CMC Materials, Inc. (CCMP) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2013 Cabot Microelectronics earnings conference call. My name is Jasmine and I'll be your coordinator for today. At this time all participants are in a 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 conference, to 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 2013, which ended December 31. A copy of our earnings release is available in the Investor Relations section of our website, 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 number 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 of our SEC filings, including our report filed on Form 10-K for the fiscal year ended September 30, 2012. 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 2013. During the quarter we achieved revenue of $106.5 million, gross profit margin of 47% of revenue, and earnings per share of $0.41, which includes an adverse impact of approximately $0.07 associated with a tax adjustment related to the operations of our facility in Korea since its opening in 2011. Though we experienced continued soft industry conditions and macroeconomic uncertainty in addition to the usual seasonality during the quarter, we achieved revenue increases in both our core CMP slurry and pads businesses when compared to last year. In addition, during this past quarter we continued to prudently manage our operating costs and generate a strong gross margin despite the slight sequential decline in demand for our CMP consumables products. Bill Johnson will provide more detail on our solid financial results later in the call.

Let me start this morning with our views of the industry environment. Industry reports indicate that IC inventory decreased during the December quarter, although they are still remain slightly above normal levels. Given the current inventory situation, the collective view of industry analysts and some of our strategic customers appears to be that softness in semiconductor demand will continue through the March quarter as manufacturers continue to reduce their inventory to more normal levels. Sources within the industry are forecasting that inventories will return to normal levels during the June quarter, while global fab utilization is expected to approach 90% sometime during the second-half of calendar 2013.

In addition, some of the industry's technology leaders continue to reinforce expectations for longer-term demand growth by increasing their capital expenditure forecasts as part of aggressive capital plans. Industry analysts are forecasting stronger IC unit growth in calendar 2013, when compared to 2012. The analyst consensus for IC unit growth this year is between 3% and 7%, a meaningful increase from their zero to 3% unit growth estimates for calendar 2012. We expect a continuation of positive trends in mobile connectivity, mobile devices including tablets and smartphones, cloud computing and emerging markets to be key drivers for IC unit growth in 2013 and beyond. We are cautiously optimistic that these positive industry trends indicated through calendar 2013 leave us well-positioned for another solid year of performance, particularly in the second-half of the year. However, we acknowledge that we have very limited visibility into near-term demand, and so we intend to continue the to vigilantly watch evolving trends and market conditions, and will respond accordingly.

Now let me discuss Company-related matters. As the leading supplier of CMP slurries and a growing supplier of CMP pads, we believe that technology and innovation, coupled with a focused approach towards partnering with semiconductor industry leaders, are vital to success in our business. We believe our unique global capabilities and CMP expertise position us well for continued success in providing reliable, cost-effective solutions as semiconductor technology advances. Within our core CMP consumables business, I am pleased to report that our CMP polishing pads business achieved revenue growth of approximately 22% year over year this quarter. However, after achieving three consecutive quarters of growth, our pad revenue decreased sequentially in the first fiscal quarter of 2013. We believe this sequential revenue decrease is due to the soft industry conditions I mentioned earlier, particularly at certain foundries. During the quarter we continued to leverage our D100 and tuneable D200 pad product platforms and we won new business across a number of applications and technology nodes.

As I mentioned earlier, we believe our ability to partner with the key strategic customers is critical to our success. Our pads business team is focused on several joint development projects with customers and semiconductor tool manufacturers to address business opportunities with advanced technology. In addition to this development activity, we continue to improve our manufacturing processes, to gain efficiencies and drive profitable growth. We are selling our pads to more than 30 customers, and we have a rich pipeline of opportunities for our D100 and D200 pad products around the world in various stages of evaluation or qualification.

Turning to our CMP slurry business, I am pleased that our CMP slurry revenue held essentially even during the first fiscal quarter when compared to the prior quarter, despite soft industry demand conditions. We remain focused on technology trends in supporting our customers' activities related to the leading edge applications. As a result, we continue to strive to be a key technology enabler by developing and commercializing reliable and innovative solutions for our customers to address both their performance and cost of ownership requirements. During the quarter we experienced heavy sampling of our new products by customers across a variety of applications and technology nodes, in addition to intense collaboration with several customers focused on new product development. These activities led to business wins during the quarter in advanced node tungsten and through silicon via, or TSV, applications at leading edge customers.

During the quarter, our advanced dielectrics business continued to gain traction and achieved record revenue in the quarter. We also remain pleased with the growth we are experiencing with our slurry products for polishing aluminum. We believe this growth is a good example of our ability to meet our customers' challenging removal rate, defectivity, and cost of ownership targets for advanced node technologies. Our data storage business grew this quarter after two quarters of sequential revenue decreases, and during a period of generally weak PC demand. We believe that continued growth in cloud computing will drive the need for more data centers utilizing hard disk drive storage technology, helping to mitigate the impact of weak demand for PCs on this industry.

Concluding my remarks today, we actively participate in a dynamic consumer electronics-driven industry by supplying CMP consumables products to the semiconductor industry. With the continuation of positive trends in mobile connectivity, mobile devices including tablets and smartphones, cloud computing and emerging markets, we expect long-term growth in demand for CMP consumables. In addition, we believe we have a robust business model, which has been characterized by solid revenue growth, relatively high profitability, limited capital intensity, and strong consistent cash generation through a range of industry environments. We remain mindful of the potential impact of near-term industry softness and global macroeconomic uncertainties. But we believe we are positioned well for continued success and profitable growth. And with that, I'll turn the call over to Bill.

Thanks, Bill, and good morning, everyone. Revenue for the first quarter of fiscal 2013 was $106.5 million, which was up by 4.3% from the first quarter of last year, and down by 3.7% from the prior quarter. We believe the decrease in revenue from the prior quarter primarily reflects generally soft industry conditions that we began to see late in the fourth fiscal quarter of 2012. Despite the overall sequential revenue reduction, on a geographic basis our revenue in Korea was up 9.3% sequentially, and up 18.4% year over year.

Drilling down into revenue by business area, tungsten slurries contributed 38.2% of total quarterly revenue, with revenue essentially even with the same quarter a year ago and with the prior quarter. Dielectric slurries provided 28.5% of our revenue this quarter, with sales up 8.4% from the same quarter a year ago, and down 3.8% sequentially. Sales of copper products, including slurries for polishing barrier and aluminum, represented 16.9% of our total revenue, and increased 12.1% from the same quarter last year, and increased 4.8% sequentially. Sales of our polishing pads represented 7.9% of our total revenue for the quarter, and increased 22.1% from the same quarter last year, and decreased 13.8% sequentially. As Bill mentioned earlier, we believe the sequential revenue decrease is a result of soft industry conditions, particularly at certain foundries.

Data storage products represented 4.8% of our quarterly revenue. This revenue was up 1.7% from the same quarter last year, and up 5.9% sequentially. Finally, revenue from our Engineered Surface Finishes business, which includes QED, generated 3.7% of our total sales, and was down 27.2% from the same quarter last year, and down 40.5% sequentially. Volatility in our QED revenue is expected, given that it is primarily a capital equipment-oriented business.

Our gross profit this quarter represented 47% of revenue, which is at the mid-point of our guidance range of 46% to 48% of revenue for the full fiscal year. This is down from 48.3% in the same quarter a year ago, and down from 48.6% in the prior quarter. Compared to the year-ago quarter, our gross profit percentage decreased, primarily due to certain higher manufacturing costs and a lower-valued product mix, partially offset by higher sales volume. The decrease in gross profit percentage versus the previous quarter was primarily due to higher variable manufacturing costs and lower manufacturing yields, partially offset by lower fixed manufacturing costs and a higher-valued product mix.

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 $33.4 million were $0.6 million lower than the $34 million reported in the first quarter of fiscal 2012. The decrease was primarily driven by the absence of professional fees related to our leveraged recapitalization, a special cash dividend that we executed during fiscal 2012. Operating expenses were approximately $100,000 higher than the $33.3 million reported in the previous quarter. We continue to expect our operating expenses for full fiscal year 2013 to be in the range of $132 million to $136 million.

Diluted earnings per share were $0.41 this quarter, which includes an adverse impact of approximately $0.07 associated with a tax adjustment related to the operations of our facility in Korea since its opening in 2011. This is down from $0.45 reported in the first quarter of fiscal 2012, and down from $0.49 reported in the previous quarter. Compared to the same quarter last year, earnings per share decreased, primarily due to the tax adjustment I mentioned, and higher interest expense, partially offset by higher revenue, foreign exchange gains and lower operating expenses. The decrease compared to the prior quarter was primarily due to lower revenue and a lower gross profit margin, partially offset by foreign exchange gains.

Turning now to cash and balance sheet-related items, capital investments for the quarter were $3 million, and depreciation and amortization expense was $5.6 million. In addition, we purchased $10 million of our stock during the quarter. We ended the quarter with a cash balance of $169.6 million, and have $168.4 million of debt outstanding.

I'll conclude my remarks with a few comments on recent sales and orders. During the first fiscal quarter, we saw a decrease in demand for our CMP consumables products of approximately 2% compared to the prior 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 slightly lower than the average rate in our first fiscal 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)

Avinash Kant with D.A. Davidson and Co.

A few questions. I think in your prepared remarks, Bill, you talked a little about the foreign exchange gain. Could you give us some idea about the impact of foreign exchange on the revenue, and also maybe in the other income line item, if there was any?

Yes. Within kind of the operating results, there was a very modest impact of foreign exchange. We saw a strengthening of the dollar versus the yen, which helped us a bit. But I think we saw a bit of a weakening of the US dollar versus the NT dollar, and both those kind of offset. So within our P&L, gross margin revenue, not much of an impact. Within other income and expense, we report foreign exchange gains and losses. And these are more with respect to balance sheet exposures, and we have more of a balance sheet exposure to the yen. So the weakening yen to the dollar gave us some foreign exchange rate gains within other income and expense. It's on the order of $850,000, I think.

Okay, that's what it was though. Okay, 854, yes. Okay. And also if you could talk a little about the DSOs. They seem to have gone up a little bit in the quarter, up to 54 days, I believe, versus 44 last quarter.

That's right. And there's nothing to be alarmed there. We did see an increase in our accounts receivable and generally in working capital. Overall, two big causes. One was related to the timing of some payments in Asia. Given the holiday schedule, there are two significant customer payments that were initiated by our customers late in December that, because of the holidays, they didn't settle in our banks until the second of January. So as of December 31, we had some funds in transit. And that really accounted for the increase in the DSOs. But as we sit here today, those collections have already been made, and so no issue.

The other thing that increased working capital is a reduction in payables. And we have incentive compensation that we accrue during the year as a payable. That's paid in December, and so that payable comes down. And that was another contributor to the increase in working capital. But we've seen that sort of phenomenon year-by-year because of the payout in December.

And my final question is on the pads business. Of course, it looks like in the quarter there was some sequential down-tick. But overall for the year, could you give us some idea on a year-over-year basis what kind of growth are you're targeting in the pads business? Maybe for calendar year '13?

Yes. Avinash, we haven't talked about our internal targets for growth for our pads business. We're pretty happy with the growth we saw, 2012 to '11. We're up about 22%, as I said in my prepared comments. The activity continues to be rich. The sampling, the evaluations, and the qualifications continue to be active. And we remain optimistic about our ability to grow the pads business. But we haven't shared targets externally.

Okay, perfect. Thank you so much, Bill.

Thank you, Avinash. We'll take our next caller.

Chris Kapsch with Topeka Capital Markets.

Had some questions about the sequential mix trends that you talked about. I think, looking at the gross margin in the December quarter versus the fiscal fourth quarter of 2012, I think you mentioned that the mix was actually improved. So I'm wondering if that's simply a function of the pad business being much -- the pad revenues being much weaker in the December quarter versus September quarter. Is there something else contributing to the mix effect there?

Yes. Each of our products, the main products -- pads, tungsten, slurries, copper, dielectrics, data storage -- each has kind of a different price and margin characteristic. And so it really is sort of the collective impact of all of those. To the extent that our tungsten revenue was essentially even quarter-to-quarter and year-over-year, then yes, it's the interplay of copper, change in copper, change in pads, and dielectrics that contributed to that. I don't think pad was a particular driver of that, but it did contribute.

Okay. So, but higher mix sequentially, but we'll see 160 basis points of lower gross margin. So I think you called out manufacturing, higher manufacturing costs and lower yields. Can you just talk about what contributed to the lower yields, order of magnitude, how much of a contributor of that to the 160 basis points was the lower yield? Is that something that's like one-time in nature and that can be fixed? Or was there like a quality issue in the manufacturing plants?

Yes. When we talk about manufacturing yields, it refers to our quality systems and our ability to catch any sort of quality issue internally before anything goes to a customer. So in the case of lower manufacturing yields that I mentioned, there was some off-quality material that we scrapped or disposed of in order not to pass that along to our customer. It contributed to the gross margin variance, but it wasn't the primary cause. It was one of four or five different contributors to the gross margin variance. And we've seen those occasionally. It's hard to predict, but we've called those out in the past.

Okay. So something that's been rectified, the quality issue?

Yes, that was corrected, yes.

Yes, okay. And then just a comment about the softness in the December quarter, particularly in the foundries. In the past, when there's lower utilization at the foundries, they have a little bit more, quote-unquote, tool time, which they can use to qualify new products. So I'm just wondering if there was any sort of increased activity, given the slack in their utilization rates at the foundries, that allowed you to sort of accelerate any pad qualifications or other product qualifications?

Yes, I don't think -- Chris, I don't think we've seen any difference in the intensity of qualification activity at the foundries for our products. At the leading edge, there is a lot of activity. And that activity has not either increased or decreased. I would just tell you, it's been a very sort of aggressive time for the industry. These advanced node technologies are proving to be very difficult. And there are many materials, challenges -- and we think that's a great thing for our Company. We like it when it's hard and challenging. We think we have an advantage when it comes to very difficult technology challenges. And we're very active at the leading edge with all the foundries and the IDMs as well, and the memory customers. So as I talked about in prepared comments, both our slurry business and our pads business, we are deeply engaged with many of the industry leading companies, with next-generation technology.

Right. And just to follow up on that note, in your prepared comments talking about the industry leaders and their CapEx sort of ramping this year. Is it fair to say that those expenditures are more on the technology buys versus capacity buys, and where you would probably disproportionately benefit? Or is it just hard to say? Is it really just across the board in terms of their CapEx spending?

I think it's sort of across the board. But there is a -- I don't know the exact answer to your question, Chris. And I probably should. But I think there's -- a lot of the investment today is, particularly at the leaders, is all about advanced node technology and pushing Moore's Law down past 28-nanometer technology. Which, as I said earlier, we think that's a great thing for our Company. The CMP intensity increases as these technologies get smaller and smaller feature sizes, there's more CMP passes, there's new materials. Aluminum is a great example of a new material introduced at high-k/metal gates, where we were quick early into the market with an aluminum CMP solution and we are benefiting from the growth of aluminum in that architecture. So we continue to believe that as the industry continues to pursue Moore's Law and drives these feature sizes to smaller and smaller sizes, that that will be a good thing for CMP in general. And if it's too good for CMP, it's good for Cabot Microelectronics.

Got you. Thanks, guys.

Thanks, Chris. We'll take our next question, please.

(Operator Instructions)

Dmitry Silversteyn with Longbow Research.

Couple of questions, if I may. First of all, you talked about winning some tungsten business in your prepared remarks. But tungsten was conspicuous by showing no growth year-over-year amongst your slurry and pad businesses. So can you talk about which end-market, or end-markets, that tungsten was going into that was weak relative to others that kept this business flat year-over-year, versus the mid-single-digit to double-digit growth you've seen in other applications, whether slurry or pads?

Sure, Dmitry. Let me first talk about tungsten in general. We see tungsten as a growth market. It's a very important market for our Company. We continue to see people integrating tungsten in some of the advanced node technologies. So we continue to believe that tungsten will be a very important market for our Company going forward. Some of these new product wins I talked about are early ramp, and we wouldn't expect to see significant or meaningful revenue from them in kind of the next two or three quarters. But we see a lot of opportunities for advanced tungsten, advanced tungsten integration, and advanced tungsten CMP solutions well into the future.

Okay. So I guess as I'm trying to -- because usually tungsten and dielectric move somewhat in step, and then copper can be a little bit different because it's got more ties to the logic market versus the memory market. So the fact that tungsten and dielectric, there was a disconnect -- was there anything particular going on with the segment that tungsten is particularly heavy in? I'm not sure where there's a disproportionate presence of tungsten slurries versus other slurries.

Well, I think -- listen, I think it's fair for me to say, I think we've gained share in tungsten. I think our performance in Korea is an indication of our success with some of our tungsten, as well as our advanced dielectric slurries in that very important market which is South Korea. I can't explain -- I agree with you, the separation between our dielectrics business and our tungsten business for the full year. But we have a significant slate of new tungsten products, advanced tungsten products that are in the market. They're getting a lot of acceptance. And we see it as kind of the next wave or the next generation of tungsten leadership for Cabot Microelectronics.

Also, Dmitry, when we say we won a new kind of business with a new advanced tungsten application, that doesn't mean that we saw necessarily significant revenue from that. We won the business, and then you would expect that application to ramp over time.

Got it, all right, thank you. And Bill, moving on to the R&D line. Your third quarter in a row of above $50 million in R&D spend. Is that sort of the new normal we should be thinking about? Or are we going to be seeing high R&D spending in the back-end of the year, given that historically your first-quarter spend is a little bit lower than the rest of the year? I'm just trying to see what the R&D spend could be in terms of your overall SG& -- or of your overall operating cost.

You wouldn't expect to see any significantly different trend going forward than in the past. We talk about technology becoming more and more important at advanced nodes. But we also have to be mindful of the level of spending. And so sort of the challenges -- how do you meet the needs of the customers with these advancing technologies, with greater and greater technical challenges, but also stay within sort of a target of around 30% of revenue for operating expense? That's something we talked about in the past for overall operating expense. And we have internal targets for the separate components of that. But I think you would expect to see continued consistent trends in our operating expense, but then I'm trying to manage within sort of the soft environment.

Got it, Bill, thank you. And then, and speaking of technological challenges, I think it's a foregone conclusion, as far as I can tell, that we're going to have a move to 450-millimeter wafers here in the not (technical difficulty) future. Have you given any (technical difficulty) your participation in that move, and how it could impact Cabot Microelectronics revenues in consumables going into the IC market?

Boy, Dmitry, I think there's still a lot of speculation about when 450-millimeter wafers will actually be a reality. There's some people that are talking 2016. Just yesterday, I heard someone talk 2020. But when it occurs is not really the issue, it will occur. I think from -- there is two aspects to it. From the pad side, I think the pad opportunity is really interesting for us. Because our technology lends itself to bigger form factors, particularly our D200 technology. So we see that as an opportunity for our pad business, if and when 450-millimeter wafers were ever to come on the scene.

From the slurry side, you know what happened when we went from 200- to 300-millimeter wafers. There was kind of a little plateauing as 300-millimeter fabs came on the scene and displaced 200-millimeter fabs, and the impact of more slurry per wafer but less slurry per dye. And that efficiency that our customers got that took kind of, maybe a year to wash out through the system as more 300-millimeter fabs were built. We'll probably see that same impact with 450-millimeter fabs. On the technical side, I think there will be a significant technical challenge involved with going from 300- to 450-millimeter wafers in the CMP processing, getting the slurry distributed across the wafer and minimizing edge effects, and all those things that occur at 300-millimeter wafers. Going from 200 to 300, I think they'll all be amplified at 450-millimeter wafers.

Okay, fair enough. That's all the questions I have, thank you.

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

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