Entegris Inc (ENTG) 2014 Q1 法說會逐字稿

Ladies and gentlemen, please stand by. We are about to begin. Good day, everyone, and welcome to the Entegris first quarter earnings 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 Mr. Steve Cantor, Vice President of Corporate Relations. Mr. Cantor, please go ahead sir.

Good morning, everyone, and thank you all for joining our call.

Earlier today we announced the financial results for our first quarter ending March 29, 2014. You can access a copy of our press release on our website 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.

In addition, I want to remind everyone that we will be holding an analyst meeting on June 19 at our i2M Center for advanced membrane and coatings manufacturing in Massachusetts. You can contact me for more information and to register.

On the call today are Bertrand Loy, President and CEO, and Greg Graves, Chief Financial Officer, and Bertrand will now begin the call.

Thank you, Steve.

I will make some comments on the quarter's results, then Greg will provide more details on our financial performance and our guidance for Q2. Our first quarter was in line with our expectations. Although our revenue of $166 million was at the low end of our guidance, I am pleased with our operating results for the quarter as we continue to maintain good operating and financial discipline. We executed well, improving our gross margin, achieving our target model and generating cash from operations, consistent with our plans.

For the past nine months, the industry environment has been mixed with pockets of strength in some segments offset by softer trends in others. The original revenue guidance for Q1 assumed a continuation of this mixed picture combined with the seasonally slower wafer start environments.

Our customers demand for the quarter was consistent with this view. The strength at some foundries contrasted with more muted production for most other industry participants. This was reflected in our unit-driven sales, which in aggregate were down 9% after a strong 19% growth in the fourth quarter.

We also saw these uneven trends on the capital side of our business. Our CapEx -driven sales were down 14% sequentially as we experienced softening and demand from OEMs and facility projects.

Sales to adjacent markets declined 6% as continued softness in display and data storage overshadowed some signs of life in LED and solar after several quarters of dormancy. Reflecting these trends, our mix for the quarter was 66% unit-driven and 34% capital-driven, shifting slightly to the unit side from Q4.

Looking at our strategic initiatives, I am pleased with the ongoing product progress with a number of product platforms, including next-generation liquid filters, new eE-Chucks and our advanced FOUPs. These new products are the results of our efforts into deepen the collaborations with the industry technology leaders. The challenges presented by the next generation of process technology are immense, but the extent of our engagements continue to confirm the value of our solutions.

Our investment in the new i2M center for advanced membrane and coatings technology will be key to these partnerships. The project is progressing well.

We completed the move of our coatings operation in March, and we are on track to complete all our customer qualifications membrane-based products by Q4. We believe this new facility is one of the most advanced of its kind in the world and will provide key benefits to our customers well into the future. We invite you to visit the new site during our analyst meeting on June 19.

Before I turn the call to Greg, I want to provide a quick update on our pending acquisition of ATMI. I am very pleased to note that ATMI shareholders voted overwhelmingly in favor of our combination. We have secured the financing at very favorable rates, which makes the financial rationale of this transaction even more attractive. We have only the regulatory in Taiwan remaining, which we expect to secure sometime around the end of April. We will close the transaction shortly thereafter.

Our integration teams have been working very hard these past two months to finalize our plans for a smooth and rapid integration that will delivered $30 million in cost synergies. We are very excited about what the combination will mean for our shareholders, our customers, and our employees.

Over the past three weeks I've had an opportunity to meet with our three largest customers in the US, Taiwan, and Korea. These visits confirm that our customers are just as convinced of the tremendous potential of our combined Company as we are internally. We cannot wait until after the close to start engaging with them more specifically to unlock the full value potential of our new platform.

Greg will now provide more detail on the quarter. Greg?

Thank you, Bertrand.

Good morning, and thank you all for joining the call. Despite the lower sales in Q1, we executed well and achieved our target model. By region, sales to Asia, our largest region, were down 10% as higher sales in Taiwan were offset by lower sales in Korea. Sales to Japan were down 22%, North America declined 13% while sales to Europe increased 3%.

By division, sales for the contamination control division declined 15% sequentially to $105 million. The decline reflects weakness in component sales to OEMs and a slowdown in sales of advanced filtration products as a number of customers slowed their ramp at advanced nodes.

Operating margins for the CCS division were 23.2% versus 24.6% in Q4. The decline in operating margin is a result of sustained investment in ER&G in spite of lower sales volumes. Sales for the microenvironment division decreased 6% sequentially to $43 million. ME's operating margin of 18.3% was essentially flat with 18.4% in Q4.

Specialty material sales were $17.7 million, or up slightly. SMD's operating margin improved to 10.8% from 5.7% in the fourth quarter. Excluding the one-time cost associated with the move of the coatings operations, the i2M facility, SMD's operating margin would have been 13.5%, its best quarterly performance in the last two years.

Gross margin improved to 43% from 42.6% as the impact of lower volume was offset by favorable mix. Operating expenses for Q1 amounted to $50.5 million, down $2.9 million from Q4. This included $1.3 million of cost associated with the ATMI transaction. SG&A as a percentage of sales was 21% and R&D was 9.5%, reflecting our sustained investments in filtration and wafer handling products for the advanced nodes.

Our GAAP tax rate was 23% in Q1. This was slightly lower than anticipated due to favorable geographic income mix. Q1 EPS on a non-GAAP basis, which excludes amortization of intangibles and acquisition related costs, was $0.12 per share.

Cash flow from operations was $12.4 million. Consistent with prior years, this was down as planned from Q4, primarily as a result of annual variable compensation payments. Capital spending in Q1 was $14 million and depreciation expense was $7.8 million. For 2014, we are planning for CapEx to return to more normalized levels of approximately $30 million.

As Bertrand had indicated, we are excited to complete the acquisition of ATMI. We secured permanent financing for the transaction in March with very favorable terms. The $460 million 7-year term loan, priced at LIBOR plus 2.75% with a 75 basis point floor, providing for an initial rate of 3.5%. The $360 million of 8-year bonds priced at a fixed rate of 6%. This gives us an initial weighted average rate of 4.6% for the total combined debt, which is significantly better than our assumption of a blended rate of 5.5% when we announced the deal in February.

In addition to the low rate, we are very pleased with the terms overall. With minimal required amortization and no maintenance covenants, this debt structure provides us with sufficient flexibility to operate in a cyclical industry environment. Following the transaction closing, we have very good liquidity.

Our cash balance will be over $300 million, of which more than $50 million will be in the US. We will also have an undrawn asset-backed revolving credit facility of approximately $75 million that will provide additional liquidity. As Bertrand noted, we are confident of our ability to realize the synergies from the acquisition and expect to be at a minimum of a $10 million run rate as we end 2014.

Excluding the effect of ATMI and any transaction-related costs, we expect our Q2 sales to be in the range of $165 million to $175 million. Given these revenue levels, we expect non-GAAP EPS into be $0.10 to $0.14 per share, consistent with our target model. At our analyst day in June, we plan to present our modified target model and to update our Q2 guidance to reflect the impact of the acquisition of ATMI.

In summary, business trends were soft during Q1 due to expected seasonal trends and softer OEM demand. We maintained our financial discipline, flexing our cost and achieving our target model. We anticipate the business environment will improve modestly in Q2, and finally, we are ready to quickly integrate ATMI to achieve our $30 million synergy target by the end of 2015.

Operator will now take questions.

(Operator Instructions)

Vernon Essi, Needham and Company.

Thank you very much. I was wondering, Bertrand, if you could go over the CCS business and how you see that progressing through 2014. Obviously in a little bit of a slump here. Is there any optimism out there on new spend in the area, or do you see this being in somewhat of a flatish trend line?

Vern, this is Bertrand. I'm going to try to breakdown my answer in different pieces here. But just maybe reflecting a little bit on some of the trends that we experienced in our CCS business in Q1. We saw certainly some slow wafer starts in Q1, which is fairly normal and a seasonal trend that we were expecting and that we reflected in our guidance for the quarter.

But then we also saw a slowing down in the quarter for new facility projects and a new tool build, and that negativity impacted our component and subsystem sales. As we fast-forward into Q2, I would say that we would expect an improvement in terms of wafer starts.

Yet, we remain relatively cautious in terms of new OEM build plans, and we have some, I would say limited expectations in terms of short-term recovery for our component and subsystem business. I will limit my forecast to Q2 given the lack of forward visibility that we have at this point in time.

Okay. Fair enough. Thanks for the answer there. And Greg, just a question on SG&A, and appreciate all of the progress on the debt side. In terms of the acquisition of ATMI, a lot of the synergy is going to come out of that end of things. I'm wondering just internally, relative to your top line, I know there is probably some one-time, I think you said $1.5 million of one-time costs due to the ATMI situation.

But were there any other costs that hit in the first quarter that we wouldn't see going forward? It seems like it came in just a little bit higher than I would of expected on that revenue line.

The only other unusual cost in the OpEx during Q1 would have been, we had about $800,000 of costs related to the transition into our new i2M facility here in Burlington. We will still see some portion of that in Q2, but for instance, the move for the SMD business is entirely behind us at this point. That was about $400,000. But in general, I think you should expect that our guidance for the OpEx for the next quarter is $50 [million] to $51 [million], so really pretty consistent with where we were in Q1.

Okay, all right. Thanks, Greg.

Patrick Ho, Stifel Nicolaus.

Maybe first off in terms of the outlook for the June quarter, you mentioned that the wafer start business begins to pick up on a seasonal basis. Can you just give a little bit of color of the type of percentages you are expecting from both the units versus the CapEx side of things? Is it going to be a sharp jump on the unit side whereas CapEx continues to decline?

Hi, Patrick. If you think about the assumptions behind our guidance for Q2, we are currently modeling a 10% sequential growth for wafer starts, and assuming a 10% decline in CapEx. Obviously, all of those numbers would be very much customer specific, but that is the overall rate assumption that we are using for Q2.

Great, that's helpful. A question for Greg in terms of gross margins. They held up pretty well in the first quarter, but as you moved to the i2M facility, are there any duplicate costs that are going to linger for, let's say the next couple of quarters before, I think you mentioned by Q4 everything will be completed? What is the potential impact from this continued transition over the next few quarters?

What I would say is Q1 of 2014 would be the peak quarter from a drag on the P&L perspective because the coating business is now out of their duplicative facility. They have incurred their moving costs, so they are operating in that business. We do have duplicative costs related to our membrane manufacturing operation and will have that really through 2015.

But like I said, those are already reflected in the P&L and in the gross margin. The drag from that transition, it was Q1 that was really the peak quarter.

Great. Thank you very much.

Avinash Kant, D.A. Davidson & Co.

Good morning, Bertrand and Greg. Two questions. The first one is that you talk about the lower rates now that you have. Have you done any math or any kind of some rough expectations that you can give that, post ATMI acquisition, what kind of interest expenses that we are looking at on a quarterly basis?

Sure. So long as LIBOR stays below 75 basis points and we don't repay, assuming all of the debt stays outstanding, the annual interest cost will be about $38 million.

$38 million annually.

So, that's, call it $9.5 million a quarter.

Okay, perfect. And then in terms of the cost synergies that you have talked about, $30 million, can you give us some breakdown of that $30 million? Where is that coming from, and based on what you have seen thus far, where do you think -- could call this relatively conservative or not? What do you think at this point?

Well, it really, Patrick, it falls into three broad buckets. One is, I will call it duplicative corporate cost which is one senior -- go from two senior management teams to one senior management team, eliminate a board of directors, eliminate a D&O policy, go from two audits to one audit. That is the first bucket.

The second bucket is what I would call infrastructure or backend operations. Finance, IT, HR, general kind of corporate organizations.

And then the last area would be, what I call field operations, and that is going from two sales offices in Taiwan to one in Taiwan. The same thing in all the different countries in Asia. One global account manager for the major key accounts. So, those are the three broad buckets.

Okay, perfect. Thank you so much.

(Operator Instructions)

Ben Pang, Northland Capital Markets.

Thanks for taking my questions. First a clarification on the guidance for 2Q. Is your assumption at the high end of your guidance that the project part of the business comes back?

Hello, Ben. No, I would say that right now we have relatively low expectations in terms of our OEM business and facility-related business. I think that what really moves -- or would move our revenue from the low end to the high end of the guidance really has more to do with the timing of the ramp of some of the new fabs which should benefit our new products, and in particular, some of the newer generation of liquid filters that we have been developing. It is really more of a -- I'm sorry, Ben, did you have a question?

Yes. The second part of the question is if you look at your non-semi business that has trended in the same band for a while now. What is the expectation there for the rest of the year?

You commented that the LED and solar are improving, but some of the other display are weaker. What does that look like? Is there a view for the rest of the year?

I would say that the overall ratio should be about the same. So, we would expect the non-semi business to be still about 25% to 26% of total revenues. If you look back historically, we continue to look at these businesses as a portfolio of opportunities, and very rarely have we seen conditions were all of those markets actually performed well at the same time.

Again, I think it is really more of a buffer, if you want. Having said that again, as we pointed in our preliminary remarks, we've seen some interesting developments in some of those emerging markets which are LED, solar and even life sciences. So, we hope that we can continue to see those trends and that those markets, over time, will become more important to our overall business.

Thank you very much.

Jairam Nathan, Sidoti

Hi, thanks for taking my question. I just wanted to dig a little more on your comments about strength in Taiwan and offset by the strengths and the weakness in Korea and the other regions. DSMC also indicated that the 28-nanometer was one of the reasons why the numbers were stronger and as they move to 20. Is the shift to 20-nanometer not as beneficial for you as the 28-nanometer has been?

The answer to that question is yes. We continue to be very well postioned(technical difficulty). And as all of those larger customers move (technical difficulty) to their more advanced process technology nodes, we will benefit from that. And as I said earlier, the real question for us is the timing of the transition. And much like you, we are very eager to see them continue to stick to very aggressive transition timeframe. That is really what we expect to see later on in the year, and we certainly expect to benefit from those trends later on in the year.

Given your comment there, is there an early [inaudible] that we can take on what you would expect on the unit side for the full year?

We typically do not to provide annual guidance, but given the fact that it's part of the financing of the acquisition of ATMI, we volunteered some views around the overall annual industry projections. I will probably make an exception today and just remind everyone that we are actually optimistic about 2014. We expect the year to be an up year.

But I would also remind you that our expectations going into the year were probably more measured than some of the more aggressive views in the industry. Internally, we are counting on wafer start to grow between 2% and 3%, so low single-digit, and we are expecting CapEx to be growing in the low teens. And as of right now, I would say that we still believe that this outlook and these assumptions are reasonable.

Okay, and last question. On the -- specialty materials saw an increase in revenue, is there anything specific that drove that sequentially?

Nothing terribly specific. They had a stronger quarter at Poco Graphite, but in general, it was ebbs and flows that resulted in a little bit of overall strength.

Remember that this business is less dependent on the semiconductor industry than most of our other divisions, and we saw some very nice momentum in some broader industrial applications.

Okay. Thank you.

Jason Ursaner, CJS Securities.

Good morning

Hi, Jason.

First a question on the microenvironment segment. Wondering if you can maybe break down the quarter, 300-millimeter FOUP versus shipper versus some of the legacy diameter products. Margin was down a little, so just wondering if it was normal manufacturing leverage or more of a product mix there.

The revenue was down about 6% and the operating margin was relatively flat. The performance of the business, given the revenue, was about what we would've expected.

And in terms of the overall trends by product, I would say that we continue to do extremely well on our 300-millimeter FOUP platform and continue to win the vast majority of the opportunities at the advanced nodes. I think that business, however, was in modest decline sequentially, and that is really more of a function of the product mix.

As you may know, you may remember from product presentations, our FOUP platform comprises very different form factors and utilizes different types of materials, and the ASP, as a result, can vary quite a bit from one product flavor to the next. I would just say that our factories remain fully loaded in the quarter, and what you are seeing is really more of a function of the mix than anything else.

Okay. And longer term there, maybe just an update on 450. Generally, what is the industry feeling towards that? It seems to be being pushed out a bit. Just wondering where you look at it from your perspective.

I would still say that we still remain confident that the economies around the 450 migration are compelling and ultimately, this transition is a necessity for the industry. I think as it's always the case in any wafer sized transition, the timing is going to be very fluid. We knew that going in.

We made a strategic decision to invest early as we wanted to establish the brand and establish our capability across the ecosystem in a resounding way. That is what we have done. I think we are really well-positioned.

But it is true that at this point in time, I think that the adoption of 450 is probably going to be delayed to hopefully 2017 or 2018. But I think we are ideally positioned to benefit from this transition when it happens.

Does the timing matter much from a competitive standpoint, though? Is the IP, once it gets set, is that -- is there still an opportunity for that to change? Or in terms of laying the groundwork early, it is set for whenever it happens?

Yes. Again, I think we feel that we are very well-positioned today. It is clear that any delay in the adoption will provide an opportunity for our competitors to catch up. The onus is on us to make sure that we continue to engage and we continue to modify and tune our platform in such a way that we maintain the leadership position that we believe we are having today.

Okay. And there has been a number of announcements recently related to green recycling of electronics. Any update on the evolved platform that ATMI has. Obviously, it's a fairly unique process. I'm wondering maybe if you could talk a little bit about what Entegris might bring to that process and maybe your long-term expectations for it on how maybe it goes from side business to a core contributor over the next couple of years.

That's a great question, and I would say that, as we mentioned during the call in January, we are very excited about the promises of this platform. The technology is very exciting.

I think the team managing this business is very dedicated and very driven, and I believe that this technology is really just entering the commercialization stage. And again, everything seems to be very promising. This technology clearly belongs in the overall portfolio of capabilities of Entegris going forward.

I think that a broader platform would hopefully be an asset to this technology and to the team as it will allow us to secure funding and to secure support to the team and to the technology as we, again, as we engage into the commercialization phase. I would say that as we complete integration of ATMI and as we become one Company, I think that the time will be right for us to start spending maybe more time categorizing all of those opportunities that we are excited about.

Okay, great. I appreciate all the details. Best of luck in Q2.

Thank you.

With that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Loy, I will turn the conference back over to you for any closing remarks.

Thank you all for joining our call today, and we look forward to seeing many of you, I hope, during our analyst day in New England on June 19. Thank you. Bye-bye.

And ladies and gentlemen, this will conclude today's conference. Thank you for your participation.