by James Montgomery, News Editor, Solid State Technology

Apr. 28, 2008 - ASM International has come up with an extensive new plan to return its frontend business to profitability -- and rapid-thermal processing (RTP) tools aren't in the picture. Nor is its HQ in Bilthoven, The Netherlands.

The company's new "roadmap" seeks to focus the company's frontend business on sustained profitability in line with a group of industry peers (defined as Aixtron, Axcelis, Mattson, Novellus, Semitool, Varian, and Veeco --), with a goal of "above-market" revenue growth by 2009, with 37%-39% gross margins (vs. 32.2% in FY07) and 11%-13% operating margins (vs. 3.4% in 2007), working capital reduced by €30M (US $46.9M), and total net capex limited to €20-€35M ($31.3M-$54.7M). (See Fig. 1 & 2)

Fig. 2. ASMI's 2009 financial targeted improvements, based on market assumptions. (Source: ASMI)

Fig. 1. ASMI's margins trail most of its peer group. (Source: ASMI)

Part of that focus on profitability will involve exiting the RTP market, in order to streamline the company's wafer processing product portfolio and focus on "core strengths" of ALD technology (both thermal and plasma-enhanced, and both batch and single-wafer), PE-CVD, single-wafer epitaxy, and thermal/LPCVD batch processing. Continued support/service for existing customers will be transferred to an unidentified third party.

"Although we have always believed in the exceptional breakthrough technology of our Levitor RTP systems ...we have decided to really focus on ASMI's core strengths" in those frontend growth areas, noted company president/CEO Chuck del Prado, in a statement. Financially, the RTP business' losses should be off the books by the end of this year, no longer impacting front-end P&L and operating results.

ASMI also plans to move its head office from Bilthoven, The Netherlands, to Almere (~50km north). Back in 2004 subsidiary ASM Europe moved its 200mm operations from Bilthoven to be integrated with Almere's 300mm operations.

And further gains will be realized by shifting more work to ASMI's Singapore facility, and standardizing the company's single-wafer products onto one platform.

ASMI has been under fire from investors for several years -- most recently, Fursa Alternative Strategies in February -- who have lobbied to separate what they consider a historically underperforming frontend business from a healthier backend business (the 53% owned ASM Pacific Technology Ltd.). ASMI's 4Q07 financial results suggested wisdom in such a division -- the frontend business eked out a profit (?3.4M), while ASM Pacific posted a 10% increase in profits to about $75M.

Back in 2006, responding to similar requests for a business split, ASMI laid out plans to bring its frontend group back to profitability: achieve EBITDA positive in 2006 (which it did: €17M/$26.6M), and positive net earnings in 2007 (which it also did: €7.7M/$12.0M, though that didn't include -€10M in early debt-erasure penalties).

The new plan targeting 2009 incorporates four areas:
- Drive revenue growth,
- Expand operating margins,
- Improve cash position, and
- Change the organization's structure and culture.

Revenue growth. This will involve "promoting the 'customer voice' much higher up the organization," ASMI says, as well as focusing its revenue approach with a new VP of global sales/service. The company also plans to accelerate its penetration into Asia and memory/foundry segments. By 2009 the company expects sales to reach €440-€480M ($687.8M-$750.3M), flat to slightly better (-2% to +6%) vs. 2007, amid an anticipated -9% market decline (citing Gartner stats).

Operating expenses/margins. Margins will be improved by continuing a shift of frontend production to ASMI's frontend manufacturing site in Singapore (FEMS), which already has reduced materials costs by €16M ($25.0M) since 2005, and is expected to shave another €15M-€20M ($23.4M-$31.3M) by 2009 as the transition enters a 2nd and 3rd phase involving merge-in-transit, DFM, and final assembly/test (see Fig. 3.

Fig. 3. Progress in shifting work to ASMI's frontend manufacturing site in Singapore. (Source: ASMI)

Meanwhile, all single-wafer applications and product lines will migrate to one platform by 2010, with all single-wafer products using the same frontend module by 2009 (manufactured by FEMS), driving standardization across all of ASMI's frontend products and saving another €10M-€20M ($15.6M-$31.3M) by 2010-2011. And a global sourcing initiative is expectedt o contribute at least €10M ($15.6M) to gross margins by 2009 (and a key focus of a new VP of global operations).

Fig. 4. The planned transition to a single process technology platform. (Source: ASMI)

Overall, ASMI says it will reduce operating expenses by up to 12% -- from €130M ($203.2M) in 2007 to €114-€125M ($178.2M-$195.4M) in 2009. Key drivers of this will be divesting the RTP and NP product lines (combined operating losses of €3.5M/$5.5M in 2007, and expenses of €4.5M/$7.0M); standardizing SG&A and global rollout of a SAP system, consolidation and standardization of production at FEMS; and consolidating in Almere; a "global disciplined approach" to R&D resources and budgets, driven by a new VP of frontend products.

Cash position. As far as improving cash conversion, ASMI says it will focus on more efficient capex -- not exceeding depreciation or 4% of revenues in 2008 and 2009, and totaling €30M-€35M ($46.9M-$54.7M) for 2008-2009 combined. Also, reducing working capital "will have a positive impact on cash level of over €30M from 2007 to 2009," the company stated.

Fig. 5. Adding up cost savings initiatives. (Source: ASMI)

Changed organization/culture. Finally, addressing a changing "organizational structure and culture," ASMI says it will restructure its frontend business from "a regional structure with geographical silos to a truly global structure," with newly appointed VPs for global sales/service, operations, and frontend products all reporting directly to the CEO.

In the statement, president/CEO del Prado called these goals "ambitious, but deliverable," building on progress he says the company has achieved in the past two years to improve the frontend unit's profitability, but also acknowledging that "hard choices" have been made.

"We continue to make good progress decreasing cost levels and improving profitability, despite the challenging operating environment" he stated. "The changes we are making to the focus, organisation and culture of the company will propel growth and transform the cost structure of the frontend business and pay further benefits when market conditions start to improve."

Preliminary results from 1Q08 seem to show the company's plan for its frontend unit are already taking shape. it says the unit's revenues exceeded expectations (€83.9M/$131.2M, vs. guidance of €77M-€83M/$120.4M-$129.7M, though down from €106.3M$/166.2M in 4Q07), with gross margins improving to 34.9% (vs. 30.0% in 1Q07 and 32.2% for FY07), and a positive EBIT, with earnings breakeven lowered from €110M/$171.9M (average in 2007) to ~€90M ($140.7M).