Entegris Inc (ENTG) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to Entegris' First-Quarter 2015Earnings call with analysts. 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, and thank you all for joining our call. Earlier today, we announced the financial results of our first quarter ended March 28, 2015. 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.

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 general comments on the business. Greg will then provide more details on our financial performance.

Overall, I am very pleased with our quarterly results. Our revenues of $263 million were in line with our expectations. And were 5% above the same quarter a year ago on a pro forma basis, despite the impact from a stronger dollar.

The quality of our execution was solid, as we improved our operating margin and achieved non-GAAP EPS of $0.18. We generated $56 million of EBITDA, and paid down our debt by $25 million. The integration of ATMI is virtually completed, and we are now fully focused on leveraging our broader technology and operating platforms.

Trends in the semiconductor market in Q1 were seasonally soft, as expected. Additionally, the number of IDMs and foundries reduced their manufacturing activity in response to sluggish demand in some end markets, such as PC and mobile devices.

Our adjacent markets represented approximately 20% of our revenue in Q1. Trends in these markets were generally positive, with continued recovery in solar and LED production, offset by seasonal softness in data storage and display. In light of these patterns, the Critical Materials Handling or CMH grew both sequentially and year over year.

We had a strong quarter of FOUP sales driven by demand from foundry customers getting ready to ramp their 14/16 nanometer nodes. We also recorded higher sales of specialty materials products in a number of new emerging applications.

The Electronic Materials, or EM segment, continued or declined from the relatively strong Q4, but grew slightly from a year ago on a pro forma basis. Growth of specialty gas products was offset by softer sales of advanced chemistries, which reflected reduced fab utilization at some customers.

In March, we received Intel's Preferred Quality Supplier Award for the first time. We are particularly pleased with this achievement, since we accomplished this during a year when the organization was mostly focused on completing the ATMI integration. Entegris was among 19 suppliers to Intel that earned this distinction.

Leadership in our markets today requires more than having the best technology. To be a strategic supplier, you now need advanced quality systems and rigorous management of your supply chain. Precision, speed, control and collaboration are also needed to drive innovation and enable the industry road map. This award validates the investments we have made to be a better supplier, and signals our ongoing commitment to continuous improvement.

Regarding our integration of ATMI, I am very proud to say that the integration is virtually complete. I want to extend my sincere thanks to the global Entegris teams for their relentless dedication and the quality of their work. Within one year since completing the deal, we are ahead of our objectives in terms of magnitude of the savings realized, the timing of putting these savings in place, and the cost required to unlock these synergies. Our full attention can now return to maximizing the potential of the broader platform we have created, both in terms of technology solutions and our global operational capabilities.

This is a dynamic time for the semiconductor industry. Our semifab customers are aggressively working to make their ramps of 14 and 16 nanometer technologies as effective as possible. At the same time, they are already turning their attention to developing the next generations of process technologies, and we are actively engaged with them on these projects. I am very excited about the pipeline of products and new opportunities we have in front of us. To address emerging technology challenges, as well as to harness our strength at legacy nodes and to expand in new adjacent markets.

I will now turn the call to Greg for the financial detail. Greg?

Thank you, Bertrand. I was very pleased with our results for the quarter.

We achieved non-GAAP EPS of $0.18, and improved our adjusted operating margin to 16.1%. When we adjusted for unrealized synergies, this would have been 17.3%, which is in line with our target model.

Q4 sales of $263 million were in line with our expectations. Overall, the impact from FX moderated from Q4. But still represented a $3 million headwind to revenue on a sequential basis, and an $8 million headwind compared to a year ago.

By segment, CMH revenues of $167 million were up 1% from Q4, and 7% above the first quarter a year ago on a pro forma basis. The operating margin for CMS improved to 24.7% from 18.8% in Q4, primarily as a result of improved factory performance, better product mix, and lower allocated sales expense. These favorable items were offset in part by ongoing qualification costs for the i2M center.

EM Q1 revenues of $96 million declined 9% from the strong Q4, were up 1% year over year on a pro forma basis. The lower volumes and higher allocated sales expense drove the decline in EM's operating margin to 21.1% from 28.8% in the fourth quarter.

As Bertrand indicated, the integration of ATMI is basically complete. We expect to have nearly all of the $30 million in annualized cost synergies in place by Q3, which is faster than originally expected.

We've incurred approximately $22 million of integration expense to date. And we expect total integration expense to be approximately $28 million, or about 20% below our initial estimate of $35 million. We expect integration costs to be about $2 million in the second quarter, and then to taper off through the balance of the year.

Gross margin of 44.2% improved from 43.6% in Q4, due to better manufacturing performance and improved product mix. In Q2, we expect gross margins to improve slightly given the higher expected revenue levels.

Excluding amortization and transaction-related costs, non-GAAP operating expenses were $74.1 million in Q1, down slightly from Q4, and at the low end of our guidance. For the second quarter, we expect non-GAAP operating expenses to be $74 million to $76 million. Net interest expense continued to decline and was $9.6 million in Q1, reflecting the lower levels of debt.

The GAAP tax rate for the quarter was 24%. On a non-GAAP basis in Q1, our tax rate was 27%. We expect a similar tax rate for the balance of the year.

Adjusted EBITDA for the quarter was $55.8 million, giving us an EBITDA margin of 21.2%. When adjusted for unrealized synergies, EBITDA would have been $58.9 million or a 22.4% EBITDA margin.

Cash flow from operations for the quarter was essentially breakeven and in line with our expectations. Cash flow reflected an $18 million decrease in accrued liabilities for the payment of our annual incentive compensation. And as expected, higher accounts receivable levels due to the timing of customer collections. Our cash balance at the end of Q1 was $341 million, a decline of $48 million from Q4. This reflects the lower cash from operations, $25 million debt repayment, and $20 million of capital expenditures.

Total long-term debt, including current maturities, was $741 million, and our net leverage ratio was 1.7 times. As we have previously discussed, we expect to pay down an additional $75 million in debt over the next two quarters, consistent with our stated priorities for capital allocation in 2015.

In Q2, we are planning for CapEx of approximately $15 million, with depreciation of approximately $14 million. For the full year, we expect CapEx to be approximately $60 million.

Turning to our outlook. Despite the mixed news from some chip makers and OEMs, we believe 2015 will be a good year for Entegris given our predominantly unit-driven model and solid pipeline of new products. For Q2, we expect sales to range from $265 million to $280 million. At these revenue levels, we expect non-GAAP EPS to be $0.18 to $0.21 per share, consistent with our target model.

In summary, we executed well and achieved our target model. We improved gross margin and effectively managed operating expenses. We grew our sales 5% compared to a year ago, despite a significant headwind from the stronger dollar, and we continued to pay down debt.

With that, operator, we'll now take questions.

Thank you.

(Operator Instructions)

We'll take our first question from Jason Ursaner with CJS Securities.

Good morning.

Good morning, Jason.

First on the cash flow, and I apologize if you did say this in the prepared remarks, but there was a fairly sizable working capital outflow during the quarter. Just wondering what expectations are for free cash flow for the full year in terms of cash conversion, or some type of percentage of net income or anything like that?

Well, what I would say is first of all, with regard to the changes in working capital, Jason, it's really a timing issue. If you look, the bulk of the change in cash flow from operations between Q4 and Q1 related to accounts receivable. Many of our customers in Asia pay on the calendar quarter end date.

So if you were to roll it back between our quarter end on April 28th and the 31st of March, excuse me on March 28th and March 31st, we collected about $37 million in accounts receivable. Because a number of the Asian customers tend to pay right on the date. So nothing out of the ordinary.

As we move into Q2, we'd expect the receivables turns to go -- DSOs to go to more normalized levels. And I think you'll see operating cash flow again in that $50 million a quarter range, like we were seeing in the later quarters of last year.

Okay. Great. That's actually very helpful.

And then just for Bertrand, you mentioned the Intel award and some of the characteristics that go into being a strategic supplier now that go well beyond just having a good technology. Wondering if you can maybe talk a little more about how you see this changing the barriers to entry for the whole semiconductor equipment and materials market?

And then for Entegris specifically, understanding that it may not be showing up in sales today. What is being more tied in with the tech road map in terms of share at the leading edge that might be more critical for the next couple years?

Thanks, Jason. This is actually a great question.

And as you said, I think that to be viewed as a strategic supplier in this industry, you need a lot more than just being a technology leader. The technology leadership gets you a seat at the table. It's an (technical difficulty), if you want.

But you also need to be able to have robust manufacturing capabilities, as well as being, I would say, a partner that is easy to do business with. And those two attributes are things that are really difficult to create. So if you think about the manufacturing environment, variability is a killer in our industry.

You need stable. You need capable. You need cleaner processes, and we've made a lot of very significant investments to reach acceptable levels of performance on those fronts. We can always improve, but I'm pleased with the progress we've made and we will continue to improve. It's a journey. It's an endless quest for excellence, but we've made a lot of progress.

In terms of the ease of doing business, increasingly, it is important to have the right level of global infrastructure. Not just in terms of local manufacturing capabilities, but you need to have the right capabilities in terms of development, analytical capabilities in the major markets, which is particularly true in Taiwan and in Korea.

And I would say the ATMI acquisition was a great help to get to that point, as we added much needed critical mass in R&D capability in those two countries. But I think that Entegris has done a lot in the last several years to improve, and I think that we are viewed today as a much better partner than ever before. And over time, it's going to make us a much stronger competitor.

Okay. Great. I'll go back in the queue and let some others have a chance. But great quarter, and I'll catch up with you guys later. Thanks.

Thanks, Jason.

We'll go next to Patrick Ho with Stifel Nicolaus.

Thank you very much, and congrats on a very nice quarter. Bertrand, first off, maybe as a follow-up to that semi question that was just asked.

Can you remind us of some of the increasing capital intensity trends for Entegris? On both your traditional Entegris products, as well as some of the materials opportunities given a lot of the process technology changes we're seeing in both FinFet, 3D NAND, multi patterning. How much to you see capital intensity for your solutions, say, over the next few nodes?

I'm not sure I totally understand your question, Patrick. As you know, the solutions that we're providing our customers are usually taking the form of chemistries, filters. So they are not viewed as a CapEx sales to our customers, instead they would be viewed as materials and consumables by the fab.

So I'm not sure that we have -- we are measuring, in fact, our market share gains or our increase in SAM in terms of capital intensity. Having said that, we do believe that as the industry transitions from, say, 14-nanometer to 10-nanometer, that we will see an increase in our SAM. There's been a number of external studies published around that.

We have, of course, some internal work that we've been developed. The increased opportunity would be probably in the range of 20% to 30%. But as I stated in prior calls, I certainly would want to see some of those fabs in operation and running high volume productions before we can actually formally finalize those expectations.

So again, I would expect some positive trends as the industry continues to advance to tighter nodes. But again, we will -- you have to stay tuned before we can actually quantify that in final terms.

I apologize. You answered the question, but I was looking more maybe capital intensity trends is not the right metric. But just given all the materials engineering that's going on with semiconductor manufacture processes. I was trying to get I guess a more quantifiable look in terms of your content and your market expansion that you mentioned on a going forward basis. So 20% to 30% makes a lot of sense.

Maybe going to the adjacent markets for a second. Obviously, ATMI broadens your product portfolio and the opportunities there. Can you just broadly discuss what are some of the, quote, non-semis and add adjacent markets that ATMI could potentially bring you into?

So I would say that if you think about the non-semi markets that we've been traditionally participating into, you would have a long list ranging from data storage, LED, solar. And again, it was actually a very good quarter for all of those market segments.

Today, most of those non-semi opportunities relate to legacy Entegris products. Having said that, to your question, I would say that the primary opportunities for us will be for the legacy ATMI technologies would be around the electronic waste, recycling opportunity. What is referred to as the evolve technology.

We are aggressively funding this initiative, but it is really too early for us to really quantify the size of this opportunity long term. Something that, again, we continue to remain very excited about. But not something that had any bearing in the most recent quarter, and not something that I would anticipate will have any significant bearing this year in 2015.

Great. Thank you very much.

We'll take our next question from Amanda Scarnati with Citi.

Hello. Thanks for the question. You had mentioned that there was an impact due to lower utilization at some of the fabs. Have you been impacted at all by the higher reuse rates mentioned by TSMC and Intel, or is that sort of a non issue for Entegris?

Amanda, it's really a non issue for us. If you think about the amount of materials that those fabs will be using, whether it's a new fab or a fab that will be reusing existing equipment, it doesn't really change much if anything for us. And again, 80% of our business as you know is wafer start driven.

So we have a small fraction of our business that is CapEx driven. And if you think about that, we actually have seen a very robust performance in our FOUP platforms. So a lot of the customers migrating to 16 and 14 did actually purchase a number of new FOUPs that are required for them to manage this transition. So our business actually was favorably impacted by the transition to tighter nodes.

Great. Thank you.

What do you see as the biggest growth drivers for Entegris in 2015? Is it just higher process stuff that's going to drive increased revenue? Or is there some other growth drivers that you're looking forward to this year?

Sorry, Amanda, can you repeat the question?

Sure. So what are the biggest growth drivers that we should expect out of Entegris this year? Is it increased process stuff as we transition to higher nodes and 3D NAND? Or are there other drivers that we should expect to see out of the revenue lines this year?

It will be the greater number of wafer starts in the year, so that's the first driver. The second driver will be indeed the greater opportunities that we see as the industry transitions to tighter nodes. And one of the reasons for that is the increase in our number of process steps at those tighter nodes. And then lastly, it will be the successful introduction of a number of new products and new product lines, both in semi as well as in non-semi applications.

Great. Thank you.

We'll go next to Dick Ryan with Dougherty.

Thank you. Greg, can you talk a little about your assumptions for the CapEx side and unit driven business? Maybe address this on your guidance for Q2, and any visibility you have yet on either side going into the second half of the year?

I'd say with regard to the unit side of the business, our assumption is that while the outlook is a little bit unclear, that Q2 is typically a much stronger quarter for unit production. So we do expect to see some improvement in units, and so we should see some improvement in that side of the business for Entegris.

On the CapEx side, with it only being 20% of our business, I would say we've got less visibility there. But in general, I think our outlook there would be flattish.

Okay. And not that you've had concentration issues, but was there any 10% customers or do you have the top 10 contribution?

For the quarter, it looks a lot like what we disclose in our investor presentation for the top 10. The one large customer which we disclosed in our 10-K, TSMC, continues to be above 10%. But no one else has reached that threshold.

Okay. Thank you.

And we'll go next to Jairam Nathan with Sidoti & Company.

Hello, thanks for taking my question. Just one question on the margins. So we did see the EM segment margins go down, and you talked about some cost here. So is that transitory? Do we expect that to come back, especially given that you said it's a pretty strong quarter?

So yes, and I commented in both CMH and EM about -- CMH, as we readjust our sales force and some of our go-to-market strategies and how our sales force is organized. We've also reallocated how those expenses are split between the two divisions. So EM, 2.5% to 3% negative impact on the margin related to a higher allocation of sales costs.

And you'd say vice versa with regard to CMH. They clearly benefited from lower sales costs. Our overall sales costs remained relatively constant, and continue to be consistent with our target model.

Other than that, the EM margin, that accounts for a meaningful part of the drop. But the other piece of it is the revenue was down $10 million. So just the impact of volumes really played a meaningful role in that decline in the operating margin there.

Thanks. And with respect to -- you kind of tried to talk about Entegris as more of a unit driven business. How conjoined are the CapEx and unit driven businesses within Entegris? And how should we think about it at least -- not in the near term but over time either selling the CapEx run businesses or is that a non starter?

I think that, again, each of those product lines have a unique role to play in our portfolio. It doesn't -- the fact that they have different patterns doesn't mean that they don't belong in the portfolio. If you think about the value proposition that Entegris brings across the ecosystem, this is really around contamination control. It's around better solutions to manage critical chemistries and critical substrates.

So when you think about, for instance, our FOUP platform, they play a very critical role in the fab as it transports in a very pristine way the in-process wafer from one process step to the next. So it's very consistent with the overall value proposition that we want to be providing to our customers.

The fact that it's, again, not a unit driven product is almost irrelevant. And very frankly, I think that this is probably a way of describing our business that we're going to try to move away from going forward, because I don't think it's particularly relevant.

Okay. Thank you.

We'll go next to Todd Morgan with Jefferies.

Thank you. Good morning. Good quarter.

I just wanted to follow up on SG&A. And I don't think I heard you call it out, but I apologize if you did. Much lower sequentially, and I guess so is there any big item behind that? Is that a run rate to think about going forward?

Actually, Todd, it's Greg Graves. We'll see -- we talked about our guidance for overall OpEx of being $74 million to $76 million in the coming quarter. I think you'll continue to see SG&A trend down slightly as the accounting, finance and IT folks leave ATMI which is actually happening this week. And then you'll see some of that investment shift over to the ER&D side.

That makes sense. And then secondly, as I think you talked also about the new products that you are working on. Can you give us any sense of the broad time frame for when we might see those products start to impact the P&L? Do we need to see the next node size really grow, or is this something for existing processes? Thanks.

It's really a collection of new products and opportunities that relate to different nodes and across different markets. Remember that we don't really have any product line in our portfolio that would represent more than $50 million of revenue on an annual basis.

So again, as you look at the Entegris portfolio in general, it's really a collection of small product platforms or derivatives. And again, we are trying to address different opportunities across leading edge and legacy fabs alike, and across different markets.

Okay. I understand that. But in general, the efforts that you've obviously started as part of the acquisition and the integration, the products that you would hopefully then be cooperating on. Are those items that could be brought to market this calendar year? Next calendar year? Any broad sense of timing for when those sorts of developments might start to roll out.

If you think about the more meaningful platform development work, usually most of them relate to the advanced nodes. And right now I would I say the bulk of that activity is targeting the 10-nanometer process node. So it's not something that will impact our P&L and the top line until most likely next year.

Okay. Great. Well, thank you. Good quarter.

Thanks, Todd.

(Operator Instructions)

We'll go next to Christian Schwab with Craig-Hallum Capital Group.

Hey, good morning, guys. I was just looking for a little bit of clarity, further clarity on the growth drivers for of 2015 that you talked about. Wondering, one, what your expectation is for wafer starts?

Two, what the growth rate expands to given the opportunity for increased number of process steps as we shrink nodes? And three, a quantification of the impact of new products. Don't expect you to talk about for competitive reasons what they are, but potentially what the revenue amount we should expect is.

All right. So Christian, this is Bertrand. We continue to believe that the MSI index will be up in 2015, most likely in the low single digit range, around 2% to 3%.

Again, as I stated earlier, we are very excited with the amount of new products and new opportunities that we have in the pipeline. So that's going to be the fuel that will allow us to outperform the industry by about 100, 150 basis points. That's the stated objective that we have.

And as you know, MSI is an index that doesn't adjust for the currency impact. So I would tell you that we feel pretty good about the way we started the year. We're up 5%, which we believe is ahead of MSI at this point.

And again, we've accomplished that in an environment with very severe headwinds from the foreign currency translation. So good start, and we continue to remain optimistic for the balance of the year.

Great. Thanks, guys.

Thank you.

And with no further questions in the queue, I'd like to turn the conference back to Bertrand Loy for any additional or closing remarks.

Thank you all for joining us on the call today. We look forward to seeing you at our Analyst Day in July or on the call to review our Q2 results. Thank you.

Again, that does conclude today's presentation. We thank you for your participation.