Entegris Inc (ENTG) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Entegris Fourth Quarter 2008 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 Mr. Steve Cantor, Vice President of Corporate Relations. Please go ahead, sir.

Good morning, and thank you, everyone, for joining our call. Earlier today we announced our sales results for and our operating results for our fourth quarter ended December 31, 2008. You can access a copy of our press release on our website with those results on 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 which are outlined in detail in our reports and filings with the SEC.

On the call today are Gideon Argov, President and CEO; Greg Graves, Chief Financial Officer; and Bertrand Loy, Chief Operating Officer. Gideon will now begin the call.

Thanks, Steve. Good morning. As most of you know, the global economic slowdown has contributed to a steep and abrupt downturn in the semiconductor and electronics markets. Not surprisingly, our business like every other supplier of semiconductor components and materials has been adversely impacted in the fourth quarter. These trends have thus far continued through February. While we have historically experienced cyclical downturns in our primary semiconductor market, we have never experienced the level and degree of negative factors we are seeing today, virtually an evaporation of capital spending, which has coincided with historically low fab utilization rates.

In light of these extraordinary macro and micro economic conditions, I'll focus my comments this morning on what we have done and what we are doing to lower our cash breakeven point, to maximize our cash flow or free cash flow and to protect our balance sheet. These actions will not only allow us to manage effectively through this downturn, but also position us for significantly better profitability when the industry does recover.

First and foremost, we've accelerated steps to fundamentally restructure our business, which will eliminate approximately $28 million in annual fixed operating costs. Many of these steps were initiated several months ago, well before the global economic meltdown in September. These steps have included the organizational changes we talked about last quarter, which led to the elimination of several senior management level positions and a 15% approximate reduction in global headcount compared to a year ago.

In conjunction with these permanent cost reductions, we are consolidating our manufacturing operations by closing our largest manufacturing facility in the U.S., which will provide additional savings when business recovers. In January, we implemented additional headcount reductions, as well as a series of temporary cost saving measures, including work furloughs, global salary reductions, four-day workweeks, and a clamp down on all discretionary expenses. In light of our current business trends and the near-term market uncertainty, we have also restructured the terms and covenants of our revolving credit agreement to provide us with a flexibility to contend with a sustained downturn. Greg Graves will have more details on this in his prepared remarks shortly.

While our attention and focus is on taking the necessary actions in the short-term to maximize our free cash flow and secure a balance sheet, we're doing this in a way that balances our key market and product development initiatives. Looking beyond the current business environment, what we do for our customers will continue to grow in importance. The need for contamination control and substrate handling becomes even more important at successive technology generations. Over the past quarter, even in these difficult times, we've maintained our leading market positions and even increased our share in some key areas such as 300-millimeter wafer shipping.

In our contamination control business we've achieved key qualifications of our new products and subsystems with OEM and device maker customers in every area of our business that will benefit us when the market recovers. These qualifications include 5 and 10-nanometer advanced filtration products for photochemical and wet etch and clean applications, fluid delivery systems for lithography track and stepper tools, as well as gas purification systems for controlling airborne molecular contamination in critical areas of the fab.

In our microenvironments business sales of our 300-millimeter wafer shippers increased more than three-fold in 2008, an indication that we're taking share in that market. We were recently named by a leading wafer grower as their primary vendor for their 300-millimeter shippers.

In 2008, as you know, we embarked on a diversification initiative to bring material science-based technologies to markets outside of the semiconductor industry. Our specialty materials business, which includes the Poco Graphite, is addressing numerous growth opportunities for advanced graphite, silicone carbide, specialty coatings, and performance polymer products that are built on a proprietary carbon nanotube technology. These products offer growth in a variety of markets, including medical, aerospace, and specialty industrial.

I will now turn the call over to Greg to provide some comments on our financials. Greg?

Thank you, Gideon. In view of the steps that Gideon described, I want to provide some commentary on our current breakeven level and our balance sheet before discussing the details of the fourth quarter. Given the unprecedented turbulence and uncertainty in our markets, we have focused on reducing our fixed costs and lowering our cash breakeven point. When these actions are fully in place later this year, we'll have reduced our quarterly breakeven by 30 million on an EBITDA basis compared to a year ago. To achieve this we have taken steps to eliminate 7 million of quarterly fixed operating costs since February of last year, which includes about 1 million of quarterly fixed cost savings from our manufacturing consolidation.

We have also imposed short-term cost reductions, including across the board salary reductions, selective work shutdowns, four-day workweeks, which will save an additional 4 million on a quarterly basis. Thus, in Q1 we expect to breakeven on an EBITDA basis of 110 million and with the completion of our manufacturing consolidation, as well as the previously mentioned structural and short-term measures, we should reach a target breakeven below 100 million by the second half of 2009.

While these steps will allow us to manage through this downturn, they also position us for improved profitability when the market improves. [With] quarterly revenue levels of 160 million, which is comparable to the run rate in 2007, these actions should enable us to achieve gross margin in the mid-40s and GAAP operating margins of 10%. To put this in perspective, our GAAP operating margin in 2007 was 7% at similar quarterly revenue levels.

Turning to the balance sheet, we ended the year with 115 million in cash and 139 million in borrowings under the revolving credit facility. As Gideon outlined, we have reached an agreement in principle with our bank group to amend the terms and covenants of our credit facility. Under the initial credit agreement, we had a $230 million borrowing capacity and two primary covenants - a leverage test of debt to EBITDA and an interest coverage test of EBIT to interest expense. I want to emphasize that we were in compliance with both covenants at year-end 2008, but given the anticipated impact of the current business trends, we initiated a process with our bank group to restructure the facility. This week we received a commitment letter for a revised agreement, which includes highly flexible covenants in the form of a monthly cumulative EBITDA test that allows for potential losses over the next 12 months.

In exchange, we reduced the size of the facility to 150 million, shortened the maturity from February 2013 to November 2011, and agreed to a 400 basis point increase to the interest rate and granted a security interest in certain assets. We believe these amended terms together with our cash balance provide us with ample liquidity to fund our operations until we see a market recovery.

In terms of our fourth quarter results, sales were 112.7 million. Excluding the full quarter impact of Poco, revenues were down 27% from the third quarter. The unit driven, capital driven mix of sales was 70/30, reflecting the addition of Poco's predominantly consumable product line and the falling level of capital spending in the semi industry. The non-GAAP loss for the fourth quarter was 15.4 million, or $0.14 per diluted share. We generated 23.4 million in cash from operations, primarily due to decreases in working capital. EBITDA for the quarter was 2.4 million, adjusted for non-cash accounting charges and stock-based compensation expense of 1.5 million.

Our normal annual CapEx spend is roughly 30 million, but we have deferred all non-essential projects to later in the year in an effort to maximize cash flow. We would expect CapEx to run at a maximum of 16 million for 2009. Our GAAP fourth quarter results included the following non-recurring non-cash items - a goodwill impairment charge of 93.9 million related to FASB 142--this impairment is the result of the continued deterioration in our share price; purchase accounting adjustments of 7.8 million related to the adjustment of acquired Poco inventory to market value--we expect these adjustments to wind down in the first quarter as we sell the remaining acquired Poco inventory; a write-off of 10.6 million related to our equity investments in two emerging technology companies; and a 12.5 million increase in the deferred tax asset valuation allowance related to U.S. tax credit carry forward.

In addition to these non-cash items, we had restructuring charges of 7.2 million in Q4, primarily related to severance. Reconciliation of our GAAP to non-GAAP results for the fourth quarter and fiscal 2008 is available in today's press release.

Non-GAAP gross margin for the fourth quarter of 35.5% declined from the third quarter due to lower revenues and under absorption in our factories. Operating expenses were 40.1 million on a non-GAAP basis, excluding amortization. OpEx benefited from an 8 million reduction in variable compensation accruals.

(Inaudible) income tax benefit on a non-GAAP basis was 500,000, reflecting the increase in allowance for deferred tax assets. Despite the current lack of visibility, we believe we have a head start in taking the steps that will enable us to not only withstand what could be an extended downturn, but to emerge on the other side with a stronger and more profitable business model. As I told our bank group, Entegris is here to stay. We have a diverse mix of customers and products, strong market share positions, and what we do will only become more critical to semiconductor manufacturing processes as technology advances and consumer trends improve.

With that, we'll now take your questions. Operator?

Thank you, sir. (OPERATOR INSTRUCTIONS.) And we'll take our first question from Brett Hodess of Bank of America.

Good morning, guys. I know that you're probably not giving any outlook, but I wanted to ask a couple of questions about how we should be thinking about the parts of the business. First, I was wondering if you could give us a little bit of a breakdown between what was semi and non-semiconductor and how the semiconductor versus the non-semiconductor parts of the business might be performing. And then, secondly, I was wondering a lot of the other consumables companies have talked about maybe declines in the 25 to 35% range. Is that something that might be reasonable if we think about your consumable part of your business?

Brett, Gideon, here. Good morning. So on the first part of your question, the non-semi portion of our business was about just over 30--just about 31% of our business in the fourth quarter, and 70% obviously semiconductor. So that is a higher number than we've seen before and that's largely because of the Poco and its inclusion in the numbers. As we've said before, Poco is about 40% semi historically and 60% non-semi, so that changes the mix and you'll expect to see that continue to be a higher mix of non-semi.

And both that business, as well as our semi, are being affected by the downturn. I would say that within our Poco business, certainly the non-semi--it's not as dramatic, Brett. But we're still seeing falloff in revenue that's substantial in a number of areas within Poco. Again, not as dramatic as it is in semi.

For the second part of your question, let me turn it over to Bertrand.

Hi, Brett. Well, clearly, we're not providing guidance for Q1 2009. However, I think it's reasonable for you to expect to our overall consumable revenues would be trending pretty much in line with some of the guidance provided by our major IDM and foundry customers.

Okay. And at this stage of the game, if we look at the major IDM and foundry customers, there's a spread of actual decline, the foundries being down more in 1Q than the IDMs. Would it be appropriate to be in between those or could you give us some idea of what the mix is between foundry and IDM?

We typically don't provide a lot of details around the mix between IDM and foundries. But again, I would say that, yes, I think a good approximation for you would be to probably see us being impacted somewhere in the middle of the trends reported between those different types of customers.

(Multiple Speakers)

Brett, that was a similar--this is Greg. That was a similar trend to what we saw in Q4 as well, where our business declined the steepest in Asia, which is a heavily driven foundry type market for us.

And just a final one for you, Greg. Can you give us a little thought on what kind of tax benefit you might be--do you have a range in terms of percentage of something like that that we might see this year?

Yes. Well, Brett, we will--because we've written our deferred tax assets off we're carrying an allowance against them. So from a book accounting purpose we will not show a tax benefit. So as we think about the tax rate in 2009, domestically we think about a rate of zero and then it's--outside the U.S. depending on our income or loss in other jurisdictions we could have a million or two a quarter of actual tax expense as a result of earnings in places like Japan or other places outside the United States. But we will not book significant tax benefits because of our book accounting position.

Yes. Got it. Thanks so much.

(OPERATOR INSTRUCTIONS.) We'll take our next question from Steve Schwartz of First Analysis.

Good morning, gentlemen.

Good morning, Steve.

I'd like to talk just a little bit about the revolver, if I could. I think coming out of the third quarter you had just over 100 million available and it looks like this revised agreement trimmed about 80 million. Am I right in thinking you've got about $20 million available under that?

Today we're drawn to 139. The total available is 150.

Okay. And is it still expandable by another 20?

Yes, in the third quarter we were drawn more to like the 105 range as we became--saw increasing declines in the industry environment. We did through the fourth quarter make a number of small draws to just increase our liquidity position.

Yes, I saw that your cash balance went up nicely on the balance sheet. If I remember from reading the details of the former agreement, you could exclude certain non-cash items from EBITDA. It looked almost like it read like cash from operations. Is that about right, Greg?

Well, it--the primary things, I mean, for instance, these big one-time charges we have this quarter are obviously excluded. The primary item we can exclude though that is non-cash is the stock-based compensation.

Okay.

And so, really it is--it's primarily depreciation, amortization, and stock-based comp.

Okay. And then, from that I would imagine in going through these discussions you guys have looked at what cash from operations might look like over the next 12 months. Can you share that with us what your thinking is there?

Steve, at this point, we're really--we're not providing forward guidance. What I would say is that I believe that the credit agreement combined with the existing liquidity that we have on the balance sheet puts us in a position to weather a pretty unattractive scenario in the industry over the next 12 months. And we focused on a relatively pessimistic scenario in setting the covenants under the credit agreement. And then, we continue--I mean, we're becoming much more aggressive about how we manage cash and just thinking about every penny, if you will.

Okay. And then, just one last one before I get back in queue and this relates to the 28 million in fixed cost savings. How do you expect that to split out between cost of sales and SG&A?

It's 6 million in SG&A and 1 million in cost of sales.

6 million and 1 million per quarter?

Per quarter, yes.

Okay. All right. Very good. Okay, thank you.

(OPERATOR INSTRUCTIONS.) And we'll take our next question from Timothy Arcuri of Citi.

Hi. This is Janaid calling in for Tim. Good morning. I wanted to know if you--could you talk about any progress on Poco within Japan region?

Yes, I didn't catch that question. I think you were asking about progress with Poco in Japan.

Yes.

Okay. The answer to that is our--the Poco business is performing reasonably well. It is profitable overall and has not had the kind of declines that we've seen in some of the core semi business, because it's not limited to semiconductor.

Right.

We have actually introduced that business to Japan and we have actually seen some pretty good traction with new applications. I would say that those are technology buys and they will not result in substantial revenues until we have an upturn in the business, because in Japan, Poco is directed at the semiconductor part of the marketplace. But we have seen some interest and we have introduced that group to Japan and have had actually meetings with customers over there.

Okay. And thank you for that. And do you see your non-semi business percentage--like it was at 31% this quarter--growing for 2009 given the semiconductor environment--?

--We're not--we can't give guidance. And so, it all depends on the marketplace, and obviously the market that's most down is the core semi market.

Right.

In general, I would expect that the percentage you see is likely to remain roughly constant in 2009. But it's very difficult to say. Bertrand?

Yes, Gideon. I would just simply add that we are also aggressively pursuing applications of I would say CCS and ME products outside of semi. And I would expect to see some tangible results of those ventures to be recorded in 2009. It's a little early for us to really give you a lot of details around that, but this is definitely a new strategic avenue for us.

Our CCS business is contamination control solutions, so that's a part of our business that comprises the liquid filtration and fluid handling. ME is micro environments, which consists of all our wafer handling and substrate handling products.

Right. Thanks. Just one last one. The new products that you spoke about--and I know in previous calls you've said a lot of them are targeted at 45-nanometer. Given that the foundries are maybe delaying that towards the end of '09, would you--would it be right to assume that revenue potential from those new products would be not much at best in '09?

Yes, I think you're right. I mean, we--it's very difficult right now to [assert] the market share and market penetration. We are really living through very unique market conditions and so it's hard for us to really give tangible targets for new product introductions at this very moment.

Thank you.

I think that once the industry starts settling down a little bit more, we'll be happy to provide a little bit more clarity around those goals.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS.) And we'll take a follow-up from Steve Schwartz of First Analysis.

Just one question about the industry really, and related to your restructuring actions, the plant closures in North America. How do you think your competitors are handling this? Do you think they're taking a lot of capacity out as well on par with what you guys are doing?

Yes, this is Gideon. I don't think we're really in a position to comment on that. I think every company handles this in their own way. And all I can direct you to is to the scripts of other conference calls. I think certainly--I mean, I'm seeing some of the same things happening in other places. I think that I don't--I can't really speak for other companies. I can tell you that we saw this coming relatively early. We took action going back to the middle of last year. So we started these steps early. We've intensified our cost reduction and our structural cost reduction efforts. And so, we had a running start as the year progressed.

Okay. The reason I'm asking, Gideon, is I think in the last conference call you mentioned that the restructuring would get your capacity utilization up to reasonable levels - 60 or 70%. And just given the amplitude of these cycles, it just leaves me to wonder what happens when the turnaround comes. Do you find yourself capacity constrained? And I guess if your competitors are in a similar situation, it's less of a concern. So that's the nature of the question.

Yes. It's a fair concern. Obviously, that has been something we've been watching very, very careful as we were taking some of those cost reduction measures. And to a great extent, that's why we started migrating away from just headcount reductions into reduced workweeks, furloughs, and other solutions that allows us to preserve institutional knowledge and allows us to be able to ramp up when the industry recovers.

Okay, that's helpful. Thanks for taking the question.

And we'll take another follow-up question from Mr. Arcuri's line.

Yes. Hi. Just a quick follow-up. Was I--could you just confirm that you said for on a non-GAAP basis the income tax benefit was 500,000 this quarter? Was that right?

Could you repeat that? We have a hard time hearing.

The income tax benefit, could you just repeat? You stated in your comments what that was on a non-GAAP basis for this quarter.

The tax benefit on--.

--Yes, on a non-GAAP basis was 500,000, because there was a significant charge related to additional deferred tax adjustments on a GAAP basis.

Okay. And just one (inaudible) lastly. The 28 million of cost reductions you said it should be done by second half. Is that exiting the second quarter or how should we think about when those costs would all kind of kick in?

The 6 million of operating expense reductions will all have taken place by the--as we go into the second half of the year, so going into the third quarter. The cost related to the manufacturing moves is as we move sort of between the third and fourth quarter those costs will be gone. And they relate primarily to our building four initiative, which we've talked about being completed by the end of the third quarter.

Okay.

The manufacturing costs.

Okay. And this 28 million is--would be relative--the reduction would be relative to beginning '08? What would you--would it--what would it be relative to? You said (inaudible).

I'm sorry. Our connection--your connection is just not very good. It's--.

--I'm saying the 28 million annual cost reductions.

Yes.

That's in--relative to where--beginning of '08, the 28 million?

So if you look back to--look back 12 months, our operating expenses were running in the low 50s. So I'd say $50 to $52 million--between 50 and 53 depending on the quarter. We are--I would expect those operating expenses in Q2, or actually in Q1, to run somewhere in the low 40s. So we'll have taken out much of the $6 million in costs, as well as the impact of some of the short-term initiatives. So we would expect to run--our operating expenses in Q1 to run about $9 million less than they ran in the similar quarter last year. And by the time we get to Q2, where we're getting the full benefit of the short-term initiatives, we should be running on an operating expense basis about $10 million lower than a year earlier. So I would expect the Q1 operating expenses to be--excluding amortization to be somewhere in the 42 to 43 range, and I'd expect it to be in the 41 range in Q2.

Okay. Thank you very much. That was very helpful.

And it appears there are no further questions at this time. Mr. Argov, I'd like to turn the conference back over to you for any additional or closing remarks.

To summarize, we've taken action to protect our balance sheet and give us sufficient flexibility and liquidity through a--what is obviously a horrendous downturn in the business. Number two, we've reduced our permanent cost structure in a significant way, as well as taking temporary measures, both of which will provide us with better profitability when things do improve. And number three, the Company is here to stay. This is an important company. It provides critical products, it has a strong market position in critical technologies, and a product pipeline that will serve us well when the industry recovers.

Thank you for participating. And we'll talk to you later.

That does conclude today's conference. We thank you for your participation. Have a great day.