Entegris Inc (ENTG) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to Entegris' first-quarter 2009 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. Steve Cantor, Vice President of Corporate Relations.

Good morning and thank you for joining our call today. Earlier, we announced our results for our first quarter ended March 28, 2009. You can access a copy of our press release on our website, www.Entegris.com.

Before we begin today, I would like to remind listeners that our comments 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; Bertrand Loy, Chief Operating Officer; Greg Graves, Chief Financial Officer; and John Goodman, CTIO and the head of our Specialty Materials division. Gideon will now begin the call.

Good morning. Our results for the March quarter reflected the impact of the global economic crisis and one of the steepest and sharpest downturns in the history of the semiconductor and electronic industries.

First-quarter sales declined 48% from the December quarter, to $59 million, which led to a $39 million operating loss for the quarter before restructuring charges. As a result of the steps we took to reduce our costs, our EBITDA loss for the quarter, excluding restructuring charges, was $16 million, well within the cumulative EBITDA loss of $31 million stipulated by our bank covenant.

Much of our focus over the past two quarters has been on re-setting our cost structure. While there were some signs of improved trends for our unit-driven products beginning in March, we took additional cost-reduction steps in the beginning of April to further reduce our quarterly breakeven point to less than $85 million per quarter.

These steps include both long-term actions, such as headcount reductions, as well as temporary cost savings, including work furloughs.

To put this in context, we have reduced our quarterly fixed operating expense by $28 million per quarter, compared to the beginning of 2008, on an apples-to-apples basis, including Poco Graphite. This has entailed a reduction of about 800 positions, including direct labor, or roughly one-third of the number of employees we had a year ago on a pro forma basis.

The vast majority of these reductions are structural, meaning that we have streamlined the organization and resized the business to revenues that are significantly lower than historical mid-cycle levels. We believe the cost structure we have in place will enable us to operate our business well within the covenants of our credit agreements, even if the depressed levels of business we experienced in the first quarter persist for the remainder of the year.

While we believe it is prudent to be prepared for this scenario, we do not believe this will be the case, since we think Q1 revenues represent the baseline and the low point for the year.

Turning to the revenue trends for the quarter, the unit-driven, CapEx-driven split was approximately 75% to 25%. This compared to a 70%/30% split in Q4, reflecting the drop-off in semiconductor capital spending.

In terms of our sales by markets, sales to semiconductor customers represented 63% of Q1 sales and declined to 54% from the fourth quarter. Given the fab shutdowns in January and February, and the freeze in fab spending and construction, this is not surprising.

Our sales to customers outside of the semi industry did fare relatively better, declining 37%.

Sales in the data storage market continued to be weak as the seasonal softness in the first quarter was compounded by high inventories of data storage components in the channel. Sales of filtration products, the flat-panel display market, and sales of Poco Graphite products declined from the fourth quarter, but fared relatively better than our semiconductor-related sales.

In terms of sales trends by division, sales in the contamination control division were $34 million, or down 46% from the fourth quarter. About half of these sales relate to our liquid filtration business, as many of our fab customers had significant shutdowns through most of January and February. And those that were operating were doing so at utilization levels of 30% to 40% of capacity.

As is typical during these periods of low-fab utilization, we experienced some customers stretching filter lives. Sales of other CCS products, such as our photochemical pumps, fluid-handling products, and gas-purification systems, were impacted by a virtual halt in capital spending and fab tool shipments.

Sales in our Microenvironments division, which declined 57% in Q1, to $15 million, were particularly hard hit by both a slowdown in fab capital spending, as well as reduced wafer starts in the quarter. Demand for FOUPs and wafer carriers has been especially impacted by the industry downturn, since these products are driven by, primarily, new fab and capacity additions.

Although sales of our wafer shippers reflected the weak wafer starts through much of the quarter, demand for 300 mm shippers picked up in March and in April, requiring us to add an additional manufacturing shift to meet this demand. We continue to be very encouraged by the progress of our 300 mm wafer shipper product, and are on track to see sales expand in the second quarter as wafer shipments increase and we continue to take market share.

Data storage shipping products, which are part of the Microenvironments business, were very soft, as I indicated.

Much of the restructuring of our business over the past 18 months has been focused at re-sizing this business, ME, and moving it closer to our key customers in Asia and Japan, including closing our largest manufacturing facility in North America and relocating production to our plant in Malaysia. Indeed, we have cut the breakeven point of this business by half since last year, while protecting key R&D investments that will further differentiate our products, providing even higher levels of protection from contamination, as required by 32 nm and 22 nm processes.

Sales in our Specialty Materials division fell 34%, to $10 million. The majority of the decline was due to a fall-ff in sales of Poco Graphite-based products to the semiconductor segment within that business.

We think the first quarter set a baseline for revenues, overall, for our business. While there are some signs that we will see improving trends in Q2 and throughout the year, we've taken steps to reduce our breakeven point to enable us to manage effectively through these difficult times.

We've also protected our investments in product and market development, and are continuing to position the Company to execute our strategy in both our core semiconductor market as well as new high-technology markets.

Greg Graves will now provide comments on our financials.

I want to provide some commentary on our current breakeven level and our balance sheet before discussing the details of the first quarter.

In April, we have taken steps to lower our quarterly EBITDA breakeven level to less than $85 million in Q2. To achieve this, we have eliminated an additional $6 million of quarterly fixed operating costs and imposed short-term cost reductions, such as unpaid leave, selective work reductions, and four-day work weeks, which will save an additional $5 million on a quarterly basis.

Since February of last year, we have eliminated approximately $28 million per quarter of costs, above and beyond reductions in direct labor. Cost savings include permanent reductions of $13 million, comprised of $8 million of operating expenses and $5 million of fixed manufacturing expenses.

In addition, we have imposed $15 million of temporary cost reductions.

To put this in perspective, in the first quarter of last year, we reported operating expenses of $54 million. In Q1 of this year, that number was $38.6 million, and we expect it to be approximately $32 million in Q2. This is a 40% reduction from Q1 of 2008.

Looking at this another way, our EBITDA breakeven level in Q2 of less than $85 million is based on quarterly manufacturing fixed costs of about $29 million, variable manufacturing costs of about 39% of revenue, and operating expenses exclusive of amortization of approximately $32 million. We expect the breakeven level to be at this similar level in the second half, as further reductions in costs related to the completion of our manufacturing moves are offset by the reversal of temporary cost reductions.

Shifting to our first-quarter results, the loss for the quarter included a purchase accounting expense of $4 million to adjust acquired Poco inventory to market value, and a restructuring charge of $4.6 million related to severance and the costs associated with the closure of one of our two manufacturing facilities in Chaska, Minnesota.

Going forward, there will be no additional purchase accounting adjustments for the Poco inventory.

Gross margins for the first quarter was 8%, or 15% excluding the purchase accounting adjustments, a decline from the fourth quarter due to lower revenues and underabsorption in our factories.

Operating expenses were $38.6 million, excluding amortization and restructuring charges. R&D spending was essentially even with the fourth quarter, reflecting our commitment to key development projects to support next-generation EUV in immersion lithography applications, as well as to bring our core technologies into related non-semi markets, such as solar, medical, and aerospace.

Cash from operations was a negative $9.5 million, primarily due to lower net income, offset in part by decreases in working capital.

EBITDA for the quarter, as measured by the terms of our amended credit agreement, was a loss of $16 million, well within the $31 million cumulative loss allowed under our debt covenants.

CapEx was $7.9 million in Q1, which includes $4.7 million related to assets acquired in 2008. We expect CapEx to run at a maximum of $16 million for 2009.

Turning to the balance sheet, we ended the quarter with $95 million in cash and $135 million in borrowings under the revolving credit facility. Cash decreased by $19.6 million from December, largely due to the net operating loss in Q1 and capital expenditures.

Given the steps that we have implemented to lower our breakeven point further, we feel we can operate effectively within the terms of our credit facility, even in the unlikely event that business conditions remain at Q1 levels through the rest of the year. More importantly, we have structured the business to realize the leverage in our model in a meaningful way when industry and economic conditions eventually improve.

With that, we'll take your questions.

(Operator Instructions). Steve Schwartz, First Analysis Securities. One moment. Actually, we'll take our first question from Brett Hodess, BAS-ML.

I was wondering, obviously, the visibility remains low, but I was wondering if you could talk a little bit, since you think the first quarter might be the bottom and you gave us some idea that the wafer shippers were picking up, how you think some of the other product areas will pick up as utilization -- a lot of the reports on foundry and even a little memory utilization is rising. Do you think the customers will go back to normal usage cycles on the different filter products? So you will see some of your consumables business picking up? I know it's probably too soon for CapEx related, but maybe you could give some color on that.

Let me try, and then, I'll ask Bertrand, as well, to chime in. The areas where we are seeing some, and I reiterate some, improvements are all related to consumable products and unit-driven products. And you're right, for 300 millimeter new shippers towards the end of the first quarter, we did see a pick-up.

Part of that relates to market share, part of that relates to wafer growers and 300 mm production, as you know. The wafer grower business was essentially shut down for most of the first quarter, or much of the first quarter.

We are not seeing a recovery at this time in capital-oriented products, although I would also tell you that we have a lot of products in that area, that are actually new products, that will be on platforms that eventually will see recovery, and then we are going through various phases of qualification with customers. So we don't have a lot of visibility, as you know.

And at the same time, we do see some signs of life in the unit-driven products, including, I would say, filtration, where we are seeing expediting going on, much of that related to Asia and the foundries.

I think you've covered it. The CapEx-related business was virtually nonexistent in Q1. We don't really expect any meaningful recovery anytime soon.

And I think you covered the trend in the unit-driven business. We saw some improvement in the second half of March, and that trend has continued and accelerated as we get into April and the second quarter.

Just as an add-on to that, can you talk a little bit about the non-semi businesses? At 37% of the business, that's a pretty reasonable amount. But we've heard flat-panel display demand has been a little better than expected. And some of the other areas, life science, things like that, can you give us any feel for how those are trending?

Those businesses have not been as negatively impacted in Q1. We do expect those trends to also strengthen as we get into Q2 and later on in the year.

In our Materials business, our semiconductor side is down, in comparison to the core, about the same. The glass business that we are a participant in, in the manufacturing of glass bottles, has remained relatively stable. And we have seen only a slight decline there.

Our EDM business, which is related to injection molding, has been flat to slightly down. We saw a couple of pull-in orders from distributors that helped. But on balance, it's held up fairly well.

Medical is one area that, while it's still small, is a focus for us, and that's held up quite well. And then, our aerospace and aviation business is down a little bit but not nearly the same as the core.

So overall, the trends have been flat to slightly down, but nothing like we've seen in the semiconductor market.

My follow-up question to that is, if you look at the rising mix of non-semi, we've talked a little bit about this before. Is there much difference in margin between semi and non-semi? So that, if we have a stronger mix of non-semi in the near term, does that have any positive or negative impact on the overall margin mix?

Really, the margin profile across the different sectors is pretty comparable, because, in general, we are selling similar types of products into the different markets.

And then, final question, you talked about the EBITDA, just want to be really clear. So you could have a cumulative of $31 million, you had $16 million in the first quarter, but that's -- a decent portion of that was because of different charges.

So, Gideon, in your opening comments, that even if you continued at this level, you wouldn't be in noncompliance with your covenants through the year, that's because, even if you stay at this level, you would have a much lower loss going forward.

I'd make two comments with regard to that. First of all, as we move into the second quarter, that $31 million widens out to $45 million. So if you'll think about it from what do we have to work with in the second quarter, it's almost $30 million.

The other thing that I would comment on is, while our revenue in the quarter was relatively linear, our profitability -- our losses in the quarter were frontloaded in January and February as we worked very hard to take costs out of the business as we came through the quarter. So our performance in the back end of the quarter was much stronger than the front end of the quarter.

And like we said, at that kind of run rates we had, we feel very comfortable that even on flat revenue, we will make the covenants comfortably.

And, finally, just to summarize on the cost side, the work we have done on the cost side, as I think you know, started out last year well before the economic meltdown. We accelerated it in the wake of that meltdown, and I think what you are seeing is very, very significant and permanent cost cuts, which put us in a position today where we are in reasonable shape -- in very good shape, actually -- from a covenant standpoint, whether the business continues to be severely impacted over the balance of the year or whether we do see a rebound. In both cases, we think we are in good shape.

Excellent.

Steve Schwartz, First Analysis Securities.

Good morning, gentlemen. I guess my first question is on the breakeven point. You had expected to maybe get to this level in the third or fourth quarter of this year, with Chaska going over to Malaysia. So at this point, have you just moved that up, or will you continue to lower this breakeven point as you move through the year?

I would expect the breakeven point to be relatively consistent through the year. What's going to happen is, as the migration of manufacturing continues, we'll continue to take fixed costs out on that side of the business.

But at the same time, some of the temporary initiatives -- for instance, we are doing furloughs in Q2. We wouldn't expect to be doing those in Q3 and Q4. So the reinstatement of some of the short-term reductions will offset some of the additional savings that we will see on the fixed side in the back half of the year. So the breakeven will be consistent.

And on that, you guys gave some pretty good detail about the temporary and permanent actions you've taken. Can you just very simply break down, in percentage terms, what percent is permanent versus percent temp?

We said about $28 million in costs over the past 15 months that we've taken out of the business, about $15 million of that is temporary and $13 million of it is permanent.

Okay. And then with respect to your cash flow, it looks like you've been getting some cash out of Accounts Receivable, but at the same time, and going forward, I would imagine that would taper off. I'd like to hear how you think that might play out over the next couple of quarters.

And then, along with that, I think, Gideon, the way you described customers using up their consumables, almost cannibalizing off of shuttered equipment, what have you. I would imagine that you will prepare and put cash into inventories to prepare for that pendulum swing back, as the recovery begins. Can you talk a little bit about what you see in cash flow in those two categories?

What I would say, in general, is I feel very good about our cash position and the cash flow going forward. I would say I expect that we will burn some cash in Q2 because I don't think we will hit that breakeven EBITDA level, but at the same time, I am hopeful, actually, that we will burn some cash, as you said, putting inventories and receivables back onto the balance sheet as the business expands.

But I expect the cash burn to be moderate and a number clearly that is manageable within the terms of our covenants, and, like you said, overall feel good about the cash position and the cash flow prospects.

Very good. Thanks Greg.

I will take on your question about inventory. I think what will happen very likely over the next couple of quarters is that, first of all, the organization will continue to stay very focused on optimizing inventory levels. This said, as you would expect as part of product transfers, we have been building some level of inventory to cover for the needs of our customers during the transfers of the product from Chaska to Malaysia. It's about $2 million to $3 million.

And I would expect that particular inventory to be reduced and, at the same time, we will allow, obviously, some increase in inventory levels for our consumable business.

But net net, I would expect the finished goods levels to be relatively flat and I would expect some further reduction in [WIP] and raw material inventory levels. So I don't expect, in the short term, any significant pressure on working capital from the inventory.

And a final point on that, related, is that the way we have sort of transitioned our infrastructure over the past year is designed to give us maximum flexibility from a manufacturing standpoint, and the ability to respond rapidly to an influx of orders, or to the opposite, which is a downturn.

So that we have a lot of capacity, obviously, in our operations going forward, and don't see an issue responding to increased demand on a product line by product line basis. Partially through inventory, but frankly a lot of it is simply through flexible manufacturing.

That's very helpful. Thank you.

Christian Schwab, Craig-Hallum Capital Group.

Thank you for taking my question. When we look at the revenue recovery, what should we be thinking here? If we fall -- similar recovery scenarios, it seems like you're beginning to see that, right? We see some rush orders out of the blue, then the filter side picks up, then a leg behind that the wafer shippers pick up, and then, lastly, the capital side picks up, so you could sell fluid-handling products to the tool makers before they sell it to their end customers.

If we follow that typical recovery scenario, what -- where are we in that? Are we just at the very first step? Any help?

I would really reiterate, there has been nothing typical about this cycle. And there is no reason to suspect that the recovery will be typical, because this has not been a typical cycle.

It's been a cycle where capital- and unit-driven have simultaneously gone down dramatically in a way that's never been seen before. There is a question about how much of the pick-up that we may see in the next quarter or two is related to a sort of one-time inventory replenishment. We don't know the answer to that, so I would hesitate to answer your question.

If it is a typical recovery, then what you've said is correct. We would expect, over the next couple of quarters, to see a gradual increase and maybe not so gradual increase in capital orders as well.

We saw that in the last cycle in 2001, 2002. We have not, and I caution, seen that take place yet on the capital side here. So that's a question mark. We are prepared, either way, from a cost standpoint.

And for us, I think the most -- the positive thing about us, I can say, is that we are in a variety of products, both on the unit-driven side and the capital-driven side. We have taken this time to qualify new products on new platforms that are relevant for 32 nm and 22 nm platforms of the customer and technology of the customer, something that we know is coming down the line.

We know that Intel and now TSMC has committed to 22 nm. We have a slew of products on the filtration side, the purification side, and, frankly, on the microenvironment side that are actually designed to work at 32 nm and 22 nm, an environment that's going to require far more stringent contamination control.

We think the materials side of our business, the material science-oriented side of our business, plays into that extremely well, including the new acquisitions that were made. So we are well prepared. But we can't tell you when that's going to occur.

Right, I understand that. Can you speak to some of the leading customers that you have? Who is asking for rush orders? Who has lagged behind that could increase, should the world get better here, and demand for chips continue to moderately improve or at least stop deteriorating at a rapid pace? I mean, is TSM back? Is Intel back? Can you give us any color there?

Unfortunately, I won't be able to, for obvious reasons, to share with you the details of some of those orders we are getting. But I would simply say that what the activity that we are seeing is mostly driven by the usual suspects.

Great. Thank you.

Timothy Arcuri, Citigroup.

This is Junaid Ahmed, calling in for Tim. My first question is could you just outline the charges for each of -- for the R&D and SG&A? How they hit those lines?

The restructuring charges were about $4.6 million in the quarter. That breaks down roughly 50% related to severance, and approximately 50% related to the migration of our manufacturing from Minnesota to Malaysia.

Okay. So -- but could you outline how -- in what proportion it affects -- on the OpEx, individually?

We broke -- those charges are broken out as a separate line item on the P&L of $4.6 million. So they are not included in the SG&A or the ERND.

Secondly, what kind of tax guidance would you -- how should we be monitoring the tax going forward?

I would think about the tax rate, in general, as zero for the year. Depending on our profitability in Japan, you could see some modest benefits or some modest tax charges. For instance, in Q1, we had tax benefit of $2.6 million. That all related to our Japanese entity.

But as it relates to the United States, we are not a taxpayer. We are in a valuation allowance position with regard to our deferred taxes, so we don't recognize tax benefit, either. So it's really hard to say exactly -- to give you a rate, per se, but I would say, in general, it's going to be $1 million or two -- $2 million to $3 million, positive or negative, in any given quarter. And in general, they are going to be non-cash taxes.

And in terms of your breakeven, given that right now, as was mentioned on the call, there is -- a lot of the wafer starts increase is being driven by inventory restocking rather than end demand increase. If things taper off or even track back a little bit once that restocking is done, and end demand doesn't pick up, how do you see your breakeven -- would you -- or how much lower would you be able to take that, or would you take your planning, if things kind of taper back?

What I would say is we have taken very significant actions to get that breakeven down to inside of $85 million. So our intention right now would not be to make any additional cost-reduction measures. I would say, if things got extremely dire, are there additional actions that we could take on a short-term basis? Yes. But today, we are not contemplating those.

My last question. In terms of the expected technology shrinks by most of the memory guys, which is expected in [them], how do you line up in terms of getting exposure to that, if that takes place?

I would say that, despite some of the cost reductions initiated late last year and earlier in this year, we have been very, very careful in not impacting our R&D capabilities. And if anything, we have continued to very aggressively work with our customers to allow them to very successfully and aggressively continue to migrate down on their technology roadmap.

As such, I am very happy with the position we find ourselves in. We have a very rich pipeline of new products, both in the CCS arena and in the ME division. We have the right filters to enable our customers to migrate to 32 nm and 22 nm. We have the right microenvironment products to allow them to deal with more difficult contamination challenges around the wafer, as it is transported from one process step to another, and we feel very good around the competitive position we find ourselves in.

So, if the leading memory guys, like, move to the 3X in NAND, and then maybe the 5X node in DRAM, you would expect to have some -- you would expect to see some benefit there?

Absolutely.

All right. Thank you.

That does conclude our question-and-answer session. At this time, I'd like to turn the call back over to Mr. Argov for any closing remarks.

Thank you very much for participating on our call. We look forward to speaking with you as the year progresses.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.