Entegris Inc (ENTG) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to the Entegris first-quarter 2016 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.

Great. Good morning, everyone. Thank you all for joining our call today.

Earlier we announced the financial results for our first quarter ended April 2, 2016. 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. 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, CFO. Bertrand will now begin the call. Bertrand?

Thank you, Steve. I will make some general comments on the quarter; Greg will then provide more details on our financial results.

Let me start by saying that I am very pleased with our performance for the first quarter. We achieved sales of $267 million, which was above the high end of our expectations. We recorded non-GAAP EPS of $0.17. We generated solid cash flow and achieved an EBITDA margin of 20.4%.

Finally, current trends point to a strong second quarter, and we are positive about our prospects for the remainder of the year. So we performed well in the first quarter, which typically is a seasonally soft one for the industry.

Overall, demand from fab customers strengthened through the quarter as end-market trends reflected improving demand for low- and mid-tier smartphones and IC inventory restocking. Continued fab adoption of next-generation technologies drove demand for our FOUPs, liquid packaging solutions, and advanced deposition materials. Sales of our other products were in line with our expectations and with normal seasonal trends.

In 2016, we believe three Entegris-specific factors will enable us to outperform the market: market share gains for our in-fab solutions; expansion of our served markets, with the emergence of new applications deeper in the supply chain; and finally, new Entegris capacity coming online, which will ease current constraints. Let me provide some details around these three factors.

First, the industry continues to drive the adoption of advanced materials and process technologies, which require even greater levels of purity and cleanliness. This is not new for us.

These more stringent requirements, as well as the increasing number of process steps in the semiconductor fabrication environment, continue to be fundamental drivers of our business and our new product development cycles. In the first quarter, the strength of our FOUP solutions is a perfect example of how we are helping our fab customers address their increasingly complex contamination issues, and how we can achieve and maintain significant market shares.

Second, many leading-edge chipmakers are pushing Entegris' solutions deeper into their supply chain and are asking Entegris to help reduce variability during the manufacturing and transportation of critical process materials. This is creating new incremental market opportunities for us, which we are addressing with a comprehensive range of solutions including advanced bulk filters and high-purity chemical packaging solutions designed specifically for electronic chemical suppliers.

Entegris is the only supplier in the industry with the combination of broad materials science knowledge, contamination control expertise, and deep understanding of fab processes. This unique array of capabilities allows us to develop high-value solutions for the manufacturing, transport, delivery and usage of critical materials across the supply chain.

Third, over the past 18 months, we have contended with capacity constraints that have limited our ability to meet demand for some key new products, such as our UP filters for photoresist production and high-purity drums used by many chemical manufacturers. I am pleased to report that with the significant progress achieved in the qualification of i2M-made UPE filters by our customers and a new capacity coming online for our high-purity drums, we now have adequate capacity to meet growing demand for these products.

In addition, the completion of these projects will benefit our margins as we eliminate redundant costs and customer qualification expenses which have been a headwind for the past 12 months.

As we look out to the balance of the year, we expect modest growth for wafer starts. While the precise outlook for the industry in the second half of 2016 is unclear, we are very excited about the Entegris-specific opportunities in our rich pipeline of new products, which include new generation of deposition materials, boron gas mixtures, specialty coatings, and new filtration solutions.

Finally, I would like to announce that we will be holding an Investor Meeting on July 12 in San Francisco during SEMICON West and in conjunction with the celebration of the 50th anniversary of Entegris.

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

Thank you, Bertrand. First-quarter sales of $267 million were above the high end of our guidance, driven by sales of our advanced micro environment and liquid packaging solutions. Sales were up 1% from a year ago.

On a sequential basis, the impact of currency was negligible, and on a year-over-year basis was less than a 1% headwind. Our non-GAAP earnings per share of $0.17 was at the high end of our expectations.

Gross margin of 43% improved from 41% in Q4 due to higher production volumes and better manufacturing efficiencies, which were offset in part by qualification and startup costs at the i2M Center. We expect gross margin to be approximately 43.5% to 44.5% in the second quarter.

As previously discussed, we will complete the full transition to the i2M Center early in the third quarter and will exit the redundant facility. At that point, with the i2M transition costs behind us, gross margin should continue to strengthen through the year.

By segment, sales for Critical Materials Handling, or CMH, declined modestly to $166.2 million from Q4, while the operating margin for CMH improved to 22.8% in Q1, up from 20.2% in Q4. Sales for Electronic Materials, or EM, rose 5% sequentially to $100.8 million as EM's operating margin of 21% grew slightly from Q4. The margin improvements in both CMH and EM were largely due to greater manufacturing efficiency.

Excluding amortization of $11.3 million, non-GAAP operating expenses in Q1 were $73.9 million, which included approximately $2 million of unplanned costs for severance and bad debt expense. We expect non-GAAP operating expenses to be $74 million to $77 million in the second quarter of 2016.

Adjusted operating margin was 15.3% and should improve to 16% to 18% in Q2. Net interest expense was $9.1 million in Q1, down modestly from the fourth quarter.

Our GAAP tax rate for the quarter was 23%, and our non-GAAP rate was 27%. As previously discussed, this reflects a higher tax rate compared to 2015 largely due to the expiration of a tax holiday in Malaysia.

Adjusted EBITDA for the quarter was $54.5 million, giving us an EBITDA margin of 20.4%. Cash flow from operations for the quarter of $17.3 million was consistent with our expectations and reflected $24.1 million of annual incentive compensation payments.

Inventory decreased $11 million sequentially as we prepare for higher sales activity in Q2 and beyond. Turns of 3.4 were flat with Q4; DSOs in Q1 were 51 days compared to the record low 48 days we achieved in December.

First-quarter CapEx was $18 million, and we are expecting CapEx for the full year to be in the range of $75 million to $85 million, which includes about $15 million earmarked for key growth initiatives. We repurchased $4 million of stock under our share repurchase authorization during Q1.

Our cash balance at the end of Q1 was $344 million, of which approximately $128 million was in the US. Total long-term debt including current maturities was $657 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. We are continuing to execute our capital allocation strategy, which balances debt repayment, building liquidity for potential M&A, and opportunistic share repurchases.

Turning to our outlook for Q2, we expect sales to range from $270 million to $285 million, reflecting both seasonal and Entegris-specific strength. At these revenue levels, we expect non-GAAP EPS to be $0.18 to $0.22 per share, consistent with our target model.

In summary, we performed well in Q1, achieving sales above the high end of our guidance. We achieved an improvement in gross margin and expect further improvement in Q2 and into Q3, as we complete the i2M transition.

Finally, we are excited about our new product pipeline and our strategic initiatives that position us to outperform our markets in 2016. Operator, we'll now take questions.

(Operator Instructions) Dick Ryan.

Thank you. Hey, Greg, just a couple housekeeping items. It looks like from the 10-K to today's announcement there's been some reclassification or adjusted entries: debt, some other assets. Can you explain what went on there?

Yes. The most significant one was a change in the accounting convention around debt. Our debt, while we didn't make any payments in the quarter, was actually $10 million lower. You now net the unamortized issuance costs against the debt for classification purposes. And that's the primary one, the primary change.

Okay, okay. You talked about the margin enhancement as qualification issues get behind you. But can you ballpark how much of a hindrance they've been on margins the last couple of quarters, or what you might expect -- not so much maybe in Q3, but Q4 and beyond?

Well, by the time -- so they've been running $2 million-plus in Q4 and in Q1. We expect that to move down incrementally in Q2, which is in part why we guided to slightly higher margins. By the time we get to Q3 there should be a small amount of residual. But by the middle of Q3 we intend to be out of the redundant facility. We should be qualified at all of our customers and continue to see some upward bias to the margin.

Okay. Bertrand, it looks like in CapEx you're going to spend $15 million in some key growth initiatives. Can you give us a high level or outline what those initiatives might be?

Sure. I was referring in my prepared remarks that we expect actually to see a number of new product introductions in the year, some of which would be around advanced deposition materials and a new range of boron mixtures. Those products require a new fleet of cylinders and canisters, so we're already investing in those containers ahead of the launch of those products and materials.

Okay. As you look at the leading-edge, lagging nodes out there, can you comment on what you're seeing in utilization? Is it stabilized in Q1, and do you expect it to improve through the year?

What we saw in Q1 was actually interesting. We saw a fair amount of positive activity in the trailing-edge fabs, and we expect to see that continuing in the year, and some softness at the leading-edge fabs. So that really was really the story behind our performance during the quarter.

Okay, great. Thank you.

Patrick Ho. (Operator Instructions)

Thank you very much. Bertrand, in terms of industry trends and particularly at the leading-edge, as the industry starts building out their fabs in 3D NAND as well as for 10-nanometers, when do you think you'll start seeing some of, I guess, your wafer starts products benefiting from the leading-edge in terms of your products there?

As you know, we have different types of products, and the adoption of those solutions will depend, depending on those different product platforms. We have started to see some adoption of our advanced FOUPs at some of the customers that are planning to ramp the 10-nanometer nodes, so we saw that in Q1. And we expect to see more of that in Q2 and Q3.

We're also benefiting from good demand from our OEM customers for some of the high-value components that are built into the OEM tools. We started seeing some positive momentum there in Q1, and we expect to see more of that in Q2.

As it comes to really seeing momentum for our consumable products such as the advanced chemistries, advanced materials, or filtration products, we're going to have to really wait until those leading-edge fabs reach high-volume manufacturing. That's going to be later in the year or early next year. So later in the year as they get ready for the ramp and, then again, there will be -- we expect to see them in full ramp starting the beginning of next year.

Great. That's helpful.

So the demand for our new products related to the 10-nano ramp will be going crescendo throughout the year.

Great; that's helpful. Maybe as a follow-up, in terms of some of your, quote, non-semis business and some of the new opportunities there, can you just give a little bit of color how you see some of those businesses trending for 2016 as a whole?

Well, we expect those businesses to do well. If I look at Q1, in Q1 with the exception of data storage, which was down after a record quarter in Q4, we saw strength across all of our non-semi markets. We saw strength in solar display, LED, and even in life sciences.

Life sciences is going to be an interesting area and an interesting market for us. We are about to roll out and introduce a number of new products for single-use bags during the INTERPHEX show this week in New York. So we expect actually this particular market segment to be a bright spot for us in 2016.

Great. Thank you very much.

Christian Schwab.

Hey, great; good quarter, guys. Bertrand, I just want to be clear. The strength, the outperformance in the quarter in Q1 from an end-market perspective, not a product perspective, was non-leading-edge fab strength; is that correct?

Yes, that's correct. As I said in my prepared remarks, the PC market contracted sharply, and that was offset by healthy demand for low- and mid-tier mobile devices and IoT-related IC. So when you think about all of that, what it means for Entegris is that it translated into solid demand for our products at our trailing-edge customers and somewhat subdued activity at the leading-edge fabs.

Yes, that's great. Then as we look to the current positive trends for Q2, can you talk about what you're seeing that's going to drive that strength from an end-market perspective? Is it a pickup in demand at the leading-edge? Is it a continuation of strength at the non-leading edge?

Is there some share shifts going on? Any color there would be helpful.

If you think about Q2, we believe that we will benefit from what is seasonally a stronger quarter. But I think if you compare that to seasonal norms, we would expect Q2 2016 to be maybe not as strong on a relative basis than what we've seen in other years.

In other words, think about wafer starts maybe in the low single digit sequential growth rate. And that's really what our guidance covers; it covers really different levels of fab activity.

But more importantly, what is driving our guidance for Q2 is different rates of adoption of a number of new products. In Q2 specifically, we expect to benefit from greater adoption of bulk photoresist filtration solutions, and those are UPE-based filters; and we continue to expect greater penetration from our FluoroPure packaging solutions. Those are -- this is a full platform of drums and containers for specialty materials requiring high degrees of cleanliness. And I would expect to see actually again continued adoption of those solutions by our customers.

Okay; that's great. Then my last question. Greg, why are inventories up sequentially? Is that an indication of demand for the June quarter and your confidence in that? Or does that have to do with some of the new facilities moving around?

No, it really has to do with the former. As I said in my script, we increased inventory in anticipation both of a stronger June quarter and strength in the balance of the year.

Okay, perfect. No other questions. Thanks, guys. Good quarter.

(Operator Instructions) Amanda Scarnati.

Hi. Thanks for taking the question. First on use of cash, Greg, there is an expectation to pay about $50 million in debt throughout 2016, which is unchanged from last quarter. But beyond that, what is the priority for use of cash throughout the year?

Is it just to build up the cash position in hopes of potentially doing an acquisition long-term? Or repurchasing shares at a similar rate that you've done this quarter? Or is there something else that you would like to use the cash for? Potentially paying more debt down, etc.

No. Really our capital allocation strategy remains unchanged from what we started talking about in the fall. Beginning six months ago, we said we were going to take our US liquidity up to $100 million, and for every dollar above $100 million we'd use $0.50 to build US liquidity and $0.50 to pay down debt. That continues to be our approach.

The share repurchase program, as we said at the time of the announcement, is an opportunistic program. So if there were -- if the stock were to be weak, you would definitely see us in the market for the shares. But really unchanged in terms of the overall capital allocation strategy.

Great, thanks. Then Bertrand, just your exposure to China. We see China as a growing market, increasing in CapEx spend, increasing in semiconductor growth over the next couple of years. What is Entegris' exposure to China? And do you see this as an opportunity to grow revenue and to expand your market in the next coming year or so?

China has certainly been an area of growth and an area of strength for us. We saw that in Q1; we saw that throughout the year in 2015.

In Q1 specifically we saw great activity at some of the foreign companies operating in China but, more interestingly, some of the indigenous Chinese IC manufacturers. And that benefited all of our product lines including our FOUP platform. So great demand for advanced FOUPs at some of those trailing-edge Chinese customers. So again, a very important market for us, and an area where we will be focusing going forward.

Today, as you may know, we are really limited to a commercial presence in China. So like everybody else, we are actually looking at whether or not our commitment to this market would require us to rethink this strategy and to start thinking about having some additional tech center capabilities and potentially some level of local manufacturing as well.

Those are questions that we'll be contending with over the next few years as we recognize that, again, China is a very important growth market for us.

Great. Thank you.

Tom Diffely.

Yes, good morning. Another question on the trailing-edge strength you saw in the quarter. Now, I guess first, do you see that as the beginnings of an IoT buildout? And then do you think that's sustainable at least through this year?

Certainly, I mean, to start with the latter part of your question, we believe that this is a trend that will be sustainable at least through this year. What is really interesting at the trailing-edge is that we're seeing two different types of drivers for our business.

One is just a greater consumption of our consumable products, be it filters, chemistries, deposition materials, and so on and so forth. That's a function of how many wafers are being produced in their fabs.

But increasingly, we are seeing evidence of another type of opportunity for us related to some upgrade kits that we are providing those customers. We, for instance, have high-value components like gas filters, gas diffusers, or liquid dispense systems that can be used to upgrade older-generation tools.

This represents a very interesting alternative for the trailing-edge fab customers as opposed to having to purchase a very expensive new tool. So we are seeing actually a fair amount of demand in China and other parts of the world for those upgrade kits.

Okay. So most of that business is directly with the fab as opposed to through an OEM?

Correct, correct. We would actually replace, for instance, photoresist dispense systems on an old track; and as part of that package, we will be including an improved filtration solution for the point-of-use resist filtration as well.

Okay, great. I guess a longer-term question: When you look at the growth prospects for the next several years, how does it break out on a relative basis between leading-edge, trailing-edge, and maybe new products?

I think it's a difficult question. I think, again, we are encouraged by some of those new emerging opportunities for us at the trailing-edge, encouraged by the increased level of activity that we see in these fabs.

But we continue to be extremely excited with all of the opportunities at the leading-edge. As I was mentioning in my prepared remarks, we are seeing increased level of complexity, increased risk of contamination of critical materials in the supply chain at the leading-edge. That is allowing us to increase our served available markets by, again, working with our fab customers and helping them improve the manufacturing process of those advanced chemistries that are used in the fabs and making sure that they are transported into the right packaging solutions -- solutions that are the cleanest and the safest for the chemistries and the people handling those chemistries.

Okay, great. But it sounds like there is a pretty strong or potential for some nice growth in each of those categories.

Right, correct.

Great. Okay; thanks for your time this morning.

(Operator Instructions) Tony Venturino.

Hi, good morning. Bertrand, I wanted to ask you, kind of related to the last question, but your comments about your customers pushing you further into the supply chain. Could you maybe give us a little bit more color on that? Is this a new occurrence, and maybe if you could size your opportunity there?

Yes. Again, it's something that I've said before and you probably have heard that theme developed in many of our recent investors' meetings. Contamination control, safety, cleanliness, stability of the process chemistries and materials are becoming increasingly important concerns for our customers. And the challenges are really very complex, up and down the ecosystem.

I would argue that the introduction of new materials has been the dominant contributor to device performance improvements in the last generation of process technology. Yet when you think about the complexity, the inefficiency of the supply chains that those chemistries have to go through, it's really mind-boggling.

So when you think about Entegris, we are really uniquely positioned to help the ecosystem find solutions around that. We have a broad knowledge of chemistry; we know how materials interact with one another; we have unparalleled contamination-control expertise; and we really also understand how materials are being used in the fabs.

So that makes us the partner of choice for the fab customers and their chemical suppliers to understand the challenges and find solutions, again, for the proper handling of those chemistries from the point of manufacture to the point of consumption. That's a theme again -- if you look back for the last couple of years, we've been flagging that as an emerging trend in the industry. We started to see evidence of those increasing requirements when the industry transitioned to 16 and 14, and those trends are just accelerating.

Okay. Is this something that's being pushed down by your customers? Or are you seeing a pull from farther down the supply chain?

Well, today we are dealing with challenges so complex that what you see increasingly is really multiparty collaboration arrangements. So I would say this is a collective effort between a fab customer sponsoring usually a joint development agreement between us and some chemical manufacturers.

Again, that's one of the many reasons why we have this high degree of confidence that we're going to be able to sustain the pace that we've seen last year, and we're going to be in a position to outpace the market by 200 to 300 basis points.

All right. Thank you very much.

We have no further questions. I'd like to turn the call back over to Bertrand. Please go ahead.

Well, thank you for joining us on our call today. As a reminder, I would like to invite you to the Investor Meeting that we will be hosting on July 12 in San Francisco. Have a great day.

We'd like to thank everybody for their participation on today's conference call. Please feel free to disconnect at any time.