Entegris Inc (ENTG) 2009 Q3 法說會逐字稿

Good day and welcome to Entegris's third quarter r 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.

Good morning. Thank you for joining our call. For our third quarter ended September 26th, 2009. You can access a copy of the Press Release at www.entegris.com. Before we begin I would like to remind listeners 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 this call we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can fine a reconciliation table in today's press release as well as on our website. On the call today, are Gideon Argov, President & CEO, Bertrand Loy, Chief Operating Officer and Greg Graves, Chief Financial Officer. Gideon will now begin the call.

Thank you, Steve. Good morning, thanks for joining the call. I will provide an overview on the third quarter and then Greg will provide some color on the financial results. There were three key take aways from the third quarter. First, we saw steadily improving demand from both our unit driven and capital driven products, which led to a 34% sequential increase in sales. Much of the improvement reflects a partial recovery in the semiconductor industry, but we are also encouraged by the early results of our efforts to recapture share and penetrate new markets. Second, we see evidence of the operating leverage from our improved cost structure. We executed well and were able to generate EBITDA of $14.5 million an EBITA margin of 6% before restructuring expense, even with revenues well below historical levels. Third, we significantly improved the balance sheet by reducing our debt by nearly 40% with the proceeds of our stock offering in September. Greg will cover this in more detail in his remarks.

In terms of the revenue trends by market, sales to semiconductor customers were up 38% from the second quarter representing 71% of Q3 sales. The increase in fab utilization rates and production output in Q2 on the part of foundry customers was not only sustained but broadened to other device makers in the third quarter. In addition, the capital driven side was boosted as some fab customers pushed forward R&D projects related to implementing advanced process technologies. Our sales to customers outside of semi industry were 29% of total sales as we saw continued improvement in data storage, flat panel, LED, and other industrial markets. The unit driven CapEx driven split in the third quarter was 71% to 29% reflecting a slight shift toward capital driven sales from the second quarter. This is significant since the capital driven side of our business will provide the next leg up in our growth. In terms of trends by segment, contamination control solution segment sales grew 40% from the second quarter, $66 million. Much of this growth was in our filtration and liquid container businesses, which continued to show strength after rebounding in the second quarter. Sales of CCS capital driven products, such as photochemical pumps for track tools were also up in the second quarter. In addition we experienced significant demand for our gas purification systems that are used to control contamination in the LED manufacturing environment.

After rebounding strongly in the second quarter, sales in our Microenvironment segment grew another 24%, in Q3. Demand for wafer shippers was higher for 200-millimeter and below which is a testament to the resilience of that end of market and sales of 300-millimeter shippers paused after several consecutive quarters of steady growth. On the transport side of the ME business, demand for FOUPs and carriers improved, both at a level reflecting modest industry spending for fab upgrades, which drives sales of these particular products. Finally, sales in our specialty materials segment rose 42% from second quarter to $12 million. This reflected improved demand for our coatings products as well as Poco's specialized graphite used in semi conductor and microelectronic applications.

While our third quarter sales performance was encouraging, we were pleased with our operating results. The EBITDA we generated on a relatively low level of sales demonstrates continued progress toward returning to profitability on an EPS basis, and showed the powerful operating leverage and the cash flow potential we have now built into our business model. In summary, we are gaining momentum with key product initiatives, we are benefiting from the recovery in the semiconductor device production, and from technology spending on next generation processes, and we are fostering growth opportunities outside of semi. Our improved cost structure provides for enhanced earnings potential at lower revenue levels and we have strengthened our balance sheet by paying down a sizable portion of our outstanding debt.

Greg?

Thank you, Gideon. I will provide some detail on the third quarter financials and provide an update on our Q4 operating model. We were pleased with the financial improvement in the third quarter in every respect. Sales continued to increase through the quarter, and we had positive operating margins on an EBITDA basis excluding restructuring charges. The Q3 sales growth was led by Asia, which grew 46% sequentially. Japan and the US also showed strength increasing 35% and 37% respectively. Europe sales were flat after growing 33% in Q2. Foreign exchange rates compared to Q2 at a $2 million favorable impact on total Q3 sales primarily due to change in the yen.

Gross margin for the third quarter improved to 40.4% up from 28.7% in Q2. The higher margin was the result of higher sales volumes, favorable product mix, and very good execution by our manufacturing team. Operating expenses excluding amortization and restructuring were $37.8 million or 34% of sales which compared to $33.5 million or 41% of sales in Q2. The Q3 operating expenses included the restoration of a portion of the temporary cost cuts we made in Q1 and Q2. As a result, third quarter SG&A of $29.2 million and ER&D of $8.6 million rose sequentially. Depreciation and amortization expense were $12.2 million in Q3 down modestly from Q2. Other expense for the quarter was $4.1 million, due to changes in foreign exchange, primarily the strengthening of the yen relative to the dollar. I should point out that through the nine months of the year, the net impact of FX was roughly $700,000 expense, reflecting the variability of FX rates. CapEx for the third quarter was $1.1 million, and $11.5 million through the first nine months of the year. We expect CapEx to be around $14 million for the full year, as we continue to spend at maintenance levels.

Turning to the balance sheet, we reduced our outstanding debt by $60 million, and ended the quarter with $91.6 million of funded debt including $67 million under the revolving credit facility. We achieved this primarily through the use of proceeds of the stock offering we completed in September. With the reduction in debt, we believe we can operate very comfortably within the covenants of the bank agreement, even as those terms revert to more traditional covenants in Q2 of next year. Our Q3 cash balance of $78.4 million declined $5.7 million from Q2. This reflected higher working capital needs to support the higher sales volume, and the use of cash to pay down debt above and beyond the proceeds of the stock offering. We were particularly pleased with our working capital management, since even with the increasing sales and order trends, we increased inventory by only $2 million. Inventory turns improved to 3.2 from 2.7 in Q2. DSOs were 66 days in Q3, essentially the same as in the second quarter.

Looking to the fourth quarter, we expect revenues to exceed third quarter levels. We also expect to generate cash from operations in the quarter as we continue to maintain tight cost controls, and actively manage our working capital. In Q4 we expect manufacturing fixed costs of about $25 million to $27 million, variable manufacturing costs of about 38% to 40% of revenue, and operating expenses exclusive of amortization of approximately $37 million to $39 million. As we move into 2010, and plan for the full restoration of the temporary cost reductions, we expect total quarterly operating expenses to run between $41 million and $43 million excluding amortization. To put this in perspective even with costs fully restored, this OpEx level will be approximately $12 million per quarter, below the $54 million of operating expenses we had in Q1 of 2008. Thus, beginning in 2010, we expect quarterly operating income break even to be $110 million excluding amortization, and our cash EPS break even to be approximately $112 million to $115 million.

In summary, our revenue trajectory is positive even without the benefits of a full blown recovery in the capital driven side of the business. Our permanent cost reductions position the Company to realize significant operating leverage. We continue to invest in new products and markets and to take share in key areas, and we have significantly improved our balance sheet.

With that we will now take your questions. Operator?

Thank you. Today's question-and-answer session will be conducted electronically. (Operator Instructions). Our first question is from Krish Sankar from BofAML.

This is Paul Thomas for Krish. Thanks for taking my question. First question on the gross margin front, last quarter you were talking about $28 million in fixed cost and it sounds like you have taken that down in Q4. Is there more room to go there going into next year?

Our fixed cost structure today is probably about where it will be going into next year, I think as you think about the gross margin going into next year, we really need to think about a 60% flow through on incremental revenue. If you look at the most recent quarter, we had a very strong performance on margin, the flow through on the increase in revenue over Q2 was about 80% on the gross margin line. That's in part a function of the manufacturing, the direct labor is semi fixed so we did not add labor at the same rate that we added revenue, but as we move forward, we need to think about a flow through in the 60% range. And we'll probably quit talking so much about the fixed and variable break out.

Okay. Thanks. That helps. Also, so going into a seasonally slow Q1, how should we think about the unit related revenues versus CapEx?

Our unit related revenues were really most of the improvement that we have seen year-to-date, and yet we see that potentially a shift as we move further into the year. We have all seen the actual results in the forecast for the capital equipment side of the business. We were beginning to see that in this last quarter. My guess is that we will see, we will see a continued stronger performance relatively on the capital side as we move forward.

Okay. Thanks.

The next question comes from Christian Schwab from Craig-Hallum Capital Group.

Great. Thank you. Excuse me. Semicap equipment revenue specifically, what was that in the quarter, Greg?

Semicap equipment, our revenue from the capital side of the business, is that what you are asking, Christian?

Yes.

It was 29% of our total.

Went into semicap equipment sales?

Revenue that is driven by the capital spending.

Okay. Perfect. And then as we look to kind of the mid cycle now that the world has kind of improved can you walk us through what you think mid and peak cycle revenue is for you given the new environment per product line?

We have sized the business, we are thinking of targets internally of 130 and somewhere in the kind of the 155 to 160 range is how we are, are the numbers that we are planning against.

Perfect. Thank you.

The next question comes from Avinash Kant with D. A. Davidson and Company.

Good morning, Gideon and Greg.

Morning.

Question more on the unit side actually. Most of the wafer starts based commentary that we have heard from our companies looks like wafer starts in the Q4 are going be flattish, not down much. Do you see that in your unit driven businesses?

Hi Avinash, its Bertrand. We expect the rate of wafer start growth to cool off going into Q4 but we still expect our consumer business to grow modestly. So, if you think about the order trend right now for our unit driven business, that remains actually very strong going into Q4 and while there could be some seasonal softening in terms of IT demand, that is yet to impact our consumer business. You should expect our consumer business to grow modestly going into Q4.

To grow modestly right. And if the CapEx side of commentary, we have been hearing pretty strong numbers from Q3 to Q4. But even 30%, 40% kind of growth. Is that reasonable, what you are hearing to or is that off by a bit?

We definetely saw an up tick in our CapEx business in Q3. We still expect this trend to continue going into Q4 but remember the three major factors really contributing to our CapEx business. The first one would be the technology upgrade, the second would be the new green field projects and finally there would be also some new applications for equipment products, applications into new markets. So what we are seeing right now is a very solid growth in terms of the technology upgrade and all of our product lines have been benefiting from that. And that is very encouraging. We are finding some new applications for our equipment business outside of semi applications, that is actually very promising news going into Q4 and into 2010. The ingredient that is still missing is the new capacity addition, and that would be the one ingredient we would need in order for our CapEx business to go back to its historical levels.

Okay. And also, if you could comment a little bit about some of the market share losses you've had in the past, on the wafer shipper side, are you starting to get some back?

I think we have been very open about it. Our long term goal is to gain about 25% to 30% of the 300 millimeter shipper market share. And that is what the team has been aggressively working toward. What we stated is that after four or five consecutive progress in terms of market share growth, the growth rate grows in Q3. But very frankly I think, when you go from 0% market share, and you are on your way to 25% market share, nobody really should be expecting a linear progression. Now, I am very pleased to report that our team remains very, very active and committed to our long term goal. We have a very good product, a very good design, we have a very competitive pricing, and the activity and efforts in the field are in full swing. We are very engaged with all of the major wafer growers and we continue to qualify our products at all of the major fabs.

During a previous question, on 130 and then you said 155 to 160, what are we thinking about there, 130 by early next year, and next year and 155 to 160 later on next year. How are we thinking about these two numbers?

The short answer we can't forecast the market, as you know. And it would not be unreasonable to assume we might see numbers in the 130 range at some point over the coming couple of quarters. That depends on current trends continuing however which we are not able to forecast. So, we don't give guidance and we have no ability to forecast wafer starts. So you should take that with a grain of salt. If current trends continue, not an unreasonable thing to think about, the way I would describe it longer term progression is this, in beginning of 2008, we did approximately in the $160 million rate per quarter. So, 130 represents about 20%, over 20% less than the number we did in the first quarter of 2008. So you can think about that the world does not have to go back to what it was in the end of '07, beginning of '08 for us to achieve those numbers.

Do you have an idea of the levels of EPS, what kind of EPS are we talking about given some of the OpEx coming back?

That will be in part a function of debt levels, and tax rate. But where we have given specific guidance, it is sort of 130 we said we would expect our operating margin to be 8% to 10% and at 150 we said we would expect our operating margin to be 12% to 14%.

Okay. Perfect. I will let other people ask questions. Thank you.

The next question comes from Timothy Arcuri with Citi.

Hi. This is Peter Karazeris for Timothy Arcuri. I wanted to ask on the capital spending side of the business if it started relatively narrow. I realize it is up this quarter and up next quarter. Is that from a narrow set of customers and do you sea that broadening in 4Q and first half of next year? Is that driving the strength?

It is true that the fab upgrades were led by a relatively small number of customers and we would expect more customers to start upgrading to the next technology, and hopefully at some point in time going into 2010 we will start talking about fab capacity additions.

Peter, the trend we talk back in the second quarter, early in second quarter we started to see signs of light, around the edges on the unit driven side, small number of customers, and as time has progressed that has broadened out. We have seen the same thing on technology driven CapEx, where it started with a small group of customers, and it is broadening out. We have started to see, we talked about at the beginning of Q3 seeing a glimmer of hope on the capital driven or on the technology side of CapEx. I would say now we have started to see a glimmer of hope around some of our capacity driven products. So, we have got that one additional wave to go. We are not predicting when it will come but we are seeing sign of light.

Great. That's helpful. Then just on the operating expense coming back, what's your targeted level of R&D, and is there any particular projects or products that you are scoping out?

There's no specific plan. What I will say is in the SG&A line, we have allocated more toward new market development as we move forward than we have in the past. So even though our SG&A costs are down significantly, we are spending significantly more on new market activities. With regard to ER&D while the costs appear down quite a bit year over year, if you take the compensation related costs out of that we have been relatively stable in terms of head count on the E R&D side. So we have continued to hold our position on ER&D.

Great. That's it for me. Thanks.

Your next question comes from Steve Schwartz from First Analysis.

Good morning, guys.

Hi, Steve.

Morning.

Industrial, the specialty materials business will have had the best sequential improvement for the first half of the year seemed to be lagging in the downturn. Would you guys say that business is now turning around for recovery as well?

The business grew 42% from the second quarter, you are right. A lot of that is in the semi related portion of the business. The business, as you know, has a significant semi exposure and we saw in a number of areas in etch, as well as on an impact significant growth in that business. We have seen certain of the industrial marks begin to make that turn and recover parts of the Yen market for example, and a glass market that are covered by [Pocho]. We still another leg of recovery in that business because most of what we saw this quarter was actually driven by semi.

I see. Then can you give us an update on Malaysia, are you fully settled and producing at a healthy rhythm.

Yes. Actually we have started for a number of product lines to resume production late Q2 and some late Q3. The project is going well. It is on track and we will be completing the remaining transfers by the end of the year. Arguably, the project is probably delayed to about one to one and a half months and it is the function of a surge in demand for the products being produced in Kulim. It is nice to have but it did delay the qualifications that need to happen. Yet, it is being set again, we will be on time and we shall include this massive transfer by the end of the year.

Okay. Then just one last number Greg if I can in other income, that FX is in there and you commented about that swing. How much is that FX for measurement number, out of the 4.1?

It is essentially the whole number.

Okay. Thank you.

(Operator Instructions). Our next question is from Dick Ryan from Dougherty & Company.

Good morning. So, Greg, restructuring charges going forward, how should we look at those?

In Q4, we'll have some modest restructuring charges as we finalize the product qualification in Kulim and as we finalize the final asset sales around the building foreclosure in Chaska. We are also closing another building in Chaska , a large warehouse that we could have a small charge for in Q4. We would expect the restructuring changes to be behind us as we move into 2010. So we have a modest amount in Q4, but beyond that we would not expect to see restructuring

Okay.

Just to add to that, the warehouse we're closing in Chaska, is the last step of a multiyear project, aiming at outsourcing all of our warehousing requirements to 3PLs, and that's again that's the last step in the US and we completed that in October.

Okay. When will the temporary cost be fully reinstated.

If our revenue trajectory continues on an upward path, by the end of the first quarter of next year. And that, I refer to a number of somewhere in the $41 million is to $43 million per quarter range. That will reflect a full cost structure with all of the temporary reductions.

Okay. And Gideon, the micro environment you talked about shippers increasing at the 200 level, you mentioned a pause at the 300-millimeter level. Can you give us a little more color what you see going forward there?

Well, the 300-millimeter shipper market will grow. Clearly more than the 200mm shipper market. That is back, and we know because of the nature of our relationships with the growers and device manufacturers that we have moved from essentially zero market share 18 months ago to approaching a 10% market share in the current time frame not quite 10% I should say. We think we are on track for our objectives. We know exactly where they're coming from over the next couple of years and at the same time you will have sort varying demand quarter to quarter. It is not a linear, entirely linear progression on a quarter by quarter basis. But if you look at 12-inch wafer, the compound annual growth rate the past, two to three years before the downturn over the past nine months was sort of in the compounded 12% growth rate. So that market all things equal should continue to grow into the future.

Thank you.

At this time, there are no further questions. I would like to turn the conference back over to Gideon for additional comments.

Thank you for joining our conference call. We look forward to updating you on our progress in the future. Have a nice day.

This concludes today's conference. Thank you for your participation.