Entegris Inc (ENTG) 2002 Q2 法說會逐字稿

Please stand by, the conference is about to begin. Good day, everyone, and welcome to Entegris' second quarter earnings release conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the call over to Heide Erikson, director of investor relations. Please go ahead, ma'am.

Thank you. Good afternoon, and again, thank you for joining Entegris' second quarter fiscal 2002 conference call. We issued our second quarter results just about 30 minutes ago. If you have not received a copy, and would like one, please call 952-556-8080, and we'll fax you a copy. Or, please go to our Web site at www.entegris.com.

Joining me today is Jim Dauwalter, president and chief executive officer, who is traveling and calling in from the road; and John Villas, executive vice president and chief financial officer.

Before we go into further details, let me not that certain matters we may discuss, other than historical information, may include forward-looking statements. Actual results, of course, could differ materially from the forward-looking statements we make. Additional information concerning the factors that could cause results to differ is contained in the 10-K and the first quarter 10-Q that we filed in January, 2002, and previous filings. Additional, or changed, factors, may also be mentioned on this call, and included in the Form 10-Q to be filed for the second fiscal quarter, 2002.

This takes care of the Safe Harbor language. This afternoon, John will take you through the numbers, and Jim will discuss Entegris' outlook, and give his feel of the business, and how Entegris is positioned. Finally, we'll take your questions. We plan to end the call by 5:30 PM, Eastern Time.

Now let me hand the call over to John Villas, our chief financial officer -- John.

Thank you, . We just reported our second quarter 2002, which ended March 2nd, with sales of $50.7 million, and a net loss of 1.4 million. We reported a net loss, but we reported a quarter with sales higher than what we had expected, and our first quarter of sequential improvement, since the second quarter of 2001. In addition, we continue to make progress on our balance sheet. We decreased inventories and accounts receivable, and we generated cash from operations this quarter of $7 million.

Market conditions are still challenging, but improving, and are trending in the right direction. We keep investing to support our customers, and we have some good indicators that if industry conditions improve, our financial leverage will increase. Why? Well, let me give you some background on this quarter's performance.

Sales increased by about 11 percent from the previous quarter. Our expectation was to report flat sales compared to last quarter. What happened? Sales for our products driven by wafer starts and chemical consumption, our unit driven products, continue to do very well. For example sales for our containers, in which chemicals are moved from the chemical manufacturing facilities to the fab, increased by over 50 percent.

Also during this quarter, our wafer shipping business increased by over 40 percent. We also saw some improvements in our sales that are driven by customer capital spending for the first time in the last four quarters. The area we saw the most movement was in 300 millimeter product sales, particularly our 300 millimeter . And what is especially encouraging sales our fluid handling products even those outside the container business improved.

Please take note I am now talking about improvements in capital spending sales and not declines. By business group this translated to a sales increase of about six percent from the previous quarter for our microelectronics group. This group was about 79 percent of our total sales. Fluid handling sales improved by 26 percent from the previous quarter driven by chemical containers and increases in capital spending products by our customers..

From a geographical perspective, sales decreased from the first quarter to the second quarter 2002 only in Japan. Economic conditions in Japan continued to be very difficult, which we believe is the primary reason for the weakness in this particular market. We saw the largest increases in sales in Europe and in Asia Pacific.

Overall second quarter fiscal 2002 sales were 46 percent to North America, 19 percent to Europe, 15 percent to Japan and 20 percent to Asia Pacific. The gross margin for the quarter was 33.4 percent compared to 33.1 percent during the first quarter of fiscal 2002. Generally, I would have expected gross margins to improve more from the first quarter given the increase in sales. However, as part of our heightened focus on inventory management and the close attention on our operations, we recorded high than normal inventory charges.

Our Japanese facilities were particularly scrutinized as part of the consolidation of our distributorship. Without this charge, gross margins would have been very comfortably above 35 percent. Company wide utilization is still below 30 percent, but in those plants where we primarily produce unit driven products, the utilization rates increased to between 60 and 70 percent. Again, we are calculating utilization rates based on running all of our equipment 24 hours a day, seven days a week.

SG&A expenses were $17.1 million for the quarter slightly below the first quarter of 2002. This is about the base run rate we expect going forward. As the market leader in materials integrity management, our customers look to us to develop new products, materials and solutions that solve our customers' problems. And that's why we invested about $4.8 million in the quarter on engineering, research and development. Despite the challenging industry conditions, we continue to support our current product line, develop new manufacturing technologies and develop next-generation products.

Other income was up this quarter, mainly due to favorable currency gains, half of which related to the realization of translation gains from our liquidated Korean entity. Minority interest and subsidiaries net loss was high this quarter because of losses sustained in our Japanese operations. This line will be gone in future quarters, as we now own 100 percent of our Japanese entities.

We recorded a net loss of $1.4 million for this quarter or $0.02 per share, compared to a pro forma net loss of $5.9 million or $0.05 per share for the previous quarter. Our balance sheet continues to be very strong. Cash and investments on hand are now $106 million, which is down about $7 million from the previous quarter. We bought out our minority interest partner in Japan and had higher capital expenditures compared to the previous quarter. Depreciation and amortization was approximately $7 million for the quarter.

I'd also like to call your attention to other significant cash flow items. Accounts receivable declined by about $4 million from the previous quarter. Inventories decreased by about $5 million for the same period. Roughly $1 million of this reduction relates to the higher than normal inventory charges. And, we again generated cash from operations this quarter to the tune of $7 million. We have been generating cash from operations during every quarter since we went public.

In summary, this was a quarter where we demonstrated once again our ability to manage our assets, and saw for the first time in four quarters an improvement in revenue and profit performance. With that as a background, I'm optimistic about our outlook for the next quarter and remainder of the fiscal year. We should continue to see improvements in our top and bottom lines, while still playing close attention to our balance sheet. The light at the end of the tunnel is not only visible, but also getting brighter.

Now I will turn the call over to Jim -- Jim.

Thanks, John.

Well I'm pleased with the numbers that we reported given the current industry conditions. I'm even more pleased when I analyze the trends and look at how we're positioned in the marketplace. Why? Well, first, the trend line in our business indicates that Entegris should be profitable again starting our third quarter. And we're continuing to work hard to achieve our 36-year profitability by the end of our fiscal year this August. And second, the continued progress we've made to both lower our costs, and increase manufacturing efficiencies, should lead to greater leverage as sales improve.

And third, and what I feel is most important, is our unique positioning with our customers that allowed us to reduce their costs, and help them improve their efficiencies and yields. Let me give you an example. We introduced our horizontal wafer shipping systems about a year ago to help our customers with the challenge of moving thin wafers. And I'm talking about wafers full of finished dye. I'm talking about wafers that have been thinned, and then need to be shipped around the world without breakage or contamination. Traditionally, most thin wafers were transported like any other wafer in silicon wafer shippers, or in what the industry calls "coin stacks."

This worked well for regular silicon wafers, but caused loss and contamination for thin wafers. You have to understand thin wafers are now as thin as 150 microns. This is about twice the thickness of a human hair. And the trend is to go even thinner. By comparison, a regular wafer is about five times thicker, so you can understand why preserving the integrity of thin wafers becomes more important. With the introduction of the horizontal wafer shipper, we've taken expertise gained in the front end of the industry, and applied it to solutions for backend processes. In addition, the Entregris horizontal wafer shipper addresses our customers' problem related to metal ions gathering on the surface of the wafer, which as you know, can destroy the circuits.

This ionic contamination is particularly challenging if the finished wafer is transported in human environments, or not immediately processed. And, since the majority of the backend processing is done in Southeast Asia, humidity does become a real challenge. As a result of implementing the Entegris solution, our customers see a decrease in their breakage rate from about 500 parts per million, to well under 50 parts per million. This is materials integrity management, and it really speaks to our leadership position. The reduction in parts per million translates into a yield improvement, and increased revenue for our customers. Depending on the value of the customers' wafers, these improvements enabled by Entegris technology, results in hundreds of thousands to millions of dollars on an annual basis. This is a great example of what we've been talking about with regards to materials integrity management, and how we provide value to our customers.

And what are the benefits to Entegris? Well we've seen sales in this product steadily increase even during the last few quarters. This speaks well to our leadership position in not only technology, but also the reliance that our customers have on us for solutions. Not bad for just one of the products we've introduced. And while I just gave an example of working with our customers, let me now switch to another advancement we've made regarding our internal efficiencies.

Let's talk about our diaphragm valves, the cornerstone of our fluid handling line. The majority of the valves we produce have a diaphragm that is made out of flexible Teflon. Because the diaphragm is so critical production of the diaphragm requires very tight tolerances and process controls. In the past, we used a four to five step manual intensive process with yields that did not meet our standards.

During the last month, we've developed a one-step highly automated proprietary process. With this new process, we've increased our capacity and improved quality. Thjis technique is so novel, we didn't want to reveal it in a patent application. We're treating this as a trade secret. We were able to do this thanks to the outstanding project team applying our core competencies of polymer science and producing a design that works in manufacturing.

What does this mean for our customers? Well we can deliver a critical product fast to our customers by eliminating a significant bottleneck. Again this is why we call ourselves the materials integrity management company and why we're the leader in this field. This is a win/win for Entegris and our customers. You know these examples also help us answer the question how is Entegris doing.

I believe that we've made significant strides in our manufacturing processes to increase our customer's yield and reduce costs while improving our market position. For example our fluid handling products have been qualified into the majority of OEM customers. As improve that should result in significant sales.

As the market leader in materials integrity management, our customers look to us for innovations that help move the industry to the next level and that's just what we've done. Based on enabling our customer's technologies and successfully positioning Entegris, we expect to see our market share increase as the industry grows. Over the last months, we've put our emphasis on what we can control and that's our cost structure and the leverage we have as sales improve.

Last quarter, we discussed that our break-even point has been lowered to roughly 55 million in sales. Once we move beyond this point, at least 50 percent of every additional sales dollar contributes to operating income. Now that's what I call financial leverage. It's a credit to our dedicated employees and my management team that we've made significant paradigm shifts on how we're doing things. The result: I believe we are getting even better at what we do.

In December, during our last conference call, we said it was too early to say improving industry conditions were a trend. Well, today, I can tell you, yes, we believe this is a trend and industry conditions are improving. Our sense is that we've reached the bottom and are on the way up. Why? Well, for a couple of reasons.

First, the sales for our products driven by capital spending are inching up slightly, and we're even starting to receive some expedited requests for such products in our fluid handling group. And, second, orders for our unit-driven products have continued to improve. Sequential improvements in sales are still mostly in the single digits. But, again, these are improvements. Sales are going in the right direction.

The fact is, I believe that the worst is over. Next quarter we should see sales improve again by about 10 percent, which should get us to just above our break-even level. And I believe this will be our first profitable quarter in the past year. And that's something to get excited about. But you know as I said at the beginning of the call, I'm even more thrilled about the cost structure improvements we've made internally which give us greater leverage in an upturn. And our successes over the last months, adding value to our customers by reducing their costs and increasing their yields and efficiencies. From my perspective, we are in an even better position to gain materials integrity management market share and to report solid financial results in the quarters ahead.

Again, I need to compliment and thank the women and men of Entegris worldwide who have made this happen, and to our loyal customers. You know, it takes courage for leaders to invest in all industry conditions. We've done that, and I'm convinced that we've invested in the right things.

We'll be glad to take your questions.

Our question and answer period will be conducted electronically. If you'd like to ask a question, simply press the star key, followed by the digit one, on your touch-tone phone. Again, that is star, one to ask a question, and we will pause a moment to assemble our question audience.

And our first question will come from with Merrill Lynch.

Hey, guys, congratulations on a nice quarter. Just a couple questions. First, in regards to some of the new product announcements you've been talking about in today's call in regards to wafer shipper -- the thin wafer shipper -- as well as dual containment product that you'd announced last week, does anybody else out there make any products like these, as far as you know?

There's a couple other products out there similar to this that has been in the marketplace, but actually, the combination of the technology, the material selection, and the then the processing that we're doing I think makes it rather unique. And is truly giving us some market advantage, because the customers are beginning to see some of the benefits of it.

OK, great.

And can you talk about the environment in pricing that you're seeing right now on a number of your products, both in the micro electronics as well as the fluid handling?

Well, there's always pricing pressure, particularly during the kind of industry conditions we've been under. And you know, a lot of times our competitors don't have the market strength that we do, and they try to hang on by cutting prices. Generally, we've been able to hold our pricing levels. And still help our customers increase their efficiencies or design costs. And you know, the other thing is that our customers want to do business with Entegris.

We are the leaders in material integrity management, and we have the financial strength and the product offering to support them, even through the downturn. So yes, there's pricing pressure out there, and our competition sometimes does some erratic things, but we're still the leader and are able to maintain our position.

OK, great. And in regard to some of the growth that you're seeing right now in the business, you mentioned that the capital spending side was coming in pretty strong. It almost sounded as though you guys were surprised by that? Is it fair to say you were a little surprised by the strength you're seeing on the capital spending side, even though on the unit turn side you've been seeing strength for a while? I guess actually I'm a little bit surprised by that as well, on the capital spending side. Is that what you were expecting at about this time, or is it coming a little bit earlier.

Well, I guess part of the surprise is the fact that it came. It's been a while since we've seen some of that. So I think that was more of a surprise than ... And you know, it's slight, but it's a beginning. And you know, there's been a lot of discussion about whether it's debt cap balance, or if it's -- you know, this is the real thing, but it's there and so we're reporting that we've seen some more activity going on, on that front.

OK.

Do you expect that to now? I think you said in the report quarter it's mostly 300-millimeter flute and just a little bit on the flute handling side. Do you think that's going to broaden out to some other areas as well?

Well I think that it's -- that becomes part of the ramp and you know there are I think everyone's familiar with the capital budgets that we're seeing our major customers talking about. And as those ramp up during the year and the spending occurs, we hope to participate in our share of it, but it's ever so slight at this time. And while we're encouraged by it, we're looking forward to what else can come from it.

OK great. And one last question I'm -- John on the gross margins make sure I understand this correctly. There were one-time charges I guess built into the -- into the -- some of the inventory numbers that's why your margins are a little bit lower. Is that correct and we should be using maybe a 35 percent basis going forward kind of for a modeling?

Yes we are not reflecting the inventory charges as one-time charges, but just letting you know that the -- we did some more than usual inventory charges during the quarter and that would have put our gross margins above 35 percent absent of those charges. So I think your assumptions as you stated are pretty valid.

OK great. Thanks a lot, guys.

Thank you.

And our next question comes from with Adams, Harkness & Hill.

John, could you give us a feeling for what the, assuming your revenues are up 10 percent, what that would do for your gross margins in the second quarter? And can you also talk maybe a little bit about the longer-term model. I mean you talk about all the improvements you've made. Have you made any investments to your longer-term profitability targets?

Yes, Fred in terms of the gross profit, I think as Jim mentioned, once we start to see increases in sales from this level, at least 50 percent of every dollar hits the operating income line. So we would expect gross margins to really feel, you know the great bulk of that line or that increase in sales. So I would expect gross margins to certainly improve next quarter and be up a couple of percentage points off this basis that we gave you, 35 percent.

In terms of the longer-term model, yeah we're certainly bullish about the fact that we have improved our cost structure, reduced our costs and increased our manufacturing efficiencies. So we think as sales increase and as industry rebounds, we're going to have even greater leverage as we work our customers solving their problems. And so I think that we would expect our gross margins and a rebound, a peak kind of cycle to get back into the gross margins, you know well above 50 percent and operating margins in the -- certainly the mid to upper 20 percent kind of range.

All right.

One other thing. Can you go over the -- what you said about capacity utilization that you ? I didn't quite understand it.

Yeah.

In general, our factory utilization was below 30 percent for the quarter, and I think it was below that as well for our first quarter. But for where we produce a lot of our unit-driven products, our utilization rate has actually increased between 60 and 70 percent. So utilization, I think you could say it was up a little bit this quarter, and certainly up quite a bit in some of the factories where we're running those unit-driven products.

I guess what I didn't understand is that most of your products are unit driven, therefore, how could overall be so low when your -- your unit-driven stuff is much higher?

Well our unit-driven sales, , we actually think for -- you know, for this quarter, or for generally at this time the first half of this year, a little more than 60 percent of our sales are purely unit driven. You know, less than 20 percent of our fluid sales are unit driven, and those are greatly tied to capital spending. So, on the whole, our utilization is still below 30 percent, and I would say not all of our sales are unit driven. It's more like about 60 percent in this environment.

OK, great -- thanks.

Thank you.

Thanks, .

And we'll remind everyone at this time, if you do have a question, press the star key, followed by the digit one on your touch-tone phone.

And we'll go next to with Salomon Smith Barney.

Thanks.

Good afternoon, everybody.

Hi, .

Hello, .

Question on other income, it was pretty big this quarter. Can you take us through that and what we should model going forward there?

Yeah. This quarter, , we had some favorable currency gains. As I stated, half of which related to realization of translation gains from our liquidated Korean entity.

OK.

So I would not expect that to be as high going forward. But I also would expect gross profits to be higher as well. So I think on the whole, those two items tend to cancel each other out. So gross profits should have been higher, and other income was probably overstated by -- in a normal quarter.

The other question I had was on this issue of utilization. As I recall, your peak utilization rate in the last cycle was about 56 percent. And it looks like that given the reduction in facilities that you've seen, you're going to be closer to 70 percent. What would the wafer -- you know, the -- or I guess the consumable-related utilization rates look like in that kind of environment?

In another peak rebound environment? Well I think there's -- you know, our unit-driven product, those were at 60 to 70 percent this quarter. I think in another rebound certain peak certainly rebound in sales of those products, we should be, you know, be 75 to 85 percent kind of range.

Yes, that's the same numbers I'd have said, John.

One other question is on the side. I know it's a pretty open field at this point, but do you have a sense as to what marketshare looks like there?

That's a somewhat of a tough one to answer, . You know, with the broad product offering that we have, it's more than just . It's about wafer shipping systems. It's about the wafer shippers themselves. It's about the processed products, the single wafer shippers.

And you know, on all fronts we are providing those products to all FAVs. And different facilities are spending at different levels right now, and in each of those areas, we're participating in that business.

OK. I think I'm good, thanks.

And again, we'll remind everyone, if you do have a question, press star one on your touch-tone phone. It is star one to ask a question, and we'll pause a moment to see if there are any additional questions today.

, I assume there are no more questions?

Yes, there are no more questions at this time. I'll turn the call over back to you for any closing remarks you may have.

Yes, thank you again for participating in the conference call. We appreciate your interest, and if you have any questions, feel free to give me a call at 952-556-8051.

Thank you.

Bye, bye.

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