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Executives

Geoff High – IR, Pfeiffer High

Ray Thompson – Chairman and CEO

Larry Viano – CFO, VP and Principal Accounting Officer

Larry Murphy – President and COO

Analysts

Edwin Mok – Needham & Company

Benjamin Pappas – D.A. Davidson

Graham Tanaka – Tanaka Capital Management

Michael Berg [ph] – Tennessee Capital [ph]

Watts Water Technologies, Inc. (SMTL) F3Q09 (Qtr End 06/30/09) Earnings Call Transcript July 28, 2009 5:00 PM ET

Operator

Good afternoon. My name is Tasha and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. I would now like to turn the call over to Geoff High of Pfeiffer High Investor Relations. Please go ahead, sir.

Geoff High

Thank you. Good afternoon, and welcome to Semitool’s Third Fiscal Quarter conference call.

Presenting on behalf of the company will be Chairman and Chief Executive Officer, Ray Thompson; President and Chief Operating Officer, Larry Murphy; and Vice President and Chief Financial Officer, Larry Viano.

I would like to remind everyone that matters discussed during this call may include forward-looking statements that are based on management's estimates, projections, and assumptions as of today's date, and are subject to risks and uncertainties that are disclosed in Semitool's filings with the Securities and Exchange Commission.

The company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements. Semitool assumes no obligation to update forward-looking statements that become untrue because of subsequent events.

A webcast replay of today's call will be available at semitool.com for 90 days after the call. In addition, a telephone replay will be made available for 48 hours, beginning approximately two hours after the conclusion of this call. Details for listening to today's call or webcast are available in today's news release.

With that, I will now turn the call over to Ray Thompson. Ray, please go ahead.

Ray Thompson

Progress. That is probably the best way to characterize our third quarter. Our increased bookings is one measure of that. An even better measure might be the progress we are making in the developing markets, some of which I spoke of in our last conference call. Silicon for solar, LEDs and mem power storage, that is batteries. These opportunities are all progressing nicely.

One of the four silicon applications has advanced to final line production status and is delivering good results for our customer.

It is important to note, however, that while these programs are all at various stages of development, each reflects our commitment to leverage Semitool’s core technological and vertical manufacturing infrastructure investments to grow revenue and enhance profitability.

In a minute, Larry Murphy will provide you some color on these and other initiatives. But first, I will ask Larry Viano to review our financial highlights. Larry?

Larry Viano

Thanks, Ray. I will start with a review of our revenue composition for the trailing 12 month period. Approximately 74% of our sales came from our Raider tools, while 26% came from batch tools. By region, 31% came from North America, 29% came from Europe, and 40% came out of Asia.

With respect to expenses, third-quarter SG&A came in at $10.5 million, down from $19.2 million in the third quarter last year. As a percentage of revenue, SG&A was 33%, compared with 29% for the last year's third quarter.

Third-quarter R&D expense was $5.9 million versus $7.9 million in the same quarter last year. As a percentage of revenue, R&D expense was 19% versus 12% in last year's third quarter.

Turning to our balance sheet, we closed the quarter with $44.3 million in cash, which includes approximately $15 million drawn on our revolving line of credit. Working capital at the end of the quarter was $128 million. Receivables, which came in at $28.2 million, were reduced by another $4.8 million during the last quarter, and down by more than $25 million since the end of fiscal 2008.

Inventories at the end of the quarter were $74 million, down $8.1 million during the end of Q2. Our tax rate for the first nine months of the quarter was 37.5%.

With respect to guidance, we currently expect fourth-quarter revenue will be in the range of $40 million to $42 million, which would put our full-year revenue in the range of $132 million to $134 million. We are expecting fourth-quarter earnings per share of between $0.02 and $0.05, which would put our full-year loss per share in the range of $0.40 to $0.37. Fourth-quarter shipments are expected to range from $41 million to $44 million.

I will now turn the call over to Larry Murphy, who will provide you with some operational highlights. Larry?

Larry Murphy

Thanks, Larry. Our third quarter bookings rebound was driven primarily by strong demand in the packaging and copper damascene market. On the packaging side, we saw demand for both lead and lead-free applications, and booked orders for multiple plating tools from two Taiwanese foundries.

With respect to copper ECD, we added another Asia-based device manufacturer to our growing list of memory customers. Our copper plating tools have obviously been widely adopted by the memory sector in recent years, and it appears that foundries are also beginning to recommend it for yield and cost of ownership advantages. Our most recent copper plating customer is a major Asian foundry, where we have become the process of record at its most advanced technology node.

On the cleans front, we are receiving positive response from several leading device manufacturers for our high dose, implant resist strip processes. Given the substantial cost and performance advantages we offer, we anticipate this will be a significant growth opportunity through the next 18 months.

We continue to see new opportunities in the solar industry. We have developed a new automation platform designed for extremely high throughput, low-cost production, and as Ray mentioned, we have shipped our first pilot tool for this process during the third quarter. We have received positive feedback on the tool’s performance and anticipate our first production order using this automation scheme in the near future.

In addition to our efforts in porous silicon, we are working on texturing applications for enhanced reflectivity, utilizing our batch tools. We also are engaged in several development programs for the crush on next-generation solar cells using our advanced plating technologies.

Other operational developments during this quarter include the two-year extension of the EMP 3D consortium and our entrance into the rapidly-emerging advanced battery sector.

We obviously are very encouraged by the growing strength of our balance sheet. The steps we have taken to enhance cash and reduce costs are clearly having the desired effect.

We are now ready to take any questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Edwin Mok of Needham & Company.

Edwin Mok – Needham & Company

Hey, thanks for taking my questions. Just maybe some on some housekeeping. How do we look at tax going forward, given that you guys have gone back to profitability and what was the cash flow from operations last quarter?

Larry Viano

The tax should remain at 37.5%. As we move further into profitability, it will start to come back down into historical levels, 33%, 32%.

What was the second part of your question, Edwin?

Edwin Mok – Needham & Company

Sorry. The second part is, what was the cash flow from operations in the last quarter?

Larry Viano

For last quarter, the cash flow from operations was almost $12 million.

Edwin Mok – Needham & Company

So the positive cash flow came from kind of working down the inventory and shrinking the balance sheet. Is that correct?

Larry Viano

Yes, of course we – it came from reducing our net loss, it came from the receivables and from inventory, the major areas.

Edwin Mok – Needham & Company

Great. And then, Larry, just maybe a follow-up on inventory. You have kind of a plan or target for inventory level going forward? Obviously, your business is improving, so – as the number of days will come down, but just kind of maybe an absolute level, what level are you comfortable with finding –

Larry Viano

Well, we think if we can bring it down – we can still bring it down. There is a fair amount of finished goods in there. So I think it could come down, even with business going up, I think it could come down at least another $5 million to $10 million in the not-too-distant future.

Edwin Mok – Needham & Company

Great, that's very helpful. And then, maybe talk a little about – maybe some of the new stuff first. So it looks like you guys are making some progress in the solar sector with this new tool as well as some other projects that you guys are doing for the battery. Have you guys like have done some work, tried to quantify how much opportunity do you think you have or how much (inaudible) in the market and can you kind of give us a sense what kind of revenue, run rate you think you can get? Two, even just look out a few years and you get as a baseline?

Ray Thompson

Sure, Edwin. We can give you some descriptors here. On the texturing side, there is probably about a $2 million to $2.5 million revenue opportunity for every 30 megawatt slab that is available out there. So depends on the kind of market share that we capture there. Obviously, we are looking at all kinds of different ways to go to market, whether we partner with a turnkey solution guy, go directly ourselves, or even go upstream. But we look at that – starting to generate revenue for that particular opportunity probably in our calendar Q1 of 2010. So the December quarter this year.

And then as we get a brand and move forward, we think that will grow pretty rapidly. One thing we are seeing with our texturing process is the potential to improve the reflectance and maybe it is really getting lower, which is it tend to absorb more light and our texturing process we developed for that particular space has a significant advantage, both from a cost standpoint as well as a reflectivity standpoint versus the competition. So we are working with several people around the world to see how we can go to market with this as quick as we can.

On the porous silicon side, we have already – we shipped the desktop model about a year and a half ago, we just shipped the pilot tool used in our new advanced automation this past quarter, and we expect to get a high volume tool for that particular application and very, very soon. And that is – by now, that is one customer but there is other people that are looking at similar technologies going forward. We will see how that plays out.

And other questions did you have, Edwin?

Edwin Mok – Needham & Company

And then maybe move on to just the semiconductor side, obviously looks like things on that side is improving as well. Just curious on copper plating. You guys have (inaudible) position as customer ready. Just curious, how is that progressing in terms of kind of – maybe not the leading Korean guys, but the Japanese guys, do you think they will stop converting the copper to share, or do you think that is more like a 2010 opportunity?

Ray Thompson

Let me just back up quickly as one of – since you brought the plating, on the solar space, we are doing several JDPs or partnerships and next-generation solar cells and we put next generation solar cells of use in our plating technologies, well.

Now back to semiconductor, you mentioned specifically, you said the Korean guys with the Japanese guys, when do you think they're going to revert to copper? I think that still remains to be seen, Edwin, from what I see right now, and I personally don't see a big ramp on copper going with that group right now. I want to fill that place out. If we are talking about the same group, anyway.

Edwin Mok – Needham & Company

Great. That was helpful. And then maybe on the wafer level packaging, it looks like the back-end is quite tight and you guys definitely have much better leading position there. Just curious, how long do you think that can last in terms of ramp, looks like it is part of ramping for you guys? Maybe you can quantify that or give us a sense of that market would be helpful. Thank you.

Ray Thompson

Well, as you stated, we have a very strong position in that particular space and we are trying to add more products to that and going after some resist strips and some (inaudible) applications and really get a full portfolio to take to those customers and we are having some success there. But certainly, the last quarter or two, a lot of our momentum from the down market that we had in December of 2008 has come back from the packaging side. More and more portable computing is being wafer level packaged and we have some good products to go to that space.

Talking to most of our customers, they are talking about increasing their capacity and trying to pull things in versus just the opposite. So, how high does that go and where does it stop? I don't think it is totally clear, but the good news is is that it is certainly a positive vibe in a pretty difficult market that we have been dealing with for the last nine months.

Edwin Mok – Needham & Company

Great. Just one final and then I will let someone else jump on the line. But on the (inaudible) application, I think you guys have done quite a good job there. I'm just curious, do you see that potentially being cannibalized in some of the pumping business down the road, if a customer decided to adopt that or do you see that as accretive business down the road?

Ray Thompson

Definitely accretive. There could be some cannibalization, there could be – there is going to be some overlap, but I think as TSD experiences the advanced packaging applications, we're going to follow right with it. So, right now, we feel pretty good about where we are at in that space and where this technology is going.

Edwin Mok – Needham & Company

Great. That's all I have. Thanks.

Ray Thompson

You are welcome.

Operator

Your next question comes from the line of Benjamin Pappas with D.A. Davidson.

Benjamin Pappas – D.A. Davidson

Hi guys, this is Ben Pappas for Matt Petkun. Just real quick, wanted to touch base on a housekeeping question, the interest and other income one for Q4. It kind of bounced around a little bit from Q2 to Q3, curious what it will look like for Q4.

Larry Viano

It should be pretty neutral in Q4.

Benjamin Pappas – D.A. Davidson

Okay. And then moving forward, as business kind of ramps back up and things are looking better into next year and even further, what can we think about in terms of your cost structure on the OpEx side, where do you see things kind of leveling out, and at what levels?

Larry Viano

Well, we see things in the fourth quarter going up slightly, but being pretty level with where we are at right now. Ben, it really depends upon where our revenue volumes are – if we need to cut expenses going forward, we will do that. Of course, if things take off like they appear, there is going to be a lag behind. And so we won't get back up to our levels that we were previous to the downturn for quite some time.

Benjamin Pappas – D.A. Davidson

Okay. So you are not expecting – as business comes back, you are going to start adding back a whole bunch of people in a hurry or is it going to be a pretty sticky cost reduction?

Ray Thompson

That is a tough thing to call, but I don’t think it will be real fast.

Benjamin Pappas – D.A. Davidson

Okay. And then, real quick, your single wafer cleaning business, you have indicated you have seen some traction there, some positive signs there. Can you expand on that at all?

Ray Thompson

I certainly will try, Ben. The product that we are going to market is a unique offering in that space, where we eliminate an ashing process after a high dose implanter to strip the resist. And so we do it all in a wet process on our Raider platform. And that gives our customers a couple of advantages, one is cycle time, one is potential yield and obviously the cost advantage eliminating entire processes is something that the customer base is looking for.

So we have done several demos with every leading edge manufacturer in the world that has either an applied tool or high-dose implant of some sort in their fab, and we are getting some traction and a lot of encouragement to continue and proceed with these customers. So we anticipate that the space, we will be selling tools into it in a fairly significant amount over the next 18 months.

Benjamin Pappas – D.A. Davidson

Okay, great. Thanks, guys.

Ray Thompson

You are welcome.

Operator

Your next question comes from the line of Graham Tanaka with Tanaka Capital Management.

Graham Tanaka – Tanaka Capital Management

Hey, guys. Thank you very much. Just back up, just to bounce a little bit more on the solar side, if you could – could you explain the cost manages and then maybe quantify the bid in terms of Semitool’s offering versus the traditional, conventional technology being used, both for silicon and (inaudible).

Larry Murphy

This is Larry, Graham, addressing the question and the main cost that I would say, the areas that we have to – that we are looking in to explore is in the batch tools, where we – 30 years ago introduced them to the chip-building industry and provided great savings, primarily in water consumption and chemicals consumption, re-used chemicals. And that is still in the very early stages.

I think the area, of course, of the core silicon in providing some improvement in single crystalline solar energy production and cost reduction as well are some excellent potential savings going on there. And we are encouraged by their earlier results. We are really further ahead in that area than we are in the batch. So it is still in its early stages, all of that. It is the energy business, and which is a different business than we have been in all these years. But if they can make even greater use and take greater advantages of the uniqueness of our tools, we are the first one to make sure that we tap those opportunities and –

Graham Tanaka – Tanaka Capital Management

I just was wondering if there was a way to sort of quantify, in other words, if the industry you use Semitool tools, how much could it lower the cost of water. What are we talking about in terms of percentage cost reduction?

Ray Thompson

Maybe two conference calls down the road we will have it quantified. You know, it is a great question, very legitimate question, it is really in the same place or similar place to when I started Semitool. I was delighted to see the potential, but I was not ready to quantify. As time went on, as we started delivering tools and getting feedback, multiple feedbacks, not single, then I was ready to do that and kind of that same situation here. You know, I think to give you a visible – a visual look at a little bit as thinking of workbenches in the semiconductor and the batch tools of semiconductor and the same thing applies in solar. So it is about 20% of the footprint, uses 10% to 20% of the chemicals, has the same throughput and about the same cost.

And the third thing that the solar guys are mainly interested in is how they improve their efficiency, their absorption efficiency and if we are able to reduce the reflection factor, of course we can, that is a value beyond just a cost savings of the chemistry, using the footprint and all that type of stuff that is compelling to these guys. So, initial look at things is that everything that they would measure we would have an advantage on. But obviously, you have to break in the market and prove yourself, that is where we are at.

Graham Tanaka – Tanaka Capital Management

Thank you. And the other was sort of on the battery stage, which we haven't really delved in too much and I just, since you are expecting that there may be some dividend activity near term, I just wanted to develop that one a little further in terms of cost saves, potential market size, and look who might be the first clients or customers.

Ray Thompson

Sure. Well, the – we're obviously we are just going to first order for that and the first stage is to prove the technology developed 20 years ago by Lockheed Martin; and so that is the phase we're in right now, to build basically a prototype, try to do what they tried to do 20 years ago.

After that, we will obviously optimize, do development and go to market with it. As far as the market opportunity, it is huge, billions of dollars type of number, but obviously, we have got to get the technology proven, get the cost down below the current availability, which is 350 to 500 kilowatt hour over a 20-year time period. And if we can do that, we can get to market pretty quickly.

There is a demand in the space now. Our first space we're going after is really the renewable energy, like wind and solar. So that is really our first targeted market to go after here. And right now we are doing the work on the prototype and the design work to build both the first one, which we have an order for. So –

Graham Tanaka – Tanaka Capital Management

You have to get costs down a certain percent to make a cost efficient or is the technology there now? In other words, you have a fair amount of work to go and do you need to spend another one or two or three years working at getting costs down or are you there already?

Ray Thompson

Well, it is really too early to say, but we don't look at it as a three year horizon to be able to develop, decide if we get an economical product or not. This is something, we have got most of the design – most of the design work has been done. It looks like it is very intriguing technology. With the technology-based events, obviously the process, the reason why we are (inaudible) and why we didn't jump into it is because the processes used in that are very similar to our plating processes. It is electrochemical flow batteries and electrochemical processes exactly basically the reverse of what we do in a plating process, so we are very familiar with the design, the technology, and we will see. It is too early to say, but the real message to the market is that we have identified this is a place we can leverage our core competency, we found a partner in it, and we will see what happens.

Graham Tanaka – Tanaka Capital Management

Thank you very much. Good luck.

Ray Thompson

Thank you.

Operator

Your next question comes from the line of Michael Berg [ph] with Tennessee Capital [ph].

Michael Berg – Tennessee Capital

Good afternoon, guys. Thanks. I got two questions; they're kind of the same kind. And Larry V., on the cost structure, one of the questions is really about how much that would that come back or how fast would that come back. We're going to look at it from a different angle, how much of the cost reductions do you think are fairly permanent, were they really all kind of variable flexible and we could come all the way back to the cost structure as previously – at the previous revenue levels eventually?

Larry Viano

Well, I wouldn't say all the costs are – that were – that we have cut out would be permanent. I don't think we would go back up to those levels that we got to – to revenues similar to where we were before the downturn. I think we would still be able to have some efficiencies there. It is tough to quantify that though at this point, but it would be – because there is so much going on and diversity in our product line that is tough to call.

Michael Berg – Tennessee Capital

Okay. And then I guess I will ask the same question sort of on the balance sheet in terms of efficiency there. And we talked in the past about too much inventory, it looks like you're going to be positioned to maybe run a little bit leaner. If you think about that as what kind of percentage might be seen less in inventory or some of the other counts or is anything in terms of where the business is going, velocity of ramp wires, so that you know that they need these solutions, whether it is packaging or if there is any synergy of the true silicon that helps with that at all so you can actually run a little bit more efficiently across the balance sheet and quantify that, maybe that seizure?

Larry Viano

Well, that is too early to quantify with the new technologies at this point. You know, we are always looking though to get our inventory down, being vertically integrated, we are going to have more inventory than our peers, but I think we can keep inventory down. As far as quantifying it, again, it is a matter of product mix and whatnot. And so that is tough to do at this point.

Michael Berg – Tennessee Capital

Okay, great. Thanks, guys.

Ray Thompson

Thank you.

Operator

(Operator instructions) Your next question is a follow from the line of Edwin Mok of Needham & Company.

Edwin Mok – Needham & Company

Hey, great. Thanks for taking the follow-up and by the way, congratulations on getting back to profitability.

Just a follow-up question on the copper plating side. I understand you guys have a seed enhancement product. Is that helping you in the copper plating business and you know, I understand from your earlier comment that you guys are working with some of the Asian foundry customers, was actually working on copper plating side. Is that helping you to penetrate those accounts and if not, are there reasons why you guys are winning some business in the copper plating side?

Ray Thompson

Yes, thanks, Edwin. Yes, our seed layer enhancement technology for all the leading guys, the guys that are sub 3x, you know in the 2x range right now, doing development and even in some cases 1x, but just about every one of those customers we are working with in the seed layer enhancement, with our seed layer enhancement technology. So I guess there is a lot of visibility with the leading EDGE guys for sure. But – and then just our standard plating chambers are also appreciating as well. So we are getting a chance to demonstrate our standard reactor, not just our seed layer enhancement reactor, but it looks like that may be a solution fulfilled once they get in the 2x range and we are ready to support the customers and do quite a bit of demos with them right now.

Edwin Mok – Needham & Company

Great. And then just a quick follow-up on housekeeping. Given that you guys are guiding for profitability next quarter, how much should we add back in terms of share dilutions as I guessed last quarter was lost basically.

Larry Viano

We are not looking at our weighted average shares outstanding changing much from this quarter.

Edwin Mok – Needham & Company

I see. Great, thanks.

Ray Thompson

Thank you.

Operator

There are no further questions at this time. I would now like to turn the call back to Ray Thompson for closing remarks.

Ray Thompson

Well, thank you very much for joining us on this call and I hope that it is clear that – to hear that Semitool is not lacking for opportunities. Products are keeping us busy and prioritizing them and going where the benefit is the best and cost is the lowest. We have got some good things going on there. We are making progress and capturing these prospects.

We look forward to updating you on our continued developments in three months.

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Source: Semitool, Inc. F3Q09 (Qtr End 06/30/09) Earnings Call Transcript
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