Entegris Inc (ENTG) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to the Entegris fourth-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.

Great. Thank you, and good morning, everyone. Thank you all for joining today's call. Earlier, we announced the financial results for our fourth-quarter and fiscal year ended December 31, 2014. You can access a copy of our press release on our website.

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, and 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. Bertrand?

Thank you, Steve. I will make some comments on the achievements for the year, the fourth quarter, and on our integration of ATMI. Greg will then provide more details on our financial performance.

2014 was a transformational year for Entegris. We successfully completed the acquisition of ATMI, making our strong platform even stronger. We implemented a robust integration process that is enabling us to realize the full cost synergies ahead of our aggressive original timeline. Financially, we grew our cash flow, generating $208 million of EBITDA on an as-reported basis.

We increased the non-GAAP earnings-per-share from $0.58 in 2013 to $0.69 in 2014 on an as-reported basis, and have a feasible path to achieve even higher levels. We increased the efficiency of our balance sheet while sustaining our investments in core technologies and global infrastructure. And finally, we broadened the range of our solutions to become even more critical to our customers.

Turning to the fourth quarter, sales of $272 million were at the high end of our expectations, in spite of the headwinds created by a stronger dollar. We achieved non-GAAP earnings-per-share of $0.17, meeting our target model after adjusting for unrealized cost synergies. And we generated $46 million of cash from operations, which allowed us to repay $26 million of long-term debt.

Overall, trends in the semiconductor market in Q4 were stable and reflected seasonally slower fab production levels, which were modestly down from the third quarter. In our adjacent markets, which represented approximately 20% of our revenue, we experienced modest growth in display, solar, and other industrial markets. In light of these market conditions, the performance of Critical Materials Handling, or CMH, was in line with our expectations.

Sales of our liquid packaging solutions were strong, an indicator of the increasing need for cleaner packaging solutions for high-value process materials. Sales of liquid filtration performed well against the seasonally slower wafer starts, and reflected demand for filtration solutions needed to ramp 14 nanometer and 16 nanometer processes.

Electronic Materials, or EM segment, declined modestly, as expected, after a record third-quarter. We were pleased with this performance, particularly for our Advanced Deposition Solutions and our Gas Microcontamination Control products.

Our integration of ATMI continues to track ahead of our original schedule. We achieved a major integration milestone last week with the seamless and successful conversion of our ERP systems. We are on track to exit the second quarter with the full $30 million of synergies in place.

To put this in perspective, within less than a year after the combination, all Entegris employees will be transacting from one system, working out of a unified set of sales offices, and serving our customers as one company globally. This fast and effective integration will allow our teams to return their full attention to customers and new growth opportunities.

As pleased as I am about our accomplishments in 2014, I am even more excited about Entegris' prospects for this year.

2015 looks to be another good year for the semiconductor industry, with growth expected in unit production and fab equipment. In particular, several foundry customers are finally poised to begin their ramp of 16 nanometer and 14 nanometer processes after contending with a great level of process complexities and difficult yield challenges.

These customers are expecting solutions from their strategic material suppliers that provide new advanced materials at the right level of purity and the right process stability. These are precisely the types of technologies we have in our portfolio, and the types of solutions we have been developing in close collaboration with our customers.

We are optimistic about our adjacent markets for 2015, as we expect a generally favorable business environment for display, LED, and life sciences.

Finally, before turning the call to Greg for the financial detail, I want to thank the entire Entegris team for their hard work and dedication this past year. The speed and effectiveness of our integration, while maintaining our commitments to our customers, exemplifies the talent we have at Entegris. It is a privilege to lead such a dedicated team.

Greg?

Thank you, Bertrand. I was very pleased with our results for the year. We achieved sales of $962 million and non-GAAP EPS of $0.69.

For the fourth quarter, our sales of $271.6 million were almost even with Q3, despite a $7 million impact from the stronger dollar. We achieved an adjusted operating margin of 15.5%, which is in line with our target model after adjusting for the unrealized cost synergies.

By segment, CMH revenues of $166 million were slightly ahead of Q3. The operating margin for CMH of 18.8% declined from 21.5% in Q3 as a result of qualification costs for the i2M center, the negative impact of F/X on revenue and gross margin, as well as higher ER&D spending.

EM Q4 revenues of $105 million declined 2% from the strong Q3 revenues of $108 million. EM achieved an operating margin of 28.8%, which compared to 30.9% in the second quarter. The decline was due to slightly lower volumes and higher customer sample costs.

SG&A in Q4 included approximately $9 million of integration expenses. To date, we have incurred approximately $19 million of integration expense, and we now expect total integration costs to be well below our initial estimate of $35 million. We expect these costs to come down in Q1 and to taper off as we move through 2015.

Q4 operating expenses also included amortization of $12 million, which relates primarily to the ATMI transaction.

As Bertrand indicated, our integration activities have been very productive, and we are on track to realize the $30 million in annual costs synergies faster than originally expected. At the end of Q4, we have realized more than half the annualized savings.

On a non-GAAP basis, our gross margin of 43.6% declined from Q3 and was below the approximately 45% level we expected coming into the quarter. Approximately 60% of the shortfall related to the impact of F/X, with the balance due to higher costs related to ramping the i2M facility and higher underabsorption at our factories.

In Q1, we expect gross margin to be approximately 44% to 44.5% with a slight tailwind from lower material costs and other manufacturing efficiencies. However, we expect the currency headwinds to persist.

Excluding amortization and other transaction-related costs, non-GAAP operating expenses were $76.4 million in Q4. For the first quarter of 2015, we expect non-GAAP operating expenses to be $74 million to $76 million.

Interest expense was $9.8 million in Q4, down from $10.1 million in Q3, reflecting lower debt levels.

The GAAP tax rate for the quarter was affected by acquisition-related expenditures and integration-related costs, and is not indicative of the normalized rate. On a non-GAAP basis in Q4, we had a rate of 27%. For 2015, our planned tax rate is 27% to 29%.

Adjusted EBITDA for the quarter was $55.7 million, and cash flow from operations was $46 million. As Bertrand indicated, our business model enables us to continue to generate strong cash flow.

Our cash balance at the end of Q4 was $390 million. This is unchanged from Q3, as we paid our debt down by $26 million. The Q4 debt payment followed the $25 million payment we made in Q3. At year-end, long-term debt, including the term loan and the notes, was $767 million.

We anticipate making additional paydowns of $100 million in the next six to nine months, consistent with our current priorities for capital allocation.

Capital spending in Q4 was $14 million. In Q1, we are planning for CapEx of $15 million to $20 million, with depreciation of approximately $14 million. For the year, we are currently planning for CapEx of approximately $60 million.

In terms of our outlook for Q1, we anticipate semiconductor unit production to be modestly down, consistent with seasonal patterns. Given this outlook, we expect our Q1 sales to be in the range of $260 million to $270 million. At these revenue levels, we expect non-GAAP EPS to be $0.15 to $0.18 per share, consistent with our target model and the timing of the realization of our cost synergies.

In summary, against seasonally slower trends and F/X headwinds, our top line performed well in the fourth quarter. We generated strong cash flow, and we continued to pay down debt. We achieved major milestones related to the ATMI integration, and are on track to realize the $30 million of synergies by the end of Q2. Finally, we are optimistic about what lies ahead in 2015.

Operator, we'll now take questions.

(Operator Instructions) Patrick Ho, Stifel Nicolaus.

Maybe a question first for Greg in terms of the F/X impact. In terms of the March quarter outlook, is that also being impacted by approximately $7 million on the top line?

And maybe as a second question related to F/X, how do you implement, I guess, the hedging contracts, given that the decline over the past quarter has been much steeper than I think anyone has anticipated? How do you react to those in your hedging contracts?

Yes. So, Patrick, with regard to revenue in the March quarter, the impact quarter-over-quarter -- meaning Q1 over Q4 - would probably be about half of that $7 million. I mean, if you were to play it back, that $7 million is Q4 versus Q3 - and much of that impact came in the back half of the quarter. The dollar really strengthened in kind of the late November/December timeframe.

As it relates to hedging, we do not actually hedge our revenue or our expenses. We do hedge our balance sheet. Historically, we've said, and we continue to believe, we have somewhat of a natural hedge, because we do manufacturer in Japan; but given the steep changes in currency in Q4, that natural hedge was, frankly, not enough.

Great, that's really helpful. Maybe for you, Bertrand, in terms of the overall business environment. Looking at Q4, it looked like an extremely strong quarter, particularly if you didn't have the F/X impact. Did you see any pull-ins to the December quarter? And if you didn't, are you -- I guess the overall trend for the March quarter also seemed pretty sustainable. I guess what's the industry dynamics from December to March?

Hi, Patrick. So, good questions. And I would say that, no, we didn't see any pull-ins in December. So I think what we saw and what we experienced in Q4 would certainly suggest that MSI was down probably 2% to 3% during the quarter. And as you pointed out, given the fact that we faced some significant headwinds from the strengthening dollar, we were very pleased with our performance in Q4, which is essentially revenue flat against Q3.

So, going into Q1, I would say that we are actually very encouraged by the strong levels of bookings going into 2015, but we also needed to take a number of factors in consideration when providing the guidance. I mean, particularly, we are looking at a fairly short quarter in Q1, 12 weeks. And then we also tried to capture the impact of the Chinese New Year, something that is always hard to do.

And then, of course, as Greg mentioned, there was also an expected negative impact from foreign currency. So, the net of all of that is the guidance that we are providing at $260 million to $270 million, which, again, in the business environment that we are expecting, which is essentially modestly down, we expect MSI to be down maybe 3% to 4% in Q1, I think is a good solid performance and guidance.

Great. Thank you very much.

Avinash Kant, D.A. Davidson & Co.

Good morning, Bertrand, Greg, and Steven. I had a quick question -- you talked a little bit about ATMI and you're talking about how the technology is now enabling you to introduce new solutions for your customers. Could you highlight some of the products that you are thinking about or you are thinking of introducing in line with those?

Yes, it's a great question. As I mentioned in numerous occasions, I think that the material's complexity is really increasing, as the industry continues to shrink. I think the way you develop new product is becoming more complex. It is becoming increasingly important to have three-way joint development agreements between the device makers, the OEMs, and the material suppliers.

That's something new for many. It's not something new for Entegris. Because of the nature of what we've done, we have actually been able to forge very strong partnerships and relationships for many years across the ecosystem. So that really plays to our strength.

The other thing that plays to our strength is the type of material challenges faced by the industry. I think that filtration and purification requirement continues to become more stringent. I think there is also heightened need for cleaner and safer packaging solutions. And, as you know, there's also a great expectation in terms of the process stability of your own manufacturing.

So all our areas that, as you know, we've been heavily focusing on over the last several years. And I think it really puts us in a really good position, as the industry transitions to those tighter nodes.

So, Bertrand, has anybody done some study in terms of when you move from like the 20 nanometer to 22 nanometer generation, going to 14 nanometers to 16 nanometers, what kind of increased opportunity do you have for Entegris' products?

Right. So, we've done a lot of internal studies to try to quantify that. It really remains a difficult exercise, given the number of products that we carry in our portfolio. But if you were to just look at maybe some third-party published studies around the benefits that materials companies, in general, can expect from the migration to tighter nodes, I would say that, on average, you could expect some increase in terms of the SAM by about 25% to 30%. And that's something that, obviously, we are working extremely hard to make sure we capture our fair share of those opportunities.

In that case, would you kind of give us a breakdown of what percentage of your revenues, either in materials or equipment combined, or overall, are going into the leading-edge technologies? You can define it any way you want.

Well, I think we've said that before, Avinash. We have -- you know, the way we look at it is really an approximation. But most of our new products are really geared to 45 nanometer and below, in terms of process nodes. And revenues from our new products represent something short of 30% of our revenues. So, I would say that's the best approximation I can leave you with at this point.

And again, I think that it is early, in terms of the ramp of 20 nanometer fabs and 14 nanometer and 16 nanometer nodes. So I think that as we see really high-volume manufacturing going through those fabs, I think we will be in a better position to really estimate what is the benefit that we can expect, as those new fabs come online. So again, very early, I would say, in the game, and more to come, as those geometries become mainstream.

One final question. So you have been talking about achieving the cost synergies ahead of time. Any idea or anything that you can commit to that -- could the synergies be higher than the $30 million that you had expected? Thanks.

So, again, we're feeling really good about the quality of the integration work, the speed at which we've been able to realize that. I would tell you, Avinash, that at this point, we want to really turn the page, look at the organization as one team.

It is part of what we do to continue to look for ways to optimize our gross margins, our operating expenses. And instead of qualifying that as integration synergies, I think you should just look at that as just good practices of trying to look for better ways to run the business, optimize the processes, and so on and so forth. And that's something that we always do on an ongoing basis, and you can expect us to continue to doing.

Our commitment is really to the target model. We have published the target model. We have communicated it in June of last year. And that's really what you need to refer to. And that's really the commitment that we are making.

Perfect. Thank you so much.

Jason Ursaner, CJS Securities.

Just focusing on the CMH margins, it dropped off a little from last quarter at a similar revenue level. And I think, Greg, you said this was part of the currency impact. But maybe just at a higher level, how are you looking at more of a steady-state margin profile for the combined piece of Entegris and ATMI that now make up that segment?

Yes. So, CMH, Jason, if you were to look back on really kind of on a pro forma basis, over a series of quarters, that segment profit has kind of run in that, I'll call it, $21 million, $22 million range. And I think, over time, that's a reasonable expectation for that business. And I think the $18.8 million is lower than a normalized level. So I think you should expect to see that improve to some degree.

Okay. And what do you see as sort of the incremental flow-through there on higher revenue as you start to move up in the target model over time?

Well, our overall flow-through -- and I don't have it for CMH specifically -- but our overall flow-through is about $0.40 on each incremental dollar of revenue.

Okay. And Bertrand, understanding the guidance for Q1, just maybe qualitatively tying it in with the prospects for the balance of the year, you are obviously optimistic. But CapEx trends seemed to really pick up strongly November/December, and wafer area shipments appear to be at or near record levels.

So, when you talk about the full-year, just, I guess, how divergent could it get from Q1? And how good could it get other than the currency issues? Are you sort of holding back a little in the encouragement there?

I'm sorry. I didn't get that last sentence, Jason. You -- holding back (multiple speakers) --?

I guess I'm just wondering how conservative when you talk about the full prospects for the year, given some of the trends coming out of the industry right now are very strong?

Oh, okay. But -- so, Jason we do not provide annual guidance. And I certainly didn't want to suggest anything on an annual basis, in terms of quantitatively suggest a specific number for the year. I think you are right, that qualitatively, we feel pretty optimistic about the outlook for the year for all of the reasons you cited.

And as it relates to the trends in CapEx, it's true that they remain important to us, but less so than prior to the acquisition of ATMI. Remember that today, 80% of our revenue is driven by wafer starts. So that's the primary driver for us.

Having said that, of course, we are very excited about all of this new capacity that will be added, especially at the 14 nanometer and a 16 nanometer nodes. Because as they come online, our consumable business and our materials business will benefit from those advanced nodes. So again, reasons to be optimistic about 2015, and then, frankly, reasons to be optimistic beyond 2015 as well, based on all of the trends that I was just describing.

Okay. And cash flow was very strong during the quarter, and you continue to make nice progress paying down the debt. Maybe just talk about what our priorities for cash from here and continued expectations for cash conversion.

I think we'll continue to see strong cash flow. Our priorities will be -- we have -- this is about approximately $60 million in CapEx for the year, so we're obviously going to continue to invest in the infrastructure of the business. But beyond that, our primary use of cash will be to reduce the debt. I mean, our view is, that's the best thing we can do; as we reduce that debt, it will increase our flexibility for strategic moves down the road.

Okay, great. I appreciate it. Thanks.

Thank you, Jason.

Dick Ryan, Dougherty.

Say, Greg, on the gross margin, I wasn't sure I caught it. You said 60% of the shortfall was F/X and what else was in that mix?

Yes, the other two pieces of it really were we incurred more cost than we initially expected with regard to product qualification at our new membrane manufacturing facility here in Bedford. And then the other piece of it was just lower absorption in our factories.

Will that higher cost for the i2M, will that -- is there any lingering impacts into Q1?

Yes. So, I mean, the i2M facility, the qualification-related costs we would expect to be lower in Q1 than they were in Q4. So that will be when I talked about the margins moving forward, efficiencies we'll have -- we'll do better there. There's no hiding the fact that the i2M facility today is a slight drag on the gross margins, because we're operating both that facility and the facility that it's replacing from a membrane manufacturing perspective. We should be out of the old facility by the early part of next year, which will take some of the pressure off the margins.

Greg, if you don't mind, I just would like to add one brief comment here again. For me, from the chair I sit in, I would say that it's actually good news what's happening at the i2M center. Our new UP filters have been very successful and gained more traction than we originally expected.

So there is a premium, frankly, placed on unlocking the new capacity available to us at this i2M center. And that's really one of the reasons why we have been increasing the level of staffing, allowing more pilot runs to be run in order to get high-quality data packages, so that we can complete the internal and external validation and qualification work quickly.

Of course, we want our customers to qualify at the new site and the new membrane as quickly as possible. And with that in mind, I was actually very pleased that we hit an important milestone last week, as we completed the qualification of the first family of membrane. We still have three more families of membrane to qualify, but I would expect, as Greg mentioned, all of our V&Q work to be completed before the end of the year.

Okay, great. Say, Bertrand, you mentioned generally optimistic for the adjacent markets. Anything in particular we should be paying attention to in display, LED or life sciences that you highlighted?

Yes. So, I cited a few industry segments where we believe we have some interesting opportunities. I think you know us well now, and you know that we don't like to provide details until we have some near certainty that those opportunities are real. But, as we start the year, I would tell you that I'm very excited with the opportunity pipeline that I'm seeing, both in non-semi as well as in the semi application. So, I hope that very soon, in the course of 2015, we will have some more specific details that we can share with you in terms of the industries and the applications where we've had some exciting wins.

Great. Great. And Greg, customer concentration, I know it's usually not an issue, but do you have any color on that?

I would say it's been relatively consistent with prior quarters. I mean we've got one customer that, when we report in our K, will be up over 10%. But other than that, a couple of customers in the 5% to 10% range, but that's really it and no real change in that dynamic.

Sure. Great, thank you.

Jairam Nathan, Sidoti.

Thanks for taking my question. Greg, just to kind of, for modeling purposes, how should we, with regard to F/X -- can you give us an idea of what percentage of revenue, what percentage of costs are outside the US? And how should we think about the sensitivity here? And I have a few more.

Yes. So, today, our manufacturing platform today is roughly 50/50. Maybe that it's skewed with the acquisition of ATMI a little bit more toward the US. With regard to thinking about F/X, I mean, the places where we saw the greatest exposure, I mean, Japan is about 12.5% of our revenue, and it represented about $4 million of that $7 million headwind.

Okay. And then (multiple speakers) --

But in that -- in the quarter like that we saw headwinds across the board. I mean, we saw it in the Taiwanese -- the Taiwan dollar, Korean won, were all weak against the dollar.

Okay. And with respect to oil prices, it looks like a lot of -- you have a pretty high content of petroleum related to raw materials. So I would -- how should we think about any benefit there? Is it -- does it need to sustain -- oil prices sustain at these levels for a very long time? And are your suppliers bigger than you? Can you explain the dynamics here?

Okay. So I said, Jairam, with regard to my margin commentary when I talked about Q1, I said we'll have a slight tailwind from some lower material prices. And those are -- that reference was actually to some resins that we purchased, and we know that we'll have a small gain.

Much of the resin we purchase are sort of highly-engineered materials that are custom-made for us, and so the pricing doesn't tend to move -- in the short-term, it doesn't tend to move kind of one-for-one with oil prices. I mean, and we've seen that when oil prices were going up, we didn't see big spikes in our material costs. And as they come down, we haven't seen big compression on the downside. But we do expect, as we go through the process of negotiating contracts for the next year, that we will have some modest benefit.

Okay. And my last question is on the cash in the US. I know you got -- you managed to get some cash in the last quarter, you talked about it. Is there any more progress there of getting cash flow on-site?

I think the comment that I made about the $100 million that we'll pay back over the next six to nine months, that will be a combination of a repatriation of cash as well as cash that we generate. I do want to comment, in Q1, from a cash flow perspective, it's typically a seasonally weak quarter for us. We'll have interest payments in Q1. We'll also have our annual incentive payments in Q1. So, cash flow in Q1 will not be quite as strong as what we saw in Q4.

Okay. Thanks. That's all I had.

At this time, we have one question remaining in the queue. (Operator Instructions) We'll take our next question from Todd Morgan with Jefferies.

Just to follow-up on the debt reduction question, it sounds like the original $150 million I think you talked about, that's the $100 million that you anticipate over the next six to nine months, and the roughly $25 million of each last two quarters? Is that right?

Right. We'll have paid by -- by the fall of this year, we'll have repaid at least $150 million of debt, correct.

Okay. And obviously, that's a lot of repayment. But is that timing kind of the same timing that you've sort of outlined in the past? Or is that any different than what you were originally thinking?

No, I'd say the dynamics around it really have not changed in terms of our expectations. What I'll say is we continue to work to see what else we can be doing to repatriate cash that's held overseas. But today, our commitment is around that $100 million, which, like I said, I think -it will allow us to end up making good on that $150 million commitment in the first year-and-a-half.

Okay, good. Secondly, the $30 million original synergy target, I think you've obviously made good progress against that. Can you help me think about the actual benefit that we might see in 2015 versus the 2014 level? I mean how much real cost-cutting related to those actions are we going to see in 2015 versus 2014?

Well, if you think about all of -- we didn't have a -- when you look at the numbers on a pro forma basis, wouldn't have had any synergies in Q1, because we hadn't done the transaction. Q2, we had a relatively small amount of synergies. And in Q3 and Q4, we were running at a rate of roughly $4 million a quarter in synergies.

As we move in, by the time we get into Q3 of this year, we'll be running at more of a $7 million to $8 million-a-quarter synergy run rate. So, we will definitely see greater synergies in 2014 than we did in 2013. And probably the order of magnitude will be roughly double.

Great. Great, that's helpful. Thanks a lot.

You mean 2015 against 2014?

I'm sorry -- 2015 against 2014. Yes, yes. Sorry. And as you think about it, Todd, what I would really suggest is our commitment, and I think the way you should think about the profitability of the business is to look at the target model. Because that, as Bertrand said -- I think it was the prior question -- we really want to kind of turn the page with regard to the synergies, and focus on delivering to the target model, whether that's cost reductions that are specifically related to the deal, or just prudent cost management in other places. But as you think of it going forward, the target model should really be the reference point.

Okay, that makes sense. Thank you, then.

Thank you.

It appears there are no further questions at this time. Mr. Loy, I'd like to turn the conference back to you for any additional or closing remarks.

Well, thank you all for being on the call with us today. And we look forward to reporting back to you on our Q1 performance. Thank you.

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