GT Advanced Technologies' CEO Hosts Thermal Technology Acquisition Conference (Transcript)

May.17.13 | About: GT Advanced (GTATQ)

GT Advanced Technologies, Inc. (GTAT) Thermal Technology Acquisition Conference May 17, 2013 8:00 AM ET

Executives

Ryan Blair

Thomas Gutierrez - Chief Executive Officer, President and Director

Analysts

Nimal Vallipuram - Gilford Securities Inc., Research Division

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Krish Sankar - BofA Merrill Lynch, Research Division

Scott Reynolds - Jefferies & Company, Inc., Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Mahavir Sanghavi - UBS Investment Bank, Research Division

Operator

Good morning, and thank you for standing by. Welcome to the GT Advanced Technologies Thermal Technology Acquisition Call. [Operator Instructions] As a reminder, this call is being recorded. Now I'll turn the call over to Ryan Flame of GT Advanced Technologies Investor Relations. You may begin.

Ryan Blair

Thank you, and good morning. 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 2013 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, which is 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 statements under the heading Risk Factors in the company's report on Form 10-Q for the quarter ended March 30, 2013.

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 call will be available for 90 days beginning at approximately 10:00 a.m. Eastern today and can be accessed on the IR section of our website. 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, and thanks for joining us on short notice today to discuss our acquisition of Thermal Technology. With me on the call today is Rick Gaynor, our CFO. Following our press release last night, we wanted to take a few moments really [ph] to talk about the acquisition and respond to your questions.

As noted in our press release, the financial impact of this acquisition will not move the needle this year. As a result, we are reiterating our full year 2013 revenue guidance of $500 million to $600 million and non-GAAP EPS guidance of $0.25 to $0.45 per share. I'll provide a brief overview of the deal and then open it up for questions.

The acquisition -- this acquisition adds several key products and technologies that we believe will further diversify our business and capitalize on new market revenue growth opportunities. Thermal Technology is based in California and has developed a wide range of high temperature thermal and vacuum products used in the fabrication of advanced materials. We believe Thermal's technology portfolio will enhance GT's position in a number of areas that are strategic to the company.

In addition to the LED and touchscreen markets that GT is already involved in, Thermal's products have application in medical device, oil and gas and automotive markets. We expect to leverage GT's global footprint, world-class supply chain and Asia-based operations and sales channels to unlock Thermal's growth potential. We believe this acquisition also positions GT as the industry's leading provider of sapphire production solutions by expanding our sapphire product portfolio to include new annealing, KY and EFG technology to complement our ASF and then inspection product offerings and process know-how. Thermal Technology have approximately 100 of its first generation KY furnaces installed, and is currently in the final stages of testing its next-generation KY furnace, which is capable of producing 90-kilogram boules. We expect this next-generation KY furnace to be available for launch later this year.

We found that there are certain sapphire producers who, unlike our ASF customers, are committed to KY technology for historical, and in some cases, customer-driven reasons. GT will now be able to offer them a best-in-class KY solution. Thermal's EFG production technology is still in development. However, once fully developed and commercialized, we expect to be able to address market segments where ASF and KY technology are not ideally suited. Examples of various where EFG will be a better technical fit would be large surface area applications such as airframe windows, transparent armor on military vehicles and other large-format optical windows. There may also be some application for large surface area touchscreens where EFG technology could be cost effective. With ASF, KY and EFG sapphire growth technologies in our portfolio, GT is now uniquely positioned to address the wider range of customers.

We will continue to make investments in ASF technology and support our existing customers as they drive the lower cost and expand their market penetration. At the same time, we are committed to supporting our newly acquired customer base as they drive to advance the performance of their KY operations. Ultimately, our customers will be in a position to decide what technology is best suited for their business. We expect to have the best answer whatever path they choose.

Outside of Thermal sapphire products, we have also acquired several specialty Thermal technologies. This include a Spark Plasma Sintering or SPS technology, which we think has significant potential. The SPS technology simultaneously combines the application of pressure and electric current directly on a sample, allowing then ceramics to be obtained on the uniform heating at relatively low temperatures and short processing times. We believe that SPS has a wide range of applications in medical, military and hybrid electric vehicle markets.

We expect Thermal Technology business to contribute approximately $9 million to $14 million of revenue in the balance of 2013, primarily related to KY, sapphire furnace and specialty furnace applications. We expect minimal impact on EPS as the expenses and increasing share count are expected to limit the bottom line contribution during the initial year of integration. While we're not providing guidance for 2014, we do expect the Thermal business to be profitable and contribute to our growth in 2014 and beyond. We're very excited about the team, product set and expertise that Thermal Technology brings to GT.

At this time, we'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Nimal Vallipuram of Gilford Securities.

Nimal Vallipuram - Gilford Securities Inc., Research Division

My question is -- like already when you have a very popular product like ASF furnaces, is the KY technology, is that feeling somewhat different niche like a much larger touchscreen which ASF may or may not be able to penetrate the market? Or can you tell us qualitatively what does the KY furnace do or the ASF furnace in terms of the size of the screen or any other characteristic?

Thomas Gutierrez

Okay. I'm going to sort of step back a moment and give you an example in the solar industry. And so GT obviously had a very large market share in multi. And the company chose not to invest in mono. And so for many, many years, the company was not able to address about 40% of the market, where people or customers were making their own decision that mono was going to be better than the multi product. What we've seen in the sapphire market is that there are many, many customers out there that we were not able to address because, for historical reasons, and remember Kyropoulos was the first technology and their technology being used for many, many, many years in this industry, that they would -- that they basically, under any circumstances, would not consider switching over to ASF or another growth technology because their facilities were already optimized for KY. And in some cases, customers didn't want to retune their process. Their customers didn't want to retune their process to a different type of sapphire. And there are small differences between the different types of sapphire. And so our decision to add KY is not driven because they -- one, it opens up a new market that ASF can't get to from a performance or from a form factor standpoint. It's merely an acknowledgment that there are many, many customers out there that will never consider ASF because they are KY coat members, I suppose is the way to say it. And so this just opens up that market for us. It has nothing to do with the performance differences between the ASF and KY.

Nimal Vallipuram - Gilford Securities Inc., Research Division

And during your track record commercializing like existing technologies in a scale which has not been done when the technology was in the other companies, I'm not asking you to give a 2014 guidance, could you -- is it possible for us to see a similar kind of commercialization effort with the Thermal Technology KY furnaces going forward?

Thomas Gutierrez

I think, obviously we see an opportunity here, but it's broader than KY because you see the SPS technologies having significant opportunity. We also see EFG having some significant opportunity. And Thermal has a baseline product set of other specialty furnaces that we think we can leverage. And so again, without giving numbers or qualitatively sizing the business going forward, we feel that we've acquired something that build on across multiple markets. And the other thing I'll point out is that we're sticking to our diversification program. I mean, this is really a move to diversify, in one case diversify the customer set, because there's KY customers we wouldn't otherwise get, and in other cases, the new markets that are accessible because of some of the other technologies that Thermal brings to the party. But we see it as a good building block, one that we will be able to get a profitable business and good growth out of in the coming years.

Operator

Our next question comes from Jed Dorsheimer of Canaccord.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Congratulations on the acquisition. I guess just a technical one. How then can the EFG furnaces grow windows? And the reason that I ask is more of a business perspective question. With this new technology that you now have, any -- can you give us any help in terms of how much you think this may lower costs for windows?

Thomas Gutierrez

Well, there's puts and takes there. I think EFG on the one hand is closer to the form factor of a touch screen for sure. But the surface imperfections, the ripples so to speak that resulted in the ribbons and the thickness, the optimal thickness that you can grow in today's technology, we may be able to enhance this [ph] technology, but typically, it requires some additional surface grinding to be done. And so it's not clear that when you're done you get any substantial cost advantage over certainly the ASF technology. I think the uniformity of the KY boules makes it less ideal for touchscreen technologies. But I think the -- there's many different opinions as to whether EFG is lower cost or ASF is lower cost. Our view is that we expect to have both technologies but that it is not a slamdunk that EFG technology, as it exists today, okay, will lead to a lower-cost screen. What it will do, however, is it's much harder to get large surface area touchscreen using either ASF. And so what the EFG technology could bring would be access to larger devices. And then as you know, we're still working on Hyperion, which would allow us the ability to exfoliate either form factor and create a hybrid sapphire substrate product that would have costs similar to today's solutions.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Got you. So I mean, certainly, this acquisition sounds like you risked given you sort of a broader product platform and becoming more agnostic to whichever way that the industry decides to go in terms of the technology. I'm wondering, though, do you view this as accelerating at all, the timeline that you may have been -- may have had internally in terms of when you would view adoption of sapphire [ph]?

Thomas Gutierrez

No, not really, Jed. I think we -- I think you captured it first. We become technology agnostic and so it de-risks somebody selecting one path over the other, and thus not having a horse in the race, and so that it does. But in terms of accelerating the timeline, I think the timeline is driven by factors other than the actual sapphire supply. There is a massive supply chain that has to be put in place, and it does position us as one of the few that can actually respond to that supply chain explosion that has to happen.

Operator

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

Krish Sankar - BofA Merrill Lynch, Research Division

So Tom, now that you have the -- pretty much the entire suite in terms of the EFG KY effort, SGM method, is there a risk of cannibalizing some of your products that you bring to the customers or do you think the customers are already well entrenched to the technologies that they like that each of them has their own niche to play out?

Thomas Gutierrez

Well, I mean, our expectation is that ASPs will be similar, margins will be similar and besides -- and so not only will we be technology agnostic, we'll be margin agnostic as to which product the customer selects. The KY products that have been sold by Thermal in its history were in the same ASP range as ours, if not slightly higher. And so we don't see any cannibalization from that standpoint. Having said that, our ASF customers are very committed to ASF for their own reasons and for the reasons that we've pointed out to them. The new KY customers, no, we don't have to try and convince them to change religions, if you want to look at it that way.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it, that's very helpful. And then a quick follow-up. What percentage of Thermal's revenue comes from LED and sapphire? And also do they sell sapphire coals or do they just sell equipment?

Thomas Gutierrez

They only sell equipment and we're not at this point in the position to divulge their business breakout by sector. But certainly, most, if not all, of the KY equipment that they sold has been into the LED industry.

Operator

Our next question comes from Scott Reynolds of Jefferies.

Scott Reynolds - Jefferies & Company, Inc., Research Division

I just was wondering, now that you've made a number of acquisitions specifically in this space to address some of the more industrial applications in wafering. What overall do you see as potential holes in the platform? What might you look to address next? And/or is -- or do you view the overall products solution status pretty much full now?

Thomas Gutierrez

Well, let me -- if I step back and think of what we've put in place, I mean, I think we now have sapphire growth covered in every dimension. We have some downstream capability or technology that we required in annealing that will allow us to complement that along with the inspection technology. And so that end of the opportunity's very well covered. Downstream in the LED industry, as you know, we're moving into HVPE or InGaN growth technology that we believe will significantly lower costs and potentially improve the quality of products, and essentially significantly increase the capacity of any MOCVD that gets put in. So we moved downstream into that path. And I'm not projecting anything when I say this, but obviously, there are still downstream things that we might think of that would further increase our footprint in the LED industry. In the sapphire and the touchscreen market, our view is that we're not going to enter into fabrication technology. That's not our targets, and so our approach in that marketplace is to basically have the best of every type of growth technology that could possibly be adopted and complement that with our Hyperion exfoliation technology in order to get costs down to our equal or below the existing glass solutions that are in the marketplace, and so that we'll have a costs roadmap that is powerful to the players in the industry.

Scott Reynolds - Jefferies & Company, Inc., Research Division

And when we think about the cost per mix for the new products versus the old, obviously, the old large mix to China and largely new players, how should we think about the new customer mix?

Thomas Gutierrez

I think you have to go by, by industry sector. So in solar, we've been saying for quite some time that we see the -- a shift in the equipment market away from China, and that in factors of technology inflection point here as well as the geographic inflection point. So that customer mix, Southeast Asia, Middle East and potentially depending on what happens with the tariffs that the Europeans have just announced, there could be some opportunities in Western Europe, but it's going to be all next-generation technology. In the LED industry I think the mix of customers remains pretty much the same, China, Taiwan, Korea as being the big players, very little expansion outside of that arena for us in the LED industry. In the touchscreen marketplace, it's still up for grabs as to who adopts, where they adopt, where their supply chain is put in place and all that. So the difference will be that those will be all probably new customers in most cases, and some of our existing sapphire customers may or may not get a chance to play in that field.

Scott Reynolds - Jefferies & Company, Inc., Research Division

Sure. But specifically to Thermal, their relative customer base. I mean, are they selling to similar to historic sapphire companies or where do you expect incremental orders to come from some of the customers that you have ASF products with but don't have KY technology?

Thomas Gutierrez

Well, I think there remains a -- the key question that remains unanswered, we're not in a position, been saying for quite some time that we don't know what ultimate direction it takes in. The smartphone OEMs that are -- that we're in discussion with have multiple choices. They can either rely on the supply chain we're putting in place with our customers for ASF. Or if they choose EFG, we would then be developing a new EFG platform. But they could also decide to vertically integrate into their current fabricators or they could choose to go in a different direction. And so the good news for us is, while we certainly care about our existing customers and hope to dig in some of that business, that in the end, the business opportunity for us is the same whichever path they choose going forward. Earlier when Jed was asking me about technology acceleration, I did probably shouldn't have also said that the speed with which the industry adopts sapphire and the touchscreen is going to be driven by the availability of the supply chain. And so the supply chain has to be put in place with thousands of furnaces, annealing technology eventually for exfoliation and all that. And we're pretty uniquely qualified to do that. And by virtue of us having all these pieces in hand, it enables the adoption much sooner than it would if there wasn't such a vendor like we are to do that. The annealing technology takes various forms depending on the different processes adopted by the different OEMs, but there is an acceleration factor by the fact that now there is somebody in the supply chain side of things that could make it happen.

Operator

Our next question comes from Pavel Molchanov of Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

A high-level question for you guys. So you've done a fair amount of M&A in the past 12 months, and obviously, that's been telegraphed as a strategy. At this point, are you pretty well set in the markets where you want to be or are there still some adjacent areas where you think you could use a bolt-on acquisition?

Thomas Gutierrez

I think the limits -- the self-imposed limitation that we've put on is we're not going to use any significant amount of cash to -- for a bolt-on. Now having said that, we believe that there are still opportunities for us to be able to add to the portfolio. And there's a couple of characteristics that any bolt on has to have. One of them has to come with talent. We're not a 5,000-employee company. We run very lean, and so Thermal comes with a very good set of technical and management talent that'll help us, so that's one criteria. The other criteria is that it's got to be a technology that we don't like to add share, just of the same thing that we're already doing. We like to add things that increase our footprint in particular areas where our approach to operations are fabless manufacturing, if you want to call it that, can apply. And so -- but there are still opportunities that sort of fit that mold that we would be looking at.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. And then this next question is not specifically on the acquisition, but there were some news in the past week, of course, regarding a European tariff against China and some tariff retaliation by Beijing against international poly manufacturers. I just thought I'd get your thoughts on those data points over literally the last few days.

Thomas Gutierrez

Well, the cow hasn't come home yet, okay, in terms of how this is going to play out. I think there's still a lot of drama associated with whether or not there's going to be a negotiated settlement or not. The Chinese are holding the poly business and Germany sort of hostage to what direction this takes. And I read recently in the last couple of days that Germany has publicly said that they think that a negotiated settlement is best for obvious reasons. The -- and so at the moment, I don't think that there is a bettable endpoint for this because the politicians are still in the back room arguing, discussing how it's going to play out. If indeed those tariffs stick at the levels that we they them in place, it is a very substantial blow to the Chinese industry, which I might point out, we're not heavily betting on it at the moment anyway, and could potentially open up some opportunity for us in Western Europe. I think it'll be tough, okay? Kevin said the final decision's not made yet. I think it'll be tough for the EU to just back off now that they've come out publicly with such high tariffs. But I think the endpoint is not defined yet.

Operator

Our next question comes from Shawn Lockman of Piper Jaffray.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

I just wanted to see if you could shed a little bit more light on the gross margin trajectory of the Thermal business and maybe talk a little bit about maybe the EBITDA contribution from the deal as well?

Thomas Gutierrez

Yes. We're not going to disclose that at this point in terms of what the exact margin is. I can tell you that there'll be an opportunity for us to enhance their gross margin because of the operational strength that we bring to the party. And we expect it to contribute similar margins to our other products in the area. As far as EBITDA contribution, what we've essentially said this year is that it doesn't wiggle the needle because we're spending money now to integrate and to accelerate some of the technologies that we've acquired into the marketplace. And we're not ready to talk about 2014 yet, but it will be profitable. It will contribute. Its gross margin profile will be similar to what the rest of our business is by the time we're done. And that's as far as I can go today.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Okay. And as far as looking at your future opportunities with KY and the other technologies, can you talk a little bit about is there -- as you look and say the touchscreen market, is there opportunity now that you're looking at on top of what you had seen before for GTAT in terms of numbers of furnaces, the mass numbers of furnaces. I mean, does that number tick up now that you can also address it with these other technologies or is it still basically the same opportunity as you had seen before?

Thomas Gutierrez

Well, I think, and I don't want to mislead, but KY technology is really not applicable to our smartscreen arena as we see it, okay? The KY technology opens up a universe of customers that we haven't been able to address in other industries. I think as Jed noted a little bit earlier, I think it really de-risks our opportunity versus add to it. The opportunity is the same, the question is, before had the -- any major players in the industry chosen a different technology than our ASF technology remodel our opportunity might have been diminished. But now that we can move in any direction, from a sapphire growth standpoint, it takes the risk out of being a player regardless of what direction per growth the industry here, the different players select. And I would imagine that different players will select different technologies for growth. It's not a uniform answer. But this is far and above the only technology that can do it. As I've stated earlier, there's pros and cons between EFG and ASF technology. I think everybody would agree that KY is probably not the path to go, but KY has other industries in which it's very important.

Operator

Our next question comes from Stephen Chin of UBS.

Mahavir Sanghavi - UBS Investment Bank, Research Division

It's Mahavir Sanghavi for Stephen Chin. It seems the product portfolio of Thermal is pretty broad. You talked about KY and EFG at length, I guess. I'm just trying to figure out if anything in the product portfolio that could address any meaningful markets that fits into your future roadmap of GaN SiC or any others that would be helpful.

Thomas Gutierrez

Mahavir, well, the annealing technology has a wide range of opportunities in that we didn't look at that as purely a touchscreen market technology, although, it has good application there. And so the annealing technology has some legs beyond the classic markets that we talked about. I think the SPS technology, being able to make some rather unique ceramics using that SPS technology, could have some pretty interesting applications in the hybrid electric vehicle market. And so that product opens up, which we think is probably one of the hidden jewels in -- at Thermal, could have some very substantial market opportunity for us, and it'll be -- has similar pattern to our customer base. It'll be tens of customers instead of thousands of customers. We do well when it's very targeted customer base, and so there's an opportunity there. And that was sufficient for those things that we talked about today in SPS or sufficient for us to sort of see the value that we placed on the business. There is still a portfolio of other vacuum and thermal technologies that we're still assessing as to whether or not there are other hidden jewels in that and provides a nice base business and we expect to continue to support it.

Mahavir Sanghavi - UBS Investment Bank, Research Division

Great. And then as a follow-up, you have a decent backlog of ASF furnaces with customers. I'm wondering, would you allow your customers to switch between ASF and KY if they wanted to?

Thomas Gutierrez

Well, I mean, I think it's highly, highly unlikely, okay? Because I think once you place your bet and you put in an infrastructure and you have made a technical decision to go down one path versus the other, it's awfully tough to sort of switch directions in the middle of that, so I don't expect it, okay? But I am both technology agnostic and margin agnostic and ASP agnostic. And so if a customer comes to me and says "I changed my mind and I want to switch out part of my ASF backlog and buy KY furnaces from you." I say, "How about [ph] it and we'll support you."

Operator

Our next question is a follow-up from Nimal Vallipuram of Gilford Securities.

Nimal Vallipuram - Gilford Securities Inc., Research Division

Tom, I guess my question goes back to some with both the previous questions that just in addition to LED market, as well as the smartscreen market, you are implying that there might be other interesting application where some of the new thermal technology might bring something like the hybrid car, is that right?

Thomas Gutierrez

That's correct. I mean, the SPS has some interesting applications in automotive, as well as medical devices and a variety of other things. The EFG technology, once we complete its development and are ready to take it to market, will also have application of -- in areas where very large optical windows or very large transparent armor applications are applicable so it does open up new markets. And it's consistent with what we've been saying for quite some time, that we intend to continue to diversify the company while not abandoning the solar piece which is adding to our portfolio.

Operator, this is the last question, as I understand it. And so I want to thank everybody for questions today and the time taken to talk a little bit this morning. And I look forward to talking to you on an ongoing basis over the next many years if this company continues to diversify and prepare itself for new growth moving ahead. So thank you very much.

Operator

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!