Entegris Inc (ENTG) 2009 Q2 法說會逐字稿

Good day everyone and welcome to the Entegris second quarter 2009 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 Steve Cantor, Vice President of Corporate Relations. Please go ahead sir.

Good morning, everyone. And thank you for joining our call. Earlier this morning we announced our financial results for our second quarter ended June 27, 2009, 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 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; and Greg Graves Chief Financial Officer. Gideon will now begin the call.

Thank you, Steve. Good morning, and thank you all for joining the call. I will provide an overview of the quarter and then Greg will provide some color on the financial results and an update on our break-even levels.

There were several reasons to be encouraged with our second quarter performance. First, we achieved quarterly sales of $82.6 million, which is a 40% sequential increase driven by steadily improving demand for our unit driven products. Secondly, we lowered our EBITDA break-even level to $85 million in Q2, having implemented all of the cost reduction steps we described to you in our previous quarterly conference call. This enabled us to significantly reduce our operating loss and generate positive EBITDA in the month of June. Thirdly, we improved our cash flow and continued to lower our funded debt.

In terms of the revenue trends by market, sales to semiconductor customers represented 69% of Q2 sales and were up 52% from Q1,reflecting increases in Fab utilization rates and wafer starts, particularly at our Asian foundry customers. On an industry-wide basis, Fab utilization rates rose to around 70% in Q2, from levels around 50% in Q1, when the entire industry was in a virtual shutdown mode during the January and February time frame. Similarly, our second quarter sales were boosted by increased demand from wafer growers, who responded to the increased Fab production levels. Aside from some technology-driven projects, capital spending, among semiconductor customers, was still quite soft throughout the quarter.

Our sales to customers outside of the semi industry which represented 31% of total sales reflected a mixed picture. Sales to the TFT/flat panel display market rebounded stronglydriven in part by the China economic stimulus that included incentives for purchases of new high definition televisions. Sales to the data storage market also improved somewhat. In contrast, sales to some of the other industrial markets such as EDM, declined in the second quarter after faring relatively better in the semiconductor related sales in Q1. This is not surprising since these industrial markets track broader economic trends and tend to lag the semiconductor market by a quarter or two.

The unit-driven/CapEx-driven split in the second quarter was 74-26, compared to a 75-25 split in Q1. The pickup in the unit-driven sales to semiconductor customers was offset by a decline in sales of unit-driven products to non-semiconductor customers.

In terms of trends by segment, contamination control solution sales of $48 million, increased 39% from the first quarter. Roughly half of this business relates to our liquid filtration products, which are used in a semiconductor manufacturing process. With the upturn in Fab utilization beginning in March, we received some expedited orders for filters as well as for chemical containers from customers who were ramping production. Sales of CCS capital-driven products such as our photochemical pumps, fluid handling products and gas purification systems, remain soft. While we are seeing some technology buys for some of these systems, sales of most CCS capital-driven products in Q2 remained at levels well below historical mid-cycle volumes. On an operating basis, the CCS division rebounded from a loss of $8 million in Q1 to a $3 million profit in Q2.

Sales in our Microenvironment segment grew 78% in Q2 to $26 million. After being particularly hard-hit in Q1 by both the slowdown in Fab capital spending, as well as reduced wafer starts in the first quarter. Demand for wafer shippers picked up as the industry worked through wafer inventories and some of the leading wafer growers resumed production after shutting down for most of January and February. In particular, sales growth of 300-millimeter shippers represented continued market share gains.

On the transport side of the ME-business, demand for FOUPs and carriers increased from the extremely low Q1 level, but still reflected depressed industry spending for new equipment and capacity additions.

Among the positive in the quarter was the speed with which we restructured the Microenvironment business to lower our break-even while maintaining our focus on growing market share. As we told you in our last call, the closure of our largest manufacturing facility in North America and the move of a majority of that production to our facility in Malaysia is part of a plan that lowered the break-even point of this business by half since last year. All the tooling is now in place in Malaysia and we are up to speed with production on a number of products. The full benefit of this move will be realized when we achieve higher sales volumes, but for now, we narrowed the operating loss in the segment from $10 million, to almost break-even in Q2, as a result of permanent and temporary reductions in operating expenses.

Sales in our specialty materials segment fell 12%, to $9 million. A majority of these products including Poco's specialized carbon and specialized graphite are heavily weighted to customers outside of the semi industry such as the EDM segment. As I indicated earlier, these markets typically lag the semiconductor market, which they did in Q2, after holding up relatively better early in the downturn.

In short, Q2 represented a huge improvement from Q1, and we were pleased with the upturn in the unit-driven side of our business. While we are pleased with the progress, we believe the industry and economy have a long way to go before turning to a level that we would characterize as normal. Certainly, reaching such a level will require meaningful improvement in capital equipment spending.

Although the timing and trajectory of that improvement is unclear, our break-even level does not require an extensive recovery in the capital side of the business in order for us to generate positive EBITDA and to operate comfortably within our bank covenants. We're controlling what we can control and we are reaping the early results of a lower cost structure, a manufacturing footprint that is better aligned with the needs of our customers, and a stream-lined and more focused organization. Above all, we're managing our balance sheet and cash flow effectively. When the broader recovery does occur, these steps give us significant operating leverage and earnings power. We look forward to reporting to you on the further progress in Q3.

Before turning the call to Greg, for some comments on the financials, I want to acknowledge and thank Entegris's employees around the world for their hard work and dedication during these past several months. This has not been an easy period to say the least. But the resolve of our employees during a period of incredible change has been truly inspiring. Greg?

Thank you, Gideon. I will provide some detail on the financials for the quarter, and then provide an update on our break-even model for the third quarter.

We were pleased with the financial progress in the second quarter in every respect. Sales increased in each successive month since March and while we had a small EBITDA loss for the quarter, we were EBITDA positive in the month of June. Our Q2 sales growth reflected strong increases in Asia and Japan, which grew 89% and 55% respectively. As Gideon mentioned, we continued to take share in key areas, including 300-millimeter FOSB wafer shippers and PVA post-CMP roller brushes.

We successfully implemented all of the cost reduction steps we announced last quarter to achieve an $85 million EBITDA breakeven level for Q2 excluding restructuring expense.

These actions led to a reduction in our operating loss to $14.2 million in Q2, excluding $5.5 million in restructuring costs related to cost reduction programs and manufacturing consolidation. This compared to an operating loss of $34.5 million in Q1. Gross margin for the second quarter was 29%, up from 15% in Q1, excluding the first quarter purchase accounting adjustment. The higher margin was the result of both higher sales volumes as well as continued reductions in both fixed and variable costs at our manufacturing facilities. Operating expenses were $33.5 million, down from $38.6 million in Q1, and $47.5 million in the prior year, excluding amortization and restructuring charges. Second quarter SG&A of $25.7 million, and ER&D of $7.8 million declined sequentially due to a combination of permanent head count reductions and temporary cost savings programs such as work furloughs. Depreciation and amortization was $12.8 million in Q2.

EBITDA for the quarter, as measured by the terms of our amended credit agreement, was a loss of $4.3 million. For the first six months, the EBITDA loss on this basis was $20.2 million, well within the $45 million cumulative loss under our debt covenant. CapEx was $2.5 million in Q2, and $10.4 million through the first half of the year. We expect CapEx to run at around $6 million for the second half of 2009.

Turning to the balance sheet, we reduced our borrowings by $14 million, and ended the quarter with $151.7 million of funded debt, including $130 million under the revolving credit facility. The cash balance was $84 million, as we generated $3.1 million in cash from operations, primarily due to reductions in inventories. Inventory turns improved to 2.7 from 2.2 in Q1, and DSO's declined to 65 days in Q2, from 80 days in the first quarter.

Looking to the third quarter, we expect to be above break-even on an EBITDA basis, excluding restructuring expenses. The EBITDA break-even level will be $85 million to $87 million, similar to the level we experienced in Q2. This reflects a slight upward bias from Q1, given the discontinuation of work furloughs as our plant utilization continues to ramp.

Our Q3 break-even level is based on manufacturing fixed costs of about $27 million to $29 million, variable manufacturing costs of about 36 to 38% of revenue, and operating expenses exclusive of amortization of approximately $35 million to $37 million. We expect operating expense to modestly higher than in Q2 as we reverse a portion of the temporary cost cuts that were put in place in Q1, namely the furloughs and salary reductions for non-executive employees. We intend to reinstate the remaining temporary cost reductions as revenues continue to recover to levels that support sustained and growing profitability. On a GAAP basis, we expect the break-even to be approximately $110 million in Q3.

In summary, our revenue trajectory is positive, even without the benefit of a full recovery in the capital-driven side of the business. We delivered on our cost reduction initiatives and have positioned the Company to realize significant operating leverage when the business fully recovers. We continue to invest in new products and markets and to take share in key areas, and finally, we have improved our cash flow and our balance sheet and are operating well within the requirements of our bank covenants. With that, we will now take your questions. Operator?

Thank you. (Operator Instructions) Our first question today comes from the Krish Sankar.

Good morning. This is Paul Thomas for Krish Sankar. Hi, guys. A question on -- on the units related business, obviously things recovered pretty well in foundry, and at this point, do you guys think the restocking is mostly done now? Or are we going to see a return to more normalized wafer start type growth or is it still going to be faster than that in the next couple of quarters?

This is Bertrand. I think that most of the restructuring activity took place probably in Q2, and we don't expect to see any significant impact in the second half of this year.

And then CapEx, Gideon, you said that CapEx-related sales were still pretty soft during the quarter, but we're starting to hear about orders from your OEM customers are going to be up in Q3, it seems pretty significantly. Are you seeing any activity that indicates you guys are going to see something similar to that any time soon? Or is that going to come later?

I think we haven't seen that so far, and as you know, we tend to have limited visibility in our business. The way to think about that is that we can do quite well and we've done quite well on a relative basis without that so far, and we will be happy to see any impact of that in the future, let me put it that way. That will be a good thing, and to some extent icing on the cake.

Okay. Thank you.

And we will take our next question today from Christian Schwab of Craig-Hallum Capital Group.

Great, thank you. Could you give us a little bit more color on positive EBITDA? Is that $1 million to $2 million in positive EBITDA? Is that $3 million to $7 million? Can you give us any directional help there?

Christian, we're not giving revenue guidance, and essentially, if I were to give you an EBITDA point, I would be giving revenue guidance. I think suffice it to say it will be positive. We continue to see positive revenue trends. As I said, each month in the quarter was better than the prior month. And so we feel like we've got good momentum in the business but we're not going to give a specific revenue number.

Okay. As we look at the recovery scenario, can you give us some color on how you see the recovery playing out over the next two to three quarters, your best estimate at this point?

Christian, this is Bertrand. I would just start with some considerations at the micro level, and I think it is safe to say that first there is a general consensus for a recovery in growth over GDP in the second half of the year. From industry standpoint, we also expect the cell phone and PC shipments to see some seasonal strength going into the second half of 2009. So all of that bodes well for continued strength in our unit-driven business, really again, led by a recovery in Fab capacity utilization. As it relates to CapEx, that is -- as Gideon said, that is the big question mark that we all have. Right now, on an aggregate level, Fab capacity utilization is still relatively low and we would need Fab capacity utilization to probably exceed 80 to 90% for any meaningful capacity addition to take place and as of right now, I don't think anybody in the industry would be capable to tell you when that would take place.

So when you look at Fab utilization, it was 50% in Q1, 70% in Q2, what are your leading customers telling you that they expect utilization rates to be at in the second half or exiting this year, calendar?

I think that if we look at Q3, there is a fair degree of certainty that Fab capacity utilization will reach, or will get closer to mid 70%, maybe getting as high as 80%. After that, it is, it is really -- we don't have enough visibility to comment on that. And again, very frankly, it really depends heavily on what customer you're talking to, if you talk to some of the DRAM customers, their Fab utilization is not even at those levels, as of today and I don't expect them to reach 70% Fab utilization any time soon. Now, if you talk to some of the leading edge Fabs, they are, some of them, have already exceeded 70% capacity utilization so you have a mixed picture here.

Right. As we look at the recovery over the next few quarters and peak revenue, a few quarters ago being roughly $160 million, do you see the recovery scenario returning to a more normalized rate, at about 75% of that, give or take?

That is the question. We certainly don't see the industry returning to what existed in 2007, early part of 2008. That is in my opinion, that is unlikely to happen in the next year to two. What we do see is a company, in our case, that even if we are operating at 20, 25% less than those kind of levels, will be delivering fairly healthy profits. Because the fact is we have a far more streamlined cost structure, we have executed on the product transfers. We have now for the first time a majority of our manufacturing operations in Asia and outside the United States, in the second half of this year, and you're going to see us at levels that are even 25% less than what you would call prior normalized levels, operating at a very healthy and profitable clip.

Right.

Color around that, Christian, I mean our operating margins at 125, in quarterly revenue, will be as good or better than they were at 150, in earlier cycles.

Right. Exactly. Great. And then lastly, my last question, on 300-millimeter, what do you think your market share is there? And where do you see that going in the next two to three quarters?

Christian, this is Bertrand again. I'm assuming that your question relates to our 300-millimeter for the shippers.

Yes, sorry.

And I'm actually very pleased with the results recorded in Q2. In Q2, we are back to levels we enjoyed in Q3 and Q4 of last year, which is in itself suggesting that we are continuing to gain share. But you will remember, our long-term plan, our two to three year plan is to get to 25 to 30% market share. We have continued to execute on that strategy. We have continued to make very good progress at all of the major wafer growers. And we're now currently working with some major IDM's to qualify their incoming wafer shipping lanes. So I feel pretty good about how the team has executed in Q2, and I think we are well positioned to be on par with those long-term objectives.

Great. Thank you.

(Operator Instructions) We will go next to Steve Schwartz of First Analysis.

Good morning, everyone.

Good morning, Steve.

I guess the first thing is it looks like inventory continues to generate cash. Even though you had an upturn in business. And I'm just wondering, how many quarters you think that will continue?

We have done a very good job, really in both inventory and receivables, in terms of managing the balance sheet. And that is -- I mean that is a function of the fact that we're much more focused on that today. In terms of can inventory continue to decline on a sustainable basis, I would say not at the rate that it has. But I don't think you will see inventory move up significantly over the next quarter or two. Although we would expect that if revenue continues to increase, we will see some modest increases in inventory is what we're planning for.

Okay. So just modest cash consumption there as things continue to improve?

Right. I mean we will consume, I mean more cash -- as the business grows as a percentage, we will consume considerably more cash in the accounts receivable than in the inventory area. We wouldn't expect -- receivables are going to grow in line with revenue. We would not expect inventory to grow in line with revenue on a percentage basis.

Greg, was there a tax valuation allowance in this second quarter like you had in the first?

Well, there was. I mean we're not taking any benefit with regard to the losses for US purposes.

Okay. What was that amount?

So the answer is, is yes, so as we generate the operating -- or the taxable losses, we're putting in allowance against them and not showing the benefit. Other than there was a slight benefit this quarter and that related to Japan where we're not putting valuation allowances on.

And that amount in the second quarter?

I don't have that right off the top of my head, Steve. I will have to get back to you with that.

It will be in the Q, right?

Yes.

Okay. I will get it there. And then last question is, you actually had a much stronger percentage improvement sequentially in your CapEx. Even though we know that there is still weakness there. Is there some replacement business in there that is helping to drive that?

Steve, I think part of it is we are just coming off such a low base on the capital side. That explains part of it. And then we did see -- we have seen some modest improvement, very modest improvement in our shipments during the quarter to some of the OEMs but like I said, the primary reason is that capital business had gotten so low in Q1, so when you look at it on a percentage basis, you're right, the improvement is about the same. But it was a really low base.

Very good. Thank you much.

Just to add to that, Steve, if you look at our CapEx business right now, peak to trough, our overall CapEx business is still at about 30% of peak levels of a year ago. So I think that just gives you a note of magnitude of how depressed the levels were in Q1.

Okay.

And next we will take a follow-up from Krish Sankar, Bank of America.

Hi, this is Krish. Sorry, I got in a little late. A couple of questions. I know you're not giving any revenue guidance but it seems like the semi business is picking up, but if you flat line non-semi from year how do you think of the margin profile going forward?

So number one, the non-semi business, we don't necessarily see that business flat-lining. I would say we see that business as growing over the balance of the year. And even in the specialty materials division, which we saw a decrease in revenue in the second quarter for reasons that we talked about, part of that is tied to the broader economy, there is a segment that is impacted in there to some extent by automotive, but we actually see that business growing, and we have seen a rebound in the level of activity in that business, as we get into the current quarter. The margin profile is not dramatically different between the semi and the non-semi. The way to think about the margin profile is by product line by product line basis, so within CCS, within ME, and within ESMB, all of which are outlined clearly in the financial reports, we see different product lines, with different margins, but there is no consistent and systematic bias either better or worse in terms of margin by segment is the way I would describe it.

Got it. Thank you. And then one other question. Or two more, actually. The upside in Q2 came from the unit-driven side, both the filtration and wafer shippers. Was the filtration business pickup driven mainly by the foundry guys? And the second part to that was on the base wafer shipper side is there any way of setting up what portion cane from share gains versus wafer start improvement?

You're correct in your first assumption that a lot of the improvement that we recorded in the US, in the unit-driven business, was coming from liquid filters, wafer shippers, as well as our container business, which did very well with obviously some increase in materials, in the chemicals consumptions by the Fabs as well. So we needed to provide some drums and other containers to the chemical companies. So back to your question about share gains, versus just benefiting from the industry trend, I would just say that if I look at the wafer shipper business itself, we enjoyed a growth rate in excess of 100% in the quarter, I mean quarter over quarter, which would suggest that a portion of that is related to just benefiting from the industry trend, and a portion of that is relating to market share gains.

Thank you very much.

And we will take a follow-up from Christian Schwab of Craig-Hallum Capital Group.

Just to follow up, you would expect your -- all business segments to be up sequentially? Did I understand that right, in Q3? Contamination control, Microenvironment, Specialty Materials?

Yes.

Okay. And as you look to the mid cycle, as we look out and we can all guess when that mid cycle will occur, but what do you think the quarterly revenue run rates for your Company would be at a mid cycle?

We don't have an answer for that, is the short answer. I mean that depends on overall level of activity, and Fab utilization. I think again, my personal view is that it is not unreasonable to assume that that would be somewhere around 25% lower than what we assumed to be mid cycle a year or two ago. On a pro forma basis, the third quarter of 2008, with all of our ESMB business, we did in the $165 million range. That was the revenue on a pro forma basis in that quarter. If you take 25% lower than that, 20% lower than that, I mean is that a reasonable assumption? Potentially, yes. That would put us at around $125 million a quarter. So I am not suggesting that we are forecasting that. I am suggesting that that is not an unreasonable thought. And the only question is, when, and at what rate we recover and when do we get there.

Great. Thank you.

With no further questions, I would like to turn the conference back over to Gideon Argov for any additional or closing remarks.

Thank you very much for joining our call. And we look forward to updating you in the future.

And that does conclude today's conference, ladies and gentlemen. And we appreciate everyone's participation today.