CMC Materials, Inc. (CCMP) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2012 Cabot Microelectronics earnings conference call. My name is Dominique, and I will be your operator for today. (Operator Instructions). I would like to turn the conference over to your host for today, Ms. Trisha Tuntland, Investor Relations Manager. Please proceed.

Good morning. With me today are Bill Noglows, Chairman and CEO and Bill Johnson, Chief Financial Officer. This morning we reported the results for our third quarter of fiscal year 2012 which ended June 30th . A copy of our earnings release is available in the Investors Relations section of our website at cabotcmp.com or by calling our Investor Relations office at the (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 number of risks, uncertainties, and other factors that 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 30th, 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 strong financial results for our third fiscal quarter of 2012. During the quarter, we achieved record revenue of $115.7 million gross profit margin of 47.7% of revenue and earnings per share of $0.55. All of which are significantly higher than last quarter. Our record quarterly revenue for the Company represents 16.6% growth over last quarter. We also set quarterly revenue records for most of our business areas including our Pads business which achieved double digit sequential revenue growth.

In addition, our revenue grew sequentially in every geographic region and we continue to leverage our global footprint to sell to virtually every semiconductor manufacturer in the world. We believe our strong financial performance this quarter reflects the continued successful execution of our strategic initiatives to provide high-quality solutions to our customers, coupled with strengthening overall semiconductor industry demand that we anticipated would occur during the quarter. Bill Johnson will provide more detail later on the financial performance in the call.

Looking across the semiconductor industry we serve, reports and comments from industry analysts and customers generally indicate their outlook for demand in the next quarter is relatively firm although they appear somewhat cautious due to current macroeconomic concerns. Industry analysts are forecasting IC unit growth of 3% to 5% in calendar year 2012 which is slightly lower than previous growth forecasts of 4% to 6%. Additionally, inventory levels of semiconductor devices seem generally in a slight oversupply position due to sluggish demand for mobile devices and weaker then anticipated tablet, notebook, and pc sales during the first half of the calendar year. However, industry reports suggest that seasonal growth will occur during the second half of the calendar year, although somewhat weaker than originally forecast.

In addition, some of our strategic customers are forecasting growth for the third quarter of the calendar year in line with normal seasonality. We are entering into the back-to-school and holiday seasons which have historically increased end-use demand for consumer electrons. P-drivers for end-use consumption which ultimately drives demand for our CMP consumed most products include 4G mobile devices, clouded-server infrastructure, expansion, tablets, ultrabooks, and emerging markets. Also contributing to the positive near term industry outlook is high capacity utilization. During the quarter, overall fab utilization was greater than 90%. It is anticipated that fabs will continue to run at full capacity for 28 nanometer technologies in the near term. In addition, the large semiconductor manufacturers continue to invest heavily to increase capacity in advanced technology nodes that enable key technologies to continue the progression of (inaudible). Turning now to the Company related matters.

We are happy to report that our CMP polishings pads business reported record revenue of $9 million this quarter and double-digit sequential revenue growth for a second consecutive quarter. Year-over-year quarterly revenue growth of our pads business is around 20%. We continue to leverage our existing CMP global infrastructure and expertise to serve the $600 million CMP pad market which is a natural strategic adjacency to the CMP slurry market. Our Company continues to make progress on more than 50 new business opportunities for our D100 and D200 pad products around the world, but are in various stages of evaluation and qualification. We believe our pad products continue to compete on the basis of lower cost of ownership for our customers by providing longer pad life and lower defectivity.

The ability to tune a number of parameters on our epic D200 pad platform enables us to modify our pads to meet very specific customer performance requirements. During the quarter, we secured two additional D200 business wins at Advanced Technology Nodes for emerging applications. We look forward to continuing to expand our pad customer base and winning more business. Turning to our CMP slurry business. We achieved record revenue during the third fiscal quarter in both our Tungsten and Dieletrics business areas. As demand for memory devices continues to strengthen and as memory technologies advance over time, we continue to collaborate with our customers to provide high-quality solutions for Tungsten applications.

In addition, we obtained double-digit growth in our advanced Dielectrics application are both sequentially and year-over-year and captured several new business wins during the third quarter with leading edge customers for advanced applications. We are also pleased with the growth we are seeing with our slurry products for polishing aluminum which is an emerging CMP application for use in advance high-cave metal gate device integration where we believe we hold an early leadership position. This solution is the result of extensive research and development conducted in close collaboration with our customers to help enable their integrations teams while meeting their challenging removal rates, defectivity, and cost of ownership targets. Within our copper slurry business, we are assisting our customers in lowering their cost of ownership by actively transition them from our legacy copper slurry which are sold ready-to-use onto our newer products.

These new copper slurry products are delivered as concentrates designed to be diluted by our customers. This reduces transportation costs since we are shipping less water and also and improves the gross margin percentage of our copper business but at a trade-off to the size of the total available market. Throughout the quarter, we experienced heavy sampling of our products by our customers for a variety of applications and technology nodes and our opportunity pipeline remains healthy.

As a result of these collaborative efforts, we qualified another product for a strategic customer from our South Korea manufacturing facility this quarter for an advanced Dielectrics application. Our teams around the world continue to focus on working closely with customers through joint development programs to enable us to provide them with innovative and high quality products and solutions. Finally, we are very pleased with the performance of our engineer surface finishes or ESF business this quarter which includes our QED business. QED achieved record revenue during our third fiscal quarter as customers continue to embrace our innovative metrology and polishing technology for the most advanced optical components.

Concluding my prepared remarks this morning, we believe our Company is strategically positioned to continue to be a key supplier of advanced engineered materializes to the consumer electronics supply chain. In our view, our global network of employees and facilities and our strategic initiative to closely collaborate with our customers have prepared us well for continued success in this marketplace. And with that, I will turn the call over to Bill.

Thanks, Bill and good morning everyone. Revenue for the third quarter of fiscal 2012 was a record $115.7 million which represents a 3.4% increase compared to the same quarter last year and a 16.6% increase from last quarter. Revenue from our Dielectrics, Tungsten, Pads, and ESF businesses increased this quarter compared to the same quarter last year. Compared to the prior quarter, revenue for all business areas increased except for Data Storage. Year-to-date revenue of $317 million represents a decrease of 5.6% from the prior year driven primarily by softness in demand within the semiconductor industry that we experienced during the first half of our fiscal year.

Drilling down into revenue by business area. Tungsten slurries contributed 36.4% of total quarterly revenue with revenue up 3.1% from the same quarter a year ago and up 10.3% sequentially. Our Tungsten business achieved record revenue for the quarter reflecting strong demand from the memory segment. Sales of copper products represented 15.5% of our total revenue and decreased 11% from the same quarter last year and were up 11.4% sequentially. The year-over-year revenue decrease reflects the execution of our strategy that Bill discussed related to assisting our customers in lowering their cost of ownership as well as slower recovery of demand for certain foundry customers.

Dielectric slurries provided 28.1% of our revenue this quarter with sales up 5% from the same quarter a year ago and up 19.6% sequentially which represents a record revenue level for this business area. Within Dielectrics, revenue from our advanced Dielectrics business increased by approximately 25% sequentially. Data storage slurry products represented 4.6% of our quarterly revenue. This revenue is down 22.6% from the same quarter last year and down 7.6% sequentially. We believe our soft revenue this quarter in Data Storage reflects volatility around the hard-disk drive industry related to the recovery from the floods in Thailand land last year.

Sales of our polishing pads represented 7.8% of our total revenue for the quarter and reflects increases of 19.6% from the same quarter last year and 13.9% sequentially. As Bill mentioned, our pads business achieved record revenue this quarter and a second consecutive quarter of double-digit sequential revenue growth. Finally, revenue from our ESF business which includes QED generated 7.5% of our total sales and was up approximately 61% from the same quarter last year and up 115% sequentially. QED revenue this quarter represents a record level for this business. Our gross profit this quarter represented 47.7% of revenue which is up from 47.4% in the same quarter a year ago and 46.1% in the prior quarter.

Compared to the year ago quarter, gross profit percentage increased primarily due to increased utilization of our manufacturing capacity, higher yields in our manufacturing operations, and lower logistics costs partially offset by higher fixed manufacturing costs and selective price reductions. The increase in gross profit percentage versus the previous quarter was primarily due to higher capacity utilization on higher demand and higher yields in our manufacturing operations partially offset by higher fixed manufacturing costs. Year-to-date gross profit represented 47.4% of revenue. This is in the upper half of our full year guidance range of 46% to 48% of revenue.

Now, I will turn to operating expenses which include research, development, and technical, selling and market, and general and administrative costs. Operating expenses this quarter of $33.6 million were approximately $200,000 higher than in the third quarter of fiscal 2011 and approximately $3.1 million lower than in the previous quarter. The sequential reduction was primarily due to the absence of bad debt expense related to a customer bankruptcy reported last quarter as well as lower-share based compensation expense partially offset by higher staffing-related costs. Year-to-date total operating expenses were $104.2 million which is 4.6% higher than last year.

We continue to expect our full year operating expenses to be within a range of $135 million to $140 million for fiscal 2012. Diluted earnings per share were $0.55 this quarter which is up slightly from the $0.54 reported in the third quarter of fiscal 2011. Diluted EPS this quarter was more then double the $0.23 we reported last quarter primarily due to the higher level of sales, higher gross profit margin, and lower operating expenses including the absence of bad-debt expense that we recorded last quarter.

These factors were partially offset by an unfavorable impact of foreign exchange rates which is reflected in other income on our income statement and higher interest expense associated with our term loan. Year-to-date, dilluted earnings per share of $1.24 were down 31.2% compared to last year due to the industry softness and seasonal weakness we experienced during the first half of the fiscal year and $0.19 of certain adverse items recorded during our first and second quarters.

Turning now to cash and balance sheet related items. we generated precash flow of approximately $20.2 million in our third fiscal quarter. This reflects cash from operations of $22.8 million less capital additions of $2.6 million. Cash from operations include depreciation and amortization expense of $5.7 million and share-based compensation expense of $3 million. In addition, we purchased $10 million of our stock during the quarter under our share repurchase program. We ended the quarter with a cash balance of approximately $166.9 million which is $11.8 million higher than last quarter and $175 million of debt outstanding.

I will conclude my remarks with a few comments on recent sales and order patterns. Examining revenue patterns, during our third quarter fiscal quarter we saw demand for our CMP consumable's products at a level of approximately 12% above our second fiscal quarter. As we observe orders for our CMP consumable's products received to date in July that we expect to ship by the end of the month, we see July results trending generally in line with our third fiscal quarter. However, I would caution, as I always do, that several weeks of CMP related orders our of the quarter represent only a limited window on full quarter results. Now, I will turn back to the operator as we prepare to take your questions.

(Operator Instructions). Your first question is from the line of Avinash Kant with D.A.Davidson & Co..

Good morning,

Morning, Avinash.

A few questions. Maybe Bill can answer. First is the past business. Of course it seems now coming back to again the growth board. Should we expect higher growth than what you expect from the overall business in September quarter or maybe in December quarter?

Avinash, we commented to this before. It is very difficult for us to predict when a customer will take a qualification into high-volume manufacturing. We have been on a limb before, and we probably will not do it again. We are excited about the number of opportunities we have in our pipeline for both the product lines, the older D100 technology and new emerging D200 technology. We look at the amount of activity ongoing at our customers and the activity level is very high right now. I am encouraged by what we see in terms of the numbers of customers that are looking at our pads and the number of opportunities that we have of actively in play at our customers. The last two quarters have been relatively strong. We have seen some pretty good growth last quarter and once again another quarter of double-digit growth. I am hesitant to predict what we might see in the future because we just cannot predict how quickly things will move from qualification into HBM.

Okay. Could you give us some idea what are your plans for CapEx this fiscal year?

Avinash, earlier in the fiscal year, we guided to $25 million to $30 million for the fiscal year and last quarter we pointed you toward the lower end of that. Now given that we are finished the third quarter and capital spending is around $14.5 million roughly, but we would say it is going to be between $20 million and $25 million for the year.

Okay. So that is coming down further it looks like.

That is right.

Then interest expense. Should we think of the current level of interest expense as steady a steady state going forward or is there something else in there this quarter?

In the near term about $1 million per quarter is probably about right. The interest expense is based on LIBOR process spread. Currently we are staying pretty short term on LIBOR so around 25 basis points plus a spread of 175 basis points plus some amortization of fees. So around $1 million a quarter is what you should expect in the near term.

Okay. And then final question could you talk a little bit about the CapEx that you are putting in the Asian facilities? Is it all taken care of now, or do you have some more remaining in that?

The best bulk of what we plan to spend in our South Korean facility has been spent. We continue to look for opportunities to extend our reach. For instance, our pad business, we might spend capital next year on our pad business somewhere in Asia. The bulk of the investment we made in South Korea has been spent. As we add lines in South Korea we will spend more capital, but it won't be even close to the magnitude that we have spent to date.

Perfect. Thank you so much.

Thank you, Avinash. We will take out next caller, please.

Your next question comes from the line of Dmitry Silversteyn of Long Dow Research[sic]

Good morning. Longbow Research. A couple of questions, guys. First of all, I was interested in hearing your strategy in copper in shipping concentrates and giving up volume for higher pricing and hopefully better market share as customers begin to see the benefit of that in higher margins. Can you give us an idea of how long has this been going on? Whether you see this as a multiyear strategy or something that will sort of anniversary itself in the next two to three quarters?

Dmitry, we have been talking about concentrates for a number of years now. It is not new to our business and it is not new to the industry. We embarked on. Let me back up. We have some copper that have been in the market for a very long time since the introduction of copper back at 13099 meter technology. Some of our legacy products are being used and they are still gladly accepted. The copper business has been perhaps the most competitive over the last few years, and that is competitive means we have seen a lot of pricing pressure there. We are very much focused at not only meeting the performance requirement of our customers but helping them reduce their cost of ownership targets. One way we can do that is by reformulating our slurries and allowing them to dilute (inaudible)at the CMP tool. We have been on that strategy for some time now with some of our newer copper products. We think that trend will continue going forward in the entire copper CMP market as people look or our customers look for ways to reduce the cost of copper CMP technology.

I am trying to reconcile that with your focusing on the concentrates as the explanation for down volumes in copper. Is this something that is now a step change? I understand there was dilution before by customers. I was not aware that there was intentional concentration on your part to allow for that dilution. I am trying to understand if this has this been going on for a long time and that you are pointing out the 11% year-over-year decline or the 11% quarter-on-quarter decline in copper, and you are citing concentration as the reason for that. What is going on, I guess? Has it been going on? Is it accelerating? Are you starting to see the benefit of that? And therefore the impact on the top line? Or is the 11% year over decline have nothing to do with the concentrated copper shipments?

Just for clarification, we saw sequential growth in copper of 11.4% year-over-year a decline of 11%. Yes, it became more visible this quarter because we have began ramping with a couple of customers with this new platform. We talked about new copper products for a while now, like Bill talked about that are more concentrated. So the higher ASP, higher gross margin percentage, but not as much revenue growth. This quarter we saw a couple customers ramp with that. The effect was more pronounced. In addition, there are a couple of foundry customers that are just recovering from the softness a little slower then some others and that was also factor this quarter.

If you look at the Tungsten/Dielectrics sale versus copper sales if you exclude the impact of lower volumes because of higher concentrated material that you selling in copper. Is the difference in the growth rate Tungsten/Dielectric versus copper? Is that a function of memory and more mobile applications versus logic and more desktop and laptop applications?

I am not sure what numbers you are looking at. Copper is up 11.4% and our Tungsten business was up 10.3% sequentially.

I am looking at Tungsten being up 3% year-over-year, Dielectric being up 2.5% year-over-year and copper being down 11%

Okay. You are looking at the year-over-year. I was looking at the sequential numbers. Bill answered the questions 100% accurately. We are seeing a number of our fairly large customers making a switching to the concentrate in this quarter and the prior quarter. I think that is what you are seeing. That is what we are seeing. We are happy about that. We are excited about that opportunity to increase our gross margins and maintain our positions there.

Sure. I certainly would not disagree with you there. I am just trying to reconcile the results that you are delivering versus some fairly subdued let us put it that way, results from other semiconductor companies out there. So I just want to kind of understand if there is anything in your markets going on by not so much by your product lines but maybe by your customers product lines that makes you feel more or less bullish on your outlook for the second half of the year. Obviously, we are not seeing as broad of a recovery in semiconductors in general or as strong as a recovery, but there are pockets of growth and pockets of weakness. So with respect to your business you are more exposed to the pockets of growth and not as exposed to some of the areas that are weaker.

I guess we would agree with that, Dmitri. We are feeling like we are clearly benefiting from the investments we made in Taiwan and now in South Korea as well as the technology investments we made in advance Dielectric CMP pads, aluminum, and some of these new products that we introduced to the market, copper. In our business it takes a lot longer than any of us would like it between the point in time when we start a research product process until we start getting revenue. Many of the investments we have made three or four or five or six years ago are coming to fruition now. We feel good about where we are positioned and how we are positioned both geographically and technically.

Also we continue to have a strong position with several of the larger foundries in particular TS&C and UMC had strong sequential growth and that helped to fuel some growth for us.

Sure. Switching gears a little bit on the on the SG&A. You still gave a pretty broad guidance of $5 million, $135 million to $140 million for the annual SG&A with one quarter left. Are you that uncertain about what the SG&A costs are going to be in the quarter that you could not have tightened the guidance a little bit?

No, but our approach in the past has been to give annual guidance. We just want to confirm we would be in that range. Obviously our run rate would put us at the lower within the lower portion of that $135 million to $140 million.

Okay. That is fine.

Having said that. We had a couple of things occur earlier in the year, the write off of the El Peda bad debt for example. Some of the costs associated with the leverage recapitalization which drove some higher costs on the front end. We have maintained the overall guidance for the full year even including those costs unusual costs, we will be clearly within our guidance.

No, you have done a great job this year of controlling your costs. I do not have a beef with that. I am just wondering with one quarter left with still hitting a $5 million which is $35 million run rate expense line seems like a pretty wide gate to drive through. I want to make sure it was not anything untoward there that it was just basically reiteration of annual guidance. Final question, on the share repurchase and lack of impact on the shares outstanding as a result, the stock spent most of the quarter below $30 and yet your share purchases were only $10 million and your share count actually went up sequentially which I am still trying to understand. You do not time your repurchases, but as a prudent investor thinking, is there any desire to take advantage of an appealing stock price, or are you just basically married to a $10 million a quarter come hell or high water type of program?

Our approach in the past has been to be steady investors that we have not tried to be opportunistic, but if you look this quarter we earned net income of $13.2 million and we purchased $10 million worth of our stock. 80% payout of net income for the quarter. Given our capital structure now we have $175 million of debt. We have a comfortable cash balance, but we will continue to weigh the alternatives of share repurchase, prepayments of debt, capital investment, M&A, and so that has guided our approach in the past.

All right. Thank you.

Thank you, Dmitry

(Operator Instructions). Next question coming from the line of Jairam Nathan with Sidoti. Please proceed.

Hi guys. Thanks for taking my call. On the operating expense I notice that your R&D went up sequentially. Is there any one time of stuff in there or is it normal?

No. There are two factors, and we gave kind of a high level explanation of overall operating expenses. Two things in R&D. One was higher staffing related costs. They were a little bit more pronounced then R&D, and then higher wafers in lab supplies. You have followed the Company for a while. We use wafers for customer demos and also for development of our slurries and that is a pretty significant R&D expense. We expense those as we buy them. It is been a little lumpy in the past and probably will continue. We had a bulge in wafer expense, lab supplies, and also staffing costs, but nothing unusual in R&D.

Just following in that with the UMV is on 450 and EUV. Do those have any impact on habit?

Not as yet. Other than we are excited about the potential opportunity to bring our D200 technology to bear at that form factor. We think we have an opportunity because of our process technology to have a fairly unique offering for that size wafer and that form-factor of pad. On the slurry side, we did not see a lot of R&D driven work as a result of the switch from 200 to 300 milimeter wafers. I am not going to go on record to say that won't occur. It is going from 300 to 450, but we think many of the slurry products in the market today and in our laboratories in development will be just as effective and valuable to our customers at 450 milometer as they are at 300 millimeters and smaller waif sizes.. We see it 450 as an opportunity for our pads business. We see it as an ongoing for our slurry business. EUV is a different question. We are paying a lot of attention to what is happening. I know all of you that were at Semicon West last week are alot of paying attention to what is going on with the SML and the investment by Intel. We are doing the same thing, and we will try to stay as close as we can to it.

Shifting to the pads, you say that it that it could be lumpy as far as the wins go and how does that affect production. If I look at the quarter rate of $9 million, can we think of that as a base and it goes up or down based on wafer starts? Is that something we can look as a basement?

That is a good way to think about it. f you go back in time and think about the way the CMP slurry market grew, in its earlier years. It grew

in it was in steps. It did not grown in a linear way. It grew in step changes And that is kind of what we seen in our in our pad business We get a big step up then go flat and take a step up. Your thinking is accurate. We get up a step, then the waivers start numbers drive it or up and down sort of like high and low tide, but the step stays the same. You know what I mean?

Yes.

Okay.

Thanks. My last question on QED you say equipment business, right?. I was wondering do we get an order or backlog number that you can share?

QED is predominantly an equipment business. I want to point out there is a services business that goes with it. There is a spares business that goes with it. We continue to sell the magnioreological fluid as part of our service business. There is a portion of the business that is more service-related. The bulk of the business is equipment and equipment sales. We have not shared a backlog publicly as yet. At this point in time we do not intend to.

I would tell you we are really excited and delighted with the work we have seen from our team in QED. They have done a tremendous job at diversifying the business geographically by selling our tools and equipment into markets national laboratories and universities in places like India and Eastern Europe and a number of different countries where Cabot Microelectronics does not operate as well as utilizing our Cabot Microelectronics infrastructure to sell into places South Korea and Japan and some markets where we are very active.

Combined with adding a services business to polish and finish some very precision highend optical components that serve a market that is not served today. The team has been innovative and creative and look for ways to grow and they have done a very good job. And so far we are delighted with what we have seen.

Thank you. That is all I have.

Thank you Jairam. We appreciate your questions this morning. Thank you for your time and your interest in Cabot Microelectronics.