Advanced Energy Industries, Inc. (AEIS) Earnings Call Transcript & Summary

Yes. It would be content per rec, where we participate. I think it's important in data center to remember that our strategy is not to grow market share necessarily is to operate those applications that will drive higher margins for the company. .

And some investors interferon is when ACDC moves from the rec to SEDAR or Power rec people are trying to figure out if you guys have a solution for that and you guys are expecting or already engaging with customers on that and expecting

Yes. So we do have solutions, and we're engaging with customers on the sidecar as well as more rational architectures. So I think that's 1 of the advantages of our modular strategy. It gives us a lot of flexibility on how we deal changing customer requirements. So I think we're in pretty good shape no matter which architecture a customer chooses. .

And where are will be the biggest content opportunities for you guys in this kind of transition. What needs to happen in order for to grow your content, like as you said, grow your content meaningfully in this one?

Yes. I think the 2 key parts of this market are on during the design phase. So it's having the right engineering team in place, having the right IP blocks in place. So you can move quickly. And the second is your ability to scale manufacturing quickly and reliably. And I think we've got a really good engineering team and we need to add to that team but it's difficult to find really good engineers. So that's the constraint. It's not our willingness to spend money on more engineers, just our ability to find them, but we are expanding as far as new factory space, I think we've done an excellent job in the Philippines and in Mexico, expanding capacity to meet the hyperscaler requirements. We've also done a great job upscaling our development sites because it costs more and more to develop these products with the higher power requirements. But looking to the future, we have this large factory in Thailand, 500,000 square foot factory, and that will be the future for next wave of expansion data center.

And just to double click into the -- talk about the kind of bottleneck will be the engineering innovations. So what are the most difficult things to do there is that efficiency, power density, like thermal management, reliability? Or is really all of them?

It's all of the above. So that's the key. And how can you do this? How can you juggle these different requirements and come out with a solution that's manufacturable, reliable and scalable. And that's what we've been doing for the past few years. So we built a fair amount of confidence with our customers that we can get the job done. And 1 of the things we try to do from generation to generation is reuse as much as possible that we're not inventing something new every year or at least we limit the invention, right? So I think I think that's the key is focus on a subset of customers and execute 100% on their needs.

Got it. And -- in the longer term, also there is also like the 800-volt directly to step down to 12 rather than using an intermediate 48 and 50 bus. So does that increase or decrease is content opportunity. And on the on hand side is just 1 big step down. And the other handset is it's -- it's a big step down.

Yes. Yes. And I think it depends on which customer you talk to what they want to do. And that also drove our decision to go to a modular approach with 800 volts. So way to think about this is we have what we call PDU or power distribution unit. And think of it as a motherboard essentially, where we can plug in these different 800-volt modules and you can do whatever you want with it, intervals to 6 volts or to some other intermediate voltage goes up to the customer how they want to deploy this PDU. And so that flexibility is really important at this stage of the game because I don't think anybody knows exactly how the architecture is going to look a year or 2 from now. But if you have flexible modules, you're able to experiment and figure out what makes most sense for you.

That's your strand like utilization?

Yes. And so we're all about customization.

I'll take a pause here to see any questions. Okay. Let's move on to Industrial and Medical. So I think finally looks on the way to some recovery and some growth there. How do you see the rest of the year shakeup and then look forward to next year

Yes, the industrial medical market has recovered. There's significant increases going on. I think we were up 11% quarter-on-quarter, 16% year-on-year in Q2. And as we look forward, we see each quarter getting stronger, '27. And we're seeing anything AI related, let's say, physical AI is driving a lot of the high-end industrial medical business. We operate in the high end of that business. So it's factory automation, robotics as apparatus, those types of application. And that part of the market is definitely strong. And we're basically reaping the benefits of our design wins over the past 2 to 3 years, testra medical, all of those are starting to ramp the volume. And so we're basically expanding capacity rapidly in the Philippines and in Mexico where most of these products are built.

And I think it was in Q1, you had to mix for lack of better word, sacrifications to the industrial medical because other products are renting blockbuster or demands come in like got pulling a lot faster. So at this stage right now, do you have enough capacity to support like the Ramaco sec?

Yes. Yes. So we had a hiccup in Q1. It was really our own problem. We had an execution problem in the company, which we've rectified. But we have enough capacity in industrial medical. We've basically been corrected for execution problems. I think we'll be caught up with our delinquent backlog by the end of this year in Industrial Medical. But there are no limits right now as far as what we can invest in industrial medical capacity. .

And I feel like this like telecom and networking has never really asked a lot. So how strategic is this T&M segment market to your long-term target?

We're starting to see more opportunities that are AI-related, telecom networking. So I say that definitely works into our strategy. But as a market, it's I wouldn't say is strategic, it's more opportunistic for us. So where we can reuse our existing technology to satisfy the needs of telecom and networking customers, we will. But we're not going to develop ground up products for that segment. .

And what kind of AI or maybe or just overall, like what do you provide there?

It's basically the same very similar products to what we provide to the data center customers. And so you see a convergence there with different companies that need the same basic thing, which is reliable our highly efficient power nightpower density operating.

And 1 question for Paul. Maybe on the capacity side, maybe can you explain your capacity expansion strategies, you talk about like talent or expanding a lot of capacity right now? And your customers are also aggressively adding products -- capacity as well, and we heard a lot of doubles over the past couple of days during our conference. So well, we were able to keep up with demand, if they grow more than -- the demand growth more than expected. And on the other hand, do you have any concerns for putting to large investment in capacity?

Yes, it's a good question. We've clearly biased ourselves to make sure we have enough capacity, both in terms of physical capacity and in materials to capture upside. I think we've said that for a while. We do see a ramp going on both data center and this sector market, and we're committed to make sure we can capture those opportunities. That means we've carried more inventory and we're investing quite a lot more in capital exposures. Good news is we started this a while ago. We saw this trend coming, and we were able to get in front of it. As Steve mentioned, we started our Thailand facility build out back in 2023. So that factory is now coming on stream right when we need it. with an ability to scale it very quickly. Today, we have over $3 billion of capacity in our existing facilities with the opportunity to potentially expand that more adjacent space through how we can figure things what we put in those manufacturing line. But with Thailand coming on, that would give us over $5 billion of capacity as soon as 2028, so we feel like we're in good shape from that perspective. In terms of what's the risk of like overinvesting, I think there's a few things to think about. First of all, the payback on this investment is very fast. Secondly, a lot of these investments are very fungible because we're in multiple markets, and we're basically doing final assembly and test. We can move this equipment around depending on what's the actual need at the time. And the third thing is our investments, while they're significant for us we're not building a fab or a back-end testing ability or something like that. And so the relative capital investment is fairly small. So -- all in, we believe that these investments are already built into our business model. In fact, if anything, all we've done is we pulled forward investments that were already in our 2030 model because, frankly, the demand is running ahead of what we expected.

And with that $5 billion capacity with talent ramp up, I think maybe a quarter ago or 4 months ago, it was -- the number was kind of $3.5 billion to $4 billion. So what drove that upside? Where does it come from?

I think it comes from a number of things. I think, first of all, we've sharpened our pencil a bit. I think capacity is never 1 number, it's sort of a range. I think you tried to look at that more on that context. But part of it is accelerating investments. We have increased our capital expenditures to capture -- make sure we've got equipment and space needed to meet the growth ramp. .

And while talent ramping, -- is there a period or should we think about there is kind of underutilization cost and ultimately, I believe the talent facility is margined? .

Yes, it's a good question. The investment in Thailand and the other investments capacity, we're always in our 2030 business model. So it's not new or it's not incremental. What's happened is we pulled that in because we're much further ahead, we're almost getting to the revenue levels in 2027 that we had in our model we put out just years ago, which was we had a 2030 target. So we've pulled that in. So it's contemplated in the model. And in fact, this last quarter, we said we expect gross margins to exit this current year around 42% and next year around 43%. That also contemplates the investment in bringing Thailand and the other manufacturing investments on stream.

Yes. And just on the gross margin, talk about you are very close to your target model right now, but gross margin is just a bit below. I think there is tariffs impact in there. There is like ramping costs to talk about. But is there anything else that which you think about that is kind of impacting the gross margin, not reaching the target.

You hit the big ones, right? Obviously, tariffs were not embedded in our original model. So that's a headwind Also, I think the mix of being more data center heavy is a little bit of a headwind, but frankly, margins are improving across all of our markets. And so we wouldn't be able to continue to improve margins if data center margins were also improving and so when we look forward, I think the important thing is, yes, we're approaching our model from a revenue perspective. We're also approaching it from a gross margin perspective. And we believe that the underlying factors that are improving gross margin can continue -- we still expect the majority of the benefit from mix of new products is ahead of us. So that's a positive -- when you ramp this quickly, it's not always as efficient as you'd like it to be to your last question. So there's still opportunity to bring out some efficiency in manufacturing. And we should continue to reap the benefits of volume. So while we put out a model that said 43.5%, we think we can certainly go beyond that as the business continues to grow and our new products actually become a bigger proportion of the total revenue.

And just to that point, your Analyst Day was like '24.

Yes, just 2 years ago. not even 2 years.

Any are you expecting to update your target model anytime soon?

It's a good question. Ultimately, we will do an update to it. But I think the beauty of the model is it's -- we put in place, it's a scalable model, which says that there's an opportunity to actually continue beyond kind of what we book in of that model. Clearly, revenues tracking ahead, data center has been much stronger than expected. Semi's in a fast ramp. And I&M is finally recovering. So I think those things bode well for continued growth. We think the elements of gross margin outside of tariffs and a little bit of mix are structurally intact, which can also go beyond the 43.5%. And frankly, we're quite a bit ahead on operating leverage because we've grown, we've grown faster. So we think while we haven't updated the model yet, the underlying tenants of the model still hold. .

And just you're doing so well in semis and data center and Industrial & Medical is recovering. But when you think about investment across the segments, how do you balance this kind of making investment in semis in data center or like doing like some M&As in the Consumer Medical .

Yes. So the way we think about it is we've really doubled down our investments on semiconductor and data. Those are largely internal investments. We've invested significantly in inventory to put ourselves in a position to capture upside and be ahead of the ramp. We're investing in CapEx. We're spending roughly 2x the CapEx we would normally spend. And so while that's running high today as we get through these ramps, that can move back to a more normalized level of 3% to 4%, but we're certainly making those investments today. We think from a capital allocation perspective, M&A certainly is an important part of our strategy. We think that, that's most due to the industrial medical market, where it's a more much broader-based set of customers and set of competitors. And it's a way to use M&A as a way to build a bigger beachhead in that market. Because ultimately, we'd like to have 3 very strong markets that we address going forward.

And just to wrap up, is there anything that you think investors are not understanding advanced energy story very well? Or anything that we did important that we didn't really touch.

Yes. I think the key thing is that we have multiple legs of growth. If you look at our customers and the market dynamics that growth is projected to continue. It may not always be linear every quarter, but is projected to continue over the next couple of years. and we're tied right into those leading-edge technology that support it.

That, Steve.

No, thank you very much .

All right. We're out of time. So thank you very much for coming, and thanks, Steve and Paul for joining us today.

Excellent Thanks, everyone.