees and the ability of Advanced Energy to successfully integrate REFUsol and to achieve expected benefit, as well as business and economic conditions and growth trends in the solar inverter industry, markets in various geographic regions, global economic conditions and the uncertainties in the geopolitical environment and other risk factors set forth in Advanced Energy's most recent reports on Form 10-Q and 10-K. Any forward-looking statements in the release and on this conference call are based on limited information currently available to Advanced Energy, which is subject to change. Advanced Energy will not necessarily update this information.

Lastly, as reiterated previously, aspirational goals and targets discussed on this call or in the presentation materials should not be interpreted in any respect as guidance.

And now I'd like to turn the call over to Garry Rogerson, CEO of Advanced Energy. Garry?

Garry W. Rogerson

Thanks, Annie. Good morning, and thank you for joining us today. As you know, early today, we announced the acquisition of REFUsol, a privately held solar inverter company based in Germany for approximately EUR 59 million in cash after a EUR 9 million assumption of debt and a EUR 1.8 million reduction of net working capital. In addition, there is the potential for an earn-out based on achieving stretch goals in the first 12 months, which Danny will discuss in a moment. Overall, this acquisition is very complementary, bringing us new technology, extending our product portfolio and broadening our geographic distribution to strengthening our position as a global supplier of solar inverters to the utility and commercial markets. We see this as a considerable step towards achieving the strategic plan and aspirational goals that we laid out to you at the end of 2011.

Since September 2011, we have made significant progress on those goals. We've reduced our cost structure by more than $30 million and identified an additional $25 million of savings. We have generated $111 million of cash during 2012. Through this acquisition, we expect to accelerate our profitable revenue growth.

The addition of 3-phase string inverters enhances AE's existing portfolio with a new technology that has several advantages. These include a compelling price/performance ratio, ease of installation, improved uptime and quick service ability to commercial applications, where flexibility and modular design are essential.

While AE has focused on higher power levels and central inverters for commercial and utility applications to date, this product line gives us the opportunity to target and better serve the needs of commercial customers with inverters in the 8-kilowatt to 24-kilowatt range, ideally suited for rooftop and, potentially, large applications.

3-phase string is fast becoming the inverter technology of choice of this portion of the market. In 2012, 3-phase string inverters led the growth in Europe, and we believe there is significant potential worldwide. In particular, the U.S. commercial market, which we estimate will be approximately $235 million in 2013, is projected to be one of the fastest-growing regions for 3-phase string inverters.

By acquiring a proven technology, we have an established product line that we can now offer in North America, where we have a strong infrastructure and leading position. Additionally, REFUsol has a strong foundation and a customer franchise and excellent distribution in several fast-growing territories, including India, Asia, Mediterranean countries and Eastern Europe. This positions AE as one of the few companies with a leading market presence in some of the largest inverter markets worldwide and accelerates our entrance into emerging geographies as well. For example, in India, the combination of our existing relationships with REFUsol's low-cost R&D center and direct sales force should accelerate our efforts to penetrate this market.

Another reason for the acquisition is REFUsol's fabless manufacturing model. Not only does this align perfectly with AE's overarching business model, to centralize or outsource manufacturing. While utilizing our efficient supply chain to reduce costs, it also ensures a uniform production process and enables worldwide distribution. We see the lack of a factory as a real positive, giving us lower investment, positive effects on cash generation, as well as quicker integration. Overall, we expect this acquisition to be accretive to earnings in the next 12 months.

In closing, this acquisition is just one of many ways that we are aggressively pursuing our strategic plan and goals. We successfully generated $111 million in cash in 2012, are continuing to drive our cost down and believe this acquisition will accelerate our solar energy revenue growth and profitability in the fastest-growing applications and geographies worldwide. All of this is putting us closer to our aspirational goal of $2 of earnings per share.

I would now like to turn the call over to Danny, who will discuss the financial terms of the deal in more detail. Danny?

Danny C. Herron

Thanks, Garry. Let me begin by reviewing the terms of the transaction. We paid REFUsol approximately EUR 59 million in cash after assuming EUR 9 million of debt and reducing net working capital by EUR 1.8 million. If AE's Solar Energy business achieves EBITDA of USD 46 million for the 12 months after closing, Advanced Energy will pay the solar REFUsol EUR 2 million in an earn-out. For every USD 1 million of additional EBITDA achieved above USD 46 million, Advanced Energy will pay an additional EUR 2 million, with a cap of EUR 10 million at USD 50 million of additional EBITDA. The earn-out is payable half in cash and half in stock.

With the addition of REFUsol, we anticipate increasing our annual revenue run rate in our Solar Energy business to over $400 million in 2014, exceeding our aspirational goal for this business of 20% to 22% revenue growth and positioning us to achieve our 10% to 15% operating income goal.

The size of this transaction is also allowing us to accelerate some cost reductions that we had planned to take later in the year, including the elimination of certain products and facilities. In particular, we are consolidating our factory in Bend, Oregon, into our Fort Collins facility. We also plan to combine our German office into REFUsol's and their U.S. offices into ours. In total, we anticipate approximately $8 million to $10 million in synergies. At the same time, we expect to invest in and expand our field sales. We plan to integrate our 2 product lines over the next 6 months and believe the deal will be accretive to earnings over the next year.

As we've discussed in the past, we see multiple ways to achieve our 2014 aspirational goals laid out on Slide 14, with acquisitions being just one of them. In just over a year, we've made a great deal of progress on cash generation and cost reductions. And now we have the potential to grow our business, as you can see on Slide 15.

Let me take you through a specific example of what 2014 could look like on Slide #16. With this acquisition, we believe that the revenue run rate for the Solar Energy business could be in the $400 million to $430 million range. If the thin film end markets begin to recover as expected, that business could return to the $300 million range. Based on those assumptions, we believe we have the potential to reach our strategic top and bottom line goals. But as we have said before, these are aspirational goals and targets and should not be considered in any respect as guidance.

With limited debt on our balance sheet related to the assumption of REFUsol's debt and assuming we continue to generate strong cash, as we did in 2012, we still have plenty of dry powder to pursue other potential acquisitions. All in all, this acquisition is yet another step along the path to achieve our 2014 aspirational goals.

I'd now like to turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Krish Sankar from Bank of America Merrill Lynch.

Thomas Yeh - BofA Merrill Lynch, Research Division

This is Thomas Yeh calling in for Krish Sankar. Is it safe to assume that you're still focused largely on commercial and utility markets, and there is still no desire to really enter into the residential area?

Garry W. Rogerson

That's correct. We have no interest in residential at all. It doesn't fit our model very well. It's a much lower margin business. The growth prospects of utility and commercial, in our opinion, are much greater. So we feel we're in the sweet -- actually, we feel we're in the sweet spot of the industry. I mean, if I were choosing where to go, I would choose utility and commercial. If I were choosing, which countries to go, I would choose the U.S., Pacific Rim, Eastern Europe. So I think we've got ourselves into a position of being in the growth areas of the solar business at the present time. We have no thought process of getting into the low-end marketplace.

Thomas Yeh - BofA Merrill Lynch, Research Division

Got you. And you mentioned in the slide that 3-phase inverters for the U.S. market was about $235 million expected to be in 2013. Can you give us a sense of the market size globally and how REFUsol's share fits into that market?

Garry W. Rogerson

I can give you some color. I can't answer your question specifically. I mean, REFUsol, actually, within Germany, is the #2 player in the 3-phase string. In Europe, it's the #3 player. There aren't that many players in the world, by the way, so I just want to make sure we understand that. They've got some huge technology advantages, that it's an incredibly easy to install and efficient product. And now we're releasing it into the U.S., which is the real growth market for 3-phase string. And actually, I'm just talking to our Indian sales manager an hour ago, and they are selling 3-phase string pretty steadily into India, so yes.

Thomas Yeh - BofA Merrill Lynch, Research Division

That's helpful. And then just maybe a last question, can you give us maybe a trailing 12-month sales for REFUsol, if that's possible?

Garry W. Rogerson

That's -- no, it's a really nice question actually. And what -- we are not taking the acquisition in that way. We're not thinking in that way at all. We're thinking about the future for us, which is this technology is really good technology that we have to have if we want to play in the lower end of the commercial marketplace, which we've designed to play there with both technology. And then we thought distribution channels. India is a very obvious one here, which maybe I'll dwell on for a few seconds. India, they have a distribution sale, they have salespeople. They also have manufacturing there, and they have a design center. So they don't have manufacturing, they have a design center, and they outsource to Pretil [ph] Engineering for manufacturing. And so we got a lovely model here to grow into India.

Operator

The next question comes from Joe Maxa from Dougherty & Company.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Can you break out where they're seen -- I mean, I know you're talking about you're looking at it a little bit differently than historically.

Garry W. Rogerson

Yes.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

But I mean, I'm just wondering where they're -- you said #2, I believe, in Germany, #3 in Europe.

Garry W. Rogerson

Yes.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Have they had much sales outside of Europe to-date?

Garry W. Rogerson

Well, yes, the nice thing about it -- one of the attractions of this company was its distribution channels. So I just mentioned India, which is the one I'm honestly the most excited about. It has a lot of potential for us at 3-phase, these inverters. But they all do -- they do also very well in Eastern Europe, Mediterranean countries and some areas in the Pacific Rim, including Korea. So they are pushing out into different countries there. Turkey is a very nice country for them. It will always become a nice country for them. So they have got a nice distribution outside. Where they haven't got distribution was the U.S. They tried and really not succeeded very well in the U.S. when they have a great product. So I think by putting our name onto it, we'll be -- and our distribution and our support, we'll be able to grow it well.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Can you talk a little bit more about competition? You said there's not a lot of players, but there's a couple of bigger players in the 3-phase, and it seems like a pretty competitive market overall. So how do you -- I mean, it's a great technology, but how do you differentiate where you think you can be successful?

Garry W. Rogerson

Performance and installation. This is a very easily installable product, and the performance of it is excellent. I'll ask Gordon to elaborate a little bit later on that, but the performance is really good on the product. Installation is good. It's got low cost of goods. It's a good product.

Gordon B. Tredger

It can be installed by one person, Joe.

Garry W. Rogerson

Yes. You can just mix it and pop it on a wall.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Last for me and I'll move on is this...

Garry W. Rogerson

Yes.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

So how did this become available to you to make the acquisition? And were they struggling? I believe they had been a white seller for -- white label their goods for others to sell it in the past. Will that continue?

Garry W. Rogerson

I'm sorry, you said have -- do they have RAMs [ph] in products before. How do they come about? Well, it doesn't -- for us, I think you've heard us talk in the past that we are continuing to look for acquisitions. I think you've heard me talk in the past about expanding the product line and trying to get into new geographies, and this company came up as one of those companies. We would then go out and look at the products by ourselves in the marketplace to make sure they are what we want. And then, of course, we talked to the owner and see if there's anything we can do.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

I was just wondering if you paid up for this because it's a good company or they were struggling. I mean, what was the rationale for why they wanted to sell?

Garry W. Rogerson

I'm sure if I was the owner, I'd like dollars in the bank. I'm presuming that's why he wanted to sell it. He also had his company in mind in that -- he was finding it hard to get into the U.S. and Canada, into North America. He was finding it very, very difficult. I think that was frustrating, and he saw the benefits of the 2 companies being together. And that's the reason -- that's one of the reasons. Unlike -- and I've had a lot of experience buying European companies in my time. They are interested in the cash, as I said right at the beginning, but they are very interested in their employees succeed, and it's a win-win for everyone. And he took a lot of time in trying to understand how it would work for his employees and his customers as well. So we're a great fit. I mean, it's a great fit, product-wise, very little -- there is some overlap but not much; geographic overlap, not much. It's just a very nice fit. And now when I stand up, we're now a global company. And then the next point, which I find which is really important, which distinguishes us from the rest, is we don't manufacture. We outsource as much as we can. And I think that is the right model for this industry. And I think we're unique of the large players in doing this. So you can see that we can generate cash. We can invest in our R&D. We can invest in acquisition. We're not investing in part assets.

Operator

Next question from the line of Edwin Mok from Needham & Company.

Edwin Mok - Needham & Company, LLC, Research Division

So I guess first question I have is just trying to understand a little bit on the numbers. So just curious, what kind of margins are they generating right now? And do you need to have this $8 million to $10 million of kind of cost synergy to bring that part of the business to be profitable? Or how do we kind of think about it?

Garry W. Rogerson

Well, I think as you get to know us as a company, if there's cost there that is not necessary, we'll just get rid of it. It's not a case of whether it will make us profitable or not profitable. We will continue to drive down our costs, and again, I believe that is something that will distinguish us in the future from others, that if we say we're going to take our costs out, we do take our costs out, and they don't come back. So yes, for us to have wanted to buy this business, I love to see cost synergies. And there are cost synergies there, so I like to take them out. This is strategically a great fit for us. It just is -- I'll keep on -- from the product technology, from the geographies, from the way they manufacture, it's just a very, very nice fit for us. It will take us a little time to integrate it and get it up to its potential, but just as good as I've seen actually.

Danny C. Herron

I mean, Edwin, if you'll refer to our slides, Slides 6 and 8 really show very really overlap of geography, very little overlap of products. The business is profitable, but we think we can make it more profitable, and they can help us accelerate our Solar business.

Edwin Mok - Needham & Company, LLC, Research Division

Okay, great. And then I guess it's kind of tied to that -- it's actually kind of tied to my second question. So you guys mentioned a lot about the distribution channel, right, in Eastern Europe, then Korea and, I think, India so [indiscernible]. Just curious, I guess 2 things, right. First is how much do you think you can leverage those distribution channel to push your products that you guys already have and does AE itself, not REFUsol? That's the first question. And is that baked into the $400 million assumption, the target that you guys have laid out, or is that incremental to that? That's for the first part, and I guess I'll ask the second part after you guys are done.

Garry W. Rogerson

So just asking -- answering your question another way, the U.S. is fairly obvious, that we can take their products and bring them into the U.S. So there you go [ph] . Now the other way around, for instance, in India, they are wanting a 500 product, and we have a 500 product. So their distribution will take our product line in. So in all cases, there is some product help. Their distribution channel can help us, and our distribution channel can help them. Another nice one is this product that's been developed, an SGEG, a 500 product. It's very low cost. SGEG is the China company that we partnered with. They are developing a 500 product, which now we can actually start manufacturing in India and distributing as you get Indianized throughout Indian sales force. So there are opportunities both ways for us.

Edwin Mok - Needham & Company, LLC, Research Division

Okay, that's -- actually, that's helpful. And then I guess lastly, I think they're one of the leading players in Germany, right? Any way you can kind of quantify how much of the business come from Germany right now versus archrival [ph]?

Garry W. Rogerson

Again, that's a good question and a significant amount has come in from Germany before. Remember what we're buying, we're buying technology, and we're buying distribution into growth countries. So we're not that interested in what they had in Germany or have in Germany. We're interested in the growth opportunities of these products in the future. But this data will come out later, and it was significant in the past.

Operator

Your next question comes from the line of Shahriar Pourreza from Citigroup.

Shahriar Pourreza - Citigroup Inc, Research Division

Just 2 questions. I'd be curious to see what this transaction can do to your market share leadership at the commercial and utility scale level in North America, coupled, obviously, with the Satcon bankruptcy, so maybe if you can just update us on what positioning you expect to attain from this. And then the other question is, a lot of the countries or regions where REFUsol operates in have been traded -- obviously, a lot of the competitors have been able to commoditize the products, especially in the micro inverter market. So maybe we can just comment a little bit, is there any danger of this -- the third string inverter being commoditized, where a lot of the competitors start to compete away margins?

Garry W. Rogerson

So we're not in the residential area. We're only in the commercial area. I don't think there's any way this product will get commoditized, is number one. Number two, we expect to gain strength in the low-end commercial marketplace in the U.S. through our distribution with these product lines.

Shahriar Pourreza - Citigroup Inc, Research Division

Any potential market share position you expect at the commercial and utility scale level?

Garry W. Rogerson

Well, if I'd look at the numbers which you look at as well, if we're at the numbers I tell you, we might be able to get to, we're clearly #3 going forward.

Shahriar Pourreza - Citigroup Inc, Research Division

In the world?

Garry W. Rogerson

In the world. And by the way, we're clearly #3. I just want to say we're clearly #3 with growth products, in the growth applications, in the growth geographies. So once we get this thing moving, we can clearly still keep climbing.

Operator

The next question comes from the line of Weston Twigg from Pacific Crest Securities.

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Just -- I just had a few follow-up questions. One, just wondering if you could give us an idea, the metrics used to justify the valuation on this acquisition, maybe the framework that you used.

Danny C. Herron

Well, obviously, we look at it as to what we believe the revenue and margin can be, and it's got a hit at cost of capital. A normal lag for our company is in the 12% range or so, if you do the normal lag calculation. And obviously, we want things that are accretive. All those metrics were hit in our evaluation of it. We think it's a good structure. The earn-out structure forces it to be profitable -- more profitable instead of doing an earn-out on revenue, which we don't believe in. We believe having an earn-out based on earnings is what's key to our shareholders, and that's what we've put into position here. And as we said, it will be accretive in the first 12 months. And if you look at the -- I think it's Slide #16, it certainly takes us above what our original goals were in our Solar Energy unit, at 20% to 22% growth. We'll be somewhere right in that neighborhood or higher. So it's in line our strategic plan, and we're very pleased to be able to acquire this and move forward.

Garry W. Rogerson

I think just to add a little bit to that, I listen to what have I've just said and Danny said, and we talked about revenue growth a lot. Getting bigger is allowing us now to take costs out earlier than we would otherwise going to do as well. So there's a lot of things we can do now, both in thin film and in the solar business, to start getting more and more costs out, which we are thinking will be about 12 months down the track. We can now -- we're now pulling forward because we have the ability to consolidate into something. So there are a lot of good things that come out of this for us. Yes, we get the revenue growth. I can get some more cost reduction out, and we can -- we'd be accretive pretty quickly with this one.

Operator

We have no question at this time. I would now like to turn the call over to Garry Rogerson, CEO, for closing remarks.

Garry W. Rogerson

Well, thank you for listening to us today. This is a really nice opportunity for the company. We will climb up in market share. We have lots of good costs to come out of the company. We're very excited here. And we will update you again in the earnings call in a few weeks time. Look forward to speaking to you then. Bye-bye.

Operator

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect, and have a good day.

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