Entegris Inc (ENTG) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to Entegris's second 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 Ms. Heide Erickson, director of investor relations. Please go ahead.

Thank you, Shannon.

Good morning and thank you for joining Entegris's second quarter fiscal year 2003 conference call. We issued our second quarter results about an hour or so ago. If you have not received a copy or would like to be added to our distribution list, please call 952-556-8080, or you can access the release on our website at www.entegris.com.

Joining me today is Jim Dauwalter, president and chief executive officer, and John Villas, 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 these forward-looking statements we make. Additional information concerning the factors that could cause results to differ is contained in the 10-K we filed in November 2002, along with other or previous filings. Additional or changed factors that may also be mentioned on this call and may be included in the form 10-Q to be filed for the second quarter 2003. That takes care of the Safe Harbor language.

This morning, John will take you through the numbers and Jim will present his view of the business and how Entegris is positioned. Finally, we will take your questions. We plan to end the call around 9:00 A.M. Eastern Time.

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

Thank you, Heide. Good morning, everyone.

I am pleased with our execution during the second quarter toward achieving our strategic goals. First, our goal to increase revenue. We announced two acquisitions, that of Electro-Specialties (ph) Company, or ESC, and the wafer and reticle (ph) carrier product offering from Asyst. In addition, we transitioned to a direct sales model for all our products in Japan, which should positively impact our sales starting next quarter.

Second, we continued our focus on operations as a competitive weapon. This included the closing of our Oakland, California facility at the end of February and our announcement that we will move our polymer services group closer to our primary customer base in Southeast Asia.

In short, we continue to focus on the long term success of Entegris while being steadfast and conscientiously managing the company through the current market conditions.

Now moving to the second quarter of our fiscal year 2003, we are reporting the following results -- sales of $54.1 million compared to 50.7 million a year ago, an increase of 7%. A per diluted share profit of 1 cent compared to a per share loss of 2 cents a year ago, and the generation of about $10 million in cash from operating activity while holding $103 million in cash and short-term investments.

With that quick overview, I'd like to turn my attention to our sales, which drive these results. I'm pleased to report that sales came in about where we expected from last quarter. There were also three one-time events that took place during the quarter that I'd like to review. First, the two acquisitions of Electro-Specialties Company in January and the Asyst wafer and reticle carrier product lines on February 11th, the latter a little more than two weeks before our quarter-end.

In addition, we received a return of current product from our former distributor in Japan as we were finalizing the move to a direct sales model in Japan at the end of February.

Net-net, these three events added about $800,000 to our top line.

Let me now turn your attention to sales within the individual markets we serve. First, semiconductors. The semiconductor market generated 75% of our overall sales during this quarter. Sales declined in almost all semiconductor product areas from the previous quarter. The one bright exception was Microenvironments (ph), which include our 300 mm FOOPs (ph). During the past quarter, we were able to fill most of our 300 mm order to Samsung, and in addition, many of the 300 mm fabs placed notable FOOP orders.

On top of that, most of the sales we had from the Asyst product acquisition were also for FOOPs. Sales for our wafer shippers were only down slightly not including the previously mentioned inventory returns from our distributor in Japan. What is surprising though is the strength of the current order rate. Many of our wafer shipper customers are in Japan and actually held back orders until we completed the transition to direct sales at the end of February.

Overall, though, industry conditions still remain difficult and somewhat tenuous. Semiconductor equipment companies seem to be at best in a holding pattern, particularly in light of the most recent announcement from the largest equipment supplier in the industry. Remember, this market segment is driven by capital spending, and our fluid handling products are the most impacted by weakness in the semiconductor equipment market.

Notwithstanding the geopolitical issues that are hanging over the economy at large, we seem to be bouncing around the bottom of the semiconductor industry cycle.

The next largest revenue generator for Entegris was from our data storage market, accounting for about 14% of overall sales. I'm pleased to report that data storage sales were unusually strong as sales increased by 20% from the previous quarter. We continue to benefit from changes that are taking place in the industry. These include form factor and process changes at some of the key players in the industry that resulted in the need for additional Entegris products. We do expect business levels to return to a more normalized level during our third quarter.

Our service business revenue accounted for 7% of Entegris's overall sales -- while that's down somewhat from last quarter, it's largely because of timing related to equipment used to clean our wafer and disk carrier and shipping products.

The last two markets I'd like to talk about are life sciences and fuel cells. About 3% of our overall sales are now generated by life sciences, which is directly due to the inclusion of the ESC acquisition in this quarter's results. Jim will discuss in more detail our strategy related to this acquisition.

I'd also like to point out that while our fuel cell business accounted for sales of below 1%, this is an emerging market, and one that we are investing in for the long term.

On a geographic basis, Entegris's total sales in North America were 43%. In Asia-Pacific, 28%, in Europe, 15%, and in Japan, 14%. While sales declined particularly in Europe from the first quarter 2003 to the second quarter 2003, a larger percentage of total sales compared to the last quarter came from Asia-Pacific primarily on the strength of our data storage sales. We estimate that sales for our unit-driven products were just above 60% of our total sales during the second quarter, compared to around 65% during the first quarter. This related mostly to the strength in our capital spending driven 300 mm product sales and some of the delay in the unit driven wafer shipper orders as our customers in Japan waited for the direct sales transition to take place at the end of February.

So looking forward, what are our expectations for sales? We estimate that sales for our third quarter will increase about 10 to 15% from second quarter 2003 levels. Much of the increase is related to the two acquisitions. As we said during yesterday's press release, we are in the process of moving the new wafer and reticle carrier products to Entegris's manufacturing center of excellence in Minnesota beginning April 2003, with the transition expected to be complete in June 2003.

We assume that we will experience some reduced shipping volume as we go through the transition and integration process. Let me also remind you that wafer and reticle carrier products are capital spending driven and, therefore, more volatile than our unit driven products.

An obvious wild card for our forecast is the additional uncertainty related to the geopolitical conditions and how this will impact the world economy and our business. So like everyone else who's subject to these conditions, our projection for next quarter is subject to uncertainty.

Let me now move on to gross profit margins. Our gross profit margin this quarter came in at 41.7%. I am very pleased with this level of performance. On an increase of sales from the last quarter of 410,000 dollars, we added $680,000 in gross profits. This shows not only our leverage from every additional sales dollar, but also our ability to continue to improve operational efficiencies. Given our sales assumptions for next quarter, I would expect modest gross margin gains.

SG&A expenses were 19 .8 million dollars, that's up 900,000 dollars from the last quarter -- the largest portion of this increase was related to amortization and other additional costs associated with the two acquisitions and severance of our distribution relationship in Japan. We have made the conscientious decision to position the company for growth that requires an infrastructure that can respond quickly and support our growth goals.

We are managing costs tightly and are continuously evaluating our cost structure with the focus of keeping the spinal infrastructure in place for both the short and long term success of Entegris.

Looking forward next quarter, we expect that SG&A expenses will increase about $1 million, but this will primarily be due to increased expenses related to the second quarter's acquisitions, including amortization expenses. We invested $4.2 million in engineering research and development. During the upcoming months, we expect an increase in E R&D activity since we have added nine former Asyst employees as part of our acquisition, and we will turn our focus toward the accelerated development of next-generation wafer handling products.

The effective tax rate benefit year-to-date is 45%. Excluding the tax effect from the recorded loss on our investment in Metron stock recorded in the last quarter, the effective tax rate benefit is 65%. The difference between 65% and the U.S. statutory tax rate of 35% is primarily due to lower taxes on foreign operations, a tax benefit associated with export activities, and a tax credit associated with R&D activities.

Let me remind you that tax rates around break-even levels can fluctuate widely. Therefore, it's difficult to project tax rates for the full year.

In line with what we stated earlier in this call, for the second quarter of our fiscal year, we reported a net income of $647,000, or 1 cent per diluted share. Let me point out the cost, particularly expenses we have added through our recent acquisitions have changed our break-even expectations. We estimate that our net break-even point now is at about $60 million in sales. With our sales next quarter expected to increase by 10 to 15% from our previous quarter, we expect to be just around the break-even level next quarter.

I'd also like to point out that we continue to evaluate the carrying value of $2 per share for our investment in Metron Technology stock and any potential adjustments required in the future.

Overall, our balance sheet continues to be very strong. Cash and investments on hand are now $103 million, down $18 million from the previous quarter. We paid $43 million in cash for the two acquisitions this quarter, and added $14 million in short-term debt as we borrowed against our revolving credit facility. We still have an untapped credit facility of over $25 million remaining. During the quarter, we generated about $10 million in cash from operations.

Let me again emphasize that we have generated positive cash flow from operations every single quarter during this multi-year industry cycle. Accounts receivable were at $41.8 million, up 3.7 million from the last quarter because of increased sales in February. Inventories are at 41.9 million, again, up $4.2 million from last quarter, all related to the acquisitions and the inventory return by our former distributor in Japan.

All in all, I remain pleased with our working capital management during this difficult operating environment. Depreciation and amortization expense was approximately $6.8 million for the quarter, flat with the first quarter. Finally, capital expenditures were at $3.3 million for the second quarter. Even while closing some facilities, we have been working to integrate our remaining manufacturing facilities. Therefore, I now anticipate that our full fiscal year capital expenditures will be in the 15 to $20 million range.

Let me conclude by saying once again that I believe Entegris is in a very solid financial position. As Jim will now elaborate, our immediate focus will continue to rest upon the full integration of our recent acquisitions along with leveraging our existing infrastructure. I'm excited about the opportunities we see ahead of us.

With that, let me turn this call over to Jim -- Jim?

Thank you, John. Good morning, everyone. And thanks to all of you for joining us on the call today and for your continued interest in Entegris.

John just detailed our financial performance. We again met our expectations and reported a profit, and I'm pleased at how Team Entegris executed this quarter. We continue to make significant progress towards our strategic goals of more than doubling our revenue over the next five years and becoming one of the top three materials integrity management companies in every market we serve.

I'm also pleased by the continued success we've had in controlling our cost structure, and generating cash from operations. This quarter, we added about $10 million in cash from operations, and now carry 103 million in cash and short-term investments on our books.

In short, Team Entegris has continued to show excellence in execution this past quarter. Allow me to elaborate on just two key areas. That would be efficiencies and acquisitions. These are examples that underscore this achievement. First, I'd like to talk about the great strides we've made on controlling costs and operating as efficiently as possible. Entegris views operations as a competitive weapon. One example of this is our recent announcement to move the Entegris polymer services business from Texas to our Malaysia Center Of Excellence. This further consolidates these manufacturing capabilities closer to our polymer services customers.

In addition to this consolidation of resources, we've also made investments in other existing facilities. Here in Minnesota, for example, we expanded our clean room manufacturing to accommodate increasing demand for our 300 mm product lines, and we've established a new bipolar plate manufacturing center with state of the art equipment, specifically designed for compression-molded plates for fuel cell applications.

In Germany, we expanded our wafer shipper manufacturing capabilities to better service our European customers. And in Japan, we established our direct sales infrastructure.

All these efforts and more combine to help us in achieving greater control over our costs, while boosting our operating efficiencies and our ability to respond quickly to customers' needs.

My second example of Team Entegris's excellent performance involves two strategic acquisitions. Last quarter, I told you that the semiconductor industry supplier base was primed for further consolidation, and that Entegris would be a strategic consolidator in the materials integrity management space. While true to our word, this past quarter, we acquired the wafer and reticle carrier product lines from Asyst Technologies. Why did we do that? Well, with this acquisition, we now take care of the majority of all materials integrity management products related to protecting and transporting wafers and reticles within the fab. We've added Asyst leading market share in reticle pods and Smith pods to our existing products in this area.

In the 300 mm FOOP business, Asyst and Entegris were always strong competitors. With the acquisition, we further strengthened our 300 mm position, particularly in Southeast Asia. We're taking our responsibility of being the world leader in materials integrity management very seriously. And while we gained market leadership with this acquisition, we're also finding ourselves in the unique and exciting position of combining the intellectual property and talents from both companies. That's a high priority for us, as we are accelerating the development of a new generation of 300 mm products that will benefit our customers.

The integration of the acquired manufacturing line is well on the way and is expected to be completed by the end of this quarter. We recognize that the next 120 days are critical to the integration process. But based on our past success of integrating large organizations, I have confidence we will succeed.

Another acquisition we announced during this past quarter is of particular importance to our life sciences team for the biopharmaceutical market. We acquired Electro-Specialties Company, or ESC, a market leader in clean in place, also referred to as CIP Technology. The purchase of ESC strengthens the competitive position of our materials integrity management efforts in the life sciences market. We can now integrate Entegris's fluoropolymer materials and fluid handling expertise with ESC's stainless steel system design and fabrication capabilities. This enables us to expand the scope and the integration of our products and services in this growing market.

We've retained ESC's existing management team and employees and continue to manufacture product at ESC's 52,000 square foot facility in Illinois. Since we acquired ESC in January, we have cross-trained the life sciences sales, marketing, manufacturing and technology teams for greater efficiency. I believe that we'll be able to leverage ESC's extensive clean-in-place experience, industry customer relationships, and innovative technology to help achieve our growth and diversification goals. Our objective is to successfully transition our materials integrity management expertise into this new market just as we have in the past with other markets.

Both of these acquisitions were cash transactions. We're executing on our plan to acquire technologies or companies that strengthen our materials integrity management position, both in our core markets and in new markets. We'll continue to search for value-added acquisitions.

I think it's interesting to note that Entegris has generated approximately $170 million in cash from operations over the last 12 quarters. This ability to generate cash coupled with our already strong balance sheet has allowed us the opportunity to acquire six companies plus the recent product line from Asyst. We paid a total of about $100 million in cash for these acquisitions, while still maintaining a strong balance sheet as of the end of our second quarter.

As you can see, we can continue to take advantage of difficult industry conditions to strengthen our materials integrity management position in the marketplace.

Before we take your questions, let me just say that I'm quite proud of the way Team Entegris continues to execute. We've continued to make progress on our strategic five-year plan by constantly improving our operations and thoughtfully managing our assets. And we're making progress in our goal of becoming one of the top three players in every materials integrity management market we serve, and we further entrenched our leadership in the wafer and reticle product areas.

I'm excited about our future. We continue to manage what is within our control, and Team Entegris is ready to respond to the challenges and to develop and take advantage of the opportunities ahead.

And with that, we'll open it up for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, please press "*1" on your touch-tone telephone to ask a question. If you find that your question has been answered, you may remove yourself by pressing the pound key. And we'll pause for just a moment.

And our first question comes from Brett Hodess of Merrill Lynch.

Good morning, guys. I got a couple questions. First on the outlook for the coming quarter, you said most of it comes from the acquisitions, but do you expect the core business particularly given your comment that you're seeing, you know, some pickup in the unit-driven stuff towards the end of the quarter and Japan, you know, held back a bit, do you expect the core business to grow sequentially in the quarter?

You know, Brett, I think we're going to continue to see some flatness. There might be some positive bumps along the way, but I think right now indicators are it's going to remain relatively flat. I'm not sure how much of a pause is a result of the war that we're going to have with regards to the industry.

There are some encouraging signs, Brett, but I think we noted that our data storage products were up exceptionally strong this quarter. We expect those to be more normalized next quarter, and the capital equipment driven business as we heard from some of the big players in the market is certainly not feeling very healthy right now.

Ok. So those -- if there was a little growth in the materials, the other materials side, those might offset it a little bit?

Yes.

And then -- that was the first question. And then secondly, on the Asyst move, so can you go into a little more detail? Basically you're going to take like the tool and die that Asyst had, their subcontractor, bring them into your factory and begin to run it on your equipment, and therefore, does that give you -- as you do that, does that improve your utilization and give you some margin leverage?

The first assumption is a correct one. That is, in fact, exactly what we'll do. And I think that you're quite familiar that we do have the resources here because of our position in the industry and being the leader in materials integrity management that we will be able to further leverage those facilities, but as far as what immediate impact that has, that's a little --we're a little uncertain on that just because of the time it takes to integrate and bring people up to speed as well as the process. But overall, we think that it can long-term have a positive effect on us.

Ok. And then my final question is, when you look at the Japan turnover from the distributor to yourselves, do you think that this is something that allows you to gain more share by going direct there or is it more of a cost-related changeover?

Well, obviously cost is one factor with regards to that. But, you know, there is some minimal price incentive that I think we can pick up out of it as well. And this is really something that potentially, I think, can happen as we further get into the process. We're still a little bit in the learning curve there but real excited about the potential.

Great. Thank you.

And Fred Wolf of Adams, Harkness &Hill has our next question.

Yeah. Hi, Jim and John.

Hello, Fred.

A couple of questions. One is, in terms of the SG&A, I mean, you're going through a couple of --you're working on integrating a couple acquisitions and you gave some guidance for the next quarter. Would you expect it to -- are there any sort of extra costs in there due to that, and would you expect SG&A to decline in the following quarter once you've got all these things integrated?

Yeah, certainly there were some one-time things that occurred during this quarter, Fred, because of the acquisitions and the costs associated with that. And we do expect SG&A to go up. However, we do have some intangible assets that were acquired in these transactions and those acquisitions and they will be charged to the line. So we're continuously monitoring our business and the levels that we're feeling right now managing our costs tightly, which we've done historically as we've managed through all industry conditions. So we'll monitor that closely, but for next quarter specifically, we do expect those costs to be up about a million dollars.

And my question was about the following quarter, would you expect them to come down as some of these one-time issues go away? I assume you have some acquisition-related costs in this quarter too, in this coming quarter.

I would say we're not going to give specific guidance. It potentially could come down slightly but very, very modestly.

Just to rephrase what you said to Brett, if you can, for me, you're saying basically going forward, you're seeing a little growth in the semiconductor unit stuff sort of being offset by decline in the data storage and maybe some weakness in the capital equipment-related sector. Is that fair?

Yeah, I think that's a fair statement.

Ok. Great. Thank you.

Thank you, Fred.

We'll take the next question from Darice Liu from C.E. Unterberg, Towbin.

Few questions for you. Regarding the Asyst acquisition of the wafer and reticle business, how is that affecting your pricing strategy?

Well, I really don't think that it's going to have a huge effect on our pricing strategy with the current, Darice. We're working on our next generation product, and that really has been our focus, and I think the important part here of the acquisition is not only the revenue that it generates, but also the fact that we get that much closer to so many more customers that it helps us not only with this product but all the other products that we take into that space. Particularly in some of the areas in Southeast Asia, where Asyst had a good position not only in 300 mm but also you have to remember that this acquisition included the 200 mm pod and reticle carrier business as well.

Ok. In terms of the same line, we understand that the acquisition meets your goals of about 50% gross margins and that it is accretive, but do you believe you can glean more operational efficiency from the product line?

Well, I think that that will happen overall as it relates to our total 300 mm product offering just because we're able to increase the volume or the capacity on our current equipment sets and infrastructure, and, you know, we'll know more about that as we further get into the manufacturing and assembly of some of these products. So it's a little early to tell right now.

I do think, Darice, that the infrastructure we have in place, the spinal infrastructure with our SG&A line in particular, we have good leverage capabilities there as that business grows because we've added employees basically in the engineering area primarily from Asyst.

Ok. Thank you, guys.

Have a good day.

You too.

The next question comes from James Covello of Goldman Sachs.

Good morning. This is Amanda Hinley (ph) in on behalf of Jim Covello. Could you give us a sense in terms of your unit-driven business how wafer dropped during the quarter versus your expectation?

I think that our wafer unit business as we talked about was impacted by the changeover in our distributor in Japan, so it's a little bit hard to measure that. We did say that some of the order rate continues to be a little bit more positive in the new year, but there are other factors as well with the holiday shutdowns as many of our customers, the Lunar New Year in February, so it feels a little bit better, but to say that there's some significant trends that evolved during the quarter, it would be pretty hard to nail that down.

Ok. Thank you.

Thank you.

At this time, we have one question remaining in the queue.

Once again, if you've like to ask a question or if you have a follow-up question, please press "*" one to signal. As area minder, if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We'll take our next question from Karen Wang (ph) of Salomon Smith Barney.

Hey, guys. It's actually Glen here. Quick question for you. If we're just looking at the unit-driven business and taking out the trends that you may or may not be seeing in Japan at the moment, what do other geographies look like right now?

Well, Glen, they're pretty consistently flat across all areas. We don't have any real shining star right now, nor do we have any particular market that is in some sort of recession. So it's pretty consistent, I would say, at this time.

And when you talk about the equipment business being one where they're in a holding pattern, is that to suggest they're not ordering anything or are they staying at the same level of orders they've been at and showing no change?

No, they're ordering, but it's at that - what I would call a depressed level off of where they were about three quarters ago.

Ok.

And we just haven't seen any significant new activity from them.

How would you compare that -

Glen, I would just add that during this time, and one of the things that we focus on with, and kind of --that's the bad news. The good news is that we work real hard on spec'ing (ph) in our new products and getting ourselves further position, so again, I think that's part of our strategy of taking advantage of the current conditions, whatever they are, and so that's really what our focus is.

How would you compare that business to one quarter ago?

Flat.

Go ahead.

No, sorry. Go ahead.

I was just going to say, I can't say that it's up nor is it really down. It's still at the current kind of maintenance run level.

Yes. Our unit-driven products, Glen, were about 60% of sales this quarter, 65% last quarter, so 300 mm was stronger in health this quarter, but the differences are pretty minor.

Ok. Great. Well, thanks very much.

Ok. Thanks, Glen.

And it appears that there are no further questions at this time, gentlemen.

I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you. And I'd like to thank all of you for taking time to join us today. If you have anymore questions, please call Heide Erickson. And I hope that you walk away from this call as excited about Entegris and the opportunities as we are. We see a great potential for Entegris, and again thank you for your interest in us, and we hope that you all have a good day.

And that does conclude today's teleconference. Thank you for your participation.