Entegris Inc (ENTG) 2009 Q4 法說會逐字稿

Good day everyone and welcome to the Entegris fourth quarter 2009 earnings release conference call. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn call over to Steve Cantor, Vice President of Corporate Relations. Please go ahead, sir.

Good morning and thank you all for joining our call today. Earlier we announced our financial results for our fourth quarter and fiscal ended December 31, 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 this call, we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. You can find a reconciliation table in today's press release as well as on our website.

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.

Thanks Steve and good morning. Thank you all for joining the call. I'll provide an overview on the fourth quarter and then Greg Graves will provide some color on the financial results. We are very pleased with the results of the quarter.

First, our fourth quarter sales grew 32% sequentially, to $146 million. A level not seen since 2008. The growth reflected the continued rebound in our core Semiconductor market for both our unit-driven products, which grew 23% and our capital equipment and components, which rose 56% from the third quarter.

Secondly, we returned to profitability and achieved non-GAAP EPS of $0.12, reflecting a non-GAAP operating margin of 15%. We were able to achieve this level of profitability with revenues that were $20 million below what we would have needed in previous cycles to obtain that margin. These results reflect the combination of temporary, as well as permanent cost controls.

Third, we generated $11 million in cash from operations and further reduced our debt to approximately $70 million. Our debt's been reduced by more than 50% since last year at this time.

In terms of the revenue trends by market, sales to semiconductor customers were up 41% from the third quarter, representing 75% of Q4 revenues. Our sales to customers outside of the Semi industry were 25% of total revenues. Sales to data storage, TFT, LCD and LED customers remained strong. And sales to other industrial markets improved modestly.

The unit-driven and capital expenditure-driven split in the fourth quarter was 66-34, reflecting a shift towards capital-driven sales from the third quarter.

Our business continues to be driven largely by unit production in the semiconductor and microelectronics markets, but our exposure to the capex side of the market provided a good boost in the fourth quarter. We had excellent performance across each of our divisions.

Contamination Control Solutions, our largest division, grew 43% from the third quarter to $94 million. Sales of CCS capital-driven products, such as photo chemical pumps for track tools were also up significantly.

We saw high demand for a range of fluid handling solutions used in wet etch and clean tools, as well as to facilitize already constructed new fabs and fab lines.

In addition, we experienced significant demand for our gas purification systems used to control contamination in the LED manufacturing environment. We had another quarter of excellent performance in sales of filtration solutions, in part from continued demand related to the high production levels at our customers, as well as market share gains in some key areas.

The CCS division not only provided healthy growth in the fourth quarter, it also generated $24 million in operating profit, excluding corporate costs. That is a 25% operating margin for this business for the quarter.

Sales in our Microenvironments segment grew another 18% in Q4. We experienced solid demand for shippers, both for wafers, as well as for data storage components.

In the 300-millimeter shipper market, we ended the year with just below 10% share of the market, despite a difficult industry environment during much of 2009. On the transport side of the ME business, demand for FOUPs and other carriers improved at a level reflecting modest industry spending for capacity expansion, which drives revenues for these products.

On an operating basis, the moves we made to transfer production to lower cost areas and to reduce the fixed cost of this business are paying off. The ME division reported operating profit of $9 million or 24% of revenues, excluding corporate costs.

Sales in our Specialty Materials segment rose 15% from Q3 to $14 million. This reflected improved demand for our coatings products, as well as POCO's specialized graphite used in semiconductor and microelectronics applications. Sales to other industrial markets continued to improve as those markets recovered with the general economy. Operating margins for our Specialty Materials division improved to 14% in Q4, excluding corporate costs.

Before turning the call to Greg, I want to take a moment and summarize where we are today and where we've come from over the past year. The year just ended included the most violent and abrupt downward and upward cycle of demand that our industry has witnessed. When we at Entegris saw the storm clouds gathering in late 2008, we made a series of strategic decisions. These included-

One, permanent and large reductions in our fixed cost structure.

Two, a dramatic shift of manufacturing presence away from relatively expensive North American locations towards Asia, which brings us both proximity to many of our customers as well as lower costs.

Three, a streamlined organizational structure that is both more responsive to our customers, as well as more transparent to investors.

And four, a renewed commitment to aggressive product development in order to take advantage of the downturn to ultimately gain market share.

With the fourth quarter results, you can begin to appreciate and understand the magnitude of the changes we've made at Entegris. In a real way, it is Entegris 2.0 - leaner, faster, closer to our customers and more profitable at lower revenues than ever before. Greg?

Thank you, Gideon. I'd provide some detail on the fourth quarter financials and then add commentary on current business trends and our operating model.

We truly were pleased with the results in the fourth quarter in every respect. Our 32% sequential sales growth reflected sustained and steadily increasing order rates through Q4, which have continued thus far into the first quarter. Non-GAAP EPS, which excludes amortization and certain non-cash charges was $0.12 per diluted share.

By geography, sales for our largest region, Asia, grew 36% sequentially. Japan and the US also showed strength, increasing 33% and 18%, respectively. Sales in Europe grew 58%.

Foreign exchange rate changes had a $3 million favorable impact on sales, due to the weaker US dollar. In addition, the fourth quarter included four additional days compared to the third quarter.

Gross margin for the fourth quarter improved to 43.9%, up from 40.4% in Q3 as we had significantly higher volume and realized additional benefits of the production transfer to Malaysia. It is worth noting that the Q4 gross margin is the highest level we have achieved since the third quarter of 2006 when revenue was nearly $170 million.

Operating expenses, excluding amortization and restructuring, were $42.1 million or 28% of sales. In absolute dollar terms, this was higher than the $37.8 million we reported in Q3 and slightly above the level we forecasted in our last conference call. The increase was due to variable compensation and incentive costs related to higher Q4 sales, the four additional days in the quarter and to a lesser extent, the impact of foreign exchange rates.

Q4 operating expenses did reflect the restoration in Q3 of a portion of the temporary cost cuts we made in the first half of 2009. Beginning in Q1, all compensation-related cuts have been restored. The quarter's results included a restructuring charge of $3 million related to the closure of one of our Chaska, Minnesota manufacturing facilities and the move of manufacturing from that facility to our other existing operations. The move is now complete and the vacated building is on the market. In addition, we closed a large warehouse in Minnesota and terminated a lease at the end of December. With these transitions complete, we do not expect to have restructuring charges in 2010.

Depreciation expense was $7.3 million in Q4, down modestly from Q3. CapEx for the fourth quarter was $1.6 million and $13.2 million for the full-year. We expect CapEx in 2010 to be approximately $20 million.

Turning to the balance sheet, we reduced funded debt to $72 million, including $52 million under the revolving credit facility. Last year at this time, we had debt of $164 million, including $139 million under the revolving credit facility and we were in discussions with our bank group about getting relief on our covenants.

Today, I am pleased to say we have a much stronger balance sheet and financial position. Our Q4 cash balance was $68.7 million. While this is down $10 million from Q3, our net cash position improved by that same amount as we reduced debt by $20 million in the quarter.

We continue to remain focused on working capital management. Even with increasing sales and order trends, we decreased inventories. Inventory turns improved for the third consecutive quarter, moving to just under four times from 3.2 times in Q3. DSOs also improved, going to 57 days in Q4.

Looking to the first quarter, business trends continue to be positive through the first four weeks and currently point to moderately higher revenues in Q1. To put this in perspective, our average weekly revenue continued to improve throughout the fourth quarter with the second half of the quarter being higher than the first half of the quarter.

Moving to the cost structure, we are affirming the target operating model that we communicated in September. As you may recall, at $150 million in quarterly revenue, that model had non-GAAP operating margins of 12% to 14%. At levels above $150 million, we would expect additional operating leverage and higher operating margins.

While we have restored salaries and incentive compensation, we have not and will not add significant costs back to the business. We have eliminated $40 million of annual fixed costs and we have no intention of putting that back.

In Q1, we expect manufacturing fixed costs of approximately $26 million, variable manufacturing costs of about 38% to 40% of revenue and operating expenses, exclusive of amortization, of approximately $43 million to $44 million.

Interest expense will be approximately $1.5 million in Q1 and we would expect the annual tax rate in 2010 to be in the mid-20s. Based on the $150 million revenue scenario in the target operating model and these interest and tax rate assumptions, we would expect to deliver earnings per share of $0.10 to $0.12 per quarter or $0.45 to $0.50 on an annual basis. Based on current business trends, we expect to completely repay the bank credit facility by the end of the third quarter of this year and be left only with a small amount of debt remaining in Japan.

In summary, business trends as we see them today continue to be positive and there's evidence that we are taking share in some key areas. Our largely unit-driven business continues to benefit from high fab utilization rates and expanding Semiconductor production. We are benefiting from increases in capital spending and we have a solid operating model that should generate significantly higher margins in cash earnings on lower revenues than in past cycles.

With that, we'll now take your questions.

(Operator Instructions) We'll take our first question from Steve Schwartz with First Analysis Securities.

Good morning, everyone.

Good morning, Steve.

Can I just ask about the unit driven growth profile through 2010? Right now chip production forecasts for the year look like they actually decline on a year-over-year basis in the second half of the year. And I'm just wondering if you've baked that into your forecast or which thing might happen?

Steve, first thing is we have limited visibility going forward as you know we're a book-and-turn business. Number two, I would say there are different views of whether unit production will go down. I would say that I've seen a significant number of views that say that over the full-year unit production will be up. And so, I think there's a question about whether that's the case or not.

Beyond that, Steve, what I would say is this. We, -- much of our growth is coming from our top customers which we're concentrating on more and more. And these are the folks who are investing in advanced nodes and more and more we see them operating at high capacity utilization, which means a high intensity of usage for certainly our filtration products and our unit-driven products which is positive for us.

As well, most of our new products are aimed squarely at the 45 and below advanced nodes. And as we see that come online more and more, that will help us as well. I would say our outlook is -- for the full-year is positive for our unit-driven business and on a quarterly basis you may see things moving around, but we are generally optimistic for full-year.

Okay. Very good. And then with respect to the CapEx recovery cycle, I've heard in the past you all have talked about how you tend to be a little more front-loaded in the benefit from that and then taper a little faster on the tailend because of where you sit in the production cycle for equipment. Do you see that being the case here as we go through 2010?

I would say we can't really comment on what will happen on the back half of the cycle. But, I will say at this point in the cycle, our revenues from OEM customers is certainly growing at a higher rate than the OEM's own revenue is growing. I don't mean that on a customer-by-customer basis, but when I look at our total revenue for the equipment manufacturers, the growth rate is, like I said, higher than the growth rates that they're posting individually.

Okay. That's helpful. Thanks, guys.

Our next question will come from Christian Schwab with Craig-Hallum Capital Group.

Great. Thanks for the question. Great quarter. As your look to the 300-millimeter wafer side, what do you think your market share can be? You're getting, you said, 10% this year. What is the target model or target range that you're looking for exiting 2010 and then even potentially 2011?

Hi, this is Bertrand. If you think about the 300-millimeter FOSB business, we closed the year with a market share of nearly 10%. So, that puts us in line with our overall model and on our way to gain 20% to 25% market share in the next two years, which has been our stated objective. So, we are pleased with the way we closed the year.

But more importantly, we are pleased with some of the opportunities that lie ahead of us. We've been working very closely with IDMs and growers and I would expect to break the linear market share gains and be able to grow in leaps and bounds going into 2010 and 2011.

This being said, when I think about the Microenvironment business, there are a number of other reasons to be very proud of what the team has accomplished in 2009. Number one, remember that this team has really fundamentally revamped their business model. They reduced their break-even point by half in the year and are now in a position to deliver 20% contribution margins, which is huge. And talking about 300-millimeter, there is another platform, which I am very excited about, which is really the FOUP platform and our new product being the Spectra product, which increasingly is being viewed by the technology leaders in the industry as the most advanced and most versatile product platform as they contend with the contamination challenges of the next technology node. So, that's another big area of satisfaction as we close 2009.

Great. As you look at the Contamination Control System and obviously unit and demand being better than people think or thought six months ago, are you guys seeing on the Filters, et cetera, being changed out much more significantly or at a faster pace to increase yields as part of that strength or are you seeing no dynamic changes in typical wear and tear.

What we're seeing is this. When a device manufacturer is operating at 90% to 95% capacity. And if your look at the leading device makers, they're targeting typically the advanced nodes where the capital expenditure to build the fab is so tremendous. The cost of not operating at a very high capacity utilization, in terms of -- the opportunity cost is huge. So, they're targeting higher levels than traditionally they have had to at less advanced nodes. At those levels, we see an intensity of usage of filtration products that is commensurately higher with what we have seen in prior technology nodes. That helps us, the answer is yes.

Perfect. And then my last question, I think you said it, but I missed it. What percentage of your revenue this quarter was recurring or consumable in nature?

66%.

66%. Great. No further questions. Thank you.

We will move on to our next question from Krish Sankar with Bank of America.

Good morning, this is Paul Thomas for Krish Sankar. Thanks for taking my questions. First off, congratulations on an excellent quarter. And maybe looking back, Greg, now at the operating model. You guys pointed out Q3 2006, where you had similar EPS on higher revenues. Where do you think operating margins could go at higher revenue levels now? And maybe you could talk a little bit about having POCO now versus not having it during that period. How does that change the cyclical view?

Okay. So, with regard to operating margins, the model that we rolled out -- we said 12% to 14% at $150 million. As we move up, I would say for every $8 million to $10 million of revenue, we should add at least an additional point to that operating margin. So, in addition to just having the additional flow through from higher revenue, we should have additional leverage.

As it relates to the cyclicality of the business and POCO, I think as we've said before, the downturn on the non-semi portion of POCO was clearly greater than we would have initially anticipated. But, as we watch today, the industrial parts of that business are clearly coming back. We're not back to the run-rate that we had when we purchased it, but the business continues to improve.

Okay. Thank you. That's very helpful.

The next question will come from Peter Karazeris, Citi.

Hi. Thanks for taking my question. You talked about strengthening throughout the quarter or basically Q4 -- the second half being stronger than the first half. Can you help me understand how much of that was driven by the unit side of the business versus the capital spending side of the business? And just as you're going forward into Q1, which side do you see greater strength coming out of?

Let's take the second half first. Clearly as we come into Q1, I mean our view with regard to the business coming into Q1 -- we said we would expect to be up moderately. That view is based on sort of a flattish to up slightly unit production view for the industry and a 20% to 30% up on the capital side of the business which is consistent with what you're hearing -- the OEMs talk about as they release their earnings. As it relates to the quarter -- the fourth quarter, I think the trend would be similar, the strength of the business, when we saw strength on both the unit and the capital side as we came through the quarter, but the capital side is clearly the stronger side today.

Great. That's helpful. And then you talked about having a greater focus on larger customers. Are you finding that you're having to do any I guess specialized products or specialized R&D for the larger customers? And if so, is that already in the R&D run rate or do you think you might actually have to have a bit of a tick-up in R&D just to support specialized needs?

That's a great question. And yes, we have realigned our sales organization to limit a focus really on a number of strategic and critical customers. And what we've tried to do is really to be more in line with the technology road maps of those strategic and critical customers and be viewed by those customers as a more relevant supplier and technology partner. But, that's only one of the many things that we've done in 2009.

The other critical thing that we initiated in late 2008, early 2009, is a total revamping of the R&D portfolio. We have introduced more focus and more rigor in the new product development process at Entegris. What does that mean? It means that we have cut, in fact, the number of projects very significantly to the tune of 25%. So, you have fewer projects. The funding has not changed. And if your look at the R&D spending, the spending is essentially flat today versus what we spent in 2006 or 2007. So, it means more money focused on fewer projects, which means faster to market and frankly, better positioned product lines.

And I think that's one of the biggest reasons why you are seeing some faster growth coming out of Entegris as we are taking share in our filtration products. And we are -- and we've taken the time during this downturn to work very closely with the major OEMs and we are getting design into platforms which we didn't have access to in the past.

That's very helpful. Thanks. And one last question. I understand the point that you're focused on a narrower set of customers overall, but if your look across the customers you're working with, do you see any strengthening in the customer base? Or in other words, is it a broadening of strength in the customer base or do you still see -- is it basically a few horses that are really still leading the charge? And then that's it for me. Thanks.

Well, if your look at diverse segments of the industry, I think that we are seeing an improvement in terms of wafer starts, pretty much across the board. In terms of capex, obviously, the foundries and the memory makers are being leading capital spending in terms of technology upgrades, primarily, but we are seeing some strength also from our display customers and from our LED customers, which are markets that we are starting to focus on increasingly as we are finding very exciting opportunities for our Contamination and Control platforms as they start improving their manufacturing processes and start facing up increasingly challenging contamination concerns.

So, we've been working with a number of new partners in a number of new markets and we are starting to uncover fairly significant opportunities for our legacy product lines.

We'll take our next question from Dick Ryan Dougherty.

Thank you. Greg, you gave us numbers geographically and I missed what you said about Japan and the US. Do you have to have those handy?

Japan -- the US was up 18% and Japan was up 32%.

Okay. Earlier you referenced benefiting from an industry rebound, but also wins in some key markets. Can you spell out a couple of those wins?

Well, I mentioned two already. The display market was very strong for us this quarter. We grew about 30% in display and then the other segment was LED where we are finding some very interesting applications for our gas purification systems. As you know, gas in this particular industry and the gas consumption for those manufacturers would present about 30% of their overall cost. So obviously, finding solutions that would allow them to lower the cost of ownership is very, very critical for those industries. It's critical for them now as they support the ramp in the flat panel display industry, but it will become even more so critical as they really start to contend with the next big thing in terms of LED, which is really general illumination, where costs will become very, very important.

So, our ability and unique ability to provide them with a platform that allows them to reduce their total cost of ownership in terms of gas consumption is very meaningful to them and very exciting for us.

Okay. Say, Greg, when you look at the commentary about second half of Q4 and moving into the first part of 2010, when would your normally see if there is a seasonal easing? When would you see that in your weekly revenue numbers?

First of all, our quarters are different from -- a lot of people want to look at technology companies and say is your quarter back-end loaded or front-end loaded and I would say there's traditionally not a pattern with regard to any specific quarter. Usually, people look to the industry and expect some seasonal softness in Q1. I would just say that at this point in the quarter, we're certainly not seeing that.

Okay. Thank you.

(Operator Instructions) We'll move on to Marc Balcer with BlueFin.

Hi. Thanks for your time. I was wondering if you could comment -- what's the revenue level on a quarterly rate above which you'd start to have to increase the capital spend again and what's your flexibility or ability to go above the $20 million rate you mentioned?

Well, our flexibility under the bank covenants, we've got meaningful flexibility above $20 million. The written covenant is $20 million. We get to carry over about $5 million to $6 million from last year. Contractually, we could spend $25 million to $26 million this year. Today, our operating platform is probably in a position where we could support a couple hundred million dollars a quarter in revenue. So, we are from a capacity standpoint in a pretty good shape.

Great. Should I think of the capital spend as more kind of a maintenance capital spend at this point?

Today that's largely what we're seeing. We do have some significant projects that could potentially happen in the back half of the year, but today we're seeing it's mostly maintenance capex and we're just seeing a lot of things. Last year we were very tight on the capex. I'm seeing a lot of smaller projects that would fall into the maintenance mode at this point in the year.

Great. Thanks and the commentary you made about the annualized EPS, I wasn't sure to what extent you were trying to multiple the quarter, add a penny or two. What assumptions are you making there?

I'm not focusing on that operating model. I'm not saying that our EPS guidance for the year is $0.45 to $0.50, I'm just saying that if we ran $150 million a quarter for the year, that's where we would be.

Great. Thanks for your time.

Thank you.

We have no further questions at this time. I'll turn the conference over to Gideon Argov for any closing marks or additional remarks.

Thank you operator. I just want to emphasize what has happened here over the past year. We have made permanent and large reductions in our fixed cost structure. We have dramatically shifted manufacturing away from North America and towards Asia. We have a streamlined organization. It's more responsive to our customers and we're concentrating on the top customers and we believe it's more transparent to you, our investors, and we have had a lot of product development, which is aimed at the advanced nodes in order to take advantage of what has been a very difficult downturn to gain market share. We are seeing evidence of doing that and with the fourth quarter results, you begin to see and appreciate the magnitude of the changes we've made at the Company.

Thank you for calling in. We look forward to updating you in the future.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.