Entegris Inc (ENTG) 2014 Q2 法說會逐字稿

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

Good morning, everyone. Thank you all for joining our call today. Earlier we announced the financial results for our second quarter ended June 28, 2014. 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 Bertrand Loy, President and CEO and Greg Graves, Chief Financial Officer. Bertrand will now begin the call.

Thank you, Steve. I will make some comments on the quarter's performance, business trends and on our integration with ATMI. Greg will then provide more details on our financial performance.

I am pleased to report we had a strong second quarter across the board, achieving sales of $252 million, which included two months of ATMI results. This was above the high end of the revised guidance we gave in June.

Overall, business trends were largely positive in the quarter. Production rates in fab utilization were positive for most semiconductor makers as demand for mobile devices continue to expand and demand for PCs stabilize. Even so, the leading IDMs and foundries are still in the early phase of implementing and ramping their latest process technologies as the semiconductor industry works through some difficult process challenges.

As you know, ramps of new nodes typically drive demand for our leading edge products. And while we have benefited from some early orders of the current leading edge fabs, sales of our most advanced filters and materials will remain somewhat lumpy until 16 nanometers and 14 nanometers are truly in high gear.

Capital spending trends in the industry were somewhat volatile during the quarter as new fab construction moderated and certain technology-driven projects were pushed out. The leading foundries and memory makers continue to digest their recent capacity additions as they focus on ramping new nodes.

In our adjacent markets we saw some rebound in LED and some other adjacent markets such as flat panel display. We completed the ATMI acquisition on April 30. We are very excited about the value this combination will bring to our investors, our customers and our employees.

As a result of changes to the organizational reporting structure in the second quarter, we are now reporting in two business segments, Critical Materials Handling or CMH and Electronic Materials or EM. CMH represents about 60% of our total sales and comprises mostly the legacy Entegris businesses. CMH is focused on liquid filtration and handling technologies and on the handling of critical substrate such as wafers. Electronic materials or EM represents about 40% of our sales. This segment is mostly made up of the legacy ATMI business and EM is focused on advanced chemistries and solutions for specialty gases.

During the second quarter our sales grew 12% sequentially on a pro forma basis as we recorded growth across all major product lines. CMH performed very well, growing 14% on a pro forma basis driven by record shipments of our advanced groups and high purity fluid handling solutions related to key fab projects. We also enjoyed strong growth in our liquid filtration product lines.

Electronic materials grew 6% on a pro forma basis. EM growth was driven by advanced deposition solutions, key wins for formulated cleans and solid demand for our post-CMP brushes. It was also a solid quarter for our chemical filters and gas purification systems.

For the longer term, we are still in the early stages of exploring revenue synergy opportunities. Our customers have been very positive about the tremendous potential they see in our combined platform. They have offered numerous suggestions for ways we can leverage our technologies into new, value-added, yield-enhancing solutions, and I will share a couple of examples, which are still in the concept stage.

In CMP, for example, we are exploring how we could leverage our industry-leading post-CMP clean formulation with our PVA brushes to provide more cost effective and efficient cleaning. In our specialty gases business, we're looking at ways to leverage our joint carbon expertise to enable better gas purifiers. And we are also looking at ways to combine our purification and delivery capabilities to enable application specific storage and delivery solutions for certain specialty gases.

In terms of the integration with ATMI, I am pleased with the pace of our activity. We have already achieved several key milestones and are ahead of our original schedule for realizing our targeted $30 million of cost savings.

All employees impacted by the integration have been notified. While there's little manufacturing overlap, we have also identified sales offices and facilities where consolidation makes sense. We expect to complete the majority of these consolidations within the first half of 2015.

We also are moving forward on an aggressive schedule for integrating our ERP and other systems, and I want to commend our teams around the world for their hard work as they have come together over the past month while keeping our customers as our top priority. I will now turn the call to Greg for the financial details. Greg?

Thank you, Bertrand. I was very pleased with our Q2 results. The adjusted operating margin of 18.8% in non-GAAP EPS of $0.20 for the quarter clearly demonstrates the earnings power of the Company following the ATMI acquisition.

Our GAAP financial results for the second quarter reflected a number of transaction-related charges. These are outlined in the reconciliation chart on page ten of our press release.

The $74.7 million of charges breaks down as follows. The $24 million charge in cost of goods sold reflects the fair value markup of acquired ATMI inventory that was sold in Q2. In accordance with purchase accounting rules, ATMI's balance sheet was adjusted to fair market value with inventory essentially written up to near its sales price. The total impact of this fair value adjustment was approximately $48 million, and we expect the remaining $24 million to flow through cost of goods sold in the third quarter.

SG&A in Q2 included $38 million of one-time items, including $8 million of deal-related fees, $27 million of transaction costs (primarily change in control payments and accelerated vesting of equity grants for employees of ATMI) and approximately $4 million of integration expenses. Q2 operating expenses also included amortization of $9 million, of which $7 million related to the ATMI acquisition.

The final component of the acquisition-related charges was the write off of the $4 million fee related to the bridge financing commitment that was put in place to support the acquisition. As we move into Q3, deal-related fees, transaction costs, and bridge financing fees will not recur.

The final portion of the inventory valuation adjustment will flow through in Q3. We expect to have integration expenses for the next four to five quarters and we are comfortable with the $35 million overall integration cost estimate we previously provided.

In Q3, integration expenses will be approximately $7 million to $8 million. The amortization expense will continue for the next several years and will be approximately $13 million in Q3. As Bertrand indicated, our integration activities have been productive and we believe we are ahead of our original schedule for realizing the $30 million in annual cost synergies.

During Q2, we realized approximately $8 million of annualized savings and we expect to exit 2014 at a $20 million annualized run rate. On a non-GAAP basis, excluding transaction-related costs, gross margin was 44%, essentially in line with our expectations. For the third quarter we expect gross margin to be flat to up slightly. Excluding amortization and other transaction-related charges, non-GAAP operating expenses were $65.8 million in Q2.

For the third quarter, which will include a full quarter of ATMI, we expect non-GAAP operating expenses to be $75 million to $78 million. Interest expense of $12.3 million in Q2 includes the $4 million bridge fee write-off referred to earlier, as well as a full quarter of interest on the notes and two months of interest on the term loan. For the third quarter we expect interest expense to be approximately $10 million reflecting three months of interest and amortization of financing costs.

The unusual tax rate for the quarter on a GAAP basis reflected the geographic mix of profits in the quarter. The one-time charges resulted in significant taxable losses and in turn tax benefits in the relatively high tax rate US jurisdiction. This is offset in part by taxable income outside the US that was taxed at relatively low rates. On a non-GAAP basis in Q2 we had a tax rate of 27%, which is consistent with our planned tax rate of 27% to 29%.

Adjusted EBITDA for the quarter was $58 million. Cash flow from operations was $11 million, which reflected the impact of certain transaction-related costs. Excluding these items, we would have generated approximately $35 million in cash from operations. We expect operating cash flows will return to more normalized levels in Q4.

Capital spending in Q2 was $15 million. In Q3 we are planning for CapEx of approximately $17 million and depreciation of approximately $13 million, reflecting a full quarter of ATMI. These levels are in line with our normalized levels of capital spending and depreciation.

Our cash balance at the end of Q2 was $367 million, in line with our expectations. Approximately $270 million of the cash was held offshore.

Total long-term debt, including the term loan and the notes, was $818 million, giving us a net debt ratio of less than two times trailing pro forma EBITDA. Consistent with our stated capital allocation strategy, we intend to begin making meaningful debt reduction payments in the fourth quarter. With that, I will turn it back over to Bertrand for some comments on our outlook for the third quarter. Bertrand?

Thank you, Greg. For the third quarter, the base of the ramp of leading edge fabs is still somewhat uncertain. Given this and the record Q2 for FOUPs and for fluid handling products, we expect our Q3 sales to be in the range of $255 million to $275 million. This includes a full quarter of ATMI and compares to pro forma Q2 revenue of $281 million.

Given these revenue levels, we expect non-GAAP EPS to be $0.15 to $0.20. Consistent with our newly-revised target model and the timing of the realization of our cost synergies.

In summary, we achieved good execution in Q2 in terms of both sales and operating margin. We are pleased with the pace and the quality of the integration as well as the timetable for realizing the cost synergies.

Given the growing importance of materials for next generation chip performance, I believe we are a "must have" strategic partner for yield-enabling materials and materials handling solutions. We believe we have an excellent platform for realizing increased value for our investors as we continue to execute our business strategy, focus on the quality of our earnings, and implement our capital allocation strategy. Operator, we will now take questions.

Thank you. (Operator Instructions). We'll take our first question from Patrick Ho of Stifel Nicolaus. Your line is open.

Thank you very much and congratulations on a nice quarter. Bertrand, first, in terms of the results from June and the outlook for 3Q, did you experience any pull-ins or was this just more dependent on the timing of projects and that's why you saw the very, very strong 2Q whereas things flattened and declined somewhat for 3Q? If you could just give a little color of whether it's some pull-ins or whether it's the timing of the projects.

Hi, Patrick. Thank you for your comment. It's really mostly driven by the timing of the projects as we mentioned earlier.

If you think about our full business a normal quarter would be in the range of $10 million to $11 million. We recorded sales well in excess of $17 million in Q2. And our manufacturing team did really a great job and surpassed by quite a margin what we really, frankly, viewed as our theoretical maximum capacity to fulfill some very urgent orders for Entegris barrier material FOUPs that an important Taiwanese customer was requiring.

In the case of the fluid handling product lines, this really relates to our Pureline product lines which came from an acquisition we completed in 2010, 2011. This is really the series of products that are used in the sub fabs, and again, a typical quarter for this product line would be about $4 million, and in Q2 we recorded sales in excess of $8 million for that particular business as we were completing a very important facility project in Korea.

Great. That's really helpful. Maybe a question for Greg in terms of the cost synergies and some of the pulls and pushes given that you're just integrated ATMI now and given, obviously, the lot of volatility that goes on in the semiconductor world.

How are you managing these cost saving projects versus the potential of you just witnessed in 2Q where fab projects demand that quick turn around? How are you managing the levers of getting those cost synergies in place versus meeting your customer demands?

For us, Patrick, the vast majority of the synergies are in what I'd call corporate type functions, so think in terms of finance, IT, to a lesser degree some of our global field operations as we work to consolidate facilities. So where we're reducing cost through the synergies, it really doesn't have an impact on our ability to deliver for the customer because we're doing very little -- in fact, we're not doing anything initially on the manufacturing side of the house.

Great. Thank you very much.

(Operator Instructions). And we'll move next to Jason Ursaner of CJS Securities.

Good morning. I'll echo Patrick's comment to see your stock down a bit, but congratulations on a strong quarter with the combined ATMI.

Thank you.

Just the first question on the revenue guidance. The entire range is a bit lower than I would have expected, and even if I take out the $6 million for FOUPs versus normal baseline, with the additional month of ATMI, the guidance is implying flat to even modest sequential decline, even at the high end of the range.

Generally, haven't seen any companies raising the alarm on sequential trends in that direction. Hearing utilization more flattish, but still expected to strengthen into the holiday season. So I just am trying to understand better what you're seeing in providing that guidance or whether it's simply some conservatism.

Yes, Jason, thank you for your question. Let me maybe help you a little bit with the math. I think you have a lot of the components right, but not all of the components.

Let me start first with the assumptions that we're using for the industry going into Q3. We are currently expecting CapEx to be down about 5% to 10%, and we expect MSI to be essentially flat sequentially. And that again is a reflection of the uncertainties surrounding the pace of the ramp of the leading edge fabs.

Second, I want to remind you that I continue to expect Entegris to out-perform the industry by about 200 basis points. And then lastly, let me help you normalize the future results.

There are two components. One is the FOUP and then the other one is, again, the record revenue posted by our Pureline product lines. And the sum of those two factors is an approximate adjustment of about $12 million to our Q2 revenues. So, if you take the pro forma number of $281 million and you adjust it to the normal levels of FOUP and fluid handling products and you apply the industry assumptions to that, you will get the guidance that we're providing of about $255 million to $275 million.

Okay. I appreciate those details. And on the gross margin non-GAAP of 44%, as we look forward and model blended rates, was there anything you'd call out in the two months of ATMI or the full quarter for your business that would skew the quarter performance in either direction, the excess Pureline or FOUP? Would that have an impact on the margin?

Not really. We're obviously running at high utilization rate, so that has a favorable bias toward the margin.

As we look forward, I said flattish with a slight upward bias, and that slight upward bias is a function of the fact that we'll have ATMI for the full quarter. Historically, their margins have been in the 48% to 50% range for their microelectronics business versus our margins which have tended to be in that 43%, 44% range.

Last question for me. You mentioned being ahead of schedule on the timing of the cost synergies, and I know at the Analyst Day you gave a lot of good detail about locking it in and being prepared to give advance notice. At this point is there any upside to the $30 million, though, given what you're seeing with the integration?

Jason, at this point our focus and the team's focus is really to realize the $30 million of savings that we are targeting and to realize those savings at a faster pace than planned. Once we're past that point then we'll be commenting on your question, but it's too early for us to tell.

Okay. I appreciate it.

Our next question comes from Christian Schwab of Craig-Hallum Capital.

Great. Thanks for taking my question.

As it relates to CapEx the next quarter here going into September obviously looks to be a pause but a lot of the front end manufacturers are optimistic about a Q4 snapback and then a recovery or strong spending recurring in 2015 again. As we look to the December quarter, are you seeing any initial indications of recovery in CapEx, or is it a little bit too early for you?

Christian, it's too early for us to really comment on Q4. I would just say that we continue to be optimistic that 2014 will be an up year for the industry and for Entegris. But at this point, it's too early for us to comment specifically on the trends for Q4.

Great. And I think we talked about this at the Analyst Day, the significant increase in process steps as we shrink nodes below the 20 nanometer level and the more reliance on materials such as the 14 nanometer node. You guys were going to go do some work and try to figure out if you could quantify the potential impact to your business and your growth outlook given why materials matter, I guess. Have you been able to do that work yet, or is that still a work in process?

Well, you have a good memory, Christian, and certainly this is something that we will be working on. We have not completed the work yet.

And it's really a primary function of the fact that if you think about 16 nanometer and 14 nanometer, the fabs are still ramping and it's really hard for us to have a good sense for the consumption rate of some of the products that we provide to those fabs. It's hard to have a good handle on the frequency of replacement of certain of our filters, in particular. So I think that we'll have to wait for some of those fabs to really be operating in a more steady and stable way to get a better handle on all of that.

Okay. Perfect. My last question, Greg, the capital allocation goal on an annualized basis is at least $100 million of repurchasing of debt, is that correct?

We haven't given specific guidance on that, but I think if you look at what free cash flow we think we'll generate, that's a reasonable assumption.

All right. Fabulous. No other questions. Thank you.

Thank you.

We'll take our next question from Dick Ryan of Dougherty. Your line is open.

Thank you. Say, Greg, I'm not sure if the lines are too blurred, but could you just -- if you stripped out ATMI, could you give us what you guys saw as a unit driven and CapEx driven split in Q2?

Actually, Dick, I do not have that data in front of me. I would say that, given the comments Bertrand made with regard to the two big projects that our capital piece was probably a little bit higher than it has been historically just because of the strength of those two items.

Okay.

Moving forward, we're going to really move away from breaking that out. The business going forward is about 80% unit driven. And like I say, we won't be providing the detail on the same level of granularity that we had in the past because we view ourselves as primarily a unit story at this point.

Sure. On your CapEx expenditures, you said Q3 will go back down to a more normal $17 million? And I was -- I think you --

That's actually up slightly from Q2. Q2 was $15 million. It will be $17 million in Q3.

But going into next year, we should still be looking at that $53 million-ish, $50 million to $55 million range you provided earlier?

Yes.

Okay. Thank you.

(Operator Instructions). We'll take our next question from Jairam Nathan of Sidoti & Company.

Hi, thanks. Just following up on the earlier question, you mentioned that you had ATMI revenue as well for the quarter was in the $60 million range. That seems almost flattish from what they might have done around March.

Surprising that they didn't get the benefit of the seasonal growth typically we see in June. So is there anything in there that's like shared loss or something?

Jairam, it's Greg. I would comment that ATMI's revenue we're not going to give you specifics on that. We report on a segment basis which isn't totally clean, but their revenues would have been up mid-single digits if they were a stand alone company.

And Jairam, again, as we stated earlier in our prepared remarks, starting this quarter we are moving to a new reporting structure. I think it's important that you start getting familiar with that reporting structure.

Having said that, if you want me to help you a little bit, I would suggest that you look at CMH as a fair proxy for what old Entegris was and electronic material is a good proxy for legacy ATMI. It's not a perfect match, but this is a good approximation.

Okay. Thanks. And as far as your outlook for the flat wafers start for September, there seems to be a little different from what some of your customers have been saying.

Should we think about the level of seasonality for someone like Entegris? Since you supply -- there could be inventory issues with the end customer, so seasonally, will your revenues be different?

Well, Jairam, what I was saying when I was characterizing the assumptions behind the guidance is that we expect wafer start to be flat. I think that's pretty consistent with what we've heard across the industry at this point.

But you've also heard me say is that we expect to outpace the industry growth rate by about 200 basis points. So in other words, you should expect our unit driven business to grow sequentially going into Q3.

Okay. Thank you. Thanks for that.

And we'll take our next question from Vernon Essi of Needham & Company. Your line is open.

Thank you. Sorry, I got interrupted on the call here. Greg, I wonder if you would just revisit, I think you had given some OpEx guidance. Would you mind just revisiting that, please?

I had said that, on a combined basis, our OpEx was about $65 million in Q2, and we expect it to be $75 million to $78 million in Q3, which reflects a full quarter of ATMI.

Okay. And then also on the new breakouts here, CMH versus EM, and I apologize if you said this already, are you going to provide a historical schedule of this on a backwards basis including ATMI or are we just going to play this as you roll out the quarters?

We are in the process of putting the historical pro forma data together. I mean, our goal is to provide -- we don't have it today, but our goal is to provide back to the beginning of 2013 what those segments would have looked like on a historical basis.

Okay. All right. That's helpful. Thank you very much.

It appears there are no further questions. At this time I would like to return the conference over to Mr. Bertrand Loy for any concluding remarks.

Thank you, Leo. This concludes our call. I want to thank you all for joining us today and for your interest in Entegris.

Thank you. This does conclude Entegris' second quarter conference call. You may now disconnect your lines and everyone have a great day.