CMC Materials, Inc. (CCMP) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2013 Cabot Microelectronics earnings conference call. My name is Andrew and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Trisha Tuntland, Manager of Investor Relations. Please proceed, ma'am.

Good morning. With me today are Bill Noglows, Chairman and CEO, and Bill Johnson, Executive Vice President and Chief Financial Officer. This morning we reported results for our second quarter of fiscal year 2013 which ended March 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 discussion 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 our SEC filings, including our report filed on Form 10-Q 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 second fiscal quarter of 2013. We believe our financial performance this quarter continues to demonstrate our ability to successfully manage our business over a range of industry conditions. Despite soft semiconductor industry demand and normal seasonal weakness during the quarter, we reported revenue of $100.4 million, gross profit margin of 48.2%, which is 210 basis points higher than the same quarter a year ago and 120 basis points higher than last quarter. In addition, earnings per share for the quarter were $0.40. Furthermore, for the first half of fiscal 2013, our financial performance reflects increases in revenue, gross margin, and net income compared to last year. Bill Johnson will provide more detail on our financial results later in the call.

Let me start this morning with an overview of the industry environment. Industry reports suggest that there is a slight oversupply of some IC inventories as of the end of the March quarter compared to normal inventory levels. In response to this, IC manufacturers appear to be adjusting their utilization rates to cautiously manage inventory in the supply chain. Indications are that manufacturers within the DRAM supply chain are being conservative, primarily due to the sluggish demand for PCs. The weak PC market is partly due to consumers favoring mobile devices, such as smartphones and tablets over PCs, a relatively weak reception for Windows 8, and an uncertain economic outlook. According to data from the International Data Corporation, PC shipments in the March quarter were down by approximately 14% year-over-year. This decrease marks the fourth consecutive quarter of year-on-year declines in PC shipments.

This sustained weakness in PC demand, despite the strong demand for mobile DRAM and NAND, is resulting in a negative net impact on the memory segment, which appears to be contributing to softer demand for some of our CMP consumables products. However, industry reports indicate that DRAM prices strengthened during the month of March, which suggests that inventory levels are approaching more normal levels. While actual IC units in calendar year 2012 were even with 2011 levels, industry analyss consensus for IC unit growth for calendar year 2013 continues to be between 3% and 7%. Additionally, the Semiconductor Industry Association reported that year-to-date global semiconductor sales through February were 2% higher than at the same point last year. Industry reports and some IC manufacturers continue to expect some strengthening in demand during the June and September quarters. Despite the usual limited visibility into near-term demand for our products, we believe that the positive trends in mobile connectivity, mobile devices, and cloud computing, as well as emerging markets will help offset the soft PC demand environment. We believe our global infrastructure and broad product portfolio position us well to respond quickly when industry demand strengthens.

Now let me discuss Company-related matters. As a result of our intensive focus on supporting our customers, as well as careful management of our supply chain to assure that we deliver innovative, reliable, high quality solutions to our customers, during the quarter we received two important supplier awards. We are honored to have earned Intel's most prestigious award for suppliers, the Supplier Continuous Quality Improvement award, and Texas Instruments' Supplier Excellence award for our performance in 2012. The criteria to win these awards are extremely rigorous. In particular, we are one of only eight of Intel's thousands of suppliers who won this award, and we are delighted to be recognized as an elite supplier within our customers' broader supply chains. We believe these supplier awards exemplify our commitment to deliver industry leading CMP consumable products while driving the highest standards for quality and continuous improvement throughout our robust supply chain.

Turning to trends within our core CMP consumables business, revenue from our CMP slurries increased year-over-year for the quarter and year-to-date, despite continued soft industry demand. In particular this quarter, we experienced increased demand for a number of our slurries for advanced dielectrics and aluminum applications by some of our foundry and memory customers, compared to both the same quarter last year and year-to-date. We continue to leverage our global capabilities to collaborate with our key strategic customers, and we remain committed to developing innovative solutions to help enable advanced node technologies.

Turning to our CMP polishing pads business, year-to-date our pads business grew 7% compared to last year, but we saw a sequential revenue reduction of 13% for the quarter. We believe this revenue reduction is primarily due to continued soft industry conditions, particularly at certain foundries. However, key to our value proposition in our pads business is longer pad life, and it appears that some customers are successfully polishing more wafers with our pads, thereby further extending the life of the pad. While this pad life extension validates a key element of our value proposition and reinforces customer loyalty to our products, it does serve to mitigate growth somewhat in the near-term. We expect that this product benefit and the associated customer value will provide long-term opportunities for new business wins in the future. In addition, during the quarter we captured new D100 and D200 business wins across multiple polishing applications with both new and existing customers.

Our Data Storage business grew for the second consecutive quarter, and it is notable that it grew during a period of generally weak PC demand. Industry reports suggest that demand may have stabilized to the pre-Thailand flood levels of 2011, largely driven by cloud computing and server infrastructure expansion.

Concluding my remarks this morning, we continue to execute our strategic business initiatives in order to enable technology advancements in the industry to meet the emerging and stringent needs of our customers. As we have demonstrated over the years, we continue to manage our business successfully over a range of industry environments. We remain excited about participating in a dynamic, consumer electronics driven industry with growing opportunities as new technologies are introduced to the marketplace.

And with that, I will turn the call over to Bill.

Thanks, Bill, and good morning, everyone.

Revenue for the second quarter of fiscal 2013 was $100.4 million, which reflects continued soft demand within the global semiconductor industry, coupled with traditional seasonal weakness we periodically experience during our second fiscal quarter of the year. Revenue was up by 1.1% from the same quarter last year and down 5.8% from the prior quarter. Year-to-date, revenue of $206.9 million represents an increase of 2.8% from the prior year.

Drilling down into revenue by business area, Tungsten slurries contributed 36.7% of total quarterly revenue, with revenue down 3.7% from the same quarter a year ago and down 9.6% sequentially. We believe the decline in demand for PCs, with the associated reduction in demand for DRAM, which Bill mentioned earlier, accounts for our lower Tungsten business revenue this quarter. Dielectric slurries provided 29.6% of our revenue this quarter, with sales up 9.3% from the same quarter a year ago and down 2.1% sequentially. Sales of Copper products, including slurries for polishing barrier and aluminum, represented 17% of our total revenue, and increased 6.2% from the same quarter last year, and decreased 5.2% sequentially. Sales of our polishing pads represented 7.4% of our total revenue for the quarter and reflect a decrease of 6.8% from the same quarter last year, and a decrease of 12.5% sequentially. We believe the sequential revenue reduction is primarily due to continued soft industry conditions, particularly at certain foundries, and partially due to a longer pad life value proposition. Data Storage products represented 5.4% of our quarterly revenue. This revenue was down 5.7% from the same quarter last year, and up 7.1% sequentially. Finally, revenue from our Engineered Surface Finishes business, which includes QED, generated 3.9% of our total sales, and was down 3.3% from the same quarter last year and down 0.8% sequentially.

Our gross profit this quarter represented 48.2% of revenue, which is up from 46.1 % in the same quarter a year ago, and up from 47% in the prior quarter. Compared to the year ago quarter, gross profit percentage increased primarily due to lower variable manufacturing costs and benefits associated with a weaker Japanese yen versus the US dollar, partially offset by a lower valued product mix. The increase in gross profit percentage versus the previous quarter was primarily due to lower variable and fixed manufacturing costs, including the positive impact of Japanese yen exchange rate changes, partially offset by lower sales volume and a lower valued product mix. Year-to-date, gross profit represented 47.6 % of revenue, which is in the upper half of our full year guidance range of 46% to 48% of revenue.

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 $34.4 million were $2.3 million lower than in the second quarter of fiscal 2012. The decrease was primarily due to the absence of bad debt expense related to a customer bankruptcy, partially offset by higher staffing-related costs. Operating expenses were approximately $1 million higher than in the previous quarter, primarily due to higher staffing-related costs that we typically see during the first quarter of the calendar year, partially offset by lower depreciation expense and lower clean room materials expense. Year-to-date, total operating expenses were $67.8 million, which is 4.1 % lower than during the same period last year. We continue to expect our full year operating expenses to be within a range of $132 million to $136 million for fiscal year 2013.

Diluted earnings per share were $0.40 this quarter, up from the $0.23 reported in the second quarter of fiscal 2012, primarily due to the absence of $0.12 attributable to certain adverse items recorded last year, as well as a higher gross profit margin. Our EPS was down from $0.41 in the prior quarter, mainly due to lower revenue, partially offset by a lower effective tax rate due to enacted tax legislation. Year-to-date, diluted earnings per share of $0.81 is up 19.1% compared to last year.

Turning now to cash and balance sheet-related items, capital investments for the quarter were $2.5 million, and depreciation and amortization expense was $5.1 million. We now expect our capital spending for the full year to be about $20 million, which is lower than our previous estimate of between $20 million and $25 million. We purchased $10 million of our stock during the quarter. And we ended the quarter with a cash balance of $188.4 million, which is $18.7 million higher than in the prior quarter. And we have $168.4 million of debt outstanding.

I'll conclude my remarks with a few comments on recent sales and order patterns. During the second fiscal quarter, we saw a decrease in revenue for our CMP consumables products of approximately 6% compared to the prior quarter. As we observe orders for our CMP consumables products received to date in April that we expect to ship by the end of the month, we see April results trending approximately 10% higher than the average rate in our second 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)

Eugene Fedotoff, Longbow Research.

Just to follow-up on your comment about April, Bill, does it feel like it's -- did demand hit the bottom and now recovering or it's just more sort of seasonal growth in April there?

Eugene, were you directing that question to Bill Johnson or Bill Noglows?

Bill Noglows. I'm sorry, doesn't matter I guess.

That doesn't matter, we're interchangeable. I think as we look back, the March quarter is traditionally and historically our weakest quarter of the fiscal year and we normally I think -- the numbers are 12 out of the last 13 quarters, we've seen the June quarter be stronger than the March quarter. So we certainly would expect this to be what I would describe as our normal seasonally weak quarter with anticipating a stronger quarter in the June quarter.

If we look at some of the announcements that have been made particularly by TSMC who's talking about a 17% growth in the second calendar quarter, they're a big, important customer of ours. They're at roughly 21% of our total revenue now. So we would expect to enjoy some of the growth that they're forecasting or predicting for the second quarter.

And then finally, Bill's comment about April sales being up approximately 10% over the March quarter. And I would repeat, he cautions as he always does, that three weeks is a limited window. But directionally, I think we can expect a stronger quarter next quarter.

Structurally, is there something happening in the industry? Do we see a stronger economic environment? I don't necessarily think so. So I think most of what we might see next quarter is just our normal seasonality and a pickup to get ready for the holiday season and the back-to-school season and all that normal seasonality in the industry.

Okay, thanks. And good gross margin improvement, 250 basis points year-over-year. How much was contribution from weaker yen versus the US dollar?

That was about 100 basis points on the year-over-year and sequential. It was roughly even.

Do you expect a slightly higher contribution going forward, maybe in the next couple of quarters?

There probably some tailwind with respect to foreign exchange and the weaker yen. We have revenue and cost denominated in yen, but more cost than revenue. So weaker yen benefits our gross margin.

So if you look at year-over-year, last year at this quarter the average exchange rate over the three month period was around JPY78 per dollar. For this quarter, it was around JPY90 per dollar. So a significant increase, but the yen is currently trading about JPY99 per dollar. So if that persists then you would have some continued weakening quarter-to-quarter, and that would provide some additional tailwind on gross margin.

Okay, got it. Thank you. And the final question on general expenses, G&A increased about $2 million year-over-year. So what was driving it?

Is it the new run rate for G&A? Also can you talk if it's staffing related, what areas you're investing in?

No, it's not a structural change. If you look at -- there's some seasonality to our operating expense in total, and the March quarter tends to be a bit higher in terms of staffing related costs because with a new calendar quarter, typically, there might be a merit salary increase that goes into effect January 1. And then you also have a new calendar quarter for payroll taxes that we would pay that start up fresh in a new calendar quarter. And we also have our March -- our annual meeting and an equity award for directors in the March quarter.

All those things provide some seasonality. I think year-over-year, it's mainly staffing related expense, not necessarily a big increase in headcount, but some seasonality and also accruals related to our annual bonus plan. But I think we're a little stronger this quarter than in the same quarter last year.

Actually, I'm sorry, one more question. Can you provide a little bit more color on your exposure to PC versus mobile devices and versus industrial customers there?

As you know, we have a pretty broad customer base. We essentially sell a product to every semiconductor manufacturer in the world today. I'm looking to Bill to see if we actually have a breakout of what percentage of our revenue we think goes through PCs, and I don't think we have that number, Eugene.

I think in the quarter, we talked about in our prepared comments, the memory segment is an important segment for us and we've seen DRAM suffer a bit as a result of the decline in the PC markets. The DRAM technology tends to be a little more CMP intensive than the NAND technology. So I think that impact is a little multiplied when we talk about NAND being down.

However, we're seeing indications that NAND is strengthening. Hynix just reported I think yesterday and they reported strengthening pricing on NAND. So we're hopeful that maybe going forward we see a little more strength in the NAND and DRAM in the memory segment.

Avinash Kant, D.A. Davidson.

This is Karen filling in for Avinash.

You mentioned that TSMC is around 21% of total revenues now, which sounds like it's increased a bit. I was just wondering if you've seen any other change in the mix with your other customers? Because historically CCMP has seen a strong correlation with TSMC, but lately it looks like the correlation has been breaking down. So I just wasn't sure if you could add to the customer weight.

I think that's a great question. As of the first six months of this fiscal year, TSMC is 21% and Samsung is 14%. And I think that percentage of the memory business within the total revenue of our Company has steadily increased over the last six or seven quarters.

So I think part of the break in that correlation is probably the result of two things. It's the result of our increasing presence in the memory segment, and the increasing influence of companies like Samsung and Hynix and the other memory manufacturers. As well as we've described it as -- I'm not sure we described it this way, but winners and losers in the mobile connectivity space of consumer electronics. Right now if you're a supplier to Samsung and Apple, you're doing fairly well. If you're not, kind of bad luck.

And I think what we're seeing is a little bit of that in the marketplace. And because of our exposure, our broad exposure to the overall market, I said earlier, we sell to everybody. So as we enjoy the growth at TSMC and Samsung, we're at the same time we're watching some of our other customers suffer and decline. So I think that's probably what has attributed -- those two factors have attributed to the break in the correlation between our sales and TSMC sales.

Right, and further to that, with respect to TSMC, here's a data point. Year-over-year, TSMC's total revenue is up around 26%, whereas the overall semiconductor industry is relatively flat year-over-year. So clearly, TSMC is really breaking out with a lot of strength at 28-nanometer in particular for example. We continue to grow with TSMC.

So in the first six months, 21% of our revenue is TSMC, and that's up from the same percentage of last year at this time. So we continue to grow with TSMC, but like Bill says, the rest of the industry is not keeping up with them. So really the math just works that we can't grow as fast as they are. And so the correlation is not close like it was before.

Okay, that's really helpful. And just secondly, another way to look at it, some of the other companies we've heard from have commented on a flattish wafer start environment for Q1. So I was just wondering what you would attribute your 6% sequential decline in revenues to?

Pads was down sequentially around 12.5%. Our QED was kind of flattish to down I think year-over-year. We don't attribute any -- there was no market share loss or anything like that. It was more customer specific order patterns and things like that, but the pads in particular piece of it pulled things down a bit.

Okay. Could you comment on your outlook for pads' growth potential for the year?

I think, as you know, we don't provide guidance and we don't provide forecasts on our business or some of our sub businesses. I think in general we would describe our excitement and optimism with our pad business. I think in my prepared comments this morning, I mentioned that we had won new customers and new applications for both D100 and D200. Our D200 technology continues to demonstrate an ability to meet very specific requirements of our customers. And our ability to tune those product parameters is kind of unique in our space, and it's getting a lot of interest and a lot of traction.

Although we're seeing our revenue decline as a result of our customers using our pads and really squeezing the value proposition out of them in terms of longer pad life, we're delighted that they're proving our value proposition and extending the life of the pads and getting the value. So that's taken a lot longer than we had hoped it would. We sell to a very conservative group of customers when it comes to manufacturing. They don't like change. They don't like to push too hard on these technologies.

But what they're doing now is proving out what we told them we would deliver in terms of value, and we think that will drive future sales. We think that will drive customer loyalty. And we think that will drive increased interest in our next generation pad technologies.

Okay, thank you. And then just lastly, I was just -- you mentioned the pick-up in memory. Could you break down the end market exposure between foundry memory and logic?

Roughly 50% of our revenue is foundry, 20% is advanced logic, and 30% is memory. But one of the things as Bill mentioned, if you look -- periodically we've talked about -- you see the growth in our sales to Samsung in particular, and we've talked about growth year-over-year in Korea. And so we feel like we're making some progress in picking up business, especially in the memory area.

Okay. But it really hasn't changed much then?

No, not on a full -- and what I'm quoting is kind of still full year FY 2012 compared -- and that was flat with FY 2011.

Okay.

It takes quite a bit to move that, and I'm really talking in pretty round numbers there.

Okay, that's helpful. Thank you.

Jairam Nathan, Sidoti.

Again, just kind of concentrating on a sequential decline, we also saw Tungsten coming down 9% sequentially. Now, if I look at your peers, ATM consumer peers, ATMI or Entegris or someone, they kind of indicated flat to down 1% kind of revenues. So I'm just wondering, was there any pricing impact or anything else that hit you in this quarter?

I think as Bill answered the previous question, Jairam, we don't see any market share loss. We haven't had any significant price moves. We just think what we're seeing is -- it may be a little different than some of the peers you mentioned. It's just order patterns and inventory puts and takes along the way.

But we don't see anything exceptional in the quarter in terms of share shifts or any meaningful price adjustments or changes.

And in particular with respect to Tungsten, the turndown in DRAM we think had a pretty significant impact on that sequential reduction. So in advanced DRAM there are four polish steps for Tungsten. In NAND, there's two. So there is -- at the advanced technologies, there's a disproportional impact of a downturn on Tungsten for DRAM versus NAND.

Okay, thanks. And my second question was on operating expenses. Year-to-date, you have spent like $68 million around, and you're guiding $132 million to $136 million for the year. So does that imply that the operating level is -- it implies some pretty good operating leverage in the sense, even as revenues go up, you don't -- you expect operating expense to be flat to down?

That's right, I think in terms of flattish. A lot of operating expense is pretty fixed, it's people. And we've been relatively stable in terms of the human resources and capabilities we've maintained, and we're being careful about adding resources. So yes, we feel like revenue could increase without driving much of an increase in operating expense.

Okay. And lastly, could you give us -- do you have a feel for the tax rate for the full year?

Yes, still 34% to 35%. That kind of a range.

Chris Kapsch, Topeka Capital Markets.

I wanted to follow-up on the sequential trends, and specifically the notion of how the orders look thus far into April. I think you said tracking 10% higher sequentially versus the March quarter. So I'm wondering, against the context of the comments you made about the DRAM market and then the DRAM pricing looking at like an inflection in March.

I'm wondering if the 10% order growth vis-a-vis March that you've seen so far, is it balanced across different IT manufacturers? Or are you seeing any particular strength? Is there any sign that the DRAM guys are increasing their utilization rates following that inflection in pricing?

Within a month, we really don't have that kind of visibility. That's where detail comes out of a month or a quarter close. So all we can see now are the broad trends. And there's a clear month-to-date -- an increase versus the average rate during the March quarter.

In the March quarter, there's some fluctuations month to month. January was relatively strong and then February, a short month, revenue was quite a bit weaker, and then a little bit stronger in March. But across that average, now April is around 10% higher. But yes, no visibility yet to what the individual components that might be driving that.

Okay. And then just to follow-up on that, just looking back at the last 10 years or so, eyeballing your fiscal third quarter. The 10%, obviously just 3 weeks into April it's hard to say where this plays out, but relative to your normal seasonality, is that on par or a little bit stronger seasonally versus typically the March quarter? It looks like, eyeballing the last 10 years, it looks like it would be actually stronger seasonally than what you might normally see.

Statistically, if you look at the last 12 out of the last 13 years we've seen sequential revenue growth from March to the June quarter, and it's kind of been all over the map. A lot of it depends upon the economic environment. So the seasonal trends are one input, but a lot of times they're swamped by broader changes either in the industry or the economic environment. But comparing to the average March to June change or increase over our history, 10% is high, but it's early in the quarter and there are a lot of other factors at work than just seasonality.

Right, okay. And then just circling back on the gross margin performance, if you exclude the benefit of the yen, it looks like if you said roughly 100 basis points, it would be 47.2%, still up 110 basis points year-over-year. So I guess you called out the lower variable manufacturing costs at a time when volumes are sort of weak. I'm just wondering what's contributing to the lower manufacturing costs?

We have an ongoing program, a Six Sigma program to take out variability in our manufacturing processes. So I think we've had continued sustained improvement there. Some of this is also sort of episodic. We had some fluctuation quarter-to-quarter really aside from the broader trends.

But I think our yields are good. In our slurry operations our yields are improving in the pad operations. And so those are both good things and contributing to the good cost performance.

Got you. And then typically, one of the more relevant COGS components is your silica abrasive. And I think typically the supply contract for that is annual based on the calendar, not your fiscal year.

So I'm just wondering if raws are benign? Or are you incurring higher costs and yet still able to post this lower manufacturing cost and higher gross margin?

We renewed -- it's not an annual contract, it's multi-year. And we renewed our contract I think effective January 1 with one key supplier. And for the March quarter there's no impact of that new contract.

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.