Entegris (ENTG)

Q3 2011 Earnings Call

October 26, 2011 5:30 pm ET

Executives

Steve Cantor - Vice President of Corporate Relations

Gideon Argov - Chief Executive Officer, President and Director

Bertrand Loy - Chief Operating Officer and Executive Vice President

Gregory Graves - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Thomas Claugus

Richard A. Ryan - Dougherty & Company LLC, Research Division

Wenge Yang - Citigroup Inc, Research Division

Avinash Kant - D.A. Davidson & Co., Research Division

Krish Sankar - BofA Merrill Lynch, Research Division

Steven Schwartz - First Analysis Securities Corporation, Research Division

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

Good day, everyone, and welcome to Entegris' Third Quarter 2011 Earnings Release Conference. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the conference over to Steve Cantor, Vice President of Corporate Relations. Please go ahead.

Steve Cantor

Thank you, Anthony, and good evening, everyone, and thank you for joining our call. Earlier this afternoon, we announced the financial results for our third quarter ended October 1, 2011. 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 the reconciliation table in today's press release as well as on our website.

On the call today are Gideon Argov, President and CEO; Bertrand Loy, Chief Operating Officer; and Greg Graves, Chief Financial Officer. Gideon will now begin the call.

Gideon Argov

Thank you, Steve, and good evening, and thank you for joining the call. After reaching record levels in the second quarter, our third quarter revenue of $173 million declined 17% sequentially and those below guidance as semiconductor production and capital spending flowed through the quarter across much of the industry. Despite the softening trends in the industry, there were several bright spots. Sales were strong at the advanced nodes as we continue to win key nominations on new platforms. We executed well both operationally and financially achieving cash EPS of $0.17 per share and an adjusted operating margin of 16.5%, both in line with our target operating model. And we generated $50 million in cash from operations for the quarter.

In terms of Q3 sales, our semiconductor business clearly felt the impact of lower industry capital spending and reductions in fab utilization and output. While the slowdown was not surprising, the magnitude of the reductions in customer fab utilization proved to be more than anticipated as our unit-driven sales declined 15% from the second quarter. Demand for our liquid filtration products weakened particularly for older process nodes. Many foundry and memory customers operated their legacy fabs at utilization rates of 70% and in some cases, even lower in order to work down inventory levels. In addition, sales of filters were also impacted by the drop in OEM shipments of liquid tools such as wet etch and clean tools and photolithography track systems. Shipments of these tools tend to require purchases of liquid filters in order to get them up and running. These trends were in contrast to demand from logic makers, which grew during the quarter.

In terms of other unit-driven products, we achieved record sales of our 300 mm FOSB wafer shippers, although this growth was somewhat offset by lower sale of shippers for legacy wafer sizes. Our CapEx-driven sales in the third quarter declined 22% sequentially and represented 36% of total sales. This was in line with our expectations and reflected lower OEM tool shipments and fewer fab construction projects across the industry. We felt the impact in our sales of CapEx-driven products such as fluid handling components, purification systems and FOUPs. In our markets outside of semiconductor, order trends also softened in TFT/LCD data storage, as well as sales of graphite products for certain high-tech industrial markets, they all declined modestly. In our newer emerging markets, sales of solar products were flat, although we continue to get traction with the new electrostatic truck used in the ion implant process for solar applications. While the demand environment in Q3 was far from ideal, we continue to be pleased with how we're executing our strategy, both in terms of our long-term growth as well as financial execution. We achieved a number of design wins for our fluid handling products, our new OEM platforms that will yield revenue as sales of those platforms begin to ramp. We also have strong performance from other new products such as our Torrento filters and the 300 mm wafer shippers I spoke about earlier. And we continue to win a growing share of available new opportunities for our advanced FOUPs. Several members of the Entegris Senior Leadership Team and I just returned this week from visiting customers in Asia. The conversations we had reaffirmed our conviction that we are continuing to gain market share at the advanced nodes in both our unit-driven as well as capital-driven product areas. This is a direct result of our strategy to become even closer to our strategic and critical customers. And we're doing that in a number of ways, including engaging in oil joint development projects with customers, as well as with key industry consortia and strategically moving resources such as manufacturing and engineering closer to our customers. As an example of that last week, we inaugurated a new manufacturing and development center in Hsinchu Science Park in Taiwan, which is a stone's throw from Taiwan's largest foundries and memory makers, as well as a number of LED manufacturers. We're also increasingly aligned with customer technology roadmaps and are continuing to develop unique solutions to meet their contamination control challenges, particularly for 28-nanometer and below semiconductor processes for EUV and for 450 mm. These strategies continue to service well even in the current uncertain environment. Over the past several quarters, we have performed well against our peers and against industry metrics. Over the past 9 months, year-to-date, we've grown by 16% and have generated significant amounts of cash flow while executing consistently to our model. We expect, for when 2011 is complete, it will be a record year for revenues, profits and cash flow for Entegris. And looking out to the future, our commitment to R&D and the technology roadmaps of our customers, as well as our momentum in emerging market is positioning us well to achieve our goal of reaching $1 billion in revenue over the next 2 to 3 years.

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