CMC Materials, Inc. (CCMP) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Cabot Microelectronics third quarter 2009 earnings conference call. I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Amy Ford, Director of Investor Relations.

Good morning. With me today are Bill Noglows, Chairman and CEO; and Bill Johnson, Chief Financial Officer. This morning we reported results for our third quarter of fiscal year 2009 which ended June 30. A copy of our press release is available in the investor relations section of our website, cabotcmp.com or by calling our investor relations office at (620)499-2600.

Today's conference call is being recorded and will be archived for four weeks on our website. The script of this morning's formal comments will also be available there. Please remember that our discussions today may include forward-looking statements that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from today's forward-looking statements. Risk factors are discussed in our SEC filings including our report filed on Form 10-Q for the second quarter of fiscal 2009 ended March 31, and Form 10-K for the fiscal year ended September 30, 2008. We assume no obligation to update any of this forward-looking information. I will now turn the call over to Bill Noglows.

Thanks, Amy, good morning, everyone and thanks for joining us. This morning we are pleased to announce strong financial results for our third quarter of fiscal 2009 including sequential revenue growth in excess of 90%, a gross profit margin of 46.6% of revenue and earnings per share of $0.39. This represents a significant improvement over our second fiscal quarter when our results were negatively impacted by the global economic recession, a severe correction of excess semiconductor device inventories and seasonal weakness.

While the economic recession continues, a combination of improved underlying demand and inventory replenishment within the semiconductor industry has begun to positively impact demand for our products. Our revenue growth this quarter was heavily influenced by sharply higher sales to foundry customers which is not surprising given that in aggregate TSMC and UMC publicly reported revenues that approximately doubled from their previous quarters. While we saw products at all semiconductor device manufacturers across all segments approximately one-third of our total revenue base is deprived from sales to the top four foundries. As a result there has been a strong historical correlation between demand for our CMP products and the monthly revenue reported by the two large foundries in Taiwan and this quarter was no exception.

Reports by certain industry analysts indicate that there appears to be some strengthening of demand in certain segments like smart phones and net books and in certain geographic regions such as China. At the same time, they suggest that the recent increase in IC device manufacturing is partly due to inventory replenishment within the supply chain which they expect to be largely completed by the end of the September quarter. Although we are starting to see some positive signs, we are still waiting for solid evidence of broad based improvement in end use electronics demand which is imperative for sustained long-term growth for the industry and for our Company.

We are hopeful that the upcoming back to school and holiday seasons will generate higher demand this year and that corporate IT spending will begin to pick up again in calendar 2010. However, as always, we remain cautious regarding future revenue trends given the historical volatility of the industry and our limited visibility into end use electronics demand.

We continue to believe that we are well positioned to operate successfully over a range of future demand environments. We have an experienced management team that has successfully navigated through difficult times in the past. During the current economic downturn, we have prudently managed the Company's cost during the challenging first nine months of the fiscal year while retaining the flexibility to quickly ramp up our business to meet the 90% sequential increase in demand that we experienced during our fiscal third quarter. As a result, our balance sheet remains strong with $171 million in cash and no debt outstanding and our Company has continued to generate cash during this severe economic environment.

We are encouraged by the recent upturn in our business but we remain cautious given the uncertainty as to the future demand environment. So we remain diligent with respect to the fiscal management of our Company. The cost savings programs that we implemented as we entered the economic downturn remain in effect and have contributed to our achieving the lowest level of quarterly operating expenses in over three years. As we navigate through this uncertain demand environment, we remain focused on continued execution of our primary strategy of strengthening and growing our core CMP consumables business, as well as growing our engineered surface finishes business.

During the quarter we made excellence progress on a number of strategic long-term initiatives, the most important of which relates to our recent acquisition of Epoch Material Company. We continue to be very excited about the addition of Epoch and the value we believe it has and will create. During our third fiscal quarter we successfully completed the first phase of our Epoch integration plan. The first phase was completed ahead of schedule allowing us to expedite execution on our longer-term integration goals which we believe will lead to capturing significant synergies. For example, before acquiring Epoch, we utilized third-party warehouses to provide logistic services for our business in Taiwan and we are currently transitioning to using Epoch's automated warehouse facility in the Kaohsiung Science Park for most of our logistic needs in Taiwan.

We have also started to achieve additional revenue by using our extensive global sales, logistics and technical support network to sell Epoch's products outside of Taiwan rather than through a third-party distributor. Customer feedback regarding our acquisition of Epoch has been extremely positive and we believe that it is evidence of our progress on our strategic initiative of connecting with customers. In particular, our customers in Taiwan are thrilled that we have made such a significant investment in the region. We continue to be delighted with the strategic move and look forward to the continued success that has been demonstrated thus far by our integration teams.

A second accomplishment this quarter relates to our operations excellence initiative and our ongoing efforts to optimize our supply chain and manufacturing capacity. We recently decided to bring in-house the small portion of our total CMP slurry production tat has been produced by a North American (inaudible). Over the next 12 months we plan to transition the CMP slurry production to our own manufacturing plant in Aurora, Illinois which we expect will improve our overall operational efficiency and competitiveness. As part of -- as part of the transition, we are working closely with our customers to make this change seamless for them. Excuse me.

A third important business highlight was our receiving an editor's choice best products award for our D-100 CMP polishing pad which was presented to us by Semiconductor International magazine at Semicon West last week in San Francisco. We are delighted to receive this prestigious industry recognition for our pad's strong technical performance and attractive cost of ownership. Our D-100 CMP polishing pad was developed, commercialized and is now in use by over 20 customers in a variety of high volume applications reflecting the successful execution of our technology leadership initiative. In addition, we have continued to improve our pad manufacturing yields every quarter since we began high volume manufacturing. We believe our pad's business represents the most significant current growth opportunity for Cabot Microelectronics and we are pleased with the success that we have achieved to date.

In addition to the award from Semiconductor International, we also won two customer supplier awards this quarter. We are proud to have earned these customer awards and we believe they are evidence that we can continue to build on our customer relationships and provide innovative, leading edge solutions with the quality systems, supply assurance and technical support expected by our customers.

In summary, we are pleased with our financial and operational results for this quarter, which we believe reflect both improving industry conditions and also the continued execution of our strategies and key initiatives. In our view, there are a number of indications that the industry may have bottomed but we are still cautious regarding future industry trends. We remain confident in our ability to adapt to a range of industry environments without compromising our operations, quality or intellectual capital. In addition, we believe the strong cash generating business model of our core CMP consumables business will continue to serve us well in this uncertain environment. And with that, I'll turn the call over to Bill Johnson. Bill.

Thanks, Bill, and good morning, everyone. Revenue for the third quarter of fiscal 2009 was $86.4 million, which was down by 10.9% from the third quarter of fiscal 2008 and up 90.4% from the previous quarter. Despite the continued economic downturn, which drove a decrease in revenue from the prior year, we experienced a significant sequential increase in demand across all business areas and geographies, which we began to see in March.

Drilling down into revenue by business area, tungsten slurries contributed 37.9% of total quarterly revenue which revenue down 16.2% from the same quarter a year ago and up 71.4% sequentially. Sales of copper products represented 17.3% of our total revenue and increased 3.4% from the same quarter last year and 106.7% sequentially. Our third fiscal quarter includes a full quarter impact of the Epoch business which we acquired in late February. Also included in our copper business is our barrier removal product line, revenue from which increased by 11.4% from the same quarter a year ago. Dielectric slurries provided there 30.6% of our revenue this quarter with sales down 14.6% from the same quarter a year ago and up 131% sequentially.

Data storage products represented 4.9% of our quarterly revenue. This revenue was up 44.7% from the same quarter last year and up 25.6% sequentially. The increase in revenue reflects an important customer win and represents the second sequential quarter of double-digit sales growth. Sales of our polishing pads represented 6.1% of our total revenue for the quarter, and increased 15.8% from the same quarter last year and 112.9% sequentially.

Finally, revenue from our engineered surface finishes or ESF business which includes QED generated 3.2% of our total sales and was down 44.5% from the same quarter last year and up 58.2% sequentially. Remember that our QED business is mainly capital equipment oriented so quarter to quarter revenue volatility is common. Our backlog of QED system orders that we expect to ship next quarter has increased, so at present we expect revenue from our ESF business to increase again in the September quarter.

Our gross profit this quarter represented 46.6% of revenue compared to 46.8% in the same quarter a year ago and 28% in the prior quarter. Compared to the year-ago quarter, the slight decrease in gross profit percentage was primarily due to a lower value product mix partially offset by lower fixed costs reflecting our recent cost reduction initiatives. The increase in gross profit percentage versus the previous quarter was primarily due to significantly increased utilization of our manufacturing capacity on the sharply higher level of sales volume.

Now I'll turn to operating expenses, which include research, development and technical, selling and marketing and general and administrative costs. Operating expenses this quarter of $25.1 million were 23% lower than the $32.5 million reported in the third quarter of fiscal 2008. The decrease was primarily driven by lower staffing-related costs, lower professional fees which include costs to enforce our intellectual property and lower travel expenses. These costs savings were partially offset by incremental expenses relating to our acquisition of Epoch. Operating expenses were $4.9 million lower than the $30 million reported in the previous quarter, mainly due to the absence of $3.6 million in specific expense items reported in the previous quarter as well as lower staffing-related costs and professional fees.

As Bill mentioned, operating expenses in our third fiscal quarter were at the lowest level since our second quarter of fiscal 2006. Year to date, total operating expenses were $84.4 million, which is $8.8 million or 9.5% lower than during the same period last year. We expect operating expenses for full fiscal year 2009 to be at the low end of our previous guidance range of $115 million to $120 million. Diluted earnings per share were $0.39 this quarter, down from $0.43 reported in the third quarter of fiscal 2008 on lower revenue as a result of the economic downturn partially offset by the benefits of our cost reduction efforts. Diluted earnings per share were up from a net loss of $0.44 per share reported in the previous quarter on sharply increased demand for our products and lower operating expenses.

Turning now to cash and balance sheet-related items. Capital additions for the quarter were $2 million, depreciation and amortization expense was $6.3 million and share based compensation expense was $2.8 million. We ended the quarter with a healthy cash balance of $171.2 million, which is $12.3 million higher than last quarter and no debt outstanding.

I'll conclude my remarks with a few comments on recent sales and order patterns. Recall that during our earnings call for the second fiscal quarter we discussed our achievement of a 40% sequential monthly revenue increase in March. This trend continued into April as we experienced another 40% sequential revenue increase. Our revenue continued to rise in May and again in June, but at more modest rates. As we observe orders for our CMP consumables products received to date in July that we expect to ship by the end of the month, we see July results trending at roughly the average monthly rate we experienced in our fiscal third quarter. However, I would caution, as I always do, that several weeks of CMP-related orders out of a quarter represent only a limited window on full quarter results. Now I'll turn the call back to the operator as we prepare to take your questions.

(Operator instructions) Your first question comes from the line of Steve O'Rourke with Deutsche Bank. Please proceed.

Thank you. Good morning. It's an impressive bounceback as well as cost control in the quarter. A question here on how you're seeing the business. Can you break down the demand increase you've seen between utilization at your customers and inventory restocking?

Steve, this is Bill. I don't think we have that kind of visibility. We think a large portion of the growth we saw in the March and April time frame was inventory restocking. We believe based on what we have read from certain industry analysts that a lot of that inventory restocking has begun to slow down and what we are seeing now is just underlying demand and underlying wafer starts but I don't think we can split the increase in our demand based on inventory restocking and underlying electronics demand.

Fair enough. Do you think that the inventory that your customers are holding now are kind of in line with historical norms? That is, that part of the puzzle is essentially complete, maybe a little bit more through this quarter?

Historical norms, I think that's the big question going forward, is what's the new norm? And I'm not sure -- again, I'm not sure we are in a position to discuss what we think the new norm is based on, we don't have any more visibility than many others in our sector have and I think it would be wrong for us to try to predict what the new norm is. As Bill's comments this morning reflect that, we saw very strong increase in our sales March, April, May, slowed down a little in June but continued to increase and we are seeing sort of the same kind of rate in July. September quarter for Cabot Microelectronics is seasonally our strongest quarter and so we are optimistic. I was out at Semicon West last week and although the show is a little depressing, we met with many of our customers there and I would describe our customers, if you had talked to them back in the February, March time frame, you would have -- I would have summarized those discussions as cautious pessimism. I think the discussions we had last week were more of cautious optimism about the future and what the future holds for the second half of the calendar year.

Fair enough. And one final question. Can you comment on ASP trends that you saw by product?

Yes, Steve, it is Bill Johnson. We saw a little bit of -- we saw some ASP erosion this quarter and that's unusual in that we have had relatively flat ASPs and I'm talking in terms of our CMP slurry products for the past year and a half or so. Our ASPs were down around 8% this quarter sequentially, but if you look into what caused that, about two-thirds of that sequential price decrease was just purely related to product mix and part of this was due to the inclusion of Epoch branded products this quarter. We had our first full quarter of Epoch revenue. Epoch's products and copper slurries tend to have lower selling prices but they are very -- they are high gross profit margin. So we saw product mix effect provided about two-thirds of that ASP erosion. A bit of is was actual price reductions and most of these were in line of scheduled reductions based on customers hitting volume thresholds and then there was a little bit of an impact of foreign exchange to the extent that the US dollar strengthened versus the yen, we saw a little bit of foreign exchange effect.

Fair enough. Thank you.

Thanks, Dave. We'll go ahead and take our next caller, please.

Your next question or comment comes from the line of John Roberts of Buckingham Research. Please proceed.

Good morning, guys. Nice quarter.

Thanks, John.

Did you have any up months of sales during the quarter? Were any of the individual months up versus a year ago?

I don't have that data in front of us. Overall we are down year over year 10.9%, I believe, but I don't have that in front of me. Sorry.

It just looks like being only down 10%, you might have actually had an up month sometime during the quarter. But the inventory that you started the quarter with I would guess had embedded gross margins that were well below the 46% that you had for the quarter so what you actually produced during the quarter and sold had to have been well above 46%. Is that a fair assumption?

Yes, you're referring to kind of a historical pattern where we have had fluctuations up and down in revenue and we have seen a lagged effect on our gross profit margin as a result of that because, as you're describing, you sell in a quarter products you may have produced in the prior quarter. And in the past we have seen that sort of a lag effect that was pretty pronounced. I think we found it was less pronounced in this quarter because last quarter, our second fiscal quarter, our capacity utilization was considered abnormally low by accounting standards and that required us to sweep through more of those underabsorbed fixed manufacturing costs through the P&L last quarter. So there's some of that lag effect probably in these results but it's less pronounced than what we might have seen in prior quarters.

Did you have a record gross margin during some of the later quarters like May or June during the -- I mean later months, May or June, during the quarter?

We -- gross margin by month is not all that reliable because you would take into account some closing entries of the quarter and so gross margin by month is not that meaningful.

Okay. Because it would seem to me you probably finished the quarter with much higher gross margins than you started the quarter.

Well, if there is this lag effect then there could be some upside to gross margins going forward but I would just caution that the kind of lag that we have seen in previous quarters I think is a little different this quarter because of this abnormal capacity utilization in Q2 and the accounting requirements around that.

Okay. But there's no inverse accounting requirements that if you had really above normal gross margins for some reason you wouldn't have been able to sort of bury that in the current quarter? That would follow through to the third quarter or the September quarter, rather, if you did have high gross margins going into inventory.

No, that's right, there's no sort of reverse abnormally high capacity utilization. It only works on abnormally low capacity utilization.

Thank you.

Thanks, John. We will go ahead and take our next caller, please.

Your next question comes from the line of Avinash Kant of D.A. Davidson & Company. Please proceed.

Good morning. A few questions in terms of the breakdown of customer base. I think you did mention in the beginning that a third of your customer base is foundries. Clearly we have seen a lot of growth from the foundries in the 90 to 100% range but your overall revenues being up 90 to 100%, does it mean that your memory customers and the logic customers are also growing at the same pace?

Avinash, Bill Noglows. We sell to essentially everyone in the world today that makes an IC device, both memory, foundry and logic in it and we have seen increases in all areas. We point to the foundries regularly as a fairly good proxy for Cabot Microelectronics revenue going forward and that correlation clearly continued this quarter that we just completed. But, we see a general recovery in all areas. I think you're asking about the memory segment. The memory segment is still a bit unclear to us and where that will shake out and I think we will probably have more visibility at the end of next quarter on memory.

So Bill, what I'm trying to understand is that my understanding was that foundries typically have seen much stronger growth than the rest of the industry especially the memory people. Now, the fact that your overall revenues have gone up in the same amount by the same percentage amount as the foundries, I'm not able to reconcile that because the logic and then the memory guys clearly are not growing at 90%. Is there some inventory stocking or is real demand?

Avinash, if you think about the foundries, they tend to turn up fastest in an upturn, they turn down most quickly in a downturn. Overall our revenues were up 90% sequentially but you're right, it wasn't uniformly across all segments. That might imply that we had stronger revenue growth in some areas than others.

So maybe that your sales to foundries were way higher than 90%, right?

I don't have the data in front of me but that's possible.

And now the next question was about the operating margin. You have seen a huge improvement in operating performance here in this quarter. Do you expect this to stay like this all through the rest of the year or how would that pan out?

Well, we intend to keep the same fiscal discipline that we have had in the last three quarters through the remainder of the fiscal year. There's some expenses that we have deferred or discontinued that we will look at at the end of the fiscal year and many of which that have to do with staffing-related charges as well as our ability to respond with professional fees to some of our intellectual property enforcement actions around the world. So those costs could come back and forth. As you know, our operating expenses have been a bit volatile historically, but right now we feel pretty confident that we can maintain the same kind of cost management we have had certainly in the fiscal Q3 of this year.

And of course that equates to the same $115 million in the operating expenses for the full year. That's what we should be modeling?

That's correct.

The low end.

Low end of that. Okay. And a little bit on the pads business. You typically have given in the past the number of customers, the number of applications that you are working on. Could you just give us some numbers there?

I think in my prepared comments I said we had some 20 customers in HVM manufacturing and we have another -- I think the number is somewhere around 30 other customers that are in the process of evaluating, qualifying or testing our pads. We are and continue to be delighted with the success of our pad business and our pad technology. In this quarter we see -- we saw our pad grow -- our pad business grow some 15 to 16% year on year and I remind you that Q3 '08 was a record revenue quarter for this Company. So, again, we are -- we continue to be bullish and we continue to think we have a really great pad offering that's offering considerable value to our customers.

And given this was the first full quarter contribution from Epoch, would you be willing to give us the contribution?

We are not willing to split out Epoch's contribution to the total business. We think of it as a key part of our Company today. It's -- it clearly led to our -- both our sequential and year on year growth and our copper business and, as I said in my prepared comments, we are delighted with that acquisition and that addition to our Company and we think it will add terrific value going forward.

And one final balance sheet question. Would you be able to break out the intangibles like goodwill and other intangibles typically that comes out in a Q, but if you had it handy?

As of June 30, we had goodwill of $38.9 million, intangibles of $19 million and so a total of $57.9 million.

And deferred income taxes?

I don't have that offhand. Sorry.

I'll figure that out. Thank you so much.

Thank you.

Thanks, Avinash. We will take our next caller, please.

Your next question comes from the line of Dmitry Silversteyn of Longbow Research. Please proceed.

This is Eugene (inaudible) sitting in for Dmitry. I just had a follow-up on pad business. I'm sorry if I missed it. Did you say that you gained a customer in this quarter?

What I said was we had 20 customers in high volume manufacturing with our pad technology.

Yes.

Actually, we -- this kind of relates back to Avinash's question. We have read a point in the pad business where I think we are going to stop counting specific individual customers. We described our number now as approximately 20. In fact, we added a customer during the quarter, but we are at a point I think where that's less insightful so we will talk about kind of approximate numbers and applications and really watch revenue as sort of the key metric at this point.

Okay. And any update on TSMC pad side, how successful is that business model and any color on that?

I would just say strategically it's a wonderful opportunity, it's a great place for our Company to be. I mean, we are -- we are very close with many of our customers that are buying our pad today. We work very closely on both the current technology and the evolving new technologies and our opportunity to work with and put advanced and custom grooving in one of our largest customer's fabs is clearly a great strategic opportunity for our Company and one that we would like to replicate more if we can. But that's about as much as color as I'm able to provide on what we are doing in Taiwan with that customer.

Thanks. And can you tell us if pad business was profitable in the quarter?

It was profitable at a gross margin level not yet at a net income level. This was I think our highest level of revenue in our pad, our quarterly revenue for pads that we have -- no, sorry. Slightly below the max -- or the highest. We are at 5.3 versus a prior record of 5.5. So we are happy with the revenue growth, positive at a gross margin level but not at a net income level yet.

Okay. Thank you. And in our follow-up on the Epoch acquisition. You said you're not willing to provide a contribution or dollar number for that business. Could you tell us if Epoch sales were up year over year or quarter over quarter excluding, if you exclude that from our business?

Do you have that.

Your question was was Epoch sales up year over year or quarter over quarter?

Right.

I don't know the year-over-year number. I would suspect not given the soft prior year -- or sorry -- the strong prior year, but it's certainly up quarter over quarter.

Just for reference, in the 2008 calendar year, Epoch had revenue of about $28.5 million and most of that was copper slurry related.

And just last question on your ESF business, you had that for a while, revenues are down. Just if you can provide kind of your next logical step for that business, what are your thoughts are?

Well, we continue to -- remember, ESF is a combination of things. It includes two of our previous acquisitions which we believe were smart acquisitions, Surface Finishes and QED. The QED business today continues to be one of the leading providers of leading edge high tech technology for the optics industry. We are committed to the business, we like the business and we'll continue to manage and own the business. We think that, like many companies that are in the equipment space today, they have suffered through this period of economic recession but we believe that they will come out of it strong and, they have some interesting new technologies that we are bringing to the market and, we have high aspirations for our -- our participation in the optics industry through QED.

Okay. And how significant was the increase in orders in the quarter for that business?

I don't know in terms of -- I don't think we could disclose exact numbers of equipment but it's strong enough that we called it out as leading to an expectation of QED growth, revenue growth in the September quarter. Following on pretty significant growth in this third fiscal quarter.

Great. Thank you again.

Thank you.

Thanks for your call and we have time for one last question.

And your last question is a follow-up from the line of John Roberts. Please proceed.

We have had a nice recovery in the utilization of existing CMP machines. Could you talk a little bit about placement of new machines out in the industry? I don't think we have yet seen much capital spending pick up out there.

John, that's a hard one for us to comment on. There were certainly a lot of chatter last week at Semicon West about increased capital spending. Whether that's materialized in the form of purchase orders and equipment shipments, I don't think we can say.

You're certainly involved when a new machine gets qualified.

Oh, sure, sure. In terms of qualification activity out there, it's still very low for new machines? Well, we are involved in the form of a process of record, when the -- when the tool manufacturer ships a tool, they ship it with a process of record and in many or most cases, one or two or three of our slurries is part of that process of record. I mean, that's the substance of our involvement, John. We don't have accurate visibility or clear visibility into what tools and machines our customers are buying.

Okay. But new PORs are at a low level still?

John, I -- I think new PORs for us are PORs at 32 and 22-nanometer technology that we develop for our customers. What the tool manufacturers do with our customers is a totally separate process.

Do you think that 45-nanometer node is going to turn out in hindsight a year or two from now to be relatively small because of this depression or recession that we have had we will kind of skip right over?

There is talk of people skipping the 45-nanometer node and going directly to 32. How that materializes and how that goes forward I think is yet to be seen.

Would that be good or bad, do you think?

For Cabot Microelectronics?

Yes.

It would be great. I think where -- besides our legacy business, which is a terrific business and we generate a lot of cash from, I think one of our key strengths is our ability to work with our customers to develop leading edge technology and, so those technologies of 32 and 22-nanometer technology fall right into our sweet spot of what we do best. In terms of technology development and technology leadership. And so, for us, it's really, we are working at 32 and 22-nanometer today so, for us it's -- it's really no different. I mean, we see that as an opportunity because as the technology gets harder, we think that's -- walks right into what we do best. We like hard problems and we are good at solving hard problems so I -- I see it as an opportunity, as I would see 45 or any other technology node changes.

Thank you.

Thanks, John, and thank you for your time this morning and your interest in Cabot Microelectronics. We look forward to the next opportunity to speak with you. Good bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.