Brooks Automation's Management Presents at Citi 2013 Global Technology Conference - Transcript

Sep. 3.13 | About: Brooks Automation, (BRKS)

Brooks Automation, Inc. (NASDAQ:BRKS)

Citi 2013 Global Technology Conference

September 3, 2013 10:30 am ET

Executives

Steve Schwartz - CEO

Martin Headley - CFO

Analyst

Terence Whalen - Citigroup

Terence Whalen - Citigroup

[Call starts abruptly] to Citi's Annual Technology Conference. I'm Terence Whalen, Citi's Semiconductor Capital Equipment and Specialty Semiconductor Analyst. It's a pleasure to have Brooks here. With us from Brooks is CEO, Steve Schwartz, and CFO, Martin Headley. Welcome.

Steve Schwartz

Thanks, Terence.

Martin Headley

Thank you.

Question-and-Answer Session

Terence Whalen - Citigroup

Let's just jump right in and start with a higher level question about your industry outlook for this year. How you go about looking at inputs, think about the wafer fab equipment market more broadly?

Martin Headley

Right. Well, obviously, the challenge towards is we see the market one step removed. We see it largely through the lens of our OEM customers. So we are very often following on what do our OEM customers say and what do we see in the same information that everyone could see out there. I will say that we are seeing very cautious development in terms of possibly a challenge with some of the end users, the larger end users spending at least on front-end equipment the same level that we've indicated in the CapEx forecast. And so we would not see an aggressive calendar year '14 spend -- a calendar year '13 spend, which probably bodes well for calendar year '14 spend at this juncture.

We've not seen the ramp in order at this stage clearly we gave guidance with pretty much a flat to down quarter on semi spend in the September quarter. We're not seeing any change in the trajectory of our orders that suggest a really rapid ramp in the early part of the December quarter. So we would be fairly modest in our outlook at this stage. The other inputs we get are the kind of quote alarms from our OEM customers, which tend to be around a, if you're ready to ramp, you're ready to ramp when they are in a position where we might be letting orders, we're not seeing much of that activity although we're starting to see some.

Terence Whalen - Citigroup

And may be Steve a question for you, just taking a step back. If there are three points to your vision for the company over the next three to five years what would those be?

Steve Schwartz

Yes, so for sure, making more out of the core business for the company. So we got the revenue levels even that we have today were right around a $120 million report that company needs to be more profitable. So I think from an operating action standpoint we're taking the right ones, we're improving gross margin and things that will be sustainable for the company. We continue to make very aggressive investments in design-in wins for the next technologies even around the core business that will be called adjacent space, we like the MEMS area, we like the wafer level packaging, and back-end kinds of applications. We continue to make very strong market position gains in LED and as these adjacent markets continue to grow along with the semiconductor we think the investment in these design wins is critical.

And then finally we've made a growth initiative out of the life science's space. There is a fundamental opportunity that exists for people who have been doing automation that holds the cold temperatures. And so we began two years ago by acquiring a presence in the life science systems market that enables us to take the two core capabilities of the company automation and the cryogenic expertise we have and participate in what we think will be a significant growth opportunity driven by personalized medicine as this automated cold storage market moves from storing chemical compounds at relatively cold temperatures to storing biological samples and things related to personalized medicine at ultra-cold temperatures. And we think those are the three most key initiatives for the company sustained growth in the core business and more profitability and the growth factor that allows us to use core capabilities to participate in a really exciting life sciences market opportunity.

Terence Whalen - Citigroup

And maybe we can expand on that in terms of life science and then ask some semi questions later.

Steve Schwartz

Sure.

Terence Whalen - Citigroup

We've seen some volatility in the business in terms of very good growth outlook. I think 20-ish percent bookings growth recently. But in other quarters there have been some slower developments, how should customers think about the demand profile of that business and the growth rate of life science?

Steve Schwartz

So it's a good commentary if you get this question allowed, but we also focus on it significantly as a company. Just in the June quarter we had a 100% increase in bookings, we booked from $9 million, we booked $18 million plus in the June quarter the amount of capital spend that comes is a little bit lumpier than we had anticipated. The good part about the business is these are projects that we've seen coming. And so we track them, we manage them, we work to capture them. Our ability to just to move that is going to be very important. We added some industry experts, some life science's professionals into the business different from the semi group and they are helping us to balance this is one.

We really believe in the growth opportunities that exists both in the current business that serves our pharmaceutical industry. We have automated cold storage that all of the top 20 pharmaceutical companies. But as we begin to penetrate on the biological life sciences side we think it's really important that we're able to build enough backlog to have a very healthy pipeline so we could show steadier growth in the business.

So we did approximately $9 million in revenue in the June quarter, we guided up in approximately $11 million range for the September quarter, and we'll continue to work to grow that business as we move into 2014. The near end objectives for that business over the next 18 months how do we get that to be profitable business and then continue to have sustained growth.

Terence Whalen - Citigroup

So maybe just paint more fundamental, conceptual picture how is the Cryo market going to look in three years versus what's being done today, what are the new areas that you really see coming on like perhaps cold blood storage and others like that?

Steve Schwartz

Sure. We think there's a pretty significant move towards the automated cold storage samples below what's called the glass transition point. So today most automated cold storage is done at 4 degree C minus 20 degree C where you make ice in a home freezer or minus 80 degree C. The preservation of biological sample is below minus 134 degree C is critical because that's where biological activity stops. We think that automating things like stem cells towards cold blood those kinds of things that are done at temperatures below minus 150 degree C we think could be as critical, it's done manually today in manual systems either liquid nitrogen tanks or in ultra-cold manual freezers we think there is new market for automation for the protection, preservation, and the critical nature of the cells.

And so there are technical challenges associated with it but that's really what attracted us to the market opportunity the ability to do ultra-cold storage in an automated system we think is a good market opportunity and something we've been investing in now for the past 18 months.

Terence Whalen - Citigroup

Are those semi and healthcare businesses separate businesses or how much crossover is there and how do you divide your time and focus on the two businesses?

Steve Schwartz

Yes, so they are different businesses at the engineering level, at the market development level, at the sales level, and even at the service level we anticipate in the future that from a service capability, services capability people who can help us with automation and cryogenics may be, there may be some ability to utilize those resources for both at the corporate functions we have, we really do have two separate businesses here. And the revenue breakdown in the core businesses compared to the life sciences is about 10 to 1 and we know the amount of time and focusing around the life sciences space as we continue to build that business from my standpoint, from our standpoint.

Terence Whalen - Citigroup

Perhaps moving to the semiconductor business now. One of the questions that we ask a lot of our capital equipment companies except there is a fairly visible transition of manufacturing from Korea to Taiwan led by one high profile noble customer. What are so the implications in the supply chain that you see as a result of that and how does it affect Brooks?

Martin Headley

What the immediate impact has been in the current year is because all the very low level of spending on wafer front-end equipment in Korea that had a little more adverse impact on our revenue levels because we typically have a slightly higher content on a tool going into Korea because with the focus in Korea around the Korean infrastructure and manufacturing in Korea they have developed a reasonable set of smaller OEMs in Korea and for those OEMs they look to utilize a complete automation backbone on the tool from Brooks rather than just a robot that's integrated into the round developed platform with this case so with an Applied Materials or a lamp.

And so we have a much higher content in the Korean tool as we help those folks get to market quicker and that has been a pullback in our revenue levels in '13. We think that is actually the opportunity for that time to turn and move in 2014.

Terence Whalen - Citigroup

Okay, okay. And staying on semi-cap equipment we've obviously seen a lot of merger activity between AMAT, Varian and Novellus. What are the effects that you are seeing and what's your perspective on sort of the resolution of either the opportunity of the risk in those sorts of events?

Martin Headley

Well, if you look at the impact on us from the consolidation of the OEM level those impacts are kind of absorbed as we've gone through our discussions with merged entities about how we interact with them and what our long-term profile is for margin and for market share, and then for the kind of margin enhancements that we can mutually share from that. And then the fact of going through them going through their consolidation of the supply base means that a company such as Crossing Automation whom we acquired in the fall of last year, they -- if they couldn't make traction with one of these large OEMs before they merged it was going to be doubly difficult afterwards. And it means that those kinds of opportunities can come to us will be highly successful to us providing that there are reasonable value expectations on the seller side.

We got that with the Crossing acquisition, great acquisition, some unique retro (ph) linear automation technologies that we're working with our customer base of putting that together with our systems capabilities with new solutions for our customers. And there could be other opportunities in other areas that we look at as I say we have to evaluate expectations right on the seller point.

Steve Schwartz

So, pile on there a little bit. I think that we really believe that size and capability of the company in this space that was more important with this type of consolidation even the largest equipment makers are thinking how do they spend their R&D budget and we think that we're in a better and more capability supplier, self component supplier in cryogenic space, in the automation space we think is critical and even though they have more mass and more capability and the ability if you will to do those kinds of things of themselves I think its looked on something that may and would not be the best use of their internal investment. So the more capability that we can bring to them the better chances we have to satisfy bigger opportunities for them. But we think size and capability are important and that's what we kept our DME budget very significant and actually increased it over the years to be able to support this transformation in the marketplace.

Terence Whalen - Citigroup

And so on that topic obviously scale is a priority in terms of the business and you've exhibited sort of M&A appetite in the past. How is that developing in the current environment, it seems like we're seeing M&A pickup, what are you seeing in terms of your activity in your pipeline?

Steve Schwartz

So we take a look at a lot of opportunities. We were very fortunate to be able to get Crossing Automation, incredible technical capability, good product to focus and a great market presence. And some obviously companies are available if they have scale, if they have capability if it makes sense we do it also because the gap is getting larger between the bigger and smaller suppliers some of the things may not make sense. But we do have our eye out for things that we will be accretive very quickly to the company if those come about we will act but we keep our eye on it and there aren't a lot of those Crossing Automation out there.

Terence Whalen - Citigroup

Okay. And obviously 450 is a very important topic, is the perspective of investors on 450, does that really reflect an accurate view of how the company views it, how much of your time you spend on this topic, how significant will this be for Brooks?

Steve Schwartz

I think it's significant for our interaction with our customers in terms of design-in wins. So it's very significant in terms of our engineering interaction with customers in terms of how do we support them in that 450 millimeter tool development. We have our capability developed, how do we just tweak and adjust that for the particular requirements and demands of the customer tools. That's been important, we have modest levels of revenues, we don't see it being a matter of scale to us or to our customers for a number of years four or five years yet. So, we don't think it meaningfully moved the trajectory of Brooks in the near term but the positioning of Brooks from those interactions and design-in wins that we're going through now is very critical in terms of the long-term positioning of Brooks in the marketplace.

Terence Whalen - Citigroup

As we sort of think forward in place forward to that transition, is this going to be widespread or is that going to be just one or two in terms of making that transition to the larger wafer?

Steve Schwartz

I think -- well when you talk of the OEM level, every OEM is active in 450.

Terence Whalen - Citigroup

Right.

Steve Schwartz

And nobody wants to find themselves designed outs will be with the opportunity at this stage. In terms of sizing the opportunity in terms of which of the end users will actually go to 450, I'm not sure we can provide any more meaningful input than you would read around all the industry periodical.

Martin Headley

I feel it's like it might be 1 and then 5 to 10 after that but it won't be a 100 anymore.

Terence Whalen - Citigroup

Okay, okay. Fair enough. Why don't we actually have one last question and then we'll go to the audience but we've talked sort of qualitatively about the business about looking to achieve more scale and increased profitability. Can you just put some numbers around that in terms of the growth potential and sort of profitability targets of the business?

Steve Schwartz

Well, the profitability is very much depends upon the level of business and the cyclicality in the semi business. Our business model is to develop to a 40% gross margin target. And within that 40% average gross margin target the targets for the pieces of the business are about 45% gross margins are for the Life Sciences business. It currently operates in the last quarter a couple of hundred basis points shy of that. The Brooks Product Solutions segment, which is our Technology Solutions to semi and adjacent markets, our target is about 38% margin. We're currently in the 34%, 35% area. So, we have a lot of initiative starting to bear fruit and you've seen sequential improvements in our gross margins of flat revenues, which I think is to play those benefits that we're getting. We can see ourselves being 12 to 18 months out from those kinds of target levels.

And then thirdly we've got our Brooks Global Services business, which is pretty much running I think long-term target of 33% 34% now. So, we're progressing nicely along that way. We probably won't get to 40% blended margins within the next fiscal year but we'll be pretty down closest to exit the year.

Terence Whalen - Citigroup

That sounds like pretty interesting leverage. What do you do with the cash?

Steve Schwartz

What we do with the cash is obviously we have a dividend. We continue to review that dividend. We may see opportunities to increase a little bit we will have to develop. Secondly, we have the M&A. There are number of smaller acquisitions in the Life Sciences area around building out the capability beyond just the Automated Cold Store, which is really the heart of the cold chain of custody of the sample from the time you take a sample to time it's utilized in either therapy or research. And so the idea of transportation of samples temperature tagging of samples so that and you can have absolute assurance about the some more history of a given sample over its lifetime and be sure that you're identifying the correct sample.

There are number of opportunities, there are lots of smaller companies and opportunities. There are areas within the existing business that we have -- we've hopefully talked about. Having opportunity to perform better with our consumables business. So we may look at areas to build on the consumables capability of the company.

And then in reference to our prior discussion, we continue to monitor smaller add-ons into the semi side of the business as well. So, we would see ourselves continuing to make acquisitions as well and acquisitions and dividends being our principal uses of funds at this time.

Martin Headley

I want to add a little bit on to that. The one thing we're doing is we are spending heavily in our D&A and we continue to do that on design-in wins, we continue to spend in the Life Sciences space on organic development in the next generation products. We also feel very comfortable that in and around this $150 million annualized OpEx so that's the right level of spend for us. But we -- you mentioned 450 before we were spending on 450, we shipped a lot of 450 millimeter products, we're investing in next generation products in the Life Sciences business it's all part of the current level of spending but we think it's adequate as well. So, as the revenue begins to grow we think that's -- that level of spend will stay fit.

Terence Whalen - Citigroup

Okay. Why don't we see if there are questions in the audience right now?

Unidentified Analyst

Just from a big picture in the semiconductor CapEx kind of universe. It seems like we are getting towards the ultimate days of what's either economically or physically. Has the cycle the changed and what do you think in terms of how we should think about your business from a cyclical standpoint. What are the cycles look like in that side of the business going forward in terms of new fab built?

Martin Headley

It's all like guarantees that I missed on this one. But we think it will continue to be cyclical. One of the things that's slightly encouraging however is for example is that the one of the differences this time is the memory spending is short up that's become a healthier business. I think people were not so irrational about adding capacity during those days but we built the business around anticipation that will continue to be somewhat cyclical business. But things are changing for us.

So we look at the next economic drivers that will allow the IC companies to make fundamental changes one is the EUV that's probably say one is 450 millimeter, one is wafer level packaging how do you get economics from these things. And I think during the last five years the priorities have changed based on the timing of EUV the ability to get 450 millimeter wafers and scale and I think wafer level packaging is one of the things that driven a lot of opportunity in the business.

To be in at the forefront any of those things we think it's critical and we think that we're well positioned. So we did not anticipate include silicon via or the other wafer level packaging things to come as quickly as they're starting to come but I think a delay in EUV I think the delay in 450 because of that to happen but we're well positioned on the back end of wafer level packaging and we're well positioned on 450. And when EUV comes it provides different opportunities related to contamination and may be back in positive things that will transform an opportunity for us. We think we're in front of those things and we're ready but we don't anticipate on that part of the business the cyclicality will change but coming out from every cycle and the changes that occurred to our opportunity we think are different.

So if semi is down the backend is up, we have a backend play if the opportunity might be down with 450s that were ready. And the same goes for wafer level packaging we think that's how we need to manage the business and what we'll always be a cyclical environment. We've also work at tuning the companies at all points in the cycle on that core part of the business that we will be better. So, in the December quarter which was a low point for the most recent cycle we were still able to generate cash a fundamental difference from where we've been before.

So, next time we're down point in that cycle, we'd want to not just generate cash but also be profitable and also make more out of the peaks in the cycle so tuning the business to level cycle and also make it sure that we're present in any opportunities that will come we think are pretty critical and that's how we've been working on over the last three years in the cold business.

Unidentified Analyst

If you look at partnerships, it's been tough to compare growth to definitely the growth in the last two years that you were shedding some low margins, totters a bit; you've done an acquisition this year. So, when do you think that business will be in a steady state where we can compare it to WLP growth or if you can share your thoughts on what should be assumed the growth of that business moving forward?

Martin Headley

It's a question we ask everyday inside the company and by the way because we all claim that we're gaining share. We're still really trying to measure so very specifically almost case-by-case we go through it and we look at what are the tools that's sort of there, what did we win and what happened in the competitive situation. We think the investments that we're making are absolutely the right ones the capture rate if you will on the last 200 design-in wins we had over the last nine quarters approximately 200 design-in wins. We are about 50% of those have come back for repeat orders. So, we count the win when we get a booking for a new design. So, if we replace our own robot in the next generation tool we don't call that a design-in win but if it's a brand new tool and was competitively that OE win against a competitor or we displace a competitor. So we count that as a designing win.

So, we measure by all accounts at the company level, at the account level, at the sales person level, at the product tool that gets developed we win by two out of every three that come. So, the only way we know to track this is to check this overtime and these are long tail. So if there is a product win that happened for an any competitor three years ago those products are not shifted in volume. So, we pay very close attention to we think we're winning the right ones, we do measure down at the product and tool level. So, by our measures we think we're gaining share, we do need some kind of lift in the business to know for sure that those products have -- that those investments have paid off. We're confident that the case but really have to demonstrate it. So, we're glad to do our best to report it when some of the volume begins to pick up but until we face such close attention to it because those are precious dollars that we invest in our DME.

So, we think we'll payoff, and we're confident that we will payoff but we do need to see some increase in volume to be able to measure outside of invoice level.

Unidentified Analyst

What are your cross cycle margin targets for the business? Thanks.

Martin Headley

Well, the margin targets we talked about the 40% margins that are built off the 45% is a cross cycle in the Life Sciences business. The 38% margin target is probably higher parts of the cycle in the BGS part of the business but it shouldn’t be much more than a 150 basis points off of that given the mid cycle and the BGS margin target of 34% should be a cross cycle. So a cross cycle you’re probably talking somewhere in the 38% to slightly over 40% of the cycles -- across the cycle.

Unidentified Analyst

And maybe that's a key spend would be in the low 40s and drop (ph) would be in the low 30s?

Martin Headley

High 30s.

Unidentified Analyst

High 30s?

Martin Headley

Yeah.

Unidentified Analyst

You did mention wafer level packaging. Can you just expand on that a little bit because I think it’s something that maybe that’s just a little less familiar with? And help us sort of fundamentally understand what that opportunity translates to?

Martin Headley

Basically, if you think about automation in the back-end, automation in the back-end didn't have any wafer level handling at all until very recently. So, we have no participation in any back-end capital expenditure. Our -- there has been a need to fin the chips without being stacked into these various types dimensions. The way to do this is to do this steps that were previously done on the diced chip doing them on the wafer. And we have now developed our run rates on this business over $25 million from a stunning start and a number of quarters ago we weren't even participating that.

A number of our design-in wins that we report on of being in back-end across a wide variety of customers and our ability to handle translucent wafers, irregular wafers, thinned wafers, wafers that are like paper. All significant challenges flip wafers as you, yourself are seeing with our robotics. Those were all capabilities we are ready to go to market within we think we're taking a leading position win.

Steve Schwartz

So sort of point to that challenge to handle, this company has 30 years history handling solid rigid silicon wafers. Now the gymnastic starts with wafer you could see through the growth that's flexible, how do you equip it, how do you hold it, how do you handle it, how do you flip it. The engineering challenges have been significant. I think our results to-date have been great. So when Martin talks about building a business is now kind of at a $25 million run rate, this is a business opportunity we think will grow pretty significantly but the things that we've done from an engineering standpoint are really significant and the price 10x from a challenge standpoint compared to handling the rigid silicon wafer what we think is essential and critical for the growth of the industry and we're glad we are participants.

Unidentified Analyst

Okay, true.

Martin Headley

And this is before we even got the TSV so --

Unidentified Analyst

Right.

Martin Headley

We think the potential is very, very significant.

Unidentified Analyst

What developments do you see in TSV? What's the rate of development, how is that shifted over the past six months because obviously there is a lot routing on that?

Martin Headley

Well, we know from interactions we did have a higher level of priority amongst some of the significant capital spend so they want to get to utilizing those solutions more quickly than with previously in that product climate. And so we're seeing a shift and emphasis in this area.

Unidentified Analyst

What were the competitors in the back-end say if you were to ask quota or some of the others about your wafer level packaging solution, what are the negatives about it that they were trying to shoot down as to why your -- I mean it sounds very compelling like you should take a lot of share in the back end but I'm sure there is something that they would sling at you, what might they say?

Steve Schwartz

I think probably not a lot. I think the challenge, if you could handle the challenge I think people don't much of we were -- was not the case, people don't buy a process tool because of the handle of it, but they will certainly support the fact that we can handle the wafers, it's what happens in the chamber always that this is what the customer buys from a value standpoint. So the things that we enable the things that we make sure that we never break away, we never scratch away for those in the past is critical but being invisible is a really good capability, if you've done that on the process tool you've done a great job.

So I don't think it gets down to the Brooks level of capability so much as what happens at process chamber. I think those are all the visions you might, but we enable the economics, we enable the technical performance, but I’m not sure that would be flatter to somebody has some commentary about it actually or discourage so one of those two things.

Unidentified Analyst

And just getting back to the core market how are customers using your tools differently now than perhaps three or four years ago and what sort of runway into the 450 transition is required in terms of investment?

Steve Schwartz

So we're seeing just one more step level in contamination, use to be physical particles and now in biological contamination hydrocarbons is the one that's pretty important and then precision placement. So we look at the kinds of things that as we evolve use to be can you operate in a vacuum, can you operate in a cross of environment, can you make sure that you don’t put any physical particles on the wafer and now that the nature of contamination that will destroy the device is pretty critical. So we start to care about biological contamination and hydrocarbon. So that’s one critical placement is important characteristic particularly as alignment challenges become significant.

So we see this compounded at 450 for the advantages of taking existing technologies willing to concur everything it wants. So the wafer diameter change is relatively straight-forward. So these are just incremental things that we build on 30 years of company history.

Martin Headley

One of the unique things that we're able to build on these we developed say a comparatively small footprint utilization system and that's become increasingly challenging, helpful to our customers who are challenged by how do we avoid these 450 millimeter tools just scaling up in terms of the footprint utilization and destroying the 450 millimeter economics. And so this is the area where linear solutions and very small footprint solutions both of which we've got developments that are already available there are increasingly attractive to our customers. So --

Unidentified Analyst

Well, it's really good design.

Martin Headley

Really good design, we've done most of the development cost, we don't have a huge element of cost yet come through in terms of 450 development, it's more around the tailoring of our solutions to particular requirements of customer rather than developing the base solutions, so base solutions are already in place.

Terence Whalen - Citigroup

And then in terms of just the allocation of R&D between the two businesses, can you comment on how you think about that developing overtime and help us understand any characteristics of that?

Steve Schwartz

So without a question it will change overtime. But right now we're about 3 to 1. So in the core semiconductor and adjacent space we spend about three times more than we do on Life Sciences, the revenue ratio is about 10 to 1 but we think we'll adequately invest in both businesses. So it's not like we need to take from one to another we think we are investing adequately in the core business for the company, we’re investing adequately in the Life Sciences business in time as those businesses evolve, when I say in time is over a period of a couple of years may change a little bit, but we -- right now we think both required a attention they need for their individual markets spending that we think are at very reasonable levels. If there is a diminishing return to some of the investment in the core business from a design-in wins as the instrument continues to consolidate there may be some changes there. But right now we have room to leverage either one that we do like the level of spend and we’re neither going up or down here in the near term like that.

Terence Whalen - Citigroup

Okay, terrific. Well I think we are at our time limit, it’s been a pleasure having Brooks Automation. Steve and Martin, thank you for your time.

Steve Schwartz

Thank you.

Martin Headley

Thank you.

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