Entegris Inc (ENTG) 2002 Q3 法說會逐字稿

Good day everyone and welcome to the Entegris third quarter earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Heidi Ericksen director of investor relations. Please go ahead.

Good afternoon, and thank you for joining Entegris third quarter conference call. We issued our third quarter results about 30 minutes ago. If you have not received a copy and would like to be added to our distribution list, please call 952-556-8080, or you can access the release on our web site at WWW.Entegris.com. Joining me today is Jim Dauwalter, president and chief executive officer, and also John Villas our chief financial officer. Before we get into further details let me note 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. Additional information concerning the factors that could cause this information to differ is contained in the 10-K and second quarter 10-Q filed in April 2002 and also previous filings. Additional or changed factors may also be mentioned on this call and included in the form 10-Q filed for the third quarter fiscal 2002. This takes care of the safe harbor language. This afternoon John will take you through the numbers and Jim will give you his view of the business, how Entegris is positioned and to discuss Entegris' outlook. Finally we will take your questions. We plan to end the call by 5:30 EST. I'll hand the call over to John Villas, our chief financial officer.

Thank you. We just reported our third quarter 2002 which ended June 1st. The leverage from increased sales led to results that significantly exceeded our expectations. We reported sales of 59.7 million dollars, and a net income of 2.8 million or four cents per share on a proforma basis. Including some one-time benefits, we reported 5.2 million dollars in net income, or seven cents per share. Last quarter I told you that market conditions were still challenging but improving and that we had some good indicators that as industry conditions improved our financial leverage would increase. That's exactly what happened. Sales increased by nearly 18 percent from the previous quarter. We had expected a sales increase of about 10 percent. What drove the larger than expected sequential increase? We had continued strength in our unit driven product sales which increased as more wafers are being produced and devices are manufactured. Unit driven sales category: We find sales for chemical containers wafer shippers and packaging products. Sequential improvement for unit driven sales from second to third quarter were not as strong from the first to second quarter of our fiscal year 2002. But we did sales increases in the double digits percentage areas for most of the unit driven products. We estimate that sales for our unit driven products were just about 60 percent of our total sales during the third quarter. The surprise was more in the strength of the sales driven by customers's capital spending. In micro electronics group sales for wafer for 200 mm increased significantly, but also smaller wafer sized products with respect strong. We had two large fab conversions to 200 millimeter wafer carrier, customers were replacing carriers for all wafer sizes as utilization rates increased. Overall sales for the micro electronics increased by 10 percent for the second to the third quarter in 2002, totaled 73 percent of Entegris's sales. Fluid handling, improvement was more dramatic. Quarter to quarter sales increased by 51 percent to make up 27 percent of total Entegris sales. As you know, sales for the fluid hamon group are tied more directly to increases in capital spending. In some product areas more than doubled in the previous quarter. Challeng for us was to ramp as fast as possible, even though our overall sales in this group are still about half the previous peak levels Fluid handling sales increased significantly in all geographic regions but were particularly strong in North America where many of the global semiconductor equipment companies are located. Micro electronics experienced largest in Asia Pacific and North America. Overall business conditions in U.S. and Japan are not as strong in Asia Pacific and North America. Third quarter fiscal 2002 by geographic region were 50 percent North America, 50 percent to Europe, 13 percent to Japan, 21 percent to Asia Pacific. The gross margin was 47.1 percent during the third quarter of fiscal 2002. It was an exceptional improvement in second quarter's 33.4 percent and came in well above our expectations. In this case at least a portion of this improvement is related to a very favorable product mix. Generally our products have similar margins. With over 10,000 active products there are differences. However, I attribute most of the improvement to our ability to execute on our one/two punch of reducing costs in increasing manufactured deficiencies. We have discussed this initiave over the last several quarters. We closed plants, in creased automation, changed our process flows and instituted manufacturing centers of excellence. SG and A expenses were 19 million dollars per the quarter compared to 17.2 million for the second quarter of 2002. This was primarily related to increased sales commissions, reinstating the some incentive compensation and sales increased increased and profitability and allowing as accounts receivable level rose. In absolute dollars, SG and A expenses will increase as sales improve and profit sharing and shareholder (inaudible)kick in. As percentage of sales SGA was 38 percent down from 33.9 percent in the second quarter. I would expect SG and A expenses to be up marginally in the gross dollars for our fourth quarter. We invested 4.5 million dollars in engineering research and development. That's about the level we expect to invest quarterly to develop new products and materials, solutions to solve our customers' problems. During the quarter the company reported a one-time pretax benefit of 1.6 million dollars. This is a reversal of previous accruals related to the plant closures of some of our facilities within the last fourth quarters. The effective tax rate for the quarter is 16.1 percent, includes a one-time tax benefit of 1.4 million dollars related to the treatment of earnings from certain non-U.S. subsidiaries. That calculation and fairly low profitability levels become complicated. Therefore, it's difficult to estimate taxes expenses for our full fiscal year. We reported a net income of 5.$2 million, seven cents per share or 2.8 million dollars and four cents per share on a pro forma basis for the third quarter. This is the first quarter this fiscal year in which we've reported a profit. Given the industry conditions, this truly is a significant accomplishment. Our balance sheet continues to be very strong. Cash and investments on hand are now 108 million dollars up one million dollars from the previous quarter. Accounts receivable increased to nearly 40 million dollars, up 7.6 million from last quarter. Sales outstanding are well beyond our expectations at this stage of ramp of the industry cycle. Inventory stayed flat in the last quarter as 39 million dollars. As part of our part of increasing manufacturing efficiencies we worked on inventory levels. We've seen successes in these efforts. My expectations are that under similar industry conditions, these significantly lower inventory levels than at the last peak of the cycle. In all quarters of this fiscal year we generated cash from operations even when we reported a net loss. This quarter we generated $2 million even after accounting for the increase in accounts receivable. We have a cash position while still acquiring some key technology and capabilities over the last year. So cash transactions and optimizer infrastructures. These actions position us to better anticipate and respond to our customers needs. Depreciation and amortization was approximately 6.8 million dollars for the quarter. Capital expenditures were about 8 million. We invested in a remodeling of certain facilities including our Gilroy, California facility, which was reopened at the end of May. Most of our U.S. offsite cleaning equipment and service capabilities are now housed in this facility. We continue to expect to send between 20 to 25 million dollars in total capital expenditures occurring our fiscal year 2002. As the chief financial officer for Entegris, I'm very pleased with our performance this quarter. We reported sales above expectations, gross margins improved 47.1 percent largely because of the success of our one/two punch effort to reduce costs and in crease efficiencies. Our balance sheet is very strong with 108 million dollars in cash and good asset management. And I believe our goal of reporting our 36-year profitability is very achievable at this point. We have tremendous accomplishment that the entire organization should be proud of and deserves credit for. Now I'll turn the call over to Jim.

Thank you, John, and thanks to the employees and the customers of Entegris. This was a regarding quarter. We had to ramp our production, proceedive respond to our customers' needs and deal with continued uncertainty in the market. Let me briefly cover three key points. First, we saw real results in executing our one, two punch of reducing cost and increasing efficiencies. And we were reregarded by returning to profitability and exceeding our third quarter expectations. Second, we expect Entegris sales to improve again during our fourth quarter. And we expect to be profitable for the full fiscal year. Our 36TH consecutive year of achieving this milestone. But third, I believe we're well positioned with our customers. We have the structure in place to serve our current and future markets. From my perspective, those three points add up to exceptional performance. Now, I'd like to focus on five topics. Our view of the industry conditions, China. Our recently held materials integrity management symposium. Our new organizational structure and the Entegris outlook. The last few weeks have been dominated with reports of uncertainty across the industry and everyone is wondering is this improvement sustainable. Efficiently ever company in the semiconductor industry is a customer of Entegris. We have touch points throughout the industry, from wafer growers to equipment manufacturers to the device manufacturers to the test assembly packaging warehouses. We look at the market conditions from two perspectives. Our unit driven sales and our capital equipment driven sales. Are you in a driven sales, depend on how many wafers and chips are produced and the quantity of chemicals used to begin the fab. As John just discussed, unit driven sales such as wafer shippers and chemical delivery products showed continued growth in the third quarter. As we all know, the utilization rates of the fabs have increased over the last months. In some areas capacity is tight. Particularly in the leading edge facilities where ICs with line lists of below 1.8 microns are produced. Increases in utilization rates generally translates into more demand for our unit driven products. Our product sales driven by capital spending saw a very strong pickup, particularly for fluid handling products. To give you an example. MP international, the fluid measurement and control company we acquired a year ago last May had order levels during this last quarter approaching those during the peak of the last cycle. This also speaks well for the work we have done in positioning new products with our customers during the down cycle. To look at the continuous buildout of 300 millimeter facilities, the conversion of 200 millimeter facilities and the order rate at our OEM customers, we expect capital driven product sales to move up again in our fourth quarter. You know, as we've been telling you, we sell to every fab worldwide. They're producing products for every industry in the world. So it's not so much the specific end markets, but the total consumption of silica that really impacts our business. With that as back ground, we believe that the current momentum will carry us through our next quarter and we will again see sales of improvement for Entegris during our fourth quarter 2002. I have said before, Entegris is recognized in the industry as the leader in material integrity management. At the beginning of the month we had our second annual ingetrity management symposium where 100 experts came together and learned about new developments and increasing importance of focusing on integrity of materials wherever they are. Why is that so important? Because critical materials, if not managed properly, can cause lower yields in a fab that would be hard to pinpoint. Several of the 16 industry experts presenting said that to avoid these problems it's essential that leading suppliers like Entegris work closely together. As Araj Amani from AMD said I quote I'm a true believer of dealing with suppliers and building up front partnerships. Close quote. I believe building partnerships truly is one of the key strengths of Entegris. Few companies understand materials integrity management as well as we do. Even fewer have the reputation and expertise to attract world class speakers and an interested audience for a premier industry event such as the second annual materials integrity management symposium. Our leadership and materials integrity management transcends continents. Today I'd like to focus on China. Clearly China will be a very important market in the future. At this time it's all about being properly positioned. Today, there are 3 tier one companies fully up and running in China. (Motorola) NEC and SMIC. GSMC is still under construction and in the process of making final equipment selections. There are also a number of tier two and tier three fabs that primarily run wafers below 200 millimeter. These are typically joint venture for government sponsored companies. Across all three tiers Entegris has a very strong market position. Each one of these fabs is our customer. We have a particularly strong market position with our wafer carrier products. However, our sales range across the entire spectrum. We sell the wafer shippers to the wafer growers in China. We sell our wafer carriers and pods direct to fab, fluid handling products through distributors. The fluid handling also reaches the fab through the equipment manufacturers. We sell our back end products to assembly and packaging houses. And we provide our service offerings to each of these market segments. Although we have not positioned we have significant market share across all of our product offerings. We're as our commerce with sales in Shanghai and Beijing and a service center located in the region. In other words, we have the infrastructure in place to support the growing chinese customer base. I'm optimistic about our China outlook because of our leadership position and ntegrity management and our excellent reputation with working with customers around the world. Let me emphasize we're committed to this vast country and its market. Let's shift gears from China to our recent organizational change. Entegris sales today are largely driven by semiconductor street conditions. Our vision of the future is that we'll balance our dependency on this market with additional diversification. A few weeks ago we made an important reorganization announcement. This announcement is about growth and it's about expansion. We want to maximize the growth in the semiconductor industry and that of the storage market, while expanding into new markets. We changed the organizational structure from our former microelectronics and fluid handling product groups into a high technology focused markets which include semiconductor, data storage, life science, and a new exciting area to be announced later this summer. Two key executives will be in charge of the two market segments. This is Frank Sidell, former pres. Of the fluid handling group will lead our efforts into the life science markets. As you know, Mr. Sidell is an expert in fluid handling applications, was fundamental in the Entegris success of fluid handling market. My expectation is that under Mr. Sidell's leadership we'll significantly expand our position in this market. The second seasoned exective in charge of new markets is John Goodman. He's been our chief technology officer. He'll head up a up a new market. Stay tuned for an additional announcement in the coming months. We believe we have the expertise in each of our fluid market focus groups to continue the excellent job we've done with customers and developing technology in this project meant. I'd like to take this opportunity to thank both Frank and John for their many years of excellent leadership. As I expect greater success from them in the future. Michael Wright, formerly the president of the microelectronics group is now entegris' chief operating officer. All of our different market and service executives will be reporting to him. I'm proud of this very talented team of leaders. With this reorganization we're focusing our efforts on growing Entegris's competitive markets here and successfully extending Entegris's products and services into all of our markets. Today sales outside the micro electronics market make up less than 5 percent of our overall revenues. Our goal is to substantailly increase our total sales coming from new markets by fiscal year 2004. So what does this all mean for Entegris? For our fourth quarter 2002 our outlook is as follows. We expect to report sales of about 62 to 66 million dollars. We also expect to report another profitable quarter, and we believe we will be profitable for our 36th consecutive year. We'll continue on focusing growing our leadership position as the materials integrity manager leader providing products and services that protect and transport the critical material that enables high technology. Once again, we delivered on what we promised. We delivered even under difficult industry conditions. We delivered by focusing on what we can control. This has carried us through this industry cycle and I expect you'll see an even stronger more formidable entegris in the future. Let me emphasize we have a very strong management team, a history of delivering results and a value's based organization that has been very successful in maintaining and growing our market leadership and materials integrity management, and our success continues. With that, we'll take your questions

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star followed by the digit one on your touch tone phone. Once again that's star 1 for questions and we'll take our first question from Glen Young with Salomon Smith Barney.

This is Karen (Landown). Congratulations on a great quarter. Just a couple of quick questions. When you look at the markets where you're seeing strength,, can you tell us what type of customers you're seeing the growth coming from?

With all of our touch points, that's passing a broad spectrum of customers. The wafer growers, we've seen improvement, along with the chemical manufacturers. And then most recently some of the OEM community as they've had an increase in some of their equipment. So it really did become several fronts, but no one specific technology has driven it.

And then just a little bit about the margins next quarter. Where you expect them to come in, sounds like a little bit lower.

we didn't say we expect gross margins to show slight improvement. We did guideance for SG and A would be up slightly in terms of gross dollars. R and D should be in the same range. So based on that we expect margins to be up somewhat, not down.

Thanks

We go next to Brett (Hotis) with Merrill Lynch .

Congratulations also, excellent execution on the margin side as well. A couple questions about on the gross margins you mentioned it's mostly the one two punch, John, that gave the upside there. But some of it obviously came from fixed cost absorption. Some came from, you mentioned, mix. So was the mix still heavily weighted to an area that had higher margins, that is, revenuse stay up to grow from year to year, will we see it to dip down or shall we see more improvements as the revenue is improving beyond this quarter.

I think we do attribute a lot of the improvement in gross margins to the leverage we obtained from the one/two punch reducing our costs, increasing our efficiencies. A portion of the improved gross margin was related to some of the mix. Certain of our products do have a better gross margin. They aren't all equal across the spectrum. But I do expect that with our positioning, working with our customers to solve their problems, we can continue to show sequential improvement in gross margins like we did this quarter, but there are some risks that there will be a slight decline in gross margins if certain products kick in higher than others. I think over the longer term, over the next couple of quarters it will all balance out. So when we have a great quarter like this, we're pleased with that. We're still planning to execute and imporve the gross margins over time.

One bookkeeping question and then one more question. Do you account for the coming quarter now that you'll be - you're solidly profitable again.

our share confidence for the quarter was just under 75.6 million on a fully diluted basis. We estimate for next quarter to be just over 76 million on a fully diluted basis.

Final question. This quarter you had two customers which switched over fast to the peak 200 millimeter wafer carriers. Two questions there: Do you continue to see customers switching over to that product, which I know is a very good sizable sales for you. If you start to go to 300 millmeter, do you see people using the peak (inaudible) as well, which continues to give you a performance and cost, price benefit.

That's a great question. Yes, I think there's some more peak conversions out there. In fact some that we started this quarter that we've not got fully converted. So there's more opportunity out there. Peak clear is the material of choice when it comes to high tolerance and high temperature applications. And it's really the basis for our entire 300 millimeter product offering, because of the capabilities that it has as we get into the larger wafer size. I think the other thing rather unique to this is the peak material is really our Stat Pro 3,000 which is an Entegris proprietary software. We feel on our position not only the 200 millimeter conversions as well as 300 millimeters to that.

Thanks again.

We go next to Theodore oNEILL.

I'll continue on the theme of gross profit margins. John, in the last up cycle, in the trough in terms of your gross profit margins to peak, in the last cycle they rose 20 percentage points, going from 32 percent to 53 percent. Now here I'm hearing you've got a 47 percent gross profit margin, which you typically would have had when your run rate was around 100 million a quarter instead of 60 million. So two questions are, if we go back to another peak cycle, are we going to see substantially better margins for this on the order of another 10 to 15 percentage points? And second maybe you could highlight for us exactly how much better you think the margins might be at the top of the next cycle based upon some of the things that you've done here, which clearly had a major effect for your business. in the last cycle prior to this one our gross margins actually went down into the upper 30s, low 40s, this cycle which was so severe the ramp going down so quickly we went down to that low 30 percent range. So that was actually lower than expected. Our gross margins peaked in the last cycle just under 52 percent. So during this cycle we worked very hard reducing our costs and increasing our capacity efficiency. We think that we could see gross margins again in the low 50 percent range and we need to keep investing, however, for our customers sakes, really working and focusing on our products, (inaudbile) leading edge products , to solve their problems. And I don't know that we're we're going to see gross margins significantly above where we were in the last quarter but as an organization we're always driving to im prove. So if we only do better than 51 or 52 percent, perhaps we're going to work very hard to keep investing and make sure we're serving our customers. it's interesting because here at this level of revenue, obviously you made some structural changes which have had a fairly significant impact. Maybe you could just talk, is it simply a matter of gaining some efficiencies and get just some unprofitable product lines or is there something more to it. Because your performance is quite dramatic relative to what we're seeing in the last semiconductor business in this part of the cycle.

I'll make a couple of comments before John answers that. But one of the things is it typically happens in these cycles is your costs don't catch up to you as quickly as the amount of revenue coming in. And so as we continue to ramp up, we're going to have to put on more types of support mechanisms and make sure that we're taking care of our customers, because that's really an important element of our business, just taking care of our customers so we can continue to maintain the level of service to them while also maitaining share. So there's some experience of course that goes on within that increased volume of business.

Also you recall Entegris was formed through the merger of Foward impact fe years ago. After the merger we he do some limited consolidation of facilities, but it took off and we didn't get to do a full scale integration. But thanks for this down cycle we really have worked hard to reduce our costs, we've created centers of excellence, manufacturing centers of excellence to a global scale that put us in the right place, the right customers needed to be and really gives us a great efficiency, because you only have two locations now. The one/two punch has really helped enhance our positioning and in this quarter certainly our profitability.

It's unique and outstanding

We go next to Greg (todesko) U.S. BanCorp.

Congratulations on a great quarter. A couple of questions. First, can you talk at all about where you think you might be in terms of capacity utilization? I know you've talked a little bit about that in the past. Any comments you can make about where you think you are for this first quarter.

Currently even with the number of plants that we have taken off line and the centers of excellence we've created, we still think we're probably somewhere in the 50 percent capacity range. And perhaps we're not even there when you compare or take a look at all the facilities. A lot of that has to do with the mix of products around the world. So some facilities are approaching a 50 percent level while others are, we still have quite a bit of capacity on hand. The other thing to remember is that we measure capacity by work cells or press groups. And for us to put on capacity, if and when we need it, is pretty much, in this case now we've created the centers of excellence, just adding new press stations.

That's measured on the three shifts to kind of a benchmark.

24 by seven.

Okay. And this may sound like a strange question, but given the concern in the market about things slowing down. Have you seen any parts of your more volume business seem to slow down in the last more or two.

think in some areas we've seen some of it level off. Again with the number of touch points we have and the pervasiveness of the industry when some things slow down we see some other things pick up. But it isn't at that ramp level. We're surely not coming out and saying we're seeing the return to the good old days, but we are enjoying an increase in business activities.

The last question is, for the guidance for the next quarter, in terms of the assumptions behind the two key businesses for sequential growth, is there anything you can comment on there in terms of the micro electronics being flatish and fluid handling being up or can you share anything with us in terms of assumptions on that.

There's a portion of our micro electronics driven by capital, certainly with the wafer carrier, and fab conversions, we expect to be strong. We expect that to increase the sale in our fluid hammod group which had a nice increase group with the driven by capital spending. I think that will be up as well. So we aren't really getting any specific guidance. The whole corporate guidance is up 62 to 66.

Congratulations again.

As a reminder it is star 1, if you'd like to ask a question. And we go next to Fred Wolf with Adams (harkness) and hill.

Congratulations again. Great quarter. A couple of questions. One is could you please talk about the service business, the progress you've made during the quarter.

Did you say talk about the service business?

Yes.

You know that's an important part of our operation, but we put a fair amount of attempts to that. It created this structure around it and it in additiong made the investment in our Gilroy facility where we can really take care of our porducts from cradle to grave, from the time we manufacture to a full use of fabs and then back for reuse, recycle and those are all important elements of our full service offering. We also adopt the contract that we got from Phillips and that was an important part of our offering. And we continue to see interest in our cleaning products, the products that we acquired from Add Core. So, yeah, we hit on all small cylinders for the most part with to that whole service sector this past year.

Would you expect that going forward to be a larger portion of the business.

As we continue to work closely with our customers and help them solve their problems and improve their efficiencies, I think service comes into play in a big way.

Can you also - again, I know this isn't true all of the products, but can you give me a feeling for your relative actively position of 200 or 300 millimeter, is it increasing or decreasing or remaining the same?

When we offer sales for our 300 millimeter products, they made up roughly five percent of our overall sales, and remember that our growth doesn't depend solely on 300 millimeter. It also comes real hard for us to indicate percent of our products. Particularly in 300 millimeter because of the breadth of the product offering, from shippers to (inaudible) to the carriers , to the single family products. But that market share probably is anywhere from 40 to 80 percent. And 200 millimeter, we continue to maintain the share that we have had on that front and when it comes to peak wafer carriers in the Stat Pro 3,000 materials that we talked about early, that's an important element of our product offering and we feel very good about the solid share that we have there.

Could you possibly hazard a guess as to what you think your fluid market share is?

The problem - it's a guess - it's in that 40 to 50, to 60 percent share, depending on the situation. And it's real hard to tell with the amount of fluid loss and different things going on out there.

Thank you.

Once again if you would like to ask a question it is star 1 for questions. And we go next to Steve (Marshum) with Columbia Management.

Can you hear me? Two questions. First, can you comment what you're seeing so far in the month of June, given what we're seeing from some of the other related companies, there's a lot of talk of softening business in the last few weeks.

We're coming off a great March April May, and I think our June is starting off similar to the level of May, which is, which means that it's not ramped as much as it has the third quarter. But it's still a good level of business for us.

Second question. When you commented on your fourth quarter for the - on this quarter, the strength in North America, are you seeing the same strength in Asia with the timing of these foundries or is it mostly coming just from North America

I think we saw very good sales levels and order levels from the Asia Pacific market, which certainly includes Taiwan and makes up a significant portion of that. So North America and Asia Pacific has been very strong for us. Europe and Japan are not nearly at those levesl.

A lot of talk recently about Asia Pacific reducing cap ex in the summer months. Do you see any indication of that in your business?

Well, potentially I think that could happen, but again with the number of touch points and the fact that not only does cap ex drive our business but also silicon usage, that as long as the facilities, whether they be the fabs or the foundries, the pervasiveness of our product across the market, particularly on the materials side, we continue to see reasonably good business there.

Thank you.

This does conclude the question and answer portion of our conference. At this time I'd like to turn the call back over to Heidi Ericksen for any additional or closing remarks.

Thank you for your participation in the conference call, and I'm extending an invitation to visit us at our booth the largest semiconductor materials (inaudible) in San Jose San Francisco in July 17 through the 24th. Please give me a call at 952-556-8051. If you have any additional questions regarding this conference call or the events taking place at Silicon West, again thank you for your interest in Entegris.

This does conclude our conference call. Thank you for your participation and you may now disconnect.