Advanced Energy Industries Inc at Needham Growth Conference (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Quinn Bolton - Needham & Company - Analyst : With that, let's go ahead and get started. And obviously, one of the big topics for semi and semi-cap companies today are supply chain and supply chain constraints, and so I wanted to start there. These have been a big challenge for many companies across the industry, and it's limiting Advanced Energy in its ability to meet current demand. Can you give us an update of the current supply situation? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 10, 2022 / 3:45PM, AEIS.OQ - Advanced Energy Industries Inc at Needham Growth Conference (Virtual)

Question: Quinn Bolton - Needham & Company - Analyst : And Steve, can you address the actions for some of those constrained parts to potentially either find new sources of supply, requalify components? What actions are you taking on that front?

Question: Quinn Bolton - Needham & Company - Analyst : Great. Maybe for either Steve or Paul, can you talk about the gross margin impact of these supply constraints? What are you seeing in terms of either higher input costs, elevated freight, and shipping, and how are you addressing those higher costs?

Question: Quinn Bolton - Needham & Company - Analyst : Great. Thank you, Paul. And you sort of just touched on one of my questions, and so maybe I'll just ask that, and then I'll come back to the demand environment. But you talked about that incremental $50 million of revenue as the supply chain normalizes. Is that still sort of a target that you think you can hit by the end of calendar 2022?

Question: Quinn Bolton - Needham & Company - Analyst : Great. Wanted to turn to demand next, and you sort of touched on backlog, but Steve, describe the demand environment that you currently see. I know backlog has increased pretty dramatically over the past three quarters. Do you think you can continue to build backlog into year-end 2021?

Question: Quinn Bolton - Needham & Company - Analyst : Looking at the backlog, it looks like backlog nearly tripled for the -- through the first nine months of 2021. When you think about that backlog and the supply constraints, are you seeing any demand destruction to that backlog because you can't ship components? How much of that demand is nonperishable or backlog is nonperishable? And then maybe a related question, obviously a very strong order environment, are you seeing any signs of double ordering?

Question: Quinn Bolton - Needham & Company - Analyst : Got it. I wanted to switch now to the semiconductor business and just get your thoughts on the WFE outlook both for 2022 as well as 2023.

Question: Quinn Bolton - Needham & Company - Analyst : There have been a couple of disruptions in the semiconductor industry that the first was the lockdown in Xi'an that I think has affected the Samsung NAND plan and then similarly, the recent fire at the German facility of ASML that may affect EUV shipments. Are you seeing any impact from either of those events on your business or your customers' business?

Question: Quinn Bolton - Needham & Company - Analyst : I guess maybe on the COVID front, we are getting a lot of questions from investors around the impact that Omicron may have on the supply chain. Are you seeing any of the countries in Southeast Asia reimplementing movement control orders to prevent the spread of Omicron, or is it mostly still business as usual?

Question: Quinn Bolton - Needham & Company - Analyst : I wanted to come back on the semiconductor business and just ask about inventory levels at your OEM customers. First, how do you see inventory of your products at those OEM customers? And how has the -- your supply constraints affected your relationships with those customers? Have you prevented the shipment of (technical difficulty) and OEM systems, given your supply constraints?

Question: Quinn Bolton - Needham & Company - Analyst : Great. Last question on the semiconductor business: your main competitor, MKS, has been reporting pretty strong growth in its power business over the past few quarters. How are you feeling about market share going forward? I know supply constraints may make that a tougher situation to get your hands on in the near term. But if you look at competitive wins going forward, how do you feel about market share position?

Question: Quinn Bolton - Needham & Company - Analyst : Great. Steve, I wanted to shift now to the industrial and medical markets and just get your overall view looking into 2022. How do you think those markets are positioned? It sounded like from an earlier answer, you see pretty strong demand from both of those end markets.

Question: Quinn Bolton - Needham & Company - Analyst : [Indeed]. You talked about doubling your -- the number of engineers focused on new products in these end markets. How long does it take from product introduction to design win to revenue ramp? I might imagine that that might be a longer design-to-revenue timeline. So how should investors think about when those investments start to pay off in industrial or medical? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 10, 2022 / 3:45PM, AEIS.OQ - Advanced Energy Industries Inc at Needham Growth Conference (Virtual)

Question: Quinn Bolton - Needham & Company - Analyst : On the medical market, can you talk about any specific areas you are targeting or areas where Advanced Energy is already pretty strong, given stickiness and the attractive margins in the medical segment?

Question: Quinn Bolton - Needham & Company - Analyst : I know it's -- and this is my last question in industrial-medical. I know it's a fairly broad end market, but are there certain applications that you're most excited about or see the strongest growth in 2022?

Question: Quinn Bolton - Needham & Company - Analyst : Great. Turning to the hyperscale business or I should say data center computing business, can you give us an update on what you see for that market in 2022? And remind us how many hyperscalers you've won so far and where you are winning in those hyperscale customers?

Question: Quinn Bolton - Needham & Company - Analyst : You mentioned targeting the high-value segment of the market. I believe Europe, at the beginning of 2023, will require all data center drives to be titanium or 96% efficient. If that's correct, I assume that that plays into Artesyn's strengths in this market?

Question: Quinn Bolton - Needham & Company - Analyst : And in terms of adoption of 48-volt, do you still believe five of the hyperscalers will adopt 48--volt by 2023? And is that just in their compute-intensive racks, or do you see a broader effort to adopt 48-volt across all of the racks in that -- hyperscale data centers going forward?

Question: Quinn Bolton - Needham & Company - Analyst : Maybe a follow-up there, Edwin. Has Advanced Energy announced any 48-volt design wins yet with those four hyperscale customers, or is the business today still mostly or entirely 12-volt?

Question: Quinn Bolton - Needham & Company - Analyst : Great. And last question in the data center and telco market, can you give us your view on the opportunity in 5G? I know we are still fairly early on in the deployment of 5G but talk about the opportunity there and perhaps any cannibalization of existing 4G business. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 10, 2022 / 3:45PM, AEIS.OQ - Advanced Energy Industries Inc at Needham Growth Conference (Virtual)

Question: Quinn Bolton - Needham & Company - Analyst : Great. I wanted to turn to a few financial questions in the seven or eight minutes we have left. Paul, obviously we are seeing a lot of press reports about higher inflation. How are you seeing inflation affecting wage costs and labor costs for the business, and what's the impact on OpEx as you're looking to 2022?

Question: Quinn Bolton - Needham & Company - Analyst : And as inflation and rates potentially move higher in 2022, what's the impact on your current interest expense and debt facilities?

Question: Quinn Bolton - Needham & Company - Analyst : Great. And turning into the longer-term model of $1.65 billion and $7.50, I think you had touched on it earlier, but it sounds like still no change to those long-term targets. And I guess now that we are at the beginning of 2022 is -- I think when you initially put that model out, it was a three-year model implying you could hit those numbers in 2023. Is that still the time frame folks should be thinking about, or do some of these supply chain events push that model out potentially into 2024? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 10, 2022 / 3:45PM, AEIS.OQ - Advanced Energy Industries Inc at Needham Growth Conference (Virtual)

Question: Quinn Bolton - Needham & Company - Analyst : Paul, any updates to the capital allocation strategy? I think 75% of cash is still targeted to M&A? Is that right?

Question: Quinn Bolton - Needham & Company - Analyst : On potential M&A, I think it's targeted to your high-value markets, semiconductor, industrial and medical, but can you talk about where you might be looking; what types of businesses you find attractive? And how are you seeing the M&A market right now? Are valuations fairly rich, given the overall strength of the industrial and semiconductor markets; or what are you seeing on the M&A front?

Question: Quinn Bolton - Needham & Company - Analyst : Great. And then just -- debt that has been I think a preferred method of financing M&A, at least, historically. Paul, how much debt capacity do you think the Company has to the extent you find an attractive M&A target?

Question: Quinn Bolton - Needham & Company - Analyst : Great. And I know we are running out of time. So my last question is around buybacks, and this may be a little tricky for you to answer. But while you were active in the third quarter, obviously, the whole markets have seen some fair amount of volatility here beginning the year. Do you expect to be active with the buyback and opportunistic here in the near term?

Question: Quinn Bolton - Needham & Company - Analyst : Great. I guess before we close, maybe I'll just give you, Steve, and Paul, any opportunity to make closing comments to the investors listening to the webcast.

Question: Quinn Bolton - Needham & Company - Analyst : Great. Well, we look forward to monitoring the supply chain and hopefully seeing that normalize and, as it does, it sounds like the Company does have a lot of earnings leverage that hopefully we'll see throughout the course of the year. So we look forward to monitoring that -- your progress. Steve, Paul, Edwin, thank you very much for joining us at the 24th Needham growth conference. Very, very happy that you did, and hope to see you guys soon in person.

Question: Quinn Bolton - Needham & Company - Analyst : Thanks, everyone.