Entegris Inc (ENTG) 2008 Q1 法說會逐字稿

Good day, everyone. Welcome to Entegris' First Quarter 2008 Earnings Release Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Steven Cantor. Please go ahead, sir.

Thank you. Good morning and thank you all for joining our call.

Earlier today, we released Entegris' financial results for our first quarter ended March 29, 2008. You can access a copy of our press release on our website -- www.Entegris.com.

Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and our actual results may differ, materially. These risks and uncertainties are outlined in detail in this morning's press release and in our most-recent 10K report -- as well as in our other reports and filings with the SEC. As always, we encourage you to carefully read those reports and filings.

As we indicated last quarter, in this quarterly call, we will only be referring to GAAP results in our financial discussion.

On the call today are Gideon Argov, President and CEO -- Jean-Marc Pandraud, Chief Operating Officer -- Greg Graves, Chief Financial Officer -- and Peter Walcott, General Counsel.

Gideon will now begin the call.

Thanks, Steve. Good morning, everyone.

I'll make some comments on our business trends and provide an update on a few ongoing initiatives. Greg will then provide some details on the financials.

Our results were well within the range we provided in February. We reported first quarter sales of $148 million -- a decline of 8% from a relatively strong fourth quarter. EPS was $0.01, which included the impact of a charge of about $0.02 per share related to cost-cutting measures we implemented in the first quarter.

Capital spending in the semiconductor market softened, as expected, in the first quarter -- which impacted the roughly 80% of our business tied to a broad cross-section of semiconductor makers, materials suppliers and OEMs.

However, our unit-driven business model provided some cushion against the slowdown in industry spending. Our sales mix shifted as 64% of first-quarter sales were from the unit-driven products -- up from 61% in the fourth quarter.

As for our main product lines, the lower capital spending trends did affect some sales of our contamination-control solutions product -- such as liquid-and-gas systems. After a strong December quarter attributable to the shipment of a large retrofit order, sales of our photochemical pumps declined in the first quarter. Given the large installed base of tract tools, we are addressing additional retrofit opportunities for our newest pump, the IntelliGen Mini.

Sales of liquid filters -- which is the largest portion of our contamination control solutions product line -- declined 5% from 4th quarter levels, which had been boosted by year-end preventative maintenance change-outs.

While demand for filtration products tends to be more stable than our equipment-driven, capital-driven products, sales of filters are somewhat affected by lower capital spending -- since a portion of these sales are tied to the installation of new tools.

Sales of our chemical containers actually grew as our new connection technology is being well-received in the market. Sales of our gas-filtration and purification products held at the strong level achieved in the previous quarter -- in this case, based on strong orders for our HVAC filters for lithography applications, as well as steady demand for gas-purification products.

Sales for our Micro Environments products -- which include wafer and reticle handling products, as well as data storage shippers -- declined from the fourth quarter due to reduced industry demand. We continue to work through a number of new product transitions -- which include new wafer process carriers or FOUPs, and our 300-mm FOSB shipper. Sales of the FOSB grew from the fourth quarter, while sales of 200-mm shippers declined modestly -- due in part to the effect of decommissioning or transitioning of some 200-mm fabs to 300-mm. We expect 200-mm sales of these products to benefit as new capacity comes online in China.

In the data storage portion of our Micro-Environments product line, sales of data storage shipping products for 65-mm hard drive components grew in the first quarter. But this was offset by lower sales of 95-mm shippers. Competition of the 95-mm form factor has intensified, because of consolidation within the disk-drive market.

By region, sales outside North America represented 75% of first-quarter revenues. Specifically, Asia was 35%, Japan 23%, North America 25%, and Europe 17%. Of note, North America and Japan are more leveraged to OEM customers than other regions -- and were thus, most impacted by slower capital spending, as you would expect. Sales to Europe were boosted by a large order for our wafer-processed carriers.

Although our sales performance in the first quarter reflected the current challenges of the industry, we made good progress on a number of initiatives. Our growth in the coming quarters will be driven by new products and new markets. We achieved our growth objective for our FOSB in the first quarter, and are now qualified with all but one of major wafer growers, and an expanding list of IDM customers.

Despite short-term pullbacks in capital spending, we're seeing additional technology-driven opportunities open up for liquid systems -- particularly in lithography-related applications. Demand continues to build for Liquid-Lens -- our high-purity water purification and delivery system that's used with liquid immersion stepper tools. We expect this product to continue to grow in step with industry adoption of immersion technology.

We continued to expand our line of liquid filtration products, to address leading-edge semiconductor applications, as well as a new line of products for applications in other micro-electronics manufacturing. We experienced growth in both lines of products in the first quarter, and we expect to see continued growth through the balance of the year.

We're continuing to invest to leverage our material science expertise, to address both current and future needs of our customers. These initiatives include the development of nanotube technologies to create new polymer materials for our micro-environments product line, as well as our investment in a developing company called Integrated Materials, Inc -- which makes high-purity wafer carriers, used inside high-temperature diffusion chambers.

Another ongoing and important initiative is our optimization of our global supply chain. Our plan to move manufacturing of some products from the US to our facility in Kulim, Malaysia is proceeding at pace. Three of the four products are production-ready, and are in various stages of customer qualifications. The fourth product, which is the new Spectra FOUP, will pass a key milestone this week, with the completion of all shipment of related tooling and equipment from the US to Malaysia. We expect to see the benefit of these moves as production ramps later this year.

The Kulim, Malaysia moves are one aspect of a comprehensive plan, which includes company-wide Lean Sigma activities increasing our use of outsourcing, as well as consolidating or transferring of some smaller operations.

In February, we announced plans to reduce our footprint at our San Diego operation, and move the manufacturing of the products made there to other operations or to outsource partners. This latest move is in addition to the closure and transfer of manufacturing and cleaning operations in Gilroy, California, and in Singapore. All these steps will improve our cost structure, increase our flexibility, and allow us to move manufacturing closer to key customers.

Separately and prudently, we took steps to reduce our operating costs in the first quarter. These steps match our expenses with the slower industry environment -- and maximize our operating efficiency over the long run. While these actions touched a number of areas across the Company, we were careful to protect critical investments in new products, new technologies and the means to increase our alignment and responsiveness with our customers.

Greg will now provide additional financial detail on the quarter.

Thank you, Gideon. Good morning, everyone.

Sales for the first quarter were 148.2 million -- which was down 8% from the fourth quarter, and down 7% from a year ago. Q1 sales benefited from the favorable impact of the weaker dollar.

Net income in Q1 -- the first quarter in which we have reported only GAAP results -- was 1.1 million, or $0.01 per diluted share. I want to point out that these results included a $3.8 million charge for severance -- or roughly $0.02 per share on an after-tax basis -- and $5.1 million or $0.04 per share of amortization expense.

In light of market conditions, I believe we executed well during the quarter on a number of fronts.

Despite the lower volume, gross margin for the first quarter was 41.5% of sales, compared to 41.4% in Q4. ASPs and materials pricing were relatively stable, and we incurred approximately $500,000 in costs related to ongoing manufacturing transfers from the US to Kulim, Malaysia.

Total operating expenses of $58.9 million in Q1 included the $3.8 million charge and $5.1 million of amortization I just mentioned. It also included stock-based compensation of $1.9 million -- or $0.01 per diluted share. The charge resulted from a reduction of approximately 80 existing and budgeted non-manufacturing positions.

Overall, headcount at the end of March was down 6%, to 2,500 -- from 2.650 at year-end. These actions are on top of the cost-saving steps we took to close or transfer three smaller facilities that Gideon referred to. The current steps should yield annualized cost savings of about $12 million.

SG&A in Q1 was $43.3 million, which was about even with Q4. ER&D was $10.5 million -- or 7% of sales -- which was about $400,000 higher than Q4 -- reflecting our continued investment in new product development initiatives. Interest and other expense were $614,000 for the quarter, reflecting the negative impact of foreign exchange on dollar-denominated assets, primarily in Japan.

We reported income tax expense of $613,000 -- reflecting a 31.3% tax rate for the quarter. We currently expect the tax rate for the full year to be approximately 32%. Shares outstanding on a fully-diluted basis at quarter end totaled 115 million -- a decrease of 800,000 shares from Q4 -- resulting from our ongoing stock buyback program.

During the quarter, we repurchased approximately $12 million worth of shares out of our authorized $49 million stock buyback. We have approximately $33 million remaining on the authorization.

Inventory turns were 4.6-times -- down slightly from Q4 -- as we increased our inventories by $3 million, in part to support our current manufacturing moves from the US to Kulim. Accounts receivable in dollars totaled $116 million, and DSOs were 72 days -- up from 63 days in the fourth quarter -- primarily because of the timing of quarter-end, which in our case was March 29 -- and the impact of foreign exchange.

Depreciation and amortization totaled approximately $11.3 million, and capital expenditures for the quarter were $6.6 million.

Cash, cash equivalents and short-term investments totaled $138.9 million at the end of Q1 -- a decline of $21.8 million from Q4. The decline was mostly due to our $8 million investment in IMI, and the $12 million in stock repurchases I mentioned earlier. As for our guidance for Q2, our unit-driven business model should keep business trends at levels comparable to Q1, despite the softness in industry capital spending. As such, we currently expect Q2 sales to be in the range of $144 to $152 million.

We expect operating expenses to be down approximately $6 million from Q1, or down $3 million from normalized levels -- reflecting the favorable impact of cost reduction measures. We expect GAAP EPS to range from $0.04 to 0.06 -- which includes approximately $5 million or $0.04 per diluted share of amortization expense.

With that, we'll take your questions.

Thank you, sir. Today's question-and-answer session will be conducted electronically. If you'd like to signal to ask a question, please press *1 on your touchtone phone. If you're using a speaker phone, please make sure your mute function is turned off, to allow your signal to reach our equipment.

Once again, that's *1, if you'd like to ask a question. We'll go first to Christopher Blansett of JP Morgan.

Hi, guys. Thanks.

When you think about the cost-reduction activities you're doing, how should we model on the gross margin line versus maybe the OpEX side.

Chris, when I think about it, approximately $3 million a quarter -- 750,000 of that would be in the gross margin line. And the balance would be in the operating line.

So most of it's going to hit below the line? It's going to benefit below the line?

It will be below the line.

And then are these manufacturing areas going directly to Malaysia? Or could they potentially be rolled up into other sites around the US or Japan?

The facility that we're closing in San Diego is going to a variety of different places. Some portion of it is going to Malaysia. Some portion of it is going to other outsourcers.

And then on the other side, when you think about the kind of tone and feedback you're getting from your semicap equipment customers -- are we still looking at potential mix improvement to our units for the second quarter versus the OEM or capital spending side? What's their tone? What are you getting back from them?

Chris, this is Jean-Marc. I think you are reading the right point, here. A current 64-36% split -- 64 unit-driven, 36% capital driven. If you look at it from an internal standpoint as a proxy for the industry, it is the worst capital revenue in the last six quarters. So I do believe that we have hit bottom from a capital standpoint. At least for our business.

We should see an improvement at some point. Historically, 64-36 split is very significant and reflects the downturn situation which we have experienced in the first quarter. So our model is very resistant to the downturn. The fact is that we have a large proportion of our revenue coming from unit-driven and consumables. But going forward, I believe we should see some better news on the capital side.

One last question. Were there any surprises during the quarter of strengths or weaknesses in any of your particular product lines that you weren't expecting?

No. Most of the product line related to capital went down. It was true in liquid system. It was true with FOUPs. But for the consumable revenue, we saw some good news related to our unit-driven products.

Liquid Lens, however -- which is a piece of capital -- still did well. Because it is addressing the fortified enemy there, 45 nanometers application. And we are still doing well in that area, because it is addressing the top tier of the demanding applications.

I would add, Chris, that virtually all the new products that we have coming out are in part or mainly addressing the advanced technology nodes. And particularly 45 nanometer. That's part of the reason why we see our Liquid Lens doing well. It's part of the reason we see some of the other products such as our advanced membrane technology -- 20-nanometer Torrento -- Clarilite -- these are frankly all linked to advanced technology nodes.

Then quick housekeeping. Is that 3.8 restructuring charge pre- or post-tax?

That's pretax.

Thank you, guys.

We'll take our next question from Brett Hodess of Merrill Lynch.

Good morning.

First, when we look at the June quarter guidance right now, the operating census you said you want to drop about 6 million, quarter-to-quarter. Is that correct, Greg?

Yes.

My comment was 6 million quarter-to-quarter in part because we've got that large charge in Q1 related to the restructuring. On a normalized basis, Brett, as I look back at the last five quarters of OpEX, it's what I referred to when I said, "Normalized," we have about 3 million below that. So, linking the guidance. I look at this quarter and I call it a $0.03 quarter, basically. I'd say we earned a penny. We had a $0.02 charge. So, $0.03.

The midpoint of the guidance is $0.05 -- or $0.02 better -- which is about the impact of $3 million in cost-savings after tax on a per-share basis.

Got it. Okay.

So if you look at the gross margin progression as you make the moves that you've been talking about here, assuming that the mix is about what it's been as we roll forward, at what point in time do we see the impact in gross margin, do you think?

(inaudible)

We're doing, as you point out, 4 or 5 different things. We've got the Kulim migration. We've got some outsourcing. We've got the facilities rationalization. We've got an increased focus on some of our costs around freight, logistics, duties -- those areas. But those things combined, I would expect that we would start to see some strengthening in the gross margin in the later half of 2008, as volumes begin to pick up in Kulim -- as we begin to wind down our facility in San Diego.

And then at the same time, we do have some moderate headwinds in our business. We are impacted some by oil prices, since much of our (inaudible) with our resins. Today through the first quarter, we didn't see any significant impact, but we would expect --as we renew some contracts, there's be some modest impact there.

Then the other question I had was -- do you have a feel or a breakout for the semiconductor split versus the other microelectronics area? You mentioned that you're going after some new microelectronics areas beyond data storage and semi. Is that like flat-panel display? Could you give us some color on how some of those new areas are shaping up?

Yes, Brett -- this is Jean-Marc. Our business is about 80% in the semi business, and about 20% also including flat-panel display. Yes, this is true that the decrease in the non-semi business was a little bit less in the first quarter than it was in the semi business. The semi business being mostly driven by bad news on the capital side. Capital was down 14%, and the unit-driven was only down by 4% in the first quarter.

So we do expand in some ancillary businesses, with most of the revenue coming from filter revenue in the consumer-electronic business.

Very good. Thank you.

And we'll go next to Jim Covello with Goldman Sachs.

Good morning, guys. Thanks so much.

Two quick questions. Within the unit-driven businesses, can you remind us of the breakdown between logic, memory and foundry exposure?

We are heavily exposed to logic. And I wouldn't break that down on a precise percentage. It tends to vary quarter-by-quarter. But we tend to sell -- as you know -- to a very broad section of frankly everybody in the business. All IDMs.

Certainly the majority of our business is in the logic area, but we have a fair amount of exposure -- as you would expect, also, to the foundries -- who are some of our largest customers. And we also have some exposure to memory.

So we tend to be a good proxy in that sense, I guess, for what happens in the world of IDMs and foundries. Jean-Marc?

Yes. I would agree. If you look at the business a little bit different way be segmenting the fabs versus the OEM and the growers, we have seen a negative impact in the first quarter from the fab, mainly. And with their logic, memory. Memory was really not good. But logic was also down -- in fact more than the -- I would say -- grower business, or even the equipment business. This is what happened in the first quarter, in fact.

I do expect also that the capacity realization, which was in the 80 to 85% maximum in the first quarter was at the lowest point. And according to the market that we have, this capacity realization should increase during this coming quarter and the rest of the year.

So we hit, really, a low point from the capacity realization in the first quarter of 2008.

Jim, this is Steve Cantor. I just want to add to that.

Our liquid filtration products are most leveraged to the complexity of the process and device. The more metal layers there are in the device, you tend to use more liquid filters. So -- at least in terms of exposure -- that gives us more exposure to the foundries and the logic makers.

Just one follow-up, then. Within the unit-driven businesses, are you comfortable with your share situation and the overall share situation in the market? Especially in Asia?

Yes. I would say we have traditionally enjoyed and we continue to enjoy a very good position in the filtration business. We have launched a product like Torrento 20 nanometers, and we have a next-generation coming in play as well.

Traditionally Asia is represented, and Japan included, 80% of the revenue is coming from Asia and Japan in the filtration area, where we have a solid market share position here. And the customer intimacy -- working at the doorstep of our customers -- makes us secure with some very solid revenue from this region at some point.

I would add to that. We obviously review that on a very careful basis. Literally, product-by-product and customer-by-customer. That share is driven by a number of factors. But the most important one is being able to work with the customers on their technology roadmap, which we do I think fairly well. A lot of that demand is coming from the IDM.

We tend to work with them very closely. And I think that helps us keep that share over time.

Great. Well, thank you so much. I appreciate it.

And just as a reminder, if you'd like to signal to ask a question, please press *1.

We'll go next to Timothy Arcuri with Citi.

Hi, guys. Can you break out the $3.8 million charge between R&D, SG&A and also Cogs?

Of the $3.8 million, I'll go through the operating and SG&A on the P&L. In terms of where did we reduce headcount, it was predominantly in the operating expense line -- and to a lesser extent in the cost-of-sales line.

Okay. So just so I'm clear. So that $3.8 million charge is pre-tax, and it was all in the SG&A line?

Correct.

Secondly, Gideon -- you had said last call when I had asked you about new products -- you had said that you thought that the new product revenue this year would be between $25 and 50 million. I'm wondering. Did you get any revenue this quarter from those new products? Or is that all left on the come later on this year?

No. I'll let Jean-Marc talk in a second. But the short answer to your question is, let's just say that if the number you took away was 25 million, that's a low number. Because we expect that number to be higher than 25 million. And I'm sitting here looking at a sheet which is pretty detailed, Tim. And so we have revenues from these new products, and we feel pretty good about the trajectory.

First of all, on a specific basis, we did highlight on the call that the FOSB products were actually on track to do what we said we were going to do with that product. Actually, the number of qualifications we have there is ahead of schedule, I would say, frankly.

But the same holds true in a number of other new products. Let me ask Jean-Marc to comment on those. The number is higher than 25, Tim. Go ahead, Jean-Marc.

Yes. This is correct. 25 will be probably a number we'll consider for a quarter, Tim. So we are ramping nicely. I'm never happy with the revenue coming from new products. I would like to have a higher speed there. But you know the recession hits us a little bit there. But we are doing well in these new products. We mentioned Liquid Lens. We mentioned the FOSB. We are also catching up in the FOUP Spectra business right now.

I do expect that by the end of the year, I will be on-target for the new product revenue impact. It should be expressed in several percent of a top-line, from a total contribution standpoint.

Okay. I guess I'm wondering just from a specific timing perspective whether there was any -- I'm just looking at '07 revenue and I'm taking what I think will happen to the consumables business, what I think will happen to the capital business. And I'm just trying to tack on top of that new product revenue that largely will not cannibalize current revenue.

And so I'm wondering how much of that defined $25 to 50 million number has been recognized so far as revenue this year, or if it's all on the come during the back half of the year. Because if it is, that suggests that there should be a reasonably nice whip in revenue coming in Q3 and Q4.

This is correct. I am not 25% of my expected revenue for the year, because quarters are not linear and we have the ramp. But I am only lagging a couple of percent versus this trend line if you want.

Another way to think about it, Tim is -- and you know this very well -- when the industry is at a relative low period, it is the best time, obviously, to get qualified on a new platform. Or to get qualified on a new node. Even though you don't see the revenue until capacity ramps. Because until that happens, obviously, customers are not in a position where they actually are going to implement much of that. Because they have the capacity they need.

Now that's particularly true as we all know on the memory side, today. But it is true more generally.

So having qualified and being qualified on a number of these new products will translate particularly well to new revenues when we have some tailwind in terms of the market. That is correct.

Then I guess just the last thing for me -- Jean-Marc -- even if I take your equipment revenue and I assume that it's flat even in June -- which, it's probably down a smidge. But let's just say it's flat. You take industry wafer starts, which sound like they're down quite a bit in Q2. Your revenue-per-wafer start in the consumables business actually is up quite a bit in Q2, as it was up quite a bit in Q1.

So I'm wondering, is there some --because it seems like your revenue-per-wafer kept on going down through most of '06 and '07, and there's been some reversal lately. And I'm wondering -- is that due to a particular product ramp? Or is there some kind of secular -- is 45 nanometer now kind of catching hold such that there is leverage again to your revenue-per-wafer number?

Yes. This is correct. First, we don't have a kind of systematic link in terms of revenue-per-wafer. It's not as mechanic as we would like to think. But you are right. The product we launched 9 months ago -- Semicon last year -- the Torrento - is taking higher speed. And we had better news, in fact, in the last quarters coming from that filter-based revenue. We are starting to get the benefit of that.

Your comment on the equipment business, as well, is interesting. Some of the equipment we sell -- especially in the immersion lithography application -- are in fact downturn resistant. Because we are still shipping new scanners. We are not shipping, but our OEM customers are shipping new scanners. And they do need some immersion lithography systems to go along with. So we benefit from that.

In addition to that, the initiative that we are looking at in Asia on the consumer electronics are purely incremental. Those businesses, we were not looking at them one year ago, and now we are generating some incremental revenue. We have dedicated salespeople organized around those new markets, and we are thinking of going after them right now.

Okay. Thanks, guys.

And we have no further questions at this time. Mr. Argov, I will turn the call back over to you for ay additional or closing remarks.

Okay. Thank you very much for participating on our call. We look forward to updating you in the future.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.