Good day, everyone, and welcome to the Integris First Quarter 20 16 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 note 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 Let me start by saying that I am very pleased with our performance for the first quarter. We achieved sales of 267,000,000 which was above We generated solid cash flow and achieved an EBITDA margin of 20.4%. Finally, current trends point to a strong 2nd 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 troops, 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 3 integrated 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 into supply chain.
And finally, new integrase capacity coming online, which will ease current Let me provide to drive the adoption of advanced materials and process technologies, which require ever greater levels of purity and cleanliness. This is not new for us. These most 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 food solution 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. 2nd, many leading edge chip makers are pushing integracy solutions deeper into their supply chain and are asking integrase 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 including advanced bulk filters and high purity chemical packaging solutions designed specifically for electronic chemical suppliers. Integris is the only supplier in the industry with the combination of raw 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 3rd, 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 UP filters by our customers and a new capacity coming online for a high purity drums we now have adequate capacity to meet growing demand for 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 While the precise outlook for the industry in the second half of twenty sixteen is unclear, we are very excited about the integrase specific opportunities and 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 on July 12 in San Francisco during Silicon West and in conjunction with the celebration of the 50th anniversary of Entegris.
I will now turn the call to Greg for the financial details. Greg? Thank you, Bertrand. First quarter sales of $267,000,000 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 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 $166,200,000 from Q4 while the operating margin for CMH improved 22.8% in Q1, up from 20.2% in Q4. Sales for Electronic Materials or EM rose 5 percent sequentially to $100,800,000 as EM's operating margin of 21 percent grew slightly from Q4. The margin improvements in both CMH and EM were largely due to greater manufacturing efficiency. Excluding amortization of $11,300,000, Non GAAP operating expenses in Q1 were $73,900,000 which included approximately $2,000,000 of unplanned costs for severance and bad debt expense. In the second quarter of 2016.
Adjusted operating margin was 15.3%, and should improve to 16 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 largely due to the expiration of a tax holiday in Malaysia. Giving us an consistent with our expectations and reflected $24,100,000 of annual incentive compensation payments. Inventories decreased increased $11,000,000 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. 1st quarter CapEx was $18,000,000 and we are expecting full year to be in the range of $75,000,000 to $85,000,000, which includes about 15,000,000 earmarked for key growth initiatives. We repurchased 4,000,000 Our cash balance at the end of Q1 was $344,000,000, of which approximately $128,000,000 was in the Total long term debt, including current maturities, was $657,000,000, giving us net leverage ratio of one point four times. Under the terms of the debt agreements we are not required to make any mandatory repayments in 2016 although we expect to repay $50,000,000 during the course of the year.
We are continuing to execute our capital allocation strategy. Balances debt repayment, building liquidity Turning to our outlook for Q2. We expect sales to range from $270,000,000 to $285,000,000 reflecting both seasonal and integral specific strength. At these revenue levels, we expect non GAAP EPS to be 18 $2.2 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
And we'll go first to the site of Dick Ryan. Please go ahead. Your line is open.
Thank you. Hey, Greg, just a couple housekeeping items. It looks like from the the 10 K to today's announcement, there's been some reclassification or adjusted entries debt, some other assets. Was there can you explain what went on there?
Yes, the most significant one was a change in the accounting convention. Around debt. So our debt, well, we didn't make any payments in the quarter is actually $10,000,000 lower. You're now in net the unamortized issuance costs against the debt for classification purposes. And that's the primary one that primary change.
Okay. Okay. And you talked talked about the margin enhancement as qualification issues get behind you, but can you kind of ballpark 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 $2,000,000 plus in for and in Q1. We expect that to move down, incrementally in 2, 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 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 $15,000,000 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. And those products require a new fleet of cylinders and canisters. So we are really investing in those containers ahead of the launch of those products and materials.
Okay. And as you look at kind of leading edge lagging, nodes out there. Can you comment on what you're seeing in utilization as a kind of abilize Q1 and do you expect it to improve through the year?
So 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, that really, was, really the story behind our performance during the quarter.
Okay, great. Thank you.
And we'll take our next question from the side of Atrico.
Merchon, in terms of, I guess, industry trends, particularly at the leading edge, as the industry starts building out their fabs in three d NAND as well as for 10 nanometers. When do you think you'll start seeing some of the I guess your wafer starch products benefiting from the leading edge in terms of your products there?
So as you know, we have different types of products and the adoption of those solutions will depend depending on those different product platforms. So we have started to see some adoption of our advanced loops at some of the customers that are planning to ramp the 10 nanometer nodes. We saw that, in Q1 and we expect to see more of that in Q2 and Q3. We're also benefiting from good demands from our OEM customers for some of the high value components that are built into the OEM tools. And 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. So 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 all.
So the demand for our new products related to the 10 nano ramp will be going crescendo throughout the year.
Great. That's helpful. And maybe as a follow-up, in terms of some of your 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 business 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. And life sciences is going to be an interesting area an interesting, interesting market for us. We are, about to roll out and introduce a number of new products for single use bags, during the inter effects 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.
And we'll take our next question from the site of Christian Schwab. Please go ahead.
Hey, great. Good quarter guys. So, but I just want to be 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 remark, the PC market contracted sharply, right? 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 trading edge customers and somewhat subdued activity at the leading edge fabs.
Yes, that's great. And then as we look to the current of 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 the continuation of strength at the non leading edge. Is there some share shifts going on?
Any color there would be helpful.
So 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 'sixteen to be maybe not as strong on a relative basis than what we've seen in other years. So 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, of new products.
So in Q2 specifically, we expect to benefit from greater adoption of bulk photoresist filtration solutions, and those are, UP based filters. And we continue to greater penetration for our pure or pure packaging solutions. So 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. And then my last question, Greg, why are inventories up sequentially? Is that 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, I mean, we increased inventory and both of a stronger June quarter and strengthen the balance of the year.
Okay, perfect. No other questions. Thanks guys. Good quarter.
And we'll go next to the site of Amanda Garnati. Please go ahead.
Hi, thanks for taking the question. Just first on use of cash, Greg, there's an expectation to pay about $50,000,000 in debt throughout 2016. Which is unchanged from last quarter. But beyond that, what is the priority for you cash throughout the year? Is it just to build up the cash position and hope to potentially doing an acquisition long term or repurchasing shares on a similar rate that we've done this quarter, or is there something else that you would like to use the cash score potentially paying more debt down etcetera?
No, but, really our capital allocation strategy remains unchanged. From what we started talking about in the fall. Beginning in 6 months ago, we said we were going to take our U. S. Liquidity up to $100,000,000 and every dollar above $100,000,000, we'd take for every dollar above $100,000,000, we'd use $50,000,000.50 to build U.
S. Liquidity and $0.50 to pay down debt. That continues to be our approach. Time of the announcement is an opportunistic program. And 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. And then for Trond, just kind of your exposure to China and 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.
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 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 food platform. We saw great demand for Advanced Foods and some of those trading Chinese customers.
So again, a very important market for us, 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 will 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.
And we'll take our next question from the site of Tom Diffely. Please go ahead. Your line is open.
Yes, good morning. So 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 build out And then do you think that's sustainable, at least through this year?
So certainly, I mean, to start with the latter part of your question, we believe that this is a trend that it will be sustainable, at least through this year. What is really interesting, at the trading edge is that we are seeing 2 different types of drivers for our business. 1 is just greater consumption of our consumable products, be it filters, chemistry, deposition materials and so on and so forth. And 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.
So 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. For the trading 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.
You would actually replace, for instance, photoresist dispense systems on an old track and, as part of that package, we'll be including an improved filtration solution for the point of use resist filtration as well.
Okay, great. So when you, 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 on the trading 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 and 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 the 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's pretty drawing our potential for some nice growth in each of those categories?
Right, correct.
We'll go next to Toni Ventura. Please go ahead.
Hi, good morning. Bertrand,
I wanted to
ask you kind of related to that 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? And is this a new occurrence? And maybe if you could kind of size your opportunity there?
Yes. So, I mean, again, it's something that I've said before, and you probably have heard that theme developed in many of our recent investors meetings, your contamination control, safety, cleanliness, stability of the process chemistries and materials are becoming increasingly important, concern for our customers. And the challenges are really very complex up and down the ecosystem. So, 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, And 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 for again, for the proper handling of those chemistries from the point of manufacturer to the point of consumption. So that's the theme.
Again, if you look back, for the last couple of years, we've been flagging that as an emerging trend in LEED 3. And we started to see evidence of those increasing requirements when the industry transitioned to 201614. And those trends are just accelerating.
So is this something that's being pushed down by the, by your customers, or are you seeing a pull from farther down the supply chain?
Well, today, we are dealing with challenges that are so complex that what you see increasingly is really a party collaboration arrangement. So I would say this is a collective effort between fab customers sponsoring usually a joint development agreement between us and some, chemical manufacturers. And 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.
And we have no further questions. I'd like to turn the call back over to Petron. Please go ahead.
Well, thank you for joining us on our call today. And 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.