CMC Materials, Inc. (CCMP) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome the Cabot Microelectronics first quarter 2012 earnings conference call. My name is Maria and I will be your Operator today. (Operator Instructions). I will now turn the conference over to Ms. Trisha Tuntland, Manager of Investor Relations. Please proceed.

Good morning. With me today are Bill Noglows, Chairman and CEO, and Bill Johnson, Chief Financial Officer. This morning we reported results for our first quarter of fiscal year 2012 which ended December 31, 2011. A copy of our Earnings Release is available in the Investor Relations section of our website, www.cabotcmp.com, or by calling our Investor Relations office at 630-499-2600. A webcast of today's conference call and the script of this morning's formal comments will also be available on our website.

Please remember that our discussions today may include forward-looking statements that involve a numbers of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These risk factors are discussed in our SEC filings, including our report filed on Form 10-K for the fiscal year ended September 30, 2011. We assume no obligation to update any of this forward-looking information. I will now turn the call over to Bill Noglows.

Thanks, Trisha. Good morning everyone and thanks for joining us.

This morning we announced solid financial results for our first fiscal quarter of 2012. During the quarter we achieved revenue of $102.1 million, gross profit margin of 48.3% of revenue, and earnings per share of $0.45, which includes the adverse effect of approximately $0.07 for professional fees related to our previously announced proposed leverage recapitalization and special cash dividend. Our financial performance this quarter was impacted by continued softness within the industry. We believe this is consistent with our characterization of industry and business conditions when we announced results for our fourth quarter of fiscal 2011 last October, and also during our conference call to announce our new capital management initiative on December 13, 2011. The December quarter is typically a seasonally soft quarter for us. However, our results reflect somewhat greater softness than typical seasonality. While we expect current industry conditions to persist in the near term, we are managing our business activities and discretionary costs accordingly as reflected by our solid financial performance this quarter.

Let me start this morning with our view on current industry environment. Some industry analysts indicate that overall holiday spending on electronics was in line with expectations. Demand for smartphones and tablets appears to have been relatively strong, but orders for PCs, TVs and gaming devices appear to have been weaker than anticipated with the exception of emerging markets such as China, India, and Africa. As a result, DRAM inventory levels appear to be higher than normal. However, on a positive note, industry reports indicate that IC inventories excluding DRAM had returned to normal levels.

Some industry analysts predict that soft industry demand environment will continue through the March quarter. However, they are also generally forecasting stronger IC unit growth in calendar 2012 when compared to 2011. This would suggest some anticipated strengthening in demand during the calendar year. Remember that demand for our CMP consumables products is ultimately driven by demand for end use products such as smartphones, tablets and other electronic devices. As a result, semiconductor unit growth, or wafer starts, is the biggest driver of our revenue. According to IC insights and world semiconductor trade statistics, growth forecasts for calendar year 2012 range from 3% to 7% on a unit basis. This is an increase from their 2% to 3% unit growth estimates for calendar 2011. Additionally, it appears that the hard disc drive industry is beginning to recover from the impact of the severe flooding in Thailand in late 2011. Based on what we are seeing in the market, we are planning for continued softness in industry demand through the March quarter, and some strengthening in the second half of our fiscal year. However, we acknowledge that we have very limited visibility into near term demand and so we continue to remain cautious.

Turning now to Company related matters, we announced the new capital management initiative this past December that we expect will provide additional value to our shareholders. We're very pleased with the positive reaction to this announcement. The initiative includes a proposed leverage capitalization of our Company with a special cash dividend of $15 per share, or approximately $345 million in aggregate, and an increase in authority under our share repurchase program to $150 million. We expect to declare and pay the proposed special cash dividend during our second fiscal quarter of 2012, contingent upon arranging financing that is acceptable to us.

To reiterate what we discussed on our December call, we believe this new capital management initiative represents a more efficient approach to capital allocation for our Company that will provide significant value to our shareholders. Although this capital management initiative is a departure from our historical capital allocation approach, our long-term growth and investment strategies remain unchanged. Our primary strategies continue to be strengthening and growing our core CMP consumables business, and continuing to advance our engineered surface finishes business. We intend to continue to execute our business strategies and manage our Company for profitable growth. We will continue to invest in organic growth, pursue growth through acquisitions, and also consider opportunities to provide additional value to shareholders on an ongoing basis. Bill Johnson will provide more on our proposed leverage recapitalization later in the call.

Turning to our core CMP consumables business, we continue our efforts to collaborate with our customers as a trusted industry partner through new product development and joint development programs. As I have discussed in the past, periods of industry softness sometimes provide greater opportunity for us to work more closely with our customers to evaluate new products on their tools, which may be underutilized during these times. Our technical staffs around the world are currently very busy with a high level of interactions with customers on a wide range of potential future business opportunities. More specifically, during the quarter our collaborative efforts, the investments we have made in high quality, high performing new products were rewarded with customer adoptions of our slurry products for a new copper application and a new data storage application.

We are also leveraging our customer collaboration in investments and CMP Polishing pads to earn additional business in our CMP Pad business. During the quarter, a customer who previously selected our next generation D200 pad for an advanced node tungsten buff application also selected our D200 pad for an advanced node shallow trench isolation buff application. In addition, a second existing customer adopted our D200 pad for an advanced node aluminum application while also extending its utilization of our D100 pad products for another advanced node application. On a combined basis, we continue to have more than 50 opportunities for our D100, and D200 pad products around the world in various stages of evaluation or qualification. These wins are two examples of our ability to transform these opportunities into product adoptions. While we are excited about these wins, I would emphasize that meaningful revenue from this new business is still several quarters away.

We have also experienced greater collaboration and interest from our customers in South Korea during the quarter. Sales this quarter continued to be especially strong in South Korea where our revenue increased approximately 11% compared to last quarter, and 26% versus the first quarter of last year. We believe our technical capabilities at our new facility in South Korea have strengthened our ability to serve our customers within the country. Our customers have responded positively to our local presence and are actively engaged in real-time collaboration with us to develop and qualify products. We have several products currently under evaluation at this facility with our customers and we look forward to translating these opportunities into commercial sales during the fiscal year. The increased collaboration in South Korea is a great example of the benefits we can realize from making investments close to our customers. It is also representative of the broader investment strategy we have been implementing over time within the Asia-Pacific region to strengthen and grow our business.

Concluding my remarks today, we are encouraged by our customers' continued interest in our CMP consumables products. During this period of near term industry softness and macroeconomic uncertainty we will continue to monitor industry trends and manage our business appropriately. Given the significant investments we have made in facilities and capabilities over the last several years, particularly in the Asia-Pacific region, we believe we are well positioned for profitable growth when industry demand strengthens.

And with that I'll turn the call over to Bill.

Thanks, Bill, and good morning everyone.

Revenue for the first quarter of fiscal 2012 was $102.1 million, which was down by 10.6% from the first quarter of last year and down by 6.9% from the prior quarter. We believe these decreases in revenue primarily reflect soft demand within the global semiconductor industry. Compared to the prior quarter, revenue decreased within each of our business areas.

Drilling down into revenue by business area, tungsten slurries contributed 39.9% of total quarterly revenue, with revenue down 2.9% from the same quarter a year ago and down 0.7% sequentially. Sales of copper products represented 15.7% of our total revenue, and decreased 21.8% from the same quarter last year, and decreased 0.8% sequentially. The year-over-year decrease in revenue is primarily a result of reduced demand from some of our foundry customers, similar to what we experienced last quarter. Dielectric slurries provided 27.4% of our revenue this quarter with sales down 10.2% from the same quarter a year ago and down 5.4% sequentially. Data storage slurry products represented 4.9% of our quarterly revenue. This revenue is down 30% from the same quarter last year and down 27.2% sequentially. The decrease in our data storage revenue is largely due to the slowdown in the hard disc drive industry related to the recent severe flooding in Thailand. Sales of our Polishing pads represented 6.8% of our total revenue for the quarter and decreased 17.1% from the same quarter last year, and 6.3% sequentially. Finally, revenue from our engineered surface finishes business, which includes QED, generated 5.3% of our total sales and was up 6.9% from the same quarter last year, and down 37.5% sequentially. Volatility in our QED revenue is not surprising given that it is primarily a capital equipment oriented business.

Our gross profit this quarter represented 48.3% of revenue, which is slightly above our guidance range of 46% to 48% of revenue for the full fiscal year 2012. This is down from 50.3% in the same quarter a year ago, and up from 46.4% in the prior quarter. Compared to the year-ago quarter, our gross profit percentage decreased primarily due to lower production volumes and selective price reductions, partially offset by lower variable manufacturing costs. The increase in gross profit percentage versus the previous quarter was primarily due to lower variable and fixed manufacturing cost and a higher valued product mix partially offset by the adverse impact of lower production volumes.

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 $34 million were $1 million higher than the $33 million reported in the first quarter of fiscal 2011. The increase was primarily driven by professional fees of approximately $2.4 million related to our proposed leverage recapitalization and special cash dividend and as such, should not represent an ongoing cost at this level. These costs were partially offset by lower staffing related expenses. Operating expenses were approximately $100,000 lower than the $34.1 million reported in the previous quarter.

Diluted earnings per share were $0.45 this quarter, which reflect an adverse effect of approximately $0.07 per share from professional fees associated with our proposed leverage recapitalization and special cash dividend. This is down from $0.71 reported in the first quarter of fiscal 2011 on lower revenue and lower gross profit margin. Compared to the previous quarter, diluted EPS was up from $0.40, due to a lower effective tax rate, a higher gross profit margin, and foreign exchange gains included in other income, partially offset by the adverse effect of lower revenue.

Turning now to cash and balance sheet related items, capital additions for the quarter were $3.9 million, depreciation and amortization expense was $6 million, and share-based compensation expense was $3.4 million. In addition, we purchased $13 million of our stock during the quarter under our share repurchase program. We ended the quarter with a cash balance of approximately $294 million.

Earlier, Bill discussed our proposed leverage recapitalization and special cash dividend. At this time, we expect to declare and pay the proposed special cash dividend during our second fiscal quarter of 2012. Before doing so, we need to finalize terms on the associated financing. In recent weeks we've made progress on arranging the financing. We've selected our lead banks and are working with them to syndicate the credit facility. We're negotiating a $275 million credit facility, which we expect will include a $175 million term loan with a five year maturity, as well as a $100 million revolving credit facility that we expect will be initially undrawn. We believe our Company represents an attractive credit to prospective lenders and this financing opportunity has been met with strong interest.

I'll conclude my remarks with a few comments on recent sales and order patterns. Examining revenue patterns within the three months of our first fiscal quarter, we saw demand for our CMP consumables products relatively constant during the quarter and at a level approximately 4% below last quarter. As we observe orders for our CMP consumables products received to date in January that we expect to ship by the end of the month, we see January results trending in line with the average rate in our first fiscal quarter. We typically experience lower demand around the lunar new year which began on January 23, 2012. 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 Avinash Kant with D.A. Davidson and Company. Please proceed.

Good morning. In the past you have given us some idea about the operating expenses and margins for the fiscal year. Would you give us some guidelines in terms of what should we think of those expenses and margins in the full year?

Our guidance for the full year, Avinash, is gross margins in the range of 46% to 48%, and our operating expenses we plan to spend $135 million to $140 million.

And this $135 million to $140 million includes the additional expenses for the financing and this capital restructure, or not?

Yes, that's correct, we're going to try to remain within our guidance for the full fiscal year.

Including that. Okay. And I'm a little bit confused about the remarks you made thus far in the quarter. You say steady -- I heard two things, like 4% below the last quarter and then I heard in line with the average. I didn't get it right. Could you --?

Let me try to clarify. So during the December quarter, October, November, December, we saw CMP revenue roughly constant across those three months and at a rate approximately 4% below the prior quarter. And so then as we look at orders in January through about yesterday, they're tracking in line with the rate we saw during the December quarter.

I think the other part of your question was our CMP consumables business for the quarter, if you pull out our QED business and our data storage business, were down about 4.3%, Avinash, versus last quarter.

Okay. And one question I've been asking of course is the pads business. I know the revenues in the pad business have come down pretty much in line with overall revenues, but would you say there was some ASP contribution there in volumes? Could you comment on the volumes there?

No, I think it was a pretty normal quarter, Avinash. I think the pad business is moving with the general, the general semiconductor demand. We had a couple of wins in our pad business this quarter, which we're delighted about and we certainly have a lot of interest and activity. But I think, what we're seeing is just that the general cyclicality of the industry and our pads business is being impacted just like all our other application sectors.

So the revenue decline would be [representative] to the decline in volume pretty much?

That's correct.

Thank you.

Thank you, Avinash. Next question, please?

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

Good morning, guys. Couple of questions, if I may. First of all, just some bookkeeping to follow on the previous caller. What should we think about CapEx and tax rate for 2012? You were at elevated level certainly in the CapEx in 2011. So how should we think about your spending expectations for next year, or for this year, I should say?

For capital expenditures we expect to be in a range of $25 million to $30 million, so down a bit from last year, but still at a relatively high level for our Company. And then the tax rate we would expect between 32% and 34%.

32% and 34%. And what projects are you trying to complete, or which projects are you starting in 2012 to continue to run CapEx at what I think about close to double your maintenance levels?

Last year we built the facility in South Korea. There's still some remaining expenditures that we're seeing in the first part of fiscal 2012, so a bit of a carryover of that roughly $13 million investment. We also had an expansion at our Geino facility, kind of an increment expansion of our Geino facility, and some investment, additional infrastructure there that we talked about last year that's also spilled into this year. Those are probably the two largest. There's some equipment refresh in our R&D clean rooms and some additional production equipment for new product introductions and things like that, but no significant single large investment that would make up that $25 million or $30 million.

Okay. All right. And if you look at your data storage business, you said it was impacted not just by the overall level of demand being down, but also by flooding in Thailand. Has that pretty much been put behind you? Are you back and your customers back on solid footing when it comes to normal order patterns following the flooding?

I think we have -- Dmitry, this is Bill. I think we have a couple of months to go. We would expect to be sort of through the problems in Thailand by the end of the March quarter. But our customers are quickly coming back up to speed and we're seeing our orders pick up again.

Okay. And was the flooding impactful from a point of view of your manufacturing facilities? Or was it a distribution issue? Or was it customer facilities getting impacted?

It was customer facilities. We don't have a facility in Thailand. Our facilities supply the data storage industry is located in Singapore.

Okay. So it's just the Thai customers were basically too busy (inaudible) to be buying from you.

That's correct.

Got it. Okay. These downturns happen in this industry every couple of years or so. This one doesn't seem to -- maybe a little bit more protracted, but maybe not as deep as the ones in the past. Has anything changed in the competitive dynamics of the markets that you're in from the point of view of people perhaps getting closer to a go, no go decision as far as their slurry businesses and continuing participation in the market? Are you sensing that this downturn has maybe led to some accelerated decision making, or is it business as usual?

That's a great question, Dmitry. I don't think it's business as usual. I think two things are happening. I think the downturn is certainly impacting people's ability to spend capital and invest in the business. I think perhaps more important is the level of complexity that's emerging at these advanced node technologies and the ability of some of the smaller CMP suppliers to keep up with the technology and invest appropriately. Cabot Microelectronics is fortunate.

We have a very profitable business model and we've been able to invest, call it counter-cyclically if you will. For instance, a great example is our facility in South Korea. It positions us really well to take advantage of the emerging importance of the customers in South Korea and the emerging importance of NAND Flash. You can see it in our sales this quarter that our sales in Korea were way up in the quarter when the rest of our business was down and we feel good about those investments.

So I do think some of the smaller CMP competitors, whether they be parts of very large companies or independent companies, are really questioning their ability to be successful in the long term in the space. But as you know, it takes a lot for somebody to decide to exit a business, but we watch it very carefully and we think that will happen over time. You've heard me talk many quarters now about the need for consolidation and our views on consolidation in the supply chain. So maybe some of these weak periods are at the bottom of these cycles will cause people to either choose to exit or drive some consolidation in the space.

Then final question, on the foreign exchange in particular, the yen exchange rate. Doesn't look like it changed much sequentially. Did it have much of an impact on you year over year?

No, if you look at the quarter, the rate was 81 yen to the dollar, the same quarter last year and about 77 yen to the dollar or so this year -- the quarter this year. So some significant difference, but not a big impact year over year. The thing that was different that we called out, if you look at our income statement, Other Income and Expense had foreign exchange gain this quarter. That tends to flip back and forth between a gain and a loss, based on realized foreign exchange gains and losses, net of the hedge that we put in place on our balance sheet exposure. So you did see a lift in Other Income and Expense that was related to foreign exchange gains, but that tends to kind of flip back and forth quarter by quarter.

Sounds good. All right, gentlemen. That's all the questions I have. Thank you.

Thank you, Dmitry.

Thank you, Dmitry.

(Operator Instructions). Your next question comes from the line of Edwin Mok with Needham & Company. Please proceed.

Hi. Thanks for taking my question. So Bill, I have a question regarding your customer utilization. You mentioned that on your CMP consumable you see business comp basically flattish to the fourth quarter. Do you see a difference between leading edge and trailing edge utilization, and does that have an impact on that business?

For sure there's a difference. We think and we estimate fab utilization is about 70% for the foundries, but the leading edge utilization is about 85%. So we see a lot of leading edge strength and emerging strength in next node technologies, which we think is great because we have a lot of great products that are supplying and supporting the advanced node technologies. But the -- clearly what's happening is the emerging advanced node technologies are growing very quickly and remain relatively strong in a weak environment.

I see. So, I obviously understand you guys want to be a little more conservative about looking for, or providing guidance, but given that some of your foundry customers are adding leading edge capacity, right, and on top of that there's some talk from chip makers that maybe business starts to improve. Is it too far-fetched to extrapolate by saying that things should improve after the Chinese New Year for your business?

Well you're right, we are conservative about what we say about the future. I think -- you read the same things we read. TI called the bottom a couple days ago. We use the same forecasters and analysts that a lot of people use, so as my prepared comments this morning, we talked about IC insights and world semiconductor trade statistics at 3% to 7%. If they're correct, that means we're going to have a pretty strong second half because we've had a relatively weak first quarter, or we're looking at a relatively weak first quarter. Certainly for our business, our first quarter was not as strong as we would like it to be, our first fiscal quarter. So what we're hearing and what we expect is a recovering second half of the year and we hope that's true. So we'll see what happens.

Great. That was very helpful. And then lastly, I have more of a longer term question. So we have heard more from chip makers talking about the 3D NAND technology, right, and I just want to get kind of your vantage point there. My understanding is on the 3D NAND there will be more tungsten application being used in the 3D NAND and I understand you guys have a pretty strong position in tungsten. Would that be a longer term benefit to you guys?

You know, we believe so. We've been looking at the 3D NAND technology and I think you're correct that if the industry chooses to use tungsten, that would be significant for us in terms of growth. There would be a number of CMP passes related to tungsten in those 3D devices which we would hope to benefit from, assuming the industry moves to tungsten in those 3D devices. So I think you're right, but it's yet to be seen how quickly those devices will emerge and when they'll start sort of hitting HVM.

So do you have any kind of idea when that could potentially happen? Is it more next year, or any kind of idea around that.

I'm sorry, Ed, I don't have an idea of that. I could probably get it for you through some of our guys in our marketing group, but I don't have it here today on the phone.

Great. That's all I have. Thank you.

Thank you, Edwin. That is all the questions we have this morning. Thank you for your time and your interest in Cabot Microelectronics.

Ladies and gentlemen, that concludes today's presentation. All parties may now disconnect. Good day.