Entegris Inc (ENTG) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to Entegris' first-quarter 2010 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Mr. Steve Cantor, Vice President of Corporate Relations. Please go ahead, sir.

Good morning and thank you for joining our call. Earlier this morning we announced the financial results for our first quarter ended April 3, 2010. 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 and 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.

Thank you, Steve, and good morning. Thanks for joining the call this morning. I'll provide an overview of the first quarter and then Greg will provide some detail on the financial results.

In our last quarter's conference call I described the emergence of what we call Entegris 2.0, which is a reflection of the significant changes we've put in place over the past 18 months. Our first-quarter results not only represented another quarter of very positive trends, but also clearly demonstrated the impact of these transformational changes.

Let me highlight a few key items. First, our Q1 sales grew 10% sequentially to $160.5 million reflecting solid growth in both our capital equipment and unit driven businesses and across our product lines. We're clearly benefiting from the upturn in the semiconductor industry, but we're also seeing the benefit from our renewed focus on key customers and from the increased applications of our technologies as customers move down their technology roadmaps.

Second, we reported non-GAAP EPS of $0.15 and a non-GAAP operating margin of 16.5% which exceeded our target model for this revenue level. We were able to achieve this with a much leaner cost structure and with excellent execution in our manufacturing and supply chain organizations.

Third, we generated $28 million in cash from operations and reduced our debt by $20 million. Our balance sheet is now net cash positive for the first time since the second quarter of 2008.

In terms of the revenue trend by market, we continued to benefit from the rebound in the semiconductor industry. Sales to semiconductor customers were up 12% from the fourth quarter and represented 72% of Q1 sales. Outside of semi we saw strength in TFTLCD and LED, as well as steady but modest improvement in some of our other industrial markets.

The robust industry capital spending on new tools and technology enhancements continue to drive demand for capital driven products, shifting our unit driven to capital expenditure driven mix in the first quarter of 63% unit driven to 37% capital expenditure driven. Nonetheless, our unit driven sales expanded 6% sequentially as utilization rates at our fab customers remained at levels near 90% and even higher levels for advanced devices.

We had excellent performance across each of our divisions. Sales for Contamination Control Solutions grew 8% sequentially, exceeding $100 million, which is above levels achieved in the prior 2007 peak. Sales of liquid filtration products rose modestly reflecting high but stable fab utilization rates, particularly at foundry and memory customers.

Demand for our gas purification products continues to be very strong and these products are on track for a record year. This growth is being driven by the need for systems that are used to control contamination in the LED manufacturing environment as well as filter products used in vacuum tools and applications.

The CCS division not only provided healthy growth in Q1, it also generated $28 million in operating income excluding corporate costs, that's a 28% operating margin for this division for the quarter.

Sales in our Microenvironments segment grew 10% led by the process side of the business as we saw strong CapEx driven 300 millimeter FOUP and 200 millimeter pod and carrier sales. Sales on the shipping side of the ME business were in line with industry trends. On an operating basis Microenvironments division reported operating income of $9 million or 21% of sales excluding corporate costs.

Sales in our Specialty Materials segment rose 23% in the fourth quarter to $18 million. This growth was driven by 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 margin for the Specialty Materials division was 13% in Q1 excluding corporate costs.

As we look ahead to the rest of 2010, we will continue to focus on attaining revenue growth faster than the market. We're doing this by bringing new and more advanced Contamination Control Solutions to our largest OEM and fab customers in the semiconductor market; we're seeing key design wins and retrofit opportunities at advanced nodes across all three of our divisions. In addition, we're leveraging our technology to adjacent and emerging markets such as LED.

While topline growth is clearly critical, we're equally focused on achieving superior profitability. Our Q1 results demonstrate this focus and the sustainability of our new and leaner operating model. The first quarter was a great way to start the year. I look forward to reporting our continued progress and will now turn it over to Greg Graves' commentary on our financials. Greg?

Thank you, Gideon. I'll provide some background on the first-quarter financials and then add some commentary on current business trends and our operating model. We were very pleased with the Q1 results which demonstrate the operating leverage of the business. Orders grew steadily through the quarter as sales grew 10% over Q4 and we were nearly 3 times higher than a year ago at the depth of the downturn. Our non-GAAP EPS of $0.15 per diluted share was a 25% increase over Q4.

By geography sales for our largest region, Asia, grew 7% sequentially; the US grew 19%; Japan was up nominally; and Europe grew 8%. Foreign exchange rates had a very modest unfavorable impact on sales due to the stronger US dollar.

We continue to operate our business within the parameters of our target operating model. We achieved non-GAAP operating margins of 16.5% in Q1. At $160 million of revenue our target model is for non-GAAP operating margins of 14% to 15%. This out performance was driven by strong gross margin results and continued control of operating expenses, partially offset by higher variable compensation costs.

Gross margin for the first quarter improved to 45.6% from 43.9% in Q4 due to higher volume and high efficiencies in our manufacturing operations. Operating expenses, excluding amortization, were $46.6 million or 29% of sales. As a percentage of sales this was only slightly higher than in Q4 even as we restored the remaining salary cuts as well as variable compensation plans. Total spending was slightly in excess of our guidance as higher-than-expected revenue resulted in higher variable compensation accruals.

We had another excellent quarter of cash flow generating $28 million in cash from operations. We continue to remain focused on working capital management. Even with increasing sales and order trends we kept a tight hold on inventory management. Inventory turns improved for the fourth consecutive quarter moving to just over 4 times. DSOs were 59 days, up slightly from 57 days in Q4.

We reduced our funded debt by $20 million to $51 million which includes $36 million under our revolving credit facility. Our Q1 cash balance was $73 million which makes us $22 million net cash positive, the first time we've been in that position since Q2 of 2008. We expect to completely repay the bank credit facility by the end of the third quarter of this year and be left with only a small amount of debt in Japan.

Depreciation expense was $6.7 million in Q1, down modestly from Q4. CapEx for the first quarter was $3.6 million and we expect CapEx in 2010 to be approximately $20 million.

In terms of our trends and outlook, our business strengthened through the first quarter with the back half of the quarter stronger than the first half. Thus far through second quarter, industry trends and key indicators continue to be positive and currently point to modestly higher revenues in Q2.

In Q2 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 $48 million to $49 million. The increase in spending reflects the addition of $1 million of strategic investments, which are largely variable costs, and approximately $1 million of compensation adjustments related to our annual merit increase cycle.

This cost structure is in line with our target model which calls for non-GAAP operating margins of 16% to 18% at $170 million in revenue. Interest expense will be approximately $700,000 in Q2 and we expect the 2010 tax rate to be in the mid-20s.

In summary, we're not only benefiting from the upturn in the semiconductor industry, but we are also seeing evidence of increased market share in some key areas. We have solid and sustainable operating leverage in the business which is generating significantly higher margins in cash earnings than in past cycles.

We are focused on execution throughout the Company, committed to continuing the strong manufacturing execution we've demonstrated in the past several quarters, as well as the relentless commitment to maintain a streamlined fixed cost structure and achieve bottom-line results at or above our target model. With that we'll now take your questions. Operator?

(Operator Instructions). Krish Sankar, Bank of America-Merrill Lynch.

Yes, good morning, guys. A couple of questions. Greg, if I look at your guidance, modestly up revenues and looking at your cost function, seems like gross margin is going to be flat and most of the drops are still coming from the OpEx line. It is that the right way to think of it?

We would expect gross margins -- when we talk about modest revenue, Q1 was up 10%, we'd expect Q2 to be up something a little bit less than that. With regard to the gross margin, we did have some significant tailwinds in Q1, some of the merit increases will impact gross margin. So I would expect the margin to be flat or up just slightly in Q2.

Got it, okay. And then do you guys have a revised target model now that you're running well ahead of that? What do we think of let's say you hit a $200 million revenue run rate, how would the gross margin or op margin look like?

Krish, I extended it out, we extended it out to $170 million at the analyst day on March 4. We haven't extended it beyond at that point, but what I will say is that $170 million, our variable comp plans are all maxed out. And so as you get beyond that level there should be very significant operating leverage. Although like I said, we haven't set a model out at this point.

Okay. And another thing is I'm looking at your business, seems like you're getting a pretty strong growth from the CapEx side of the business. How do you envision that going into the second half of the year? And also on the consumable side of the business is there any seasonality that comes into play? I mean, is there anything such as a normal seasonality?

Okay, Krish, Gideon. Good morning. On the CapEx side we tend and have always tended to lead on the CapEx side as we supply components and subsystems that go into tools. Now we saw sales to OEMs grow by 100% from the second quarter to the third quarter and by 100% from the third quarter to the fourth quarter. And that is reasonable and logical when you think about leading the CapEx cycle, which we now see in full bloom here throughout the industry.

We would expect to see continued improvement as the CapEx cycle develops, but on percentage basis you might not -- you would not see necessarily the same percentage increases in CapEx going forward, although we're very bullish about that business. And we're particularly bullish, by the way, about some areas that are not related to our traditional historical core business like LED which is growing very quickly and where we have a significant element of participation. So that's on the CapEx side.

And the seasonality factor that you ask about is really -- we don't see a lot of seasonality, we do see historically some occasions in the -- around the Chinese New Year, we see some fall off that did not happen this year actually in the first quarter, capacity utilization being as high as it was, there's not a lot of seasonality in the business, Krish.

Got it, Gideon. And on the non-semi business, you guys did about roughly $45 million in Q1. Is it fair to assume a huge part of the strength is coming from the LCD business and that should probably be sustainable going forward for the rest of the year?

Hello, Krish, this is Bertrand. Yes, we definitely did see some strength on the LCD market, but we saw really frankly strength across our non-semi market. I think that the strategy that we described in New York during our analyst day which was really centered around a number of adjacent markets -- LED, CE -- which is where LCD would be part of, are all actually benefiting from meaningful growth in Q1.

So I'm very pleased. I think the strategy seems to be working, our dedicated teams keep coming back with very interesting opportunities for us. So I would not necessarily single out one particular market over the others.

Okay. And a final question from my end is, your Microenvironment and Specialty Materials grew revenues pretty nicely, but the segment profitability kind of was down. Is any specific reason for that? That's my final question. And congrats on a good quarter.

No, not really. I mean, we continue to -- as we ramp up and Kulim, that's the one business where we do have some modest inefficiencies, but overall we were pleased with the performance of that business.

Christian Schwab, Craig-Hallum Capital Group.

Great quarter, guys. Regarding that LED market, can you elaborate on that a little bit further, exactly what products you're selling into that market, which customers you're selling to, approximate revenue in the quarter, as you look out the next one to two years how big of a business that can be to you?

All right, so you have a number of questions here for me. So, the types of products that we primarily sell into those markets and applications would be gas filters, diffusers, gas purification systems. We sell to obviously the two largest OEMs in this particular market, but we also sell gas purification systems directly to the end-users as very often actually they manage themselves their overall [facilitization] investments.

In terms of how meaningful it is, it is growing, it's growing actually very, very nicely. We have not broken up the overall revenues coming from LED until now; we don't intend to do it during this particular call. But at some point in time we may choose to if those numbers continue to grow the way they are.

The way those numbers could continue to grow significantly above any market trends would be if at some point in time LED are really -- the LED technology is being used in general illumination applications. And frankly right now saying that this particular industry is making some very interesting progress and they are on par in terms of making the overall cost of ownership work. So I'm pretty optimistic, but it's way too early to tell where the LED industry in general will go and how meaningful it will become for us.

I would note as well, Craig, this is Gideon. From a technology standpoint the purification systems that we make that go into the MOCVD process have a demonstrable impact on photo luminescence of LED arrays, which is really the basis for why they are essential in the manufacturing process. So it's not a "nice to have", it's actually a "got to have".

Got it. And then, Greg, as it relates to back of the envelope calculations, I just want to make sure my math is not wrong. It kind of comes to about $0.18 give or take. Is that -- are we doing our math right over here?

Give or take.

Great. And then my last question, at your analyst day you highlighted as the industry grows and you continue to gain market share and you've highlighted with the LED some of the expansion of the SAM opportunities that you believe in the next couple of years you can drive this business to an $800 million to $950 million a year business. Given what you're seeing today do you have greater or less conviction in that?

Given what we're seeing today, no, we would not change the statements that we made during the analyst day in New York.

I would agree entirely. Very high conviction on that score.

Great. Thank you, guys.

Avinash Kant, D.A. Davidson.

Good morning, Gideon and Greg. One or two quick questions actually. I did not catch your remark on the interest expense. What do you expect this to be in the current quarter and what was it -- sorry, what do you expect it to be in the June quarter and what was it in the March quarter?

It was approximately $1 million in March and we expect it to be about $700,000 in June.

And you said you expect to pay off the debt by --?

We should pay the debt off in the third quarter. And if you think about it, we're at $36 million today, we paid off $20 million last quarter, so at the current run rate that's very achievable.

Right. And you don't -- how much sales do you have into the LED market right now? It's not material yet, right?

We don't want to break it down and give you an actual number. It is material in terms of where it was a year ago and where it is today. It is a very high growth rate -- that I will tell you, its growth rate is very high -- let's just say a very high growth rate and we expect that to continue over the next few quarters. As Bertrand said, there is a threshold level above which we may choose to highlight that number. I think that it's too early to do that at this point.

Okay.

And I would say, Avinash, LED is one of a number of new markets that we highlighted as part of the analyst day in New York. We highlighted a variety of what we call adjacent markets. When we talk about $1 million of incremental investment, a large amount of that is going into those new markets. And frankly, LED is not the only one of those that's going well. We have a number of others that are very exciting that we choose to not talk about at this point but we're very excited about.

All right, and --.

Avinash, just to clarify the exact interest expense number in the quarter was $1.3 million.

Okay, and you expect it to be $0.7 million in the next quarter?

Yes.

Okay, good. And talking maybe a little bit about the (inaudible) of the business throughout the year. You have been talking about the unit driven and that CapEx driven businesses. Most of the key CapEx guys have still been talking about improvement in revenues into the June quarter. Now, any idea in terms of the unit driven business? How could that be growing in the June quarter and do you expect that to at least continue to grow throughout the year? What's the visibility out there?

Avinash, this is Bertrand. I would say that based on all of our checks with the major customers we have a fairly good visibility on business trends going into Q2 and Q3. If you talk to most of the leading foundries, for instance, they would tell you that their Q2 and Q3 capacity is totally sold out. And they are working very aggressively to make sure that the same would be true for Q4.

So as of right now I see no indication of softening in terms of our unit driven business. And I totally subscribe to some of the industry projections in terms of MSI growth for Q2 and Q3. Again Q4 is a little too early to comment on. But again, fairly robust expectation for Q2 and Q3.

Bertrand, more -- recent chatter has been regarding foundries, that they may have been getting worried about double ordering or some inventory build out. Have you heard anything from your customers in foundries or others regarding that kind of a situation?

No, we -- as Gideon stated earlier, we look into this inventory situation very carefully. And as of right now we are not concerned of any significant inventory buildup in the channels.

Okay, perfect. Thank you so much.

Dick Ryan, Dougherty.

Good morning. Gideon, can you give us a sense of market share in the Microenvironments 300 millimeter and maybe on the reuse side of that, how that's going and what those margins look like?

Good morning, Dick. So, we had a good quarter with a 300 millimeter shipper business which grew and we believe we're on track for what we expect to be a 25% market share in 2012 for that marketplace. And so what I would say is we're on a curve. As we stated at the analyst day, we're somewhere around the 10% range in the current timeframe. And we didn't give precise numbers, but that's about what we said. And we're on a trajectory I think that gets us there by 2012 and we grew this last quarter.

So, as far as profitability, I don't have anything in particular to say other than that is a business that contributes to profitability and we're happy with what we see there. Reuse is not a -- I would call it neither a strategic threat nor a strategic huge opportunity, it's a fact of life in the shipper business, in some parts of it. And it is playing a role here, but it's not playing an overwhelming role in this business, that's it.

Great. So Greg, you mentioned you've pleased with your market share performance in key areas. Can you give some metrics there? Or was that just kind of a qualitative statement?

It's a qualitative statement, Dick. I mean, it's hard for us on a product line by product line basis to be terribly specific, although we know in some areas of filtration we're gaining market share, we tend to look at the public data versus our main comparable there and we can see our performance versus theirs, which suggest we're gaining share. We're gaining share in some CMP applications, we're gaining share in LED applications.

So it's -- when you take the business as a whole, even in this quarter we had one profit center that had revenue of more than $10 million. So the business is still made up of a lot of small to medium sized product lines. So on a product line by product line basis it's hard to be specific other than to talk about those broad trends that I just mentioned.

The modest increase for Q2, is that expected to be linear, are you seeing that across the quarter? Or is there any seasonality --?

The modest increase in revenue -- in general we would expect it to be linear.

Great, thank you.

(Operator Instructions). James Gentile, Newland.

Hey, guys, what a difference a year makes, huh? Now you're in the luxurious net cash position that, given what you had said in the first quarter, is about a couple quarters early. So great job on the cash flow. So I'm going to be that annoying investor and ask what you're going to do with the cash?

James, we've got a ways to go on the balance sheet before we've got a balance sheet that we think what we should look like in this industry. Right now we've got next cash we said of about $22 million. I'd like to have net cash of somewhere near $100 million. So I look at this year as a year to rebuild the balance sheet. At this time next year we might be thinking about that question. But to me it's continue to rebuild the balance sheet, get ourselves to $100 million of liquidity and then think about options from there.

Great. Well, it seems like you're on track to attain the $100 million in cash by the end of the year. So, congratulations.

Thank you.

Steve Schwartz, First Analysis.

Good morning, everyone. Greg, just to stay on you with James' question. With respect to share buybacks you did one in 2006. I don't know that that was executed in a way you guys now consider ideal. But is that something you would be willing to consider maybe in 2011 or 2012?

I think as we get out into 2011 and 2012 we'll look at the environment, what our business opportunities are for other investment and decide at that point where we go with our cash. But it's really premature to talk about that at this point. It's probably suffice it to say we won't ever do another $250 million tender offer.

Yes, yes. So at this point you don't really think about the secondary offering and the dilution that came with that and how to maybe offset some of that?

Not really, Steve. At the time it was the right thing to do to put the liquidity on the balance sheet and reduce the debt. It was a fact and we're glad that we did it and feel good about where the balance sheet is trending today.

Yes, okay. Thank you.

(Operator Instructions). We have no additional questions from the audience. Mr. Argov, I'll turn things back over to you for any additional or closing remarks.

Thank you for joining us on our Q1 conference call. We look forward to updating you as the year unfolds. Have a good day.

Thank you. Once again, ladies and gentlemen, that does conclude today's presentation. Thank you for your participation.