Entegris Inc (ENTG) 2015 Q4 法說會逐字稿

Good day, everyone, and welcome to the Entegris fourth-quarter 2015 earnings 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.

Thank you. Good morning, everyone, and thank you all for joining our call. Earlier today, we announced the financial results for our fourth-quarter and fiscal year ended December 31, 2015. You can access a copy of our press release on our website.

Before we begin, I'd 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 results for the year and for the fourth quarter. Greg will then provide more details on our financial results.

Overall, I am very proud of the performance for Entegris and our many accomplishments in 2015. It was an extremely busy and productive year, and I wanted to thank the entire Entegris team around the world for their hard work and focus in making 2015 a success.

To list a few of our achievements, our sales of $1.1 billion reached a record high for Entegris and grew faster than our markets. We grew our adjusted earnings per share 23% to a record high. We completed the integration of ATMI, achieving the full $30 million of synergies ahead of schedule and at a lower cost; sustained our investments in new products and new technologies, both in our core semiconductor business and in our adjacent markets.

We generated strong cash flow and achieved an EBITDA margin of 21.5%. Finally, we met our debt repayment target, and paid down $100 million of debt during the year, which reduced our net leverage to less than 1.4 times. I was particularly pleased with these achievements, given the soft industry environment in the second half of the year and the significant currency headwinds we faced.

After a strong Q1, wafer production slowed through the year and was below seasonal trends, as device makers lowered their production to reduce inventories and pushed out the timing of production of new process technologies. Given these industry trends, we performed well. Our sales of nearly $1.1 billion for the year were up 3% on a pro forma basis when adjusted for a $32 million currency headwind.

This year, we made very good progress to leverage our expanded technology platform and greater scale to address opportunities in ways we could not before. The intensity and quality of customer engagements this past year were greater than anything I have seen in the past. These projects are resulting in solutions not only for the leading-edge but also for pockets of growth at the trailing nodes.

During our Analyst Day in July, we described how we are positioned to grow and expand our share by leveraging our unique strength, the breadth of our technologies, our drive for manufacturing excellence, and our larger scale. This past year, we made great progress in delivering even more differentiated materials and solutions to enable cleaner and higher purity process chemistries that are helping our customers reach acceptable yields faster.

For example, we are developing a new series of liquid filters targeting photochemical suppliers to enable them to meet more exacting purity requirements demanded by leading fabs. For Entegris, this represents an opportunity to expand our served available market and to leverage the enhanced capabilities of our i2M center.

In addition, we continue to develop a number of materials that are critical to the next generation nodes. For instance, we expanded the offering of our specialty gas solutions business with new Boron gas mixtures for advanced ion implant applications. These mixtures have produced a buildup of tungsten in the implant tool chamber, thus, improving the lifetime of the ion source and increasing the stability of the ion beam. By using our specialized gas canisters to deliver these Boron mixtures and our deep knowledge of implant gas applications, we will be ideally positioned in this growing market segment.

These two examples I just described are just samples of how we are using our capabilities to enable our customers' roadmap. More generally speaking, we are delighted with the quality of our new product pipeline as we enter 2016.

This past year, we generated healthy operating cash flow of $121 million and we deployed that cash consistent with our stated capital allocation strategy. That strategy seeks to balance debt repayment, building liquidity for targeted M&A, and opportunistic share repurchases.

In 2014 and 2015, our objective was to use our excess cash to pay down our debt, which we did. We repaid $51 million in 2014 and another $100 million in 2015, which reduced our net leverage from two times, when we announced the ATMI deal in 2014, to around 1.4 times. Today, with our shares trading at what we believe are below fair market levels, and with our growing US cash balances, the Board has authorized the repurchase of up to $100 million of stock.

Turning to the fourth-quarter results, sales of $267 million were slightly above the high-end of our guidance, as the month of December proved stronger than expected. Semiconductor sales, which represented 77% of revenue, were down 2% versus the third quarter, modestly better than the industry trends.

Sales in our adjacent markets were up 1% sequentially and represented approximately 23% of our revenue in Q4. This reflected higher sales in data storage, solar, and glass-forming, which was offset by lower sales related to flat panel display. On an operating basis, our non-GAAP earnings-per-share of $0.20 included both the impact of a lower gross margin and a favorable tax rate.

During our last call, I indicated that we would take steps to proactively manage through what we conservatively expected may be a six to nine month soft patch. Accordingly, we throttled back our expenses and took steps to aggressively reduce our inventory. We knew these measures would put pressure on margins in the short-term, but would provide us with greater cash flow and flexibility in our working capital management. Greg will have more details on this in his remarks.

Looking forward, we are excited about what lies ahead for Entegris. This year, we will be celebrating our 50th anniversary as a company, and we are optimistic it will be another record year for Entegris. While we expect business conditions to remain soft in the first quarter, which tends to be seasonally weak, we expect demand to strengthen as we move through the second quarter into the back half of the year.

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

Thank you, Bertrand. Fourth-quarter sales of $267 million were above the high-end of our guidance, driven by stronger sales across a number of businesses, including liquid filtration and specialty materials. Sales were down 2% from a year ago, but were flat when you consider we faced the 2% or $5 million negative impact of foreign exchange.

Our non-GAAP earnings-per-share of $0.20 also topped our expectations. As Bertrand highlighted, gross margin of 41% declined from 43% in Q3, primarily as a result of sharply lower manufacturing output. This enabled us to reduce our inventory levels by $15 million or 18% -- or excuse me, 8%.

In addition, we incurred higher membrane product sampling expense related to customer qualifications as we entered the final stretch of the transition to the i2M center. The transition to the i2M center currently represents a drag on margin of approximately $2 million to $3 million per quarter due to customer sampling costs and duplicative overhead.

We expect these costs will go away when we complete the transition and close the old facility in the middle of this year. Therefore, we expect gross margin to improve to approximately 42% to 43% in the first quarter and to improve further in the second quarter. Finally, we expect gross margin to reach higher normalized levels in the third quarter as we achieve the full benefit of the i2M transition.

Q4 results included amortization of $11.4 million and the final tranche of integration expense of $5.6 million. The integration expense included litigation-related costs from pre-acquisition ATMI events, the write-down of a warehouse facility built prior to the acquisition, and higher-than-expected transfer costs related to the integration of our Asian legal entities.

Excluding these costs, non-GAAP operating expenses were $72.2 million in Q4. This was within our guidance. We expect non-GAAP operating expenses to be $71 million to $73 million in the first-quarter 2016. Adjusted operating margin was 13.9%, slightly below our target model.

By segment, the operating margin for CMH of 20.2% in Q4 declined from 22.3% in Q3. EM's operating margin at 21.3% declined from 22.4%. Both CMH and EM were impacted by the volume-related gross margin headwind I just described. Net interest expense is $9.7 million in Q4. The slight increase from Q3 was due to the additional five days in Q4.

Our GAAP tax rate for the quarter was a 33% net benefit, and on a non-GAAP basis, was a 3% net benefit. The lower tax rate was driven primarily by two factors -- Congressional reenactment of the R&D credit in the fourth quarter and lower taxable income in the US, as most of the gross margin impact related to lower production at US facilities.

For Q1, we expect the GAAP tax rate to be approximately 25% and the non-GAAP tax rate to be approximately 28%. The higher tax rate in 2016 is largely due to the expiration of a long-standing tax holiday in Malaysia.

Adjusted EBITDA for the quarter was $51.4 million, giving us an EBITDA margin of 19.3%. CapEx was $16 million in Q4 and $72 million for the full-year. For 2016, we are expecting CapEx to be $75 million to $85 million as we continue to invest in a number of focused growth initiatives.

Cash flow from operations for the quarter was $52 million. Our cash balance at the end of Q4 grew $49 million to $350 million. This reflects the cash flow from operations, less $16 million of capital expenditures, plus the cash proceeds related to certain asset dispositions. Our domestic cash balance stood at nearly $150 million. Total long-term debt, including current maturities, was $667 million, giving us a net leverage ratio of 1.4 times.

Under the terms of the debt agreements, we are not required to make any mandatory repayments in 2016, although we expect to repay $50 million during the course of the year. As Bertrand indicated, the Board has authorized the repurchase of up to $100 million of stock in open market purchases or under 10b5-1 trading plans. In addition to these repurchases, we expect to continue to execute the other elements of our capital allocation strategy, namely debt repayment and building liquidity for potential M&A.

Turning to our outlook for Q1, we expect sales to range from $250 million to $265 million due to soft seasonal business trends. At these revenue levels, we expect non-GAAP EPS to be $0.13 to $0.17 per share, consistent with our target model.

In summary, Q4 capped off a very good year for Entegris with record revenue and EPS. We significantly improved our working capital and generated strong cash flow. We expect to deliver results consistent with our target model in Q1 and the balance of 2016. Finally, our balance sheet continues to improve, and we have liquidity available for buybacks, debt reduction, and possible small acquisitions.

Operator, we'll now take questions.

(Operator Instructions) Patrick Ho, Stifel Nicolaus.

Thank you very much and congrats on a nice year. Bertrand, you mentioned some comments about your overall trends as you look forward to 2016. But given the workdown of your inventory in Q4, and some of the comments from your customers to date about their inventory levels, how do you see, one, their inventory levels; and two, what kind of demand trends do you potentially see that will drive, I guess, a restocking of inventory at your customers?

Hi, Patrick. Thank you for the comment. Well, many of our customers have commented that they believe their inventory levels, or the inventory levels in their channel, are currently at healthy and normal levels. So that's really our operating assumption as well.

If you think about the guidance that we provided for Q1 and the guidance we provided for the year ahead, the guidance for Q1 reflects some caution about the overall IC demand and fab activity early in 2016. And that's a view that is consistent with the comments that we made in October of last year, and that's really the view that led us to take some of the actions that we took in terms of cost containment and inventory management.

But we expect things to turn fairly rapidly, and then probably and hopefully as early as Q2. And we expect growth in our business in 2016 as a result of two factors. The first factor is we expect MSI to grow in the low-single digits during fiscal 2016. And the second factor is that we expect Entegris to benefit from the initial ramp -- the initial 10 nanometer ramp at several fab customers later in the year.

So if you take those two factors, coupled with the planned introduction of a number of new products, I think we will be in a good position to outgrow the industry yet again by 200 to 300 basis points.

Great, that's helpful. And maybe as a follow-up question, given some of the qualifications that you are seeing at the i2M facility, obviously from an intensity standpoint, you mentioned that it's at a very high point. How much of it is for the leading-edge, as you mentioned, 10 nanometers? Or is this kind of broadly based in terms of the qualifications that you are seeing with customers?

Actually -- that's a great question. Actually, the qualifications that are taking place right now at i2M really covers the full range of products. So, trailing-edge as well as leading-edge.

But you are correct that the reason why this i2M project is so strategic and so important for us is coming from a number of different reasons. First, the i2M center will give us access to a cleaner, more capable manufacturing process. And that's going to be essential in order for us to develop the next generation of printers required at 10 nanometer and 7 nanometer.

Second, once we complete the qualification of the i2M center, it will essentially double the capacity for those filters. And ultimately, that's going to really lift the cap that -- lift the lid that has been plaguing the growth potential of those products now for a number of quarters.

So, again, I think, as we close the year, as we close 2015, I'm extremely pleased that nearly all of our internal qualifications are complete, and that we are moving extremely fast now in supporting and completing the customer qualifications. So I think we will be in a very good place in a couple of quarters from now.

Great. Thank you very much.

Thank you.

(Operator Instructions) Weston Twigg, Pacific Crest Securities.

Thanks for taking my question. First, just on the inventory. Can you give us an idea if you expect to continue to take that down in Q1 or if you think it will stabilize or maybe increase a bit?

In Q1, we'd expect inventory levels to be stable to maybe up modestly. And I think that will be a function of, as we move through the quarter, what we were expecting as we move into Q2.

Okay, helpful. And then also just wondering on adjacent market revenue or non-semi-revenue, can you help us understand the revenue trend you see in Q1 and expectations through 2016 for that segment?

It's Bertrand. So, Q1, I would expect actually modestly favorable growth for the non-semi-business. And I would expect actually a modest contribution to the overall growth in 2016. In other words, the bulk of the growth I was referring to will most likely come from our semi markets in 2016, as a result of some of the activity that we expect to see around 10 nanometer later in the year.

Very helpful. Thank you.

Dick Ryan, Dougherty.

Say, Greg, you mentioned the margin on EM having the same kind of gross margin headwinds as the previous quarter. But if you look last year, I think the contribution was like 29%. Anything else going on in that story? Are you seeing any pricing issues?

No, there's really nothing else going on in that story. I would just say that the comparability between last year is not perfect, because we brought most of the EM business on to our common SAP system and onto the Entegris costing methodology. So there is nothing that's fundamentally changed in that business. I would say when we talk about potential price pressure, we have less price pressure in CMH than we do in EM, but I mean, that's not an overarching concern.

Okay. And I think I got your topline FX impact for the quarter and the year. Did you mention profitability impact from FX at all in the quarter or the year?

No. I mean, we tend to be pretty naturally hedged, I mean, because our biggest headwind on currency on the topline tends to be the yen. And that also ends up being a tailwind on the cost side because we manufacture in Japan as well. So, for the year, currency was between $30 million and $35 million headwind. But when you think about it on an operating margin basis, it's relatively neutral.

Okay. In your Q1 guidance, $250 million, $265 million, can you kind of handicap what would need to go on? We are halfway through the quarter to hit either end of that. I mean, is it -- are you factoring anything in from the Taiwan earthquake? Maybe it's too soon for that. But anything there? Or what's your assumptions on unit and CapEx contribution?

So if you think about both ends of the guidance for Q1, again, as I mentioned earlier, we're trying to capture some caution around fab activity, starting the year. I mean, we -- remember that we left 2015 with a number of fab customers operating in the low to mid-80% utilization rates. We haven't seen any meaningful improvement from those rates so far this quarter.

So, that looks to the low-end of the range. On the high-end of the range, again it has to do with some early activity around 10 nanometer, and then some scenario where fab activity could actually improve above and beyond our expectations in the second part of Q1.

Another part of your question was around the impact of the recent earthquake that shook the southern part of the Taiwanese island. As of this point -- and again, information coming from our customers, is still preliminary and still very much partial, but we do not expect that the impact will be very significant. And we are obviously working very closely with our customers to help them mitigate any negative impact the earthquake could have on their operations. But again, we tried to factor the impact of the earthquake into our guidance the best we could.

Okay, great. Thanks and congratulations on good execution.

Thank you.

Christopher Kapsch, BB&T Capital Markets.

I had a follow-up question on the guidance for first-quarter. If I look at that range, the high-end of your sales range would be comparable to the fourth quarter. So, roughly flat sequentially. And given that you, I guess, don't have this inventory drawdown penalty in the first quarter, presumably gross margins would be healthier.

So I'm wondering why the guidance range on the EPS line isn't -- at least the high-end -- at least comparable to what you did in the fourth quarter? Is there some mix effect that's going on?

Yes, well, the big change between Q1 and Q4 is really around the tax rate. I mean, we're talking about a tax rate of 28% in Q1 where it was a benefit of 3% in Q4. We would expect our operating margins to be better than they were in Q4.

Got it, okay. And then just can you talk about, sequentially, how your order demand patterns trended during -- sequentially, throughout the quarter and thus far into the first quarter? And as a follow-up to that, can you discern any sort of bifurcation around demand trends for your products that go into leading-edge versus lagging-edge?

I think the first part of your question is what trend did we experience in our order pattern in Q4? And I would say that it remains pretty soft throughout the quarter. As I mentioned, a number of our customers were operating at very low levels of fab utilization.

What came as a surprise in Q4 -- as a positive surprise -- was that the last two weeks of the quarter were stronger than expected. In particular, we experienced very strong demand for our UPE and Teflon filters. And as a result, our liquid microcontamination business grew 3% sequentially and finished the year on a very high note.

If you think about the velocity of our orders going into Q1, I think they are at about similar levels at what we experienced in Q4. And that's really the basis for the guidance in -- the guidance that we provided for Q1.

Okay, is there -- just, yes, as a follow-up to that, is there any difference between the strength or weakness at the leading-edge versus the lagging-edge in terms of the fab utilization rates or demand for your products into those applications? Thanks.

Good question. But I would say that the fab utilization rates were actually fairly depressed across nodes. So, at the leading-edge as well as the trailing-edge. So there was not really a lot of differences between nodes and between customers.

Thank you.

Christian Schwab, Craig-Hallum Capital Group.

Congratulations on a solid quarter and good execution. Bertrand, can you please elaborate on what you specifically believe could cause demand to strengthen in Q1? Is that unit-driven? Is that CapEx-driven? Is it a combination of both? Is it leading-edge? Is it trailing-edge? Is it an industry comment? Or is it more line-of-sight to improve SAM to liquid filtration or specialty gas going on into the ion implant market? So, a little clarity of a 1, 2, 3 punch there would be very helpful.

Christian, I tried to address that question earlier in a comment, and I think that there are many reasons behind our conviction that 2016 could be a really good year for Entegris. The first is that we believe that MSI will grow, albeit in the low-single digits in 2016. And the reason for that is we believe that PC sales will be stabilizing in 2016.

We expect to see some pockets of strength on the mobile device sales front. And we expect to see continued growth on some of the Internet of Things applications. So all of that combined will help MSI to be in positive territory in 2016.

The other thing, as I mentioned earlier, is that a number of our fab customers have finally made a commitment to ramp their 10 nanometer process technology later in the year. And as you know, many of our development efforts over the last couple of years have been targeting enabling-technologies around a 10 nanometer node.

So we would expect good, positive momentum as we see evidence of those ramps later in the year. So, that's essentially really what will be driving the growth momentum in 2016. It's really leading-edge primarily, and more specifically again, the early ramps of 10 nanometer nodes.

Great. Well, congratulations. On the last conference call, you were kind of first to be kind of grumpy about the market and murky, and the SOXX (Index) was at 563 today. We said 16% lower. Now you are optimistic. So I love to hear your optimism. I don't have any other questions. Thanks.

(laughter) All right.

(Operator Instructions) Amanda Scarnati, Citibank.

Thanks for taking the question. Just a quick question on the debt, and I might have missed this. What are the expectations for debt repayment in 1Q and 2016? And is there a moderating of the aggressiveness of the debt repayment in order to maintain cash for potential acquisitions?

So, I think it's unlikely that will make a payment in Q1. We do intend to pay at least $50 million during 2016, and we've got that classified as current on our balance sheet.

And the second half of the question, was -- do we -- does this change -- is there a moderating? And I would say if you were to roll the clock back 12 months ago to today, today we are more focused on maintaining liquidity and maintaining flexibility than we probably were 12 months ago.

What we've been saying is, for every dollar of cash we generate, we'll take a dollar and continue to build liquidity, and then we'll take a dollar and use it toward share repurchases or debt repayment. Whereas a year ago, we've have said everything over $125 million in liquidity we were going to use to reduce debt. So we have -- we are focused on being a little bit more flexible.

And then on -- Bertrand, you mentioned that when the i2M center fully ramped in essence double-capacity. Do you see a risk of significantly lowering ASPs and hurting margins if you double-capacity? Or is there enough room that you need all that excess capacity? Is there enough demand?

No. And the reason why we made the investment in the first place is that we knew that the current manufacturing line was not sufficient, based on the forecasted demand for those products. So I actually do not expect to be facing a situation where there would be a lot of excess capacity.

If things go as planned, I would tell you that we could find ourselves in a position where we would need to add capacity to meet what we expect to be a great growth opportunity for those UP filters. Remember that those filters are essentially the line of defense for many of our fab customers.

So think about those filters as really being part and parcel of the fab process recipe. Think about those filters as becoming almost a requirement in terms of bulk filtration for the resist chemical manufacturers. So I think that the SAM for those filters has expanded tremendously. And I think our market share is also expanding quite a bit recently. So I would expect these products to be a great success going forward, and a very important ingredient to our overall growth.

Great. Thank you.

Thanks, Amanda.

Thank you.

(Operator Instructions) Eric Bourassa, Jefferies.

Thanks for taking my call. One of my questions were already answered, but on the debt side, is there a target leverage that you guys are looking for?

We'd say we don't have a specific target leverage ratio. I mean, we were comfortable when we were up at 2 when we announced the transaction. Our goal is to continue to drive that net leverage ratio down, however. In the absence of a meaningful M&A transaction, you should expect to see the net leverage continue to come down.

Thank you. And just in terms of cash, I know you guys said there was about $150 million of domestic cash, which puts it at about $200 million of offshore. How much of that can you repatriate without adverse tax consequences?

We repatriated about $70 million near the end of 2012 -- or excuse me, 2015, and we would expect, this year, that we should repatriate somewhere between $50 million and $75 million as well, most likely in the first half of the year.

Okay, perfect. Thank you.

And we have no further questions at this time. I would like to turn the call back to Bertrand for closing or additional remarks.

Well, thank you all for joining us today. This concludes our Q4 2015 earnings call. And have a great day.

And ladies and gentlemen, this does conclude today's program. You may disconnect at this time. Thank you and have a great day.