Entegris Inc (ENTG) 2003 Q1 法說會逐字稿

Good day, everyone. Welcome to the Entegris first quarter 2003 earnings release conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn over to Ms. Heide Erickson, Director of Investor Relations. Please go ahead, ma'am.

Thank you. It is Entegris. Again, thank you for joining our conference call today. We just issued our first quarter results about 30 minutes ago. If you have not received a copy and would like to be added to the list, call 952-556-8080 or go to our website at www.entegris.com. Joining me is Jim Dauwalter, President and Chief Executive Officer, and John Villas, Chief Financial Officer. Before we get into detail, let me note certain matters we may discuss other than historical information may include forward-looking statements. Actual results could differ materially from the forward-looking statements we make. Additional information concerning the factors that could cause results do differ is contained in 10-K and previous filings. Additional or changed factors may be listed on this call and included in form 10-Q filed for first quarter of 2003. This takes care of the Safe Harbor language. John will take you through the numbers and Jim will give you his view of the business and Entegris's position. We plan to end the call by 5:30 p.m. eastern time. Over to John Villas, our Chief Financial Officer.

Thank you. This was another quarter we made significant progress on our strategic goals. First, towards our goal of making operation of competitive weapon, we are closing upland, California facility. We are strengthening our manufacturing center of excellence and reducing cost structure. By the end of third quarter 2003, we expect to have lowered quarterly break-even sales level to low $50 million range or by $20 million over the last two years. Second, we are working on our goal to increase revenue. We focus on servicing customers around the world and will begin selling wafer chip in Japan. The partner is closer to wafer grower and data storage customers. Our goal is increasing sales by lowering cost is be achieved when managing assets widely. We are investing for customers and continuously working to improve our (inaudible) portfolio of products and services. Moving to 2003, we reported sales of 53.7 million, compared to 45.9 million a year ago, increase of 17%. Per share loss of 2 cents compared to per share loss of 5 cents a year ago on pro forma basis and increase in cash position by 1.3 million to $121 million. I see this as positive accomplishment based on current conditions. Let me walk you through specifics with focus on two unusual charges that impacted quarterly results. During the quarter, we reported pre-tax charge of $1.8 million related to Upland, California plant closure.

We expect to have the plant closed and equipment moved and running at a Minnesota plant by end of February, 2003. Upland was fifth plant closing since May of 2001. We will have lowered quarterly break-even to low $50 million range. We have taken a number of other initiatives to eliminate cost, while increasing efficiencies. The end result, we believe we have capability of generating $500 million of revenue within our current infrastructure, same sales level supportable to the five plant closures. The other was write-down of 4.5 million or 3.3 million after-tax reported in Other expense related to write-down of ownership in Metron technology stock. We own 1.6 million shares of Metron or 12% of shares outstanding. The value of the stock was reported under Investments and had carrying value of $4.80 per share. GAAP require that investments be written down when decline in value is deemed other than temporary. Since Metron stock traded between 60 cents and $2.84 during the last quarter, we thought it prudent to take the charge and wrote down the investment to $2, the closing price of Metron at end of first quarter. Let me add, we are committed and satisfied with Metron as distributor of fluid hymning products in the semiconductor.

Let's take a closer look at sales figures. While this quarter's year-over-year sales increased 17% from the first quarter of fiscal 2002, to nearly $54 million, we saw decline in quarter-to-quarter sales. We had given guidance of 20% and saw 15% decline. The semiconductor market generated 79% of our overall sales and almost all semiconductor product areas, we saw sales decline with the exception of the test, assembly and packaging product group and micro environment which include our 300 millimeter shipping product and (inaudible). We realized a number of 300 millimeter fab winds in the quarter. Orders for all of our product groups in the semi conductor market picked up toward the end of the quarter from minimally flat, which we view encouraging. However market conditions in the semiconductor industry remain difficult and somewhat tenuous.

The next largest revenue generator for Entegris was our data storage market with 12% of overall sales. Data sales and orders came in stronger than we had expected particularly after last quarter and we saw a slow down in this business. This quarter we had a number of positive (ph) events taking place at the same time. Demand for hard disk was relatively strong, inventory in the supply chain was relatively low, therefore a replenishment of inventory had to take place, and third two significant customers ordered new products for the production line because of their customer's requirements in a (inaudible) change. Service revenue made up 8% of overall sales. Our global services group also saw a slight pick up in sales from the fourth quarter. Our contract services both at our customer's facility and our facility are pretty consistent revenue generators. The last two markets I'd like to talk about are Light Sciences (ph) and Fuel Cell (ph). About one percent of our overall sales (inaudible) generated by Life Sciences (ph). We are patiently moving ahead of this market and continuing to introduce customers toward innovative palmer based fluid (inaudible) solutions. The (inaudible) group accounting for sales is well over (ph) one percent. We are receiving first time orders and the highlight this quarter was our participation in our first Fuel Cell (ph) trade show. We were very pleased with reception of our products and services. On the geographic basis, the (inaudible) total sales in North America was 43%. Asia Pacific, 25%, Europe 17%, and Japan 15%. Sales declined in all geographic regions from the fourth quarter 2002 to this first quarter 2003. However, a larger percentage of total sales compared to the last quarter came from the Asia Pacific to Europe. We estimate the sales for our (inaudible) driven products were over 65 percent of our total sales in the first quarter compared to 60% during the 4th quarter. The increase is primary due to the strength in the data source (ph) market and also our test assembly in packaging products.

In both areas, most of our sales are single or limited (inaudible) products. The gross margin was 40.7% during the first quarter of fiscal 2003, down from 44.7% during the fourth quarter. The gross margin came in better than we expected. For next quarter, I expect growth profit margins in the low 40 percent range. SG&A expenses were $18.9 million, flat with the fourth quarter. We expect SG&A expenses to be down slightly next quarter. We invested $4.1 million in engine research development. Generally we expect to spend, around $4.5 million every quarter with slight quarterly variations. We have maintained these levels of investments over the last two years in order to develop new products, materials and solutions to solve our customers' problems. Effective tax rate for the first quarter is 24.7 percent. Excluding a tax effects (ph) from the recorded lost on investment in Metron (ph) stock, the effective tax rate is 23%.

The difference between 23% and U.S. statutory tax rate of 35% is primarily due to lower taxes on foreign operations, attacks benefit associated with export (ph) activities, and a tax credit associated with R&D activities. We reported a net loss of $1.2 million and 2 cents per share on a pro forma basis and a 5.6 million or 8 cents per share on a reported basis for the quarter. Our balance sheet continues to be very strong. Cash and investments on hand are $121 million. Up slightly from the end of fiscal year 2002. We generate (inaudible) cash flow every single quarter since going public in July of 2000. Our customers know that Entegris has the financial strength and staying power to withstand even significant changes in industry conditions. Accounts receivable were at $38 million down 1.5 million from the last quarter, an inventory of that 38 million are down 1.2 million from last quarter. I'm very pleased with our working capital management. The appreciation (ph) amortization (ph) expense was approximately $7 million for the quarter, the same as in the fourth quarter. Capital expenditures were at $2.5 million in the first quarter. Let me concluded by saying I think we are in a solid financial position. We now carry $121 million in cash in our balance sheet and have the ability to make the necessary investments to meet our strategic goals while industry conditions are still challenging, we are in a position to capitalize on any up term. Now I will turn the call over to Jim (ph). Jim?

Thanks, John. Let me start by thanking team Entegris for another superb performance. I think I'm justified for such praise for the following three reasons. First, we have improved our year-to-year sales comparison for the second quarter in a row. While I'm not happy about the loss we reported, we did reduce the pro-forma loss from 3.4 million last year in the first quarter to 1.2 million on a pro forma basis this quarter. Second, we managed to go through another challenging quarter, and yet we increased our cash position again, while generating positive cash flow. This is very important because we are in a position to better execute our growth strategy. Third, in addition to this financial performance, we made continued progress on our strategy to increase operating efficiencies while improving and expanding our product offerings. These achievements speak to a great team effort and I believe they also punctuate the growing importance of materials integrity management to any company that needs our products and services to protect and transport their critical materials.

Now let me give you more specifics on my three points, our cash position is important. As we have told you before, we plan on tripling the size of Entegris over the next five years. To do that, we organize around five basic markets, semiconductor, Life Sciences (ph), data storage, services, and Fuel Cells (ph). In addition, we intend to grow (ph) by apposition. The semiconductor industry supply base is prime for further consolidation and Entegris will be a strategic consolidator in the space. Historically, we use challenging industry conditions to our advantage. That is why we are one of the few companies in our space that have a track record of annual profitability. By executing a plan that generates cash, we are able to improve in our area of leadership. We are able to strengthen our position in new markets and search for value-added acquisitions. Our cash position is strong because we have lowered quarterly break-even point by nearly $20 million since May of last year and managed our assets wisely. We have done it gradually and carefully, assuring no disruption to customers. We are working toward our long-term strategic goals. In the process, we started establishing a worldwide manufacturing centers of excellence. The fact we reported increase and quarterly revenue on a year-over-year comparison basis is not to be over looked. Does that mean the semiconductor industry has truly reached bottom or is on the way back?

We see some indications that may be the case. Yes, due to uncertain times, we expect our next quarter sales levels to be similar to this quarter. If I were a weather man, I would take current industry conditions from stormy to foggy. If we are correct in revenue projection, it places even greater importance on our continued efforts to make our operations a competitive weapon. This quarter, I am proud to report success of our lean sigma initiatives, including Kizon (ph) events. Kizon is two Japanese words meaning "change" and "good," essentially good change. Kizon is a lean sigma approach to quickly identifying and removing non-value added steps out of operation. A Kizon event involves members from different parts of the organization working together to make improvement without large capital investments. Kizon has been practicing business for many years and it is still striking what benefits we can achieve. For example, we worked on assembly for with the goal of reducing process steps and lead time while increasing through-put. The processing time was reduced almost in half and our assembly lead time by three days. That is just the benefits in the assembly area. We are working hard to be able to ship our product faster to our customers and eliminate non-value-added steps in the process to save costs and use space in the most efficient way. We estimate the 20 plus Kizon events resulted in increasing our capacity by 4% and saving over $2 million in cost this fiscal year. For more efficient use of space, we could move additional machinery into centers of excellence. We continue to work on doing more with less. That is why I believe we can grow to $500 million in sales with minimal investment in new bricks and mortar and even after consolidating five facilities. There are other areas in the organization working on increasing efficiency. We invested $2 million in the last two years in an enterprise worldwide information network. This network allows Entegris employees throughout the world to access product related data and systems online in real-time. In the summer of 2001, we completed the first phase of loading the necessary information into this system. Our engineers and other staff around the world have been able to look up these drawings and data as they are working with customers addressing challenges within the fab or as they work on product development.

With over 10,000 active products, that is important. Just this month we completed Phase II. The automation of engineering change request and order. So, why is this important? Well, it allows changes we make to a product to be processed more efficiently. It allows our engineers to collaborate around the world with their counterparts and allows changes in a product to be implemented in our manufacturing facilities. Ewin (ph) helps us increase efficiencies and improves response time to customers. Bottom line, it enables us to reduce time to market. That is another example of furthering our competitive advantage. I told you last quarter our five-year plan sees us tripling in size and operating efficiencies alone won't get us there. In addition to the acquisition strategy I referenced earlier, we are focusing on increasing sales through organic growth. We are constantly improving existing product offering, evaluating industry development roadmap and expanding the scope of our product line. Let me remind you, we already have the broadest offering in materials Entegris solutions available. One example of expanding our scope, the radical Smith ties. Why did we introduce this product earlier this year? Our material knowledge, we are able to offer a product with design improvement, coupled with innovative technology, which is increasing fab productivity and reducing cost for customers. We achieved this through innovative design. This design provides benefit to the customer, such as 40% smaller footprint than competitive offerings and advanced system to eliminate particle generation. We introduced this product last quarter and booked and shipped the first sales during this quarter. Even in down cycles, industry leaders continue to invest in research and development. We as the leader in materials at Entegris Management put our money behind the statement. Last quarter, we invested $4 million in ER&D and have seen results. Another example, we announced enhancement to the (inaudible) lab quarter. These have been so significant some customers have chosen to upgrade current installed base with new doors because they saw improvement in process flow and resulting yield increases. In two cases, these enhancements helped us to become the sole supplier of 3 millimeter to one customer pilot line and another customer line. That is R&D dollars with impact.

So, what does this mean for Entegris next quarter? You will continue to see us working on improving our operational efficiencies and increasing competitive advantages. We expect second quarter 2003 sales to be about flat with this quarter. As John said, we estimate gross margin in the low 40% range and SG&A expenses to be slightly down. Before we take your questions, let me summarize my three main points. First, I am very proud of team Entegris. We continue to make progress on a variety of fronts and as long as we focus on what we can control, I believe we will remain the undisputed leader in management. Second, we have proven history of managing successfully through business cycles and our cash position clearly speaks to that capability. Third, in the spirit of Kizon, we continue as a team to focus on good change. With that, we will take your questions.

Thank you. The question-and-answer session will be conducted electronically. To signal a question, press the star, followed by 1 on your touch-tone phone. We ask that you remove the mute function so your signal may reach our equipment. star 1 to ask a question. We will take as many questions as time permits. Our next question comes from Glen Young with Salomon Smith Barney.

Good afternoon. Congratulations on a good quarter. Few questions for you. One is looking at gross margin. More detail. It was higher than we had expected and sounds like it will get higher still on flattish revenues. Maybe, John, just detail as to how that will come about?

We have been working hard on taking cost out of the system and getting more efficient. Kizon is paying off and reducing cost and basically, we expect that we will be able to hit gross profit margins that are higher on lower sales than in the last peak. Basically, gross margins will be up slightly this quarter based on similar sales level and we are taking break even point down $20 million in two years, which will have a positive impact.

Is there a mix issue here or something specific on the cost-saving side you can point to or one broad-based theme?

Pretty broad based. We mentioned our products were generally down. Data storage is certainly strong during the quarter. And we had a good mix of test assembly and packaging products and micro environment products were good. Manufacturing people are making good progress on what they are doing and it is paying off.

One other thought for guidance. Two related questions. First, if you look at just the wafer consumable side of the business, is there geographic mix looking different in Q1 versus Q4 or basically the same?

Within products, we saw strength in Asia with data storage products. Our other unit-driven product was pretty broad-based. I don't know if I could point to one region that was up or down, particularly in one area or the other.

Looking to Q1, you think it will look pretty much the same?

We expect sales next quarter to be pretty similar mix with slightly biased toward the unit-driven products.

I guess within unit-driven, no change in expected mix within just the unit-driven product?

We said the semiconductor product groups were down in all areas other than test assembly, packaging and micro-environment. All product areas are basically strengthened slightly toward the end of the quarter, which has been flat. Pretty broad-based.

Lastly, if you look at your guidance for the next fiscal quarter, what -- where do you think the biggest sources of risk are as you look forward?

I think I may look different than John, but from market perspective is uncertain this the world today. But, we really haven't given any guidance for 2003 in general. John, any thought on the other side of it?

Yeah, I think we see microelectronics world tied to global GDP. The customer base we serve in terms of capital spending, I think, projections are pretty much all over the board on that one. A lot of risk out there. But, what we can see right now, we are expecting sales to be about flat.

Glen, I think that is why I keep stressing the importance of focusing on what we can control. You know, through 36 years, we learned to manage through all the various cycles and will continue to do that with our broad customer following. You know, we will stay after it. It is clearly focus on what we can control.

Great. Thank you very much.

Our next question comes from Bret Hodurst (ph) from Merrill Lynch.

Good afternoon. Jim, in your comments, you commented on some of the wins (ph) with the (inaudible) from the new door type. I'm wondering generally, from a competitive front, are you seeing some of the (inaudible) being more competitive, are you seeing price issues in any of the product lines that could be an issue even as you drive down some of your cost structures, your Kizon and what not?

Well as you know Bret, there is always pricing pressure out there but the broadest 300 millimeter product offering out there, we feel awful good about our position and continue to work on more wins all the time. The door clearly helped us in some accounts. As importantly, we are also successful in getting some new business. One of our existing customers also increased their quantity quite a bit. We had good success on all fronts with regard to the 300 millimeter offering this past quarter.

So, the way to sum it up, relative to pricing on 300 millimeter, normal pressure?

Yeah, pretty much where it is at, Bret.

Next question, when you look at some of the new business you moved in, you are talking about moving into, one area you are focusing on is increasing services, so like the cradle to grave wafer set and paud management (ph) and what-not. How are the businesses going in this type of environment? Do you see ability to continue to grow those? Do those get weaker in a weak environment?

Bret, as you know, our customer base is looking for more and more help as products become more sophisticated. The products we are coming out with now are more sophisticated. They need more attention in the fab. It is a huge opportunity to provide that service to the product because who knows better than we? So, it is about being on site and the successes that it enables us to get as a result of being there in the fab with our customers. Your question about how has this affected us as times get tougher and things slow down? Really, it is service sector that is pretty stable because as they continue to use products, they need to have that service in support. You know, there is more interest in outsourcing all the time. We continue to remain optimistic about that opportunity.

Final question. Back on the consumable side. When you look at wafer shipper business where you have a dominant position. I know John said most everything in semiconductor is separate in test and assembly had declined. Is that business continuing to decline in shipper business or stabilizing along with overall revenues?

I would say beginning of the quarter we saw decline. Now it has started to flat10 out. There are all kinds of theories what that could be. It could be if there was raw wafer build-up. We typically don't have a lot of build-up from the product offering. But, it is pretty stable business overall, Bret.

Great. Congratulations on a good quarter in a tough period.

Thanks a lot. Our people are working hard.

Thank you. We will take Our next question comes from James Covello of Goldman Sachs.

Good afternoon. One quick question. Can you talk a little bit about your revenues in terms of 15% sequential decline this quarter and flat next quarter in relation to historical seasonal patterns. We have information back for the last couple of years. Pre-IPO and other periods of uncertainty or weakness, could you talk about your patterns relative to historic patterns?

We are pleased our numbers are up by about 17%. We are on a firmer base and larger foundation than we were this year is somewhat unusual. We have got potential holiday shut downs for customers. We have New Year activities and basically those are in Asia after the new year. So, we don't really see typically a lot of seasonality in our business. Basically, pretty much based on customer demand and what is going on in the industry.

Okay. That's helpful. Maybe I can sneak one more question in. You mentioned signs of stabilization, the first signs of stabilization and pick-up in the industry. Maybe changing the forecast from stormy to foggy. I think you addressed a couple of those in your commentary and one in your answer to Bret's question. Could you get more granular on things you might be seeing there?

I think in general, pretty much the information we are seeing from a variety of touch points, not only the touch points we see in the broad industry itself, but also comments that we are sensing from the expert that is continue to look at the industry and the various times in the cycle. You know, there are those that think we did our -- we are coming through the dead cat bounce, if you will. So, there is activities out there that we think are just somewhat stabilized. We do have to remember, Jim, that we suggested that this quarter would be down about 20%. In fact, we are down more like 15%. So, coming off of that, we think it will remain somewhat flat. So, that is the basis for some of our thoughts.

We mention it had picked up. I think on our last conference call, we were seeing declines. We were quite pessimistic. I think the weather forecast has been updated because it feels better than it did two months ago.

That is helpful. Thanks again.

Our next question comes from Darice Lou with CE Etriburg Hohlman (ph).

Hi, guys. Most of the questions have been answered. What do you plan the tax rate for the next fiscal year?

We have not given specific guidance. Basically with the income level we are at, pretty close to break even, it is pretty hard to project. Our tax rate for first quarter was around 25%. And I guess we are guiding for the rest of the year, in that range to little bit higher. If profitability levels increase substantially, it gets more difficult to predict.

Thanks.

Thank you, Our next question comes from Greg Canusny with US Bancorp Piper Jaffray.

Thank you. On test assembly and packaging business, I believe you mentioned that showed improvement sequentially. Is that being driven by new products there or the customers there just performing better than other areas?

At this time, it appears to be mostly somewhat better performance from our customers. The other one that has had some impact is the product we introduced a couple of quarters ago, horizontal wafer shipper. That continues to show promise. We still have exciting plans for that product offering. So, primarily a somewhat healthier customer base.

Okay. On data storage, you know, that sounded pretty good for the quarter. Is that something you think there is sustainability of growth into February with that business?

You know, that business really is almost driven on a month-to-month basis. It is pretty hard for us to predict what might be going on as far as February. But, we did have some customers that had some design changes this past quarter that we were able to fulfill those requirements. We will just continue to stay tuned as that industry further evolves.

Great. Last question is can you just remind us on 300 millimeter, what is the mix of business roughly, do you think, that is driven by 300 millimeter market?

Could you rephrase that? I am not sure what you meant.

What percentage of sales are related to 300 millimeter products?

Right now, Greg, still growing component of our business, certainly not overly substantial. We have broadest 300 millimeter product offerings. We are positioned well. Right now, probably 8% kind of range of total business. We think that obviously over time as more customers adopt 300 millimeter technology, that could grow.

Great. Thanks, guys.

If you have a question today, press star 1 on your touch-tone phone now. There are no further questions. Mr. Dauwalter, I'll turn it over to you for closing comments.

Thanks. I want to thank you for taking time to join us today. If you have questions or further questions, please call Heide Erickson. I also hope you agree with me that while industry conditions remain tough, Entegris is in a strong financial position and very focused on a bright future. Again, thank you for your interest in Entegris. I wish you all a blessed holiday season and a successful 2003.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may now disconnect.