CMC Materials, Inc. (CCMP) 2016 Q3 法說會逐字稿

Good day, ladies and gentleman, and welcome to the Cabot Microelectronics Third Quarter and Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over Trisha Tuntland, Director of Investor Relations. Madam, you may begin.

Good morning. With me today are David Li, President and CEO, and Bill Johnson, EVP and CFO. This morning, we reported results for our third quarter of fiscal year 2016, which ended June 30. 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 our SEC filings, including our report filed on Form 10-K for the fiscal year ended September 30, 2015. We assume no obligation to update any of this forward-looking information.

Also, our prepared remarks this morning reference non-GAAP financial measures. Our earnings release includes a reconciliation of GAAP to non-GAAP financial measures.

I will now turn the call over to David.

Thanks Trisha, good morning everyone and thanks for joining us. This morning, we announced strong results for our third quarter of fiscal 2016, which reflect improved semiconductor industry demand as expected and discussed during our second quarter conference call in April, as well as the continued successful execution of our strategic business initiatives. In particular, we continued to support our customers' transitions to advanced logic and memory applications using our Tungsten slurries, customer adoption of our CMP pad solutions and qualification of our new, high-performing dielectrics slurries.

We realized revenue of $108.2 million, approximately 11% higher than in the same quarter last year, including the benefit of our October, 2015 acquisition of NexPlanar Corporation. We achieved record quarterly revenue in our Tungsten slurry product area, and also significant year-over-year revenue growth in our Pads and Dielectrics slurry product areas. Our gross profit margin was 48.1% of revenue, and 49.2% on a non-GAAP basis, excluding amortization expense related to NexPlanar.

We achieved diluted earnings per share of $0.76, which represents an increase of approximately 95% compared to the prior year; non-GAAP earnings per share were $0.79, excluding NexPlanar acquisition-related costs and amortization expense. In addition, we continued our strong cash flow generation trend, with cash flow from operations of $25.1 million. Bill will provide more detail on our financial results later in the call.

Let me start with some perspectives on the global semiconductor industry environment. As forecasted by some of our customers and industry analysts, industry demand strengthened during the June quarter, and our results are consistent with this. Reports suggest that the stronger demand was driven by inventory replenishments and preparation for new product launches. As a result, exiting the June quarter, most IC inventories related to smartphone, wireless, network, automotive, and gaming markets were at normal seasonal levels. PC DRAM device inventories appear to still be in moderate oversupply due to soft PC demand. We expect that semiconductor device manufacturers will continue to adjust capacity utilization and output to actively manage inventories in the supply chain.

Looking ahead, based on all of this, some of our customers and industry analysts have reported expectations of continued solid demand during our fourth fiscal quarter. This is consistent with what I heard during my recent visits to Korea and Taiwan, and we have seen continued healthy demand for our CMP consumables products in July. Bill will provide more detail on our orders to date.

The view from SEMICON West earlier this month in San Francisco appeared to support this industry outlook. The overall tone was generally bullish for a stronger second half of 2016, and also for longer-term demand. This appears to be based in part on the outlook for 3D memory and FinFET. We believe that both of these technology advancements represent growth opportunities for us since they require more CMP polishing steps, for both tungsten and dielectrics applications, and we are seeing the benefit of our customers' early ramp of production. After several years of delays, it appears that 3D NAND is now more broadly ramping in high-volume manufacturing. As a result, 3D transitions from traditional planar, or 2D, are creating an overall tight NAND supply environment due to relatively strong demand for high-end mobile devices and solid-state drives, as memory manufacturers convert 2D capacity to 3D NAND.

For 3D NAND, we believe there is currently one leading memory player in high-volume manufacturing, and reports suggest that three other manufacturers are converting lines from 2D-to-3D. We would expect these manufacturers to transition towards high-volume production over the next six to 12 months. In FinFET, we believe there are a few leading logic players that are in high-volume manufacturing. Reports suggest that they continue to focus on improving yields, which has likely contributed to a slower ramp of production. Further, some of these manufacturers are also actively preparing for 10-nanometer and smaller technologies. For both 3D NAND and FinFET, we continue to collaborate with our customers and expect that others will migrate to these applications over time.

Another industry dynamic that we are closely monitoring is semiconductor industry development in China. This region continues to be in the spotlight, with a number of fab expansions announced, and significant domestic and international investment in both logic and memory capacity expected in the future. Semiconductor industry growth in China should be a strong driver of CMP consumables over the next several years, and we look forward to continuing to participate in growth in this region.

We remain confident about the important role, highly-engineered materials and highly-formulated CMP solutions like ours will play in the semiconductor industry going forward. We believe our global resources, capabilities and infrastructure uniquely position us to deliver innovative solutions to our customers around the world.

Within that semiconductor industry context, now let me turn to Company-related matters. During the quarter, we experienced robust demand for our tungsten and dielectric slurries and pad solutions. This drove approximately 13% year-on-year revenue growth from our IC CMP consumables products, and contributed to nearly 50% growth in China.

During the quarter, we continued to support our strategic customers' transitions to 3D NAND and FinFET technologies using our Tungsten slurries. As a result, we achieved record quarterly revenue in our Tungsten slurry product area, which grew 7% year-over-year. In Tungsten, we have developed an expansive portfolio of unique, high-performing solutions, which embody broad and deep technology, covering a wide range of applications and technology nodes, including the most advanced applications, with an accompanying vibrant intellectual property portfolio. This technology, along with our extensive experience in Tungsten CMP solutions, our supply chain capabilities and quality systems, along with our global technical support infrastructure, have enabled the leadership position we have earned in this area. From this strength, we expect continued growth in our Tungsten product area, as the industry continues to move to advanced applications.

Turning now to dielectric slurries, this quarter we continued to advance the broad transformation of this product area to drive profitable growth. Our progress on this initiative over the last several quarters was a key contributor to the approximately 14% year-over-year revenue growth we achieved. During the quarter, we continued qualification of our new, high-performing colloidal silica- and ceria-based dielectric slurries. We believe these CMP solutions provide benefits of higher removal rate, improved defectivity and lower cost of ownership. We have a strong pipeline of active opportunities around the world covering logic, memory and foundry customers, on both 300-millimeter and 200-millimeter platforms, and we look forward to winning more business with these products in the future.

Turning now to pads, this quarter we grew our CMP pad revenue by almost 82% year-on-year to approximately $14 million, including $6.4 million from NexPlanar.

During the quarter, we combined elements of both our Cabot Microelectronics and NexPlanar technology to expand our product offerings. As a result, we made further progress on the qualifications we discussed last April and in our third fiscal quarter, won new pad business in Korea with an existing leading memory customer. We also completed our transition to a direct sales model and are now utilizing our global sales channel to broaden the commercialization and adoption of our pad solutions.

Through business wins, we have also expanded our customer list, and are now selling pad products to eight of the Top 10 semiconductor manufacturers in the world, versus six previously. We continue to have a rich pipeline of new business opportunities with a wide range of customers, on both 300-millimeter and 200-millimeter platforms, and including combined slurry and pad consumable sets. In addition, we continue to experience significantly shorter qualification times for our NexPlanar pads, on the order of six months, versus 18 months with our prior efforts. We are pleased with the momentum we have generated in our pad product area since completing the NexPlanar acquisition, and we look forward to continuing this momentum and growth in the future.

To summarize, we continue to make progress on the execution of several strategic initiatives to drive profitable growth for our Company. We believe that our focused business model, along with our global resources, capabilities and infrastructure, differentiate our Company as a leader among suppliers to the semiconductor industry. Based on this, and general expectations of industry participants for continued solid near-term demand, we believe we are well-positioned for continued strong performance during the remainder of our fiscal year.

And with that, I will turn the call over to Bill for more detail on our financial results.

Thanks, Dave, and good morning everyone. Revenue for the third quarter of fiscal 2016 was $108.2 million, which represents an 11.3% increase from the same quarter last year, including the benefit of our NexPlanar acquisition. We generated 12.8% year-over-year revenue growth from our IC CMP consumables products. Year to date, revenue of $307.8 million represents a 2% decrease compared to fiscal 2015. This decrease reflects soft demand within the global semiconductor industry during the first half of the fiscal year, including continued soft demand for PCs, and competitive dynamics in certain dielectrics and data storage applications, all of which we have previously discussed. Foreign exchange rate changes reduced year-to-date revenue by $2.4 million, mainly due to the weaker Korean won versus the US dollar.

Drilling down into revenue by product area: Tungsten slurries contributed 43.1% of total quarterly revenue, with revenue up 7% from the same quarter a year ago. Our Tungsten product area achieved record revenue during the quarter. As Dave discussed, we continue to see strong demand for our Tungsten slurries for advanced applications, including FinFET and 3D memory.

Dielectrics slurries provided 23.4% of our revenue this quarter, with sales up 13.9% from the same quarter a year ago. During the quarter, we saw strong demand for some of our new, high-performing colloidal silica- and ceria-based dielectrics slurry products.

Sales of slurries for polishing metals other than Tungsten, including copper, aluminum and barrier, represented 14.8% of our total revenue, and decreased 5.2% from the same quarter last year. We believe this decrease was primarily due to our continued transition of customers from our legacy products to high-performing, lower-cost copper solution, which are sold as concentrated products, and customer efficiencies that impacted revenue from our aluminum slurries, both of which we have previously discussed.

Sales of our polishing pads, which include our NexPlanar acquisition, represented 13% of our total revenue for the quarter, and increased 81.8% compared to the same quarter last year. We expect the NexPlanar acquisition will continue to fuel growth in our pads product area, and we are encouraged by the customer response and wins to date.

Finally, revenue from our Engineered Surface Finishes area and data storage products represented 4.1% and 1.6% of our quarterly revenue, respectively.

Gross profit for the quarter was 48.1%. This reflects $1.1 million of NexPlanar amortization expense. Excluding this, non-GAAP gross profit was 49.2% of revenue, compared to the 50% of revenue we reported in the same quarter a year ago. Other factors impacting gross profit this quarter compared to last year include higher fixed manufacturing costs, including costs related to NexPlanar, and higher material costs, partially offset by the benefit of higher sales volume and lower incentive compensation costs.

Year to date, gross profit was 48.5% of revenue, which includes $0.7 million of acquisition-related costs and $3.2 million of amortization expense related to NexPlanar. Excluding these costs, year to date non-GAAP gross profit was 49.7% of revenue, compared to 51% last year. We currently expect to achieve gross profit for the full fiscal year around 49% of revenue, including NexPlanar, compared to our original GAAP guidance range of 49% to 51%.

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 $29.9 million were at the lowest level for our Company since the fourth fiscal quarter of 2009. Operating expenses were $3.5 million lower than the $33.4 million reported in the same quarter a year ago. This reflects lower incentive compensation costs, the absence of costs associated with last year's CEO transition, and benefits of cost discipline in light of the soft industry demand environment we experienced in the first half of the fiscal year, partially offset by NexPlanar costs.

Year to date, total operating expenses were $100.3 million, which includes $1.6 million of NexPlanar acquisition-related costs and $1.3 million of amortization expense. We are lowering our full fiscal year guidance range for operating expenses to $133 million to $135 million, including NexPlanar. Our prior guidance range was $139 million to $143 million. This is the third time we have lowered our full fiscal 2016 operating expense guidance.

Diluted earnings per share were $0.76 this quarter, or $0.79 on a non-GAAP basis, excluding costs related to the NexPlanar acquisition. This represents an increase of 94.9% compared to the $0.39 we reported in the third quarter of fiscal 2015, which included a $0.07 adverse impact related to costs associated with material quality and certain tax items. Our earnings this quarter reflect higher revenue, lower operating expenses and a lower tax rate. Year to date, diluted earnings per share were $1.59, or $1.77 on a non-GAAP basis, excluding costs related to the NexPlanar acquisition, compared to $1.75 last year, which included that $0.07 adverse impact.

Our effective tax rate for the third fiscal quarter was 9.6%, and 14.2% year-to-date. Our tax rate was lower this quarter primarily due to a $0.9 million incremental benefit related to domestic production deductions that we identified, and change in the mix of earnings between foreign and domestic operations. We now expect our effective tax rate for full fiscal year 2016 to be within the range of 15% to 17%, including NexPlanar; our prior guidance range was 18% to 21%.

Turning now to cash and balance sheet related items, our cash flow from operations was strong again this quarter, at $25.1 million. Depreciation and amortization expense was $6.6 million, including approximately $1.6 million of amortization expense related to NexPlanar. Capital investments for the quarter were $3.5 million, bringing our year-to-date capital spending to $13.8 million. For the full fiscal year, we continue to expect our capital spending to be within the range of $17 million to $20 million, including NexPlanar. We ended the quarter with a cash balance of $243.1 million, and have $157.5 million of debt outstanding.

Now I would like to offer a few comments on revenue and order patterns.

During the third fiscal quarter, we saw a 9% increase in revenue compared to the second quarter of fiscal 2016. Earlier, Dave talked about general expectations of industry participants for continued solid near-term semiconductor industry demand. Consistent with that, orders to date in July for our CMP consumables products are trending approximately 5% higher than the average rate in our third fiscal quarter.

To summarize, from a financial standpoint, as we think about full fiscal year 2016, industry expectations are for continuing firm near-term demand; we expect a solid gross margin, and significantly better performance on operating expense on continued cost discipline. Based on all of this, we believe we are well-positioned for continued strong performance through the rest of this fiscal year.

Now, I'll turn the call back to the operator, as we prepare to take your questions.

Thank you. (Operator Instructions) Dmitry Silversteyn, Longbow Research.

Good morning, Dmitry.

Good morning, Trisha, how are you?

Good.

A quick question or maybe a couple of questions if I may. First of all, on your SG&A expenses, which as Bill mentioned came down quite significantly and I understand sort of the one-time issues or the one-time non-repeats like the CEO transition, which has been sort of in the numbers before. So if you look at the reduction in R&D expense and general industrial expense (inaudible) particularly, how much of that is sort of cost control, how much of that is delayed spending perhaps. It will back, and how much of that is fundamental and you're going to be able to run on these levels even as your demand comes back, your revenues compared?

So our operating expenses in total for the quarter were $29.9 million and $4.7 million lower than the prior quarter. You remember in the second fiscal quarter we talked about kind of Calendarization effect of operating expenses in our second fiscal quarter, which is the first calendar quarter. Typically, we see higher costs related to the new calendar year like higher payroll taxes and some vacation accruals and things like that.

And then the subsequent quarter, usually that reverses and that's what we saw, so we saw one benefit of our recurrence or reversion to kind of a more normal fringe benefit rate.

We also saw lower incentive compensation cost and that's where of an adjustment based on quarterly accruals based on expectations for performance against goals, so that's not sort of an ongoing thing, but was an effective -- it was a cost reduction this quarter.

And then from an operational standpoint, and R&D you saw some lower cost related to R&D lab expenses, there is a significant spend item in our business of wafer cost in our clean rooms and we've had a program to more discipline around these and there was a pretty significant reduction this quarter and those materials for labs, that should be something that persist. But if you look at our full year operating expense guidance, it would imply $33 million to $35 million in the fourth fiscal quarter. So we would not expect $30 million kind of a rate this quarter to be ongoing.

Okay, all right. Bill, that's helpful. Thank you. Second question -- excuse me, you mentioned that building a direct sales force if I understood correctly for pads, is that right and sort of how do you see that -- if that is right and I understood you correctly, how is that going to help you with driving revenues for pads and executing your strategy of kind of bundling the pads and slurries together?

Yes, thanks, Dmitry. So, what we are talking about there is when we acquired NexPlanar, they had a very limited resource set in place to actually sell and support and in some regions, they were actually or most regions they were actually using agents or distributors. So one of the things we're really looking forward to leveraging is our existing global sales channel and we've done that, so we've gone direct and selling the NexPlanar pads along with our slurries, so that's just using and leveraging our existing sales channel, so that our sales teams that are currently selling our slurries and supporting from a technical support standpoint are also able to promote support the NexPlanar pads.

Okay. So it's more than incremental building the sales force. It was just basically unleashing it on NexPlanar's product?

Right. And so, what we've seen is just the ability to touch more customers, promote this solution at more customers as we talked about, we continue to expand our pipeline and we're selling now to 8 of the Top 10 and we continue to look forward and really pleased with the growth so far.

Got it, David. And then, one final question on the growth in Tungsten and dielectric slurries, let's talk about Tungsten specifically here. You mentioned the FinFet and the 3D memory of the drivers, how much do those -- do products for those applications now may comp up the Tungsten revenue or the Tungsten dielectric of revenue?

Yeah. So we talked about first, of course, we're proud of our accomplishments in Tungsten, including the record quarter we had this time, but we're far from satisfied, but if you look at how our products are positioned within those advanced technologies as you mentioned like FinFet, like 3D NAND, those are just starting to ramp up. So we talked about the end of last fiscal year was about 13% of our Tungsten revenue came from products supporting those advanced technologies and we'll continue to update that progress, but as we mentioned those technologies are just starting to ramp up.

(multiple speakers) of your revenue, so that's very encouraging. Thank you.

Dmitry, just to clarify, what we talked about, that was at the end of our fiscal year 2015 and we haven't provided information.

Also that was -- excuse me, 13% of our Tungsten revenue.

Right, right, I got it. Thank you.

Thanks, Dmitry.

Thank you, Dmitry. We'll take our next question please?

Amanda Scarnati, Citi.

Good morning, Amanda.

Good morning, thanks for taking my question. Just a quick clarification, I think it was mentioned that China was about 50% year-over-year growth in revenue. And is this a function of working with new customers as they're building fabs in China or is this working with the existing customer base that's expanding (inaudible) or is this new homegrown Chinese customers?

Thanks, Amanda. So let me start it, it's probably parts of both. So if you look at how we're positioned in China, we've historically had a very strong position in that region both with the domestic and international players. So for the folks as you mentioned that the Intel, the Samsung, TSMCs, SK Hynix, in many cases what they'll do is when they build a fab in China, they'll transfer existing processes to the facilities in China, so to the extent that we're -- the incumbent, we get transferred over.

And that's for the domestic players like the SMICs. We also had very strong relationship with them because I think they really appreciate the support that we provide the experience that we bring and for them, really it's knowing that we're bringing proven technology and products that are proven in HVM or high-volume manufacturing, so it reduces the risk for them.

So when we talk about China growth, it was really broad-based and across all of our segments, and as we mentioned -- and I know as you're following, there is a lot of developments happening in China, so we definitely think this is a growth opportunity for us and we look forward to continue to grow in China.

Great, thanks. And moving into the pads business, are you seeing increased ASP pressure from the incumbent supplier there as you're coming to market with these new NexPlanar product that compete more directly with them or is there sort of a status quo in terms of ASPs?

I think if you look at -- I mean if you look at our value proposition for our pads, it's not to go in at a lower price point versus the incumbent. What we've demonstrated our customers as we have a very significant deep activity advantage; in some cases that translates to improved yield and then for our customers, what they're showing is that the technology since it's also thermoset is much easier to qualify. So as we mention six months, we're seeing qualifications complete in the six months versus 18. And then, from a cost of ownership perspective, we're competitive.

So I would say that in general we're going -- and again back to the reason, why we really found the NexPlanar technology so appealing is that it's very complementary to how we position ourselves with slurry, which is really on value and performance rather than on price. So we're seeing that validated in the market today.

Great, thank you.

Thank you, Amanda.

(Operator Instructions) Edwin Mok, Needham.

Good morning, Edwin.

Good morning. Good morning guys, this is [Arthur] (inaudible) for Edwin. Congrats on the great quarter.

Hey, Arthur.

Thanks.

Thank you.

So first question is on gross margin, I saw that gross margin came in a little softer than expected this quarter and then you highlighted some factors that impacted it. Is there any way you can give us a sense of the impact of each of these factors and some of the drivers that you have in place to bring gross margin back up?

Yes, so our gross margin this quarter was 48.1% and then if you exclude NexPlanar amortization expense 49.2%. Since the NexPlanar acquisition -- NexPlanar has been your gross margin headwind and we've said that from the start that adds gross margins are lower than the Company average. So it could be -- it would be somewhat dilutive, but it's a large adjacent market and a lot of growth opportunities, so a lot of growth margin dollars available, even if it's at a lower gross margin percentage. So that was one factor, and that'll continue to be a factor I think.

In addition, we mentioned higher material cost based on some contracts we're absorbing some higher prices in abrasive particle, a legacy abrasive particle we use and we'll continue to see that as a headwind. But we did see the benefit of higher sales volume quarter-to-quarter with the higher revenue, higher sales volume, there is some better absorption of fixed costs.

One other factor like I mentioned in the comments on operating expense was lower incentive compensation cost also had an effect on gross margin. But as you look going forward, three important initiatives for the Company are growing pads, Tungsten growth with 3D NAND and FinFet and then dielectrics our transformation from older lower-performing products to new higher-performing colloidal silica and ceria-based products. Now two out of three of those would be beneficial to gross margin, so Tungsten will be positive. The transformation of the dielectric would be positive and then like I mentioned, pads is likely lower gross margin product.

Even within pads though, we have a lot of opportunities for operational improvements, efficiencies and in fact, right now, we're investing in additional capabilities in supply chain quality systems, things like that to improve yields and performance in the pad business. So I think we would expect to see improving yields within pads and then the benefits of Tungsten growth and the dielectrics transformation providing some additional tailwinds.

Overall, for the full fiscal year, we set guidance now at around 49% and then next quarter, we would give some update on outlook for fiscal 2017.

Great, thank you. That was very great color. So my next question is on dielectric slurries, I saw that it had very good growth this quarter. You mentioned that you've completed qualification for the silica and ceria-based slurries. So I was wondering if you can get a sense of when that qualification can potentially translate into revenues, when those revenues will most likely be most meaningful. And then do you have any other qualifications currently ongoing, I know you've mentioned some opportunities on the world with logic and (inaudible) customers?

Yes, thanks. So when we talked about both the colloidal and ceria, this is our efforts to transform our portfolio over an extended period of time and so for example, for ceria, we've had products in the market for a while. The colloidal-based products are newer family of products that we introduced in the last summer. And what we talked about in the past is just for the colloidal-based products we think they can target up to a $100 million of business opportunity and we're just getting started, so we're seeing a lot of traction, a lot of qualifications ongoing and we are certainly seeing revenue from that.

From a ceria perspective, we've had products in the market for a while. These are primarily for memory manufacturers. And so, we've had products with commercial sales for a while, but what we're really encouraged by is the overall progress on transforming the portfolio, one that was really based on a lower margin, older fumed silica-based technology into these two new particles and technologies that we've developed, and customer adoption seems to be going very well.

Great, thank you.

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

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.