Good afternoon, everyone. Welcome to Advanced Energy's Third Quarter 2021 Earnings Conference Call. With me today are Steve Kelley, our President and CEO; and Paul Oldham, our Executive Vice President and CFO. If you have not seen our earnings press release, you can find it on our website at ir.advancedenergy.com. There you also find the third quarter slide presentation. Before I begin, I'd like to mention that, we will be participating at several investor conferences in the coming months. Let me remind you that, today's conference call contains forward-looking statements that are subject to risks and uncertainties that could cause the actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SEC filings. All forward-looking statements are based on management's estimates as of today November 8, 2021 and the company assumes no obligations to update them. Medium- and long-term targets present today should not be interpreted as guidance. On today's call, our financial results will be presented on a non-GAAP financial basis unless otherwise specified. Excluded from non-GAAP results are amortization, stock compensation, integration and transition costs, unrealized foreign exchange gains or losses, and restructuring items. A detailed reconciliation between GAAP and non-GAAP measures can be found in today's press release. With that, let me pass the call to our President and CEO, Steve Kelley.

Thank you, Edwin. Good afternoon, everyone, and thanks for joining the call. In the third quarter, we delivered results above the midpoint of our guidance. Stronger factory output pushed our revenue, gross margin, and earnings per share to the upper part of our guidance range. Demand remains extremely robust, across all of our target markets. In addition, our new products continued to be well received by customers, who depend on AE's innovative technologies to achieve their efficiency, power density, and precision power goals. We remain focused on the key factors driving our long-term success industry-leading innovation, strong customer relationships, outstanding quality, a strong leadership team, and a culture focused on results and speed. Over the course of the year, we have taken substantial steps to increase the capabilities of the Advanced Energy leadership team. Our latest addition to the team Eduardo Bernal joined the company in September as our EVP and COO. Eduardo has an impressive record of achievement in the semiconductor industry, with specific expertise in operations and supply chain management. Before joining Advanced Energy, he led the global back-end manufacturing organization at NXP Semiconductors, and was able to drive significant performance improvements over a multiyear period. Eduardo will be based in Singapore and Malaysia, and we are delighted to have him on board. Now, I'd like to touch on our supply chain challenges, specifically shortages of key ICs. These shortages continue to constrain shipments and limit our financial performance. We are working diligently, and with a high sense of urgency to mitigate the shortages, expediting suppliers qualifying replacement parts and where necessary redesigning boards to eliminate problematic ICs. Many of our customers are playing an important role in the mitigation efforts by expediting qualifications of new parts and by joining discussions with our key suppliers. We are seeing…

Thank you, Steve, and good afternoon, everyone. In the third quarter, we delivered revenue and earnings above the midpoint of our guidance. Total revenue of $346 million, declined 4% sequentially as our ability to ship products was limited by component supply and to a lesser extent COVID restrictions in Malaysia. Relative to our guidance, gross margins were at the high end resulting in earnings of $0.89 per share. Customer demand remains high and we entered Q3 with record backlog of over $770 million. The vast majority of this backlog is for proprietary products and roughly two-thirds is for orders that are shippable as soon as we can build them, highlighting the strong demand profile. We believe this high level of shippable backlog, represents meaningful upside to our current revenue levels, for an extended period of time as the supply situation improves. In the near term the availability and predictability of certain components, primarily critical ICs remains challenging and we expect supply constraints to continue to gait revenue. In addition, as we projected, our gross margins are being impacted by higher input costs in the form of premium buys expedite fees some price increases and underutilization of our factories. The majority of these costs, are transitory and will naturally improve over time. But we are also taking proactive actions to mitigate the headwinds on both availability and cost, which we expect to begin yielding results in Q4 and increase over time. These include working with our customers on cost recovery and pricing establishing strategic supply agreements with our suppliers and pursuing selective redesigns. During this time, we are retaining our factory capacity to be able to deliver higher revenue as parts become available and expect to maintain our broader infrastructure about flat, while reallocating resources to accelerate our most important programs.…

At this time, we’ll now be conducting question-and-answer session. Thank you. Our first question comes from the line of Tom Diffely with D.A. Davidson. Please proceed with your questions.

Yes, good afternoon. Thank you for the questions. Paul just following up on your last comment you talked about revenue going up possibly $50 million a quarter once supply constraints ease. As you talk to your suppliers, when do you think that starts? I mean, when do you see an end to the IC supply issues?

That's a good question Tom. I think the challenge we have is in the near-term we continue to see these critical parts being in short supply. But we have a highly engaged work with our supply chain also with our customers to try to accelerate and increase the amount of parts. And while it's hard to say exactly when that will turn around, we do believe that over the course of next year it will improve. I think it's very possible by the time we get to the end of next year, we could be seeing revenues running at that level, current levels plus $50 million, which would be significant for us. We believe that could drive earnings power at that time as high or maybe higher than $6 a share annualized.

Okay. That's very helpful. And then when you look at your four segments, could you rank them in order of which ones are being the most affected by the supply constraints?

Yeah. The ones that are being most affected are higher volume markets particularly the embedded power markets. These particular products use a higher number of these critical ICs. There's also more standardization across those products. So if you're short on one these critical parts that might in fact impact multiple families. Probably the second most impacted is our industrial and medical products. And then semi is actually performing quite well. As you see we continue to operate near record levels. But certainly there are critical shortages there as well and we could be doing much better if we had the parts in place.

Great. And then finally when you look at the -- you talked about qualifying new parts to get around some of the IC shortages, how long does that process take?

Yeah, Tom, this is Steve Kelley. We started that process in earnest three to four months ago for a number of our products. Typically that price is going to take around nine to 12 months to do the redesign to do the reliability testing get the qualification from our customers. The good news for us is that our customers are highly motivated to qualify these new designs. So we're seeing a record turnaround time. So it's possible we get the calls done a bit quicker than we expect.

Okay. Well, thank you both for your time today.

Thanks Tom.

The next question comes from the line of Krish Sankar with Cowen and Company. Please proceed with your question.

Yeah. Hi. Thanks for taking my question. I have two of them too. First one Paul, I just want to follow up. You said that the revenue upside of $50 million a quarter maybe happen later next year that supply normalizes. But on the same path, how long do you think the gross margin or this component cost increase going to be a drag on gross margin? Is it beyond 4Q into 1Q or beyond that too? And then, I have a few other follow-ups. Thank you.

Yeah, I said in our prepared remarks that we thought this would last a couple of more quarters. Certainly we have a lot of these premium buys, expedites that are rolling through now. And some of that's in inventory. So that certainly is impacting Q4, and will likely impact Q1 as well. As we look beyond that, it will depend on how quickly we can move to a more stable supply level where we're paying more normalized parts for these -- more normalized prices for these parts. So it's difficult to say in the near-term, but certainly over the course of the year we'd expect to see some improvement. Probably the simplest way to think about it is, probably -- the situation probably persists for another couple of quarters and then gradually improves from there. We don't see a silver bullet, Krish where suddenly magically things get much better. But we've done a lot to take mitigating actions including working with our customers, on cost recovery, on sharing some of the price changes that we're seeing. We're working with our suppliers to have better long-term agreements, and sources of supply which should hopefully get us out of some of the premium buys and things we're having, to do through distribution and other channels. And as volume begins to improve, obviously that helps our factory utilization as well. So all those factors will contribute to margins getting back to where we'd like them. It's interesting, if you look at the actual numbers, it's pretty clear, that if you excluded the higher cost of materials we're paying in the near-term. And the impact on our factories we're certainly running at or around that 40% level. So, some of these are transitory. The premium buys will pass more quickly. Some of them will be longer-term. And we think there will be opportunity for price and other mitigating actions around redesign that Steve talked about earlier. But we feel confident, as we look out I think in the last call we talked the exit rate of 2022 we could be back around that 40% level. We don't have a lot of visibility. Obviously the timing could change. But that's I think, not a unreasonable way to think about it.

Got it. That's really good color Paul. And then, I just had two quick follow-ups. The $50 million incremental revenue is this fair that you given that in your prepared comments you said there's a lot more supply constraint issues on the I&M, Telecom & Networking and data center side. Is the incremental $50 million more tied towards the legacy Artesyn business? Is there a way to think about it and i.e. that's where you might see some price recovery and helping margins as the revenue comes back?

Yeah. I think it's definitely more of a mix, Krish. There's significant upside in our semiconductor products for a lot of reasons demand is quite healthy there. And remember, not all of the semiconductor demand is in our backlog because of our -- been strategy with our largest customers. So there's significant upside in the semi as well. It's fair to think that it would affect both -- it would help all of our markets.

Fair enough. Fair enough. And then, just a final question for Steve, Steve it seems like maybe I'm wrong on this, but I'm just kind of curious it looks like you're moving away from servicing the hyperscalers markets inside. And moving -- shifting more to industry and medical a, is that true? If so can you talk a bit about that strategy? And how it could impact the long-term revenue margin profile for the company? Thank you.

Yeah, Krish, I think it's fair to say the entire company is moving towards higher value-added products. That includes what we're doing for hyperscalers and enterprise computing customers. If we take a look at I&M, the Industrial & Medical group, the most attractive part of that market is it's almost entirely sole source at least for us. And so we have put more engineering horsepower into the Industrial & Medical business and we expect to grow that at a faster rate moving forward.

Thanks, Steve.

Next question is from the line of Quinn Bolton with Needham & Company. Please proceed with your question.

Hi guys. Thanks so much for allow me to ask the question. I wanted to follow-up on Krish's question maybe ask it in a slightly different way. If you look at the business today obviously there's a lot of pent-up demand. But wondering how much of that affects the Industrial & Medical and semi business versus the more embedded telecom and server businesses? I would think that there may be more perishable demand in those embedded markets. And so, as the business comes back does it come back faster in Industrial & Medical and Semi which are higher-margin businesses, or do you think there's actually better growth off a pretty depressed level in the more embedded but lower-margin businesses that you come through next year?

Yes. Go ahead Steve.

Yes. Let me just echo what Paul said earlier. We see shortages across all of our businesses whether it's semiconductors industrial medical and the high-volume hyperscale and enterprise computing businesses. So it's hard to predict which comes back faster, if they all come back at the same time. But I can say that we're working hard in all the businesses to close the gaps. We are paying significant premiums every week to source parts from various distribution and broker channels and working closely with our customers in all the segments to meet their needs. So, we really can't predict which market will come back faster than another.

Understood. And then the second question you mentioned keeping the Shenzhen facility opened through the second quarter. Wondering if you might be able to quantify how much of an impact that might have on your fixed expense space. I imagine to the extent you closed that down that there could be a nice gross margin lift in the second half of next year, especially as revenue at that point should be ramping as you start to meet some of this pent-up demand?

Yes that's right, Quinn. We've said that the cost of keeping that site open from a fixed cost is between 50 and 100 basis points of gross margin.

Got it. Okay. Thank you.

Our next question is from the line of Mehdi Hosseini with SIG. Please proceed with your question.

Yes, thanks for taking m question. Going back to your Q4 guide what would be your revenue be if there was no supply chain disruption?

Well, I think it's easy to look at that in a hypothetical say if there was no parts disruption you could add that $50 million in today at least. We certainly have shippable demand that's well in excess of that where customers will take the products as quickly as we can get them. And then it would be just a matter of manufacturing capacity which we certainly have enough manufacturing capacity to meet that number. So it's really all about having the critical parts.

Yes. Let me just add to that. I mentioned in my prepared remarks that we are maintaining a full workforce in all of our factories. So we have the surge capacity to get well beyond $400 million a quarter in revenue. So we have the people in place. And as the parts appear we could build that equipment pretty rapidly.

Okay. And then you highlighted the growth in semi business in the December quarter versus September? Should I assume that other business units will be flat to down and semis will show growth, or would the other business units would be flat?

Yes, I would say generally speaking semi we expect to be up probably Industrial & Medical flat to up and the high volume would likely be the offset to that. The high volume being Telecom & Networking and Data Center Computing. But look at it it's all about what parts we get in and where they go. That's the critical thing. So, it's a little hard to predict exactly the mix.

I see. Okay. And just for purpose of modeling and assuming that $50 million of business were to come back throughout '22. Would you have to expand your OpEx? Should I assume that your OpEx would go up maybe $1 million or $2 million per quarter, or would you keep it kind of flattish from here on?

Yes. Our intent is to keep it flattish from here on. We have as you know Mehdi sort of accelerated already investment in R&D because we have a lot of opportunities ahead of us working with our customers. We're very excited about those. And there'll be a little bit of inflationary pressures. But our goal is to basically keep our infrastructure flat and then there'll be some inflation on top of that. But we don't need to add a lot of operating costs as revenues grow beyond just kind of your typical variable costs that are completely tied to revenue. So not much OpEx growth as revenues recover.

Got it. Thank you.

Thank you. The next question is coming from the line of Pavel Molchanov with Raymond James.

Before taking the question, you've done a little bit of M&A over the past year but I'm curious if the supply chain complications that you and everybody else clearly, is experiencing might create some distress situations that you could opportunistically take advantage of. Is that a realistic scenario in terms of your -- some of the potential M&A targets?

That's an interesting question, Pavel. What we're seeing actually is we have some targets we're looking at but they don't want to do a transaction because their financials are distressed because of the part shortages. So, it's kind of a circle here. So I think as the parts shortages start to abate, I think you'll see the potential for more deals in this space.

Okay. So kind of the opposite of what...

Yes, the opposite.

Okay. Fair enough. Your dividend is now at its one-year anniversary congrats on that. Should we anticipate a dividend increase at any point in 2022?

Yes. Pavel, obviously that's something that the Board will review on a regular basis. At this point we're not really in a position to comment on that. But look our focus right now is, on growing our business. We think there's a lot of opportunities to do that organically and inorganically. We're certainly investing a lot in working capital right now, to support what we think is that upsize of growth. So we'll take that in stride but no comments on that at this point.

All right. Thank you, guys.

Thank you. At this time we've reached the end of the question-and-answer session. And I'll turn the call over to Steve Kelley, for his closing remarks.

Thanks for joining us today. We are dealing with near-term supply challenges but we remain firmly focused on the timely introduction of new products and technologies the drivers of AE's future revenue and profit growth. With strong demand for our products, a record order book and a solid pipeline of high-value proprietary designs, we are well positioned to meet or exceed our medium- and long-term financial targets. We look forward to talking with many of you in the coming weeks. Thank you.