Q1 2022 Advanced Energy Industries Inc Earnings Call
[music].
Good day, ladies and gentlemen, and thank you for joining us for this advanced energy first quarter 2022 earnings conference call.
As a reminder, all phone participants are in a listen only mode. But later you will have the opportunity to ask questions. During our question and answer session. Also please be aware that today's meeting is being recorded to get US started with opening remarks and introductions I am pleased to turn the floor over to vice president of strategic marketing and Investor.
Relations Mr. Edwin Mok.
Thank you operator, good afternoon, everyone. Welcome to advanced Energy's first quarter 2022 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 on our website at IR Dot advent LNG dot com.
You'll find the earnings slide presentation.
Before I begin I would like to mention that we will be participating at several investor conferences in the coming months.
Let me remind you that today's call contains forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance informing.
Information concerning these risks can be found in our SEC filings all forward looking.
Payments are based on managements estimates as of today May four 2022, and the company assumes no obligation to update them.
Medium term targets and long term aspirational goals presented today should not be interpreted as guidance.
On today's call all financial results are presented on a non-GAAP financial basis, unless otherwise specified.
Exclude from non-GAAP results are stock compensation amortization.
Acquisition related costs restructuring expenses, and unrealized foreign exchange gains or losses.
Detailed reconciliations between GAAP and non-GAAP measures can be found in today's press release.
With that let me pass the call on <unk>, President and CEO , Steve Kelley.
Thank you Edwin.
Afternoon, everyone.
And thanks for joining the call.
First quarter revenue and earnings per share.
Exceeded guidance.
Firstly due to good manufacturing execution.
And our ability to secure additional key components.
Our shipments into the semiconductor market were particularly strong.
Demand is robust across all of our target markets.
And our order book is at an all time high.
To mitigate the impact of a dynamic supply environment.
We will continue to maintain full staffing levels at all of our factories.
So that we can react quickly.
When scarce components become available.
We will also continue to purchase components on the open market at a premium.
If we can't find those components through normal channels.
And finally, we will continue to address intractable supply issues.
Through alternative sourcing and.
And Redesigns.
This aggressive approach to staffing.
Procurement.
And component qualification.
Is paying off in the form of higher shipments to our customers.
Over the last six months.
There are significant incremental cost associated with our mitigation efforts.
But we think our approach makes sense for advanced energy and <unk>.
For our customers.
And I would like to thank our customers for partnering with us.
To absorb some of those incremental costs.
Although we spend a lot of time talking about parts shortages.
Let me assure you that our primary focus continues to be the development of new technologies and.
<unk> products.
Which provide value to our customers.
These technologies and products are critical to our future revenue growth and financial performance.
In the first quarter.
We launched differentiated products into <unk>.
Multiple markets.
Grew our opportunity funnel.
And when designs and many proprietary applications.
In addition.
We recently completed the acquisition of <unk> power electronics.
Expanding our product portfolio and broadening our customer base and the medical and industrial markets.
Now I'll provide more color on the operating environment.
In the first quarter, we overcame a number of COVID-19 related manufacturing challenges.
And omicron wave in Malaysia.
And our regional shutdown in Shenzhen.
The operations team's quick response to the changing environment.
Allowed us to exceed our quarterly production goal despite the COVID-19 headwinds.
To mitigate supply issues, we continue to qualify an alternative Ics.
And where necessary redesign entire circuit boards.
Customers are partnering with us in these efforts.
And we are grateful for their support.
I would also like to note that most of our suppliers are keeping up with our demand despite the challenging supply environment.
And their performance is much appreciated.
Now I'll provide further color for each of our target markets.
In the first quarter.
Revenue from semiconductor customers exceeded $200 million.
A new milestone for the company.
We expect sales into the semiconductor market to grow sequentially in the second quarter.
And to continue growing in the second half of the year.
Given that outlook, we are confident that AE can grow semiconductor sales faster.
Then the overall wafer fab equipment market in 2022.
We're making good progress developing technologies and products for.
For applications, such as dielectric etch.
Remote plasma source.
And panel packaging.
These efforts represent upside opportunity for advanced energy.
And will help drive long term revenue and market share growth for the company.
In the industrial and medical market.
First quarter revenue grew year on year.
Demand is strong and our order book increased in the first quarter.
We secured a number of important industrial and medical design slots in the first quarter.
With notable wins in Electrosurgery <unk>.
Life Science.
Test and measurement.
And vehicle charging applications.
During the first quarter, we launched the LCM 4000.
Our high efficiency high density power delivery system, particularly.
Particularly well suited for indoor farming.
And large scale commercial lighting applications.
This highly differentiated solution will enable our customers to reduce both installation costs and operating costs.
Key customer interest in the LCM 4000 as.
Has already resulted in several large orders.
Now I'd like to touch on our recent acquisition of <unk> power.
Which we believe makes it advanced energy a top tier player in the medical power market.
We like the medical market because it offers steady secular growth.
Long product life cycles and.
And sticky proprietary designs.
Medical customers demand highly reliable solutions.
On certified lines.
With custom features.
So power is a well known supplier of customized power solutions for leading medical device and equipment makers.
Roughly 75% of their revenue is derived from sole source products.
And its portfolio of low power medical products.
Dovetails nicely.
With advanced Energy's high power solutions.
With almost no product overlap.
We see a lot of opportunity for cross selling.
And concluding the market commentary.
Our revenues in the data center computing.
Telecom.
And networking markets were up year on year.
We see continued strong demand in all of these markets.
In summary.
As demonstrated over the last six months, we are gaining momentum as a company.
Our operating tempo is good our.
New products are gaining traction.
And our team is energized.
With a strong focus on innovation.
New product development.
And customer satisfaction.
Advanced energy is well positioned to deliver sustained.
Profitable growth in the coming years.
Paul will now review our financial results.
And provide detailed guidance.
Thank you, Steve and good afternoon, everyone.
We delivered first quarter revenue and EPS above the high end of our guidance ranges.
The results reflect good execution, our ability to secure additional key components increased factory output and partial recovery of material cost premiums.
Demand continues to be strong.
And our backlog grew another 9% to a little over $1 billion.
However, the supply chain continues to pace, our revenue and earnings performance.
As a result, we will continue to plan prudently, but we remain optimistic that we are on track to deliver our annualized earnings target of over $6 per share as we exit the fiscal year.
Now let me go over our financial results.
First quarter revenue of $397 million grew 13% year over year and was up slightly from our fourth quarter.
Revenue from the semiconductor market was a record $203 million.
Growing 12% from last year and 13% sequentially.
Strong demand.
And our ability to recover after significant COVID-19 impacts in Malaysia in Shenzhen.
<unk> to deliver upside to our initial target.
Looking forward, we anticipate semiconductor revenue to grow sequentially in the second quarter and in the second half of the year.
In addition, we are investing in further capacity and production flexibility.
This should enable our throughput and capacity in Malaysia to continue to increase every quarter.
And we have extended our Shenzhen plant closure to the end of the calendar year.
Overall, we expect to significantly increase our semiconductor capacity over the next few quarters, which should allow us to meet our customers' long term demand as the supply chain improves.
For the first quarter demand in our other markets was also strong and overall backlog increased.
However, revenue was paced by supply of critical components as expected.
Sales into the industrial and medical market were $83 million up 6% from a year ago, but down 16% from a record Q4.
Data Center computing revenue grew 29% year over year to $76 million, but declined 5% sequentially.
And telecom and networking revenue was $35 million up 6% from last year, but down 9% from the fourth quarter.
First quarter gross margin was 36, 6% up 110 basis points from last quarter on slightly better mix and higher factory output.
Compared to last year gross margins declined 310 basis points, primarily due to higher material costs and factory and efficiency in the current environment.
Premium recoveries, which reflect costs that we've been able to pass onto our customers, but at zero margin alone accounted for 180 basis point impact to gross margin.
We expect a higher material costs and related premium recoveries will continue to negatively impact our results in the second quarter.
However, we believe that these costs will gradually come down in the second half of the year based on our mitigating actions and some normalization of the supply chain.
Operating expenses were $87 $6 million up approximately 2% from last quarter.
The sequential increase was due to investments in R&D, partially offset by lower SG&A expense.
Operating margin for the quarter was 14, 5%.
Depreciation for the quarter was $8 4 million and our adjusted EBITDA was $66 million.
Up from $63 million last quarter.
non-GAAP other expense was $2 1 million, including $1 3 million of interest expense and $500000 of foreign exchange losses.
We continue to expect non-GAAP other expense to be in the $2 million range going forward.
Our non-GAAP tax rate was 16% slightly above our target of 15%.
The increase was due to a change in U S tax rules effective at the beginning of the year, partially offset by a favorable tax credit.
Looking forward, we now expect our GAAP and non-GAAP tax rate to be approximately 19%.
Compared to our prior target this will impact our quarterly earnings by approximately <unk> <unk> per share.
Earnings for the quarter were $1 24 per share.
This compares to fourth quarter EPS of $1 36, which included a large year end discrete tax benefit.
Excluding this benefit last quarter earnings would have been $1 21 per share.
Turning now to the balance sheet.
We ended the fourth quarter with total cash, including marketable securities of $524 million and net cash of $136 million.
Cash flow from continuing operations was $10 million.
The lower operating cash flow.
Due to higher net working capital, which increased to 120 days.
Inventory on a dollar basis increased 7% sequentially and turns were two eight times.
We continue to expect some upward pressure on inventory in the near term as we prioritize meeting customer demand, while pursuing shortages of critical parts.
However, inventory turns should normalize as the supply chain improves and shipments increase.
Days payable declined slightly to 65 days and DSO increased to 56 days largely due to timing.
During the first quarter, we invested $13 $1 million into Capex made.
<unk> made debt principal payments of $5 million and paid $3 8 million in dividends in.
In addition, we repurchased $6 6 million of common stock at $80 per share as part of our opportunistic share repurchase program.
Before I talk about guidance I want to provide some financial details on the SL power acquisition.
As we announced last week, we completed the acquisition of <unk> power electronics for $145 million on a cash free debt free basis, using the cash we have on our balance sheet.
SL power adds approximately $65 million of pro forma revenue on an annualized basis.
It is a profitable business with operating margins in the mid teens.
And we expect to realize approximately $4 million of cost synergies once we fully integrate the operations.
With a highly complementary product portfolio and customers.
We believe there are meaningful cross selling synergies, which will accelerate our growth in the medical and industrial markets.
Now, let me turn to guidance.
Our second quarter results will continue to be paced by availability of critical parts, including additional risk from the ongoing COVID-19 lockdowns in China.
As a result, we expect Q2 revenue to be approximately $395 million plus or minus $25 million.
Our Q2 guidance assumes semiconductor revenue will continue to grow sequentially and it includes a partial quarter of revenue contribution from a cell tower.
As we guided previously we expect Q2 gross margin to be approximately flat to Q1 with similar mix and material cost premiums.
We expect operating expenses to be in the $93 million to $95 million range on annual salary increases continued R&D investment and the addition of <unk> power, which adds $3 million to $4 million to our opex for the quarter.
Including the higher tax rate of approximately 19%, we expect Q2 non-GAAP earnings per share to be $1, five plus or minus 30.
Before I open it up for questions, let me make some additional comments beyond the current quarter.
As I mentioned, the operating and supply chain environment remained challenging.
And our revenue and financial results are being paced by supply of critical components.
However, we are executing well and are making progress in our supply mitigation efforts.
<unk> and our backlog position are strong and we are investing in further capacity and flexibility to increase output as the supply chain improves.
As a result, we continue to believe that we are on track to deliver annualized EPS of greater than $6 per share by Q4 with higher earnings potential in 2023.
With that let's take your questions operator.
Gentlemen, thank you.
And to our audience today, if you would like to ask a question at this time simply press star and one on your telephone keypad pressing star and one will place your line into a Q and a friendly reminder, that if you are joining us on a speaker phone today. Please return to your handset prior to pressing star one to be certain that youre signal does reach our equipment.
Again, ladies and gentlemen that is star one if you would like to ask a question. We will hear first from Quinn Bolton Needham <unk> company.
Hey, guys congratulations on the nice results.
March was the second quarter, where you guys were nicely above guidance on your ability to get.
Component supply and I'm wondering if you could just give us your updated thoughts on component availability are things starting to loosen up.
Or have some of your efforts to go out and secure components on the open market really been the source of upside in the near term.
Yeah, just just kind of.
Thinking about when do you think component.
Component availability start to get more predictable.
Yes, Colin this is Steve good question.
I think it's a daily battle essentially.
We get upsides, we get downsides literally every day from our critical IC suppliers.
We've been fighting this battle for more than a year. So I think we're giving a bit better at it so you're seeing some of the results of our efforts.
As we.
Feel the various channels and brokers.
I think thats part of it the other part is we've been working pretty hard on alternative qualifications.
As well as board Redesigns to get around some of the more intractable supply issues.
And our customers have been working very closely with us to qualify those solutions quickly and.
And so that's also played a part in our success the last two quarters.
And we see that.
These alternative solutions will play a bigger role moving forward in 2022, that's why we're optimistic about the second half.
My second question.
Really for Paul.
It's like you're reiterating your guidance for $6 of annualized EPS.
In past quarters that was sort of on a revenue run rate of something a little bit north of $400 million. I guess my question is your backlog is up now to over $1 billion. It certainly seems like if you can get components supply that.
The natural run rate of revenue would be well above that $400 million level I won't ask you to say when that might happen, but am I right to think that.
When you are no longer paced by component issues that revenue could be nicely ahead of $400 million on a quarterly basis for several quarters.
Yes, I think thats exactly right Quinn and it really comes down to how available in materials or and also what we have to pay for them. We have a little higher revenues now, but part of that is these premium recoveries, where we have more revenue, but its essentially at a pass through costs. So overtime I would expect that would be.
Decrease the actual product.
Kevin will increase.
That's why you get some of the lift in gross margin as sales improve.
So as well that would be youre exactly right. It will be paced by the availability of parts and we're doing everything inside the company.
To put ourselves in a position to get as many parts as we can.
As well as be prepared as those parts become available to deliver quickly to our customers.
Got it thank you.
Okay.
And thank you for your question Sir.
Next we'll hear from Mehdi Hosseini.
Hey.
Yes, thanks for taking my question.
When I look at.
Europe recorded March revenue.
And you may recover too.
Include or exclude the impact of the tower you were still able to.
North of $20 million.
Of revenue and I'm, just curious how should I think about that upside driven by your ability to procure components.
In the open market versus.
Other factors.
Ill also discuss other factors and I'll have a follow up.
Yes, let me just make a comment there.
I think there are two main factors that helped us in Q1.
<unk>.
Indeed, our ability to source, where components and to put some workarounds into play.
But the second.
Our ability to react quickly to the COVID-19 slowdown in Malaysia, and the Covid shutdown and Shenzhen.
And so the factories recovered very quickly and actually exited the quarter.
Very high operating tempo so the combination of good execution factories and.
Improved procurement of parts really allowed us to hit the number in Q1.
Yes.
And I appreciate the execution operational execution, but what is interesting is that.
Got.
It seems like the comp.
Components availability is there.
You are willing to pay a premium, especially if you were gone in the open market.
Yes.
Yes, I think thats true at some level.
Yes, there is a lot of components that we go after that we don't actually get.
So it does come down to both whats available.
And as Steve said I think we've gotten.
Pretty adept at trying to get with what's out there, but it really it thats the limiting factor and of course, that's very hard to predict.
Because the shortages are also dynamic Lee. Thank you recovered in some cases in.
Jimmy commit or something and youre, having to find parts quickly. So it continues to be a dynamic environment.
I think again, we were able to do better this quarter in getting parts and our factories were then able to quickly turn those into into product. Despite the COVID-19 headwinds.
Sure Okay.
My follow up now that you're on track to hit.
North of $400 million of.
Quarterly revenue and exited the year annualize.
Six.
With more than.
<unk> cash per share why not have become aggressive with capital return.
Last year, we did buy quite a lot of stock back.
You will see we did buy some stock back this last quarter and our opportunity opportunistic share repurchase plan continues to be one of the tools that we have and as every quarter, we all SaaS.
On a variety of factors that determine how aggressive we should be with that with that repurchase program.
Got it thank you.
Our next question today comes from Steve Barker at Keybanc capital markets.
Hey, thanks.
I just want to make sure I understand the guidance the midpoint.
The revenue guide, which you puts you back at record levels like <unk> and <unk> and in those quarters non-GAAP EPS averaged about $1 30 per quarter.
Guiding to 105 at the midpoint I hear you on tax rate that could be a nickel, but what are the other factors that will drive operating margin lower sequentially on higher.
Higher revenue.
Yes, I think Theres a couple of factors.
The first is that in that roughly flattish flat revenue or slightly higher does include.
A partial quarter of cell towers, so that that's revenue.
That helps us in Q2, but as you know it comes with a full cost structure. So it.
It's not leveraged revenue if you will so.
If you exclude that.
Our product revenue, it's actually we're projecting it a little bit lower in Q2 than we than we got in Q1 I think that's the biggest thing so you're just getting a little bit of headline benefit of the acquisition now over time as our.
Our organic revenues increase because there's more parts and of course, we would expect that fall through.
To occur, but that's the biggest factor.
Got it okay.
And order rates for specialty industrial equipment were strong through one Q just broadly speaking and all the commentary from the companies that have reported suggested trends remained strong in April and really no cracks in demand so.
Understanding that we're going to layer in sell power into industrial and medical just how are you thinking about organic growth in that segment for <unk>.
<unk>.
A year if you if you could.
Yes, Steve.
The organic growth in <unk> is quite impressive the only thing holding us back right now are a critical parts.
And I think some of the shortages, we have and I am a more acute than what we've seen in semiconductors. So theres been a real focus on trying to procure.
Parts.
The industrial medical business.
And we're very sensitized to it but.
Theres a lot of pent up revenue and profit and our current backlog for the industrial medical markets.
I guess if you if you are constrained on the supply side can you talk about what the order rates were year over year in China.
Sure.
I can I can say that our backlog went up.
In the first quarter. So we continue to receive orders in excess of what we could ship.
Okay. Thanks.
Our next question today comes from the line of <unk> Misra with Bahrenburg I do hope I said your name correctly. Please go ahead. Your line is open.
Thank you yeah that was perfect.
Can you talk about the mix in your backlog a bit is the mix similar to your revenue mix.
The heavier al here.
Inductor business.
Yeah in general I'd say, it's a very healthy mix.
Broadly speaking I would say, it's more healthy than our average revenue mix.
Broadly I would say over 80% is either semiconductor or a desk industrial medical products.
Got it and then how should we think about the output at your Shenzhen facility between now and the end of the year.
Given you.
Plant.
Yes.
As a reminder.
We decided to keep open the Shenzhen plant through the end of this year and.
And so the reason we did that is because we need the capacity.
And I can say that today the <unk> implant is doing an excellent job with output. In fact is the highest we've seen I'll put in many quarters. So.
So we expect that they're going to be a solid contributor.
Over the course of 2022.
And at the same time, we're bringing up our production in Malaysia. So.
The new output records every month.
Our Penang facility, and we're getting more efficient and increasing output on a regular basis. So so we think we're in good shape.
On the semiconductor production side.
Got it thanks guys.
And very quickly a reminder to our phone audience that it is star one if you would like to ask a question today, we'll hear next from the line of Krish Shankar at Cowen and company.
Yes, hi, Thanks for taking my question I had a couple of them actually Paul did you mention in your guide of $295 million, how much of <unk> power contributing.
We didn't mention it specifically, but it's about $65 $66 million annualized if you look at last year's results and we close the transaction in the last week of April . So you can roughly do the math to get to get an estimate of the contribution.
Got it got it alright, and then so and then ongoing June guidance, clearly said that semi should grow sequentially.
If I may then decide that.
So we'll help.
And then is it fair to assume that.
With EMEA in A&M growth frequently and Cheniere, while telecom and data center down in June .
Yes, let me comment here Krish.
Our guide is substantially better than what we guided in Q1, but it is less than what we actually delivered in Q1.
And really what's going on is there are a couple key uncertainties that we deal with every quarter.
One of the critical IC Decommitment upsides, so it's very difficult to predict.
The second one we have that we're dealing with this quarter of the Covid Lockdowns in China.
And it's really hard to precisely quantify the impact of those lockdowns, we know they're impacting various parts of our supply chain.
Theyre not impacting our factories, but theyre impacting our suppliers and.
And so we did take a bit of a cautious approach to our Q2 guidance.
Got it got it Super helpful. And then just a final.
Question <unk> mentioned in the past I think it was.
The good part of the last six months or so about dealing with.
Being a premium on a massive premium with the third party broker I'm just kind of curious when I look over the last month or two months or three months.
Do you think that the amount you gave the brokers have been going up or has it been flat or do you think actually rolling over from what are you paid like a few months ago.
It's a good question as Steve said, it's sort of a day to day Battle. So I think we're a little cautious about trying to divine trends, but in generally I would say there's indications that the incoming rate of those is getting better.
Not what's coming in the door, but but what we see out there is maybe trending better and thats part of what.
Leads us to conclude that we are on track to what we said earlier that towards the latter part of the year, we should see these things coming down so.
Don't want to get ahead of myself too much just because it's a dynamic environment, Steve already commented on the China.
Covid lockdowns and the impact on the supply chain so.
But we're cautiously optimistic perhaps that those are starting to starting to improve.
And then maybe if you could speak one last one Paul.
Based on what you just said in your comments that Q4 exit run rate without EPA should deal with six months annualized.
But in the past you said that gross margins you can check in the second half.
Should we still assume window do you think gross margin inflection is more of a Q4 story rather than a Q3.
Yes, it's a good question I think as we thought about that gross margins in total will be up in the second half that you should really think of it as a more of a Q4 than in Q3.
Maybe some modest improvement in Q3.
And then more in Q4, but look it's you're hitting on exactly the key issue.
To the degree that these premiums can subside that's going to help us in the question is.
Is that sooner or later.
And our best view is when that we get the most benefit of that is closer to Q4, but that we are seeing some signs that it could be modestly improving.
Got it got it thank you very much Paul Thanks, Steve.
Hans Chung with Valley Assignee. Your line is open. Please go ahead with your question.
Hi, all based on the channel from Doj.
So thank.
I guess my first question is on is very encouraging.
And then your commentary on the semi come back here.
This needs.
Two goal to outpace the FTE outlook this year so.
Can you can you kind of.
Hey, Mike.
The underlying driver is more like the share gain.
Fully or more like <unk>.
The.
Come home and critical parts to available so we are able to ship.
And they're going to ship that.
Two two.
The ship to backlog.
Or.
Maybe new pump Rins.
Yes.
Anything else would be helpful.
Yes, let me just answer your question two per tons.
So your immediate question is.
Whats driving our optimism for this year.
And our growth story.
As we go through the remaining quarters of 2022 and that simply tied to two things. The first is.
We're expecting improved parts availability based on our activities and the second is <unk>.
Factory operating tempo is quite good we expect to sustain that through the remainder of the year. So I think thats really going to drive our growth.
As we accelerated through the course of 2022.
When it comes to market share and our business in semiconductor it tends to be.
Over years that we measure market share because we are trying to win design slots and new equipment from the major makers.
And then if we win the slot we keep that business for many years afterwards, so the share really it doesn't shift that much on a monthly or quarterly basis shifts over the course of years.
And so what we're doing there is.
We are defending our current position in conductor etch, which is our strongest area has been for quite some time.
But we're also planting seeds and new markets.
So we have new products that we've launched into the dielectric etch market into the remote plasma source market.
And to the flat panel.
Market so.
We think that by doing this we can increase our our our served market essentially.
To drive our growth in 2023 and 24.
Got it that's helpful. So my next question.
Can you provide.
Colors around.
The end market.
Industrial medical.
Good afternoon, Ken and Keith.
On the implied fourth quarter guidance.
All these combined.
A decline in Sakhalin Julien. Thank you want to know like all.
Needs decline.
Okay.
I think the only way to thinking about this is that it's all a function.
Of supply.
We have huge pent up demand and all of the markets you just mentioned, whether it's industrial medical.
Data Center, and Telecom network and you name it.
We have a very solid order book and all of those.
Markets.
So as we get parts will be able to <unk>.
To maximize our output but.
This has nothing to do with demand, it's all about supply right now.
Hans.
Operator, we are ready for next question.
I always talk about.
And gentlemen, I apologize for the delay once again Mr. Chung. Please re signal to complete your question, we'll move forward to Graham price with Raymond James.
Hey, good afternoon, and thanks for taking my question.
I guess just quickly on the South tower acquisition.
Highlighted the cross selling and integration synergies there.
Wondering.
Kind of how quickly you see those playing out and then.
Just more broadly how the margins for the acquired business compare to the legacy business.
Yes, So let me just make a comment about the integration and how we intend to.
Exploit these sales synergies.
So first.
We've taken a very.
Strong approach to integration.
Immediately the factories of power are reporting directly into our chief operating officer.
And their sales force is reporting directly to our chief sales officer.
And then the remaining people.
Power.
The engineering marketing and support people are reporting to the former president of vessel, who now has responsibility for all of.
The medical power products that AE makes not just ESL power products, but also the advanced energy products.
And together.
We think the unconstrained demand there this year as well over $100 million. So it's a good sized business for us and it makes us to top tier player.
We like I said in my script, we think the medical market is a good space for US it's high mix low volume.
Mostly sole source business and Thats right in our wheelhouse essentially.
So what we're going to be moving forward as well.
We're basically training our sales force.
So power Salesforce, so AE products and the sales forces so power products and we have a particular focus on.
Medical accounts.
And a secondary focus on select industrial accounts.
And we think together.
We could do a very good job.
Cross selling because so power was strong at accounts, where we weren't and where.
We're strong at accounts, where <unk> wasn't so we think it's a very good match.
And I actually visited there.
Friday last week went down the color buses and welcomed.
So power team to advanced energy in.
There's a lot of energy a lot of positive energy from the team down there I think it's going to be a very good match between.
<unk> energy initial power.
Yes, maybe just to comment on the business model I would say the financial profile.
Coming out of the gate is very similar to advanced energy Bill.
They're pretty similar products that are in differentiated markets and so youll look generally.
We already mentioned operating margins are in the mid teens, it's very similar to AE today.
Margins are around 40% so again, yes.
Similar.
And as we combine the organizations and as Steve said, there's a lot of opportunity to grow.
The business and with that and the other integration actions there is opportunity to grow I'll say the bottom line our earnings probably faster even in the top line. So I think that said very natural fit.
And a lot of opportunity for us to grow in the medical market as we go forward.
Got it thanks.
And then for my second one just.
One housekeeping one you mentioned the income tax rate going forward will be 19%, which looks like just about the highest it's been in a few years. So I'm just trying to get a little clarity on what's causing that.
Yes, there was a change in the U S tax law that was effective at the beginning of the year.
That essentially requires companies to capitalize their R&D expenses rather than to expense them. This was something that was put in place back in 2017 as part of the tax cut and jobs Act.
That became effective obviously it didn't impact us as much in the first quarter, because we had some other benefits, but looking forward, it's about a 400 basis point impact.
You can probably do some reading about it and it's affecting all companies, particularly technology companies.
And I think there is some hope over time that that.
On a even an expectation that that will get rolled back or appeal, but at this point that's that's the current.
Current tax law, so that's what we've reflected going forward.
Understood. Thank you very much.
And gentlemen, if I could I'd like to offer just one more opportunity for Mr. Chong to re signal with star and wanted to complete his question.
We'll pause for just a moment.
Mr. John I apologize for the audio issue earlier. Please go ahead. Your line is open once again Sir.
Okay, Yes.
Quick one.
So Ken can.
Can you give us.
Some things about the gross margin impact from the high premium.
For the second quarter.
<unk> hundred 80.
Great.
Nice quarter.
Second quarter.
Yes, we didn't guide to that specifically, but in my prepared remarks, we said that we expected those premiums the premium.
Recoveries to be about the same as it was in Q1 the level of those things.
Okay got it thank you.
Yes Youre welcome.
And we have no further signals from the audience at this time I am pleased to turn the floor back over to Mr. Steve Kelly for any additional or closing remarks.
Thank you operator, and I would just like to recap our key messages first.
Demand for our products is very strong.
Second we are on track to deliver solid.
Operating results in the second quarter.
And even better results in the second half.
And finally, we are squarely focused on developing innovative technologies and products for our customers.
Thanks for joining the call today.
Ladies and gentlemen, this does conclude today's advanced energy first quarter 2022 earnings call. We thank you all for your participation you may now disconnect your lines have a great day.
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