Applied Materials Inc. - Shareholder/Analyst Call

Mar. 6.12 | About: Applied Materials, (AMAT)

Applied Materials, Inc. (NASDAQ:AMAT)

March 05, 2012 7:00 pm ET

Executives

Michael R. Splinter - Chairman, Chief Executive Officer and President

Joseph J. Sweeney - Senior Vice President, General Counsel and Corporate Secretary

Richard Vernon Smith - Partner

Michael R. Splinter

Thank you all for joining us here today at our 2012 Annual Stockholders Meeting. I'll also like to welcome our stockholders who are listening via live audio. In a few minutes, Joe Sweeney, our Corporate Secretary, will conduct the formal part of the meeting. After the meeting, I will make a few remarks about Applied, recapping 2011 and providing some insight about our markets and outlook.

Before we begin, I'd like to introduce the other members of the Board of Directors. If I could ask the board member to remain standing until they have all been introduced and request that you hold your applause until we have recognized all the members of the board. Aart de Geus; Steve Forrest; Tom Iannotti; Sue James; Andy Karsner; Gerry Parker; Dennis Powell; Willem Roelandts; Jim Rogers; Bob Swan. Thank you very much.

Today, we're also fortunate to have a number of the members of senior management of Applied in attendance. Again, please hold your applause until everyone has been introduced. George Davis, Executive Vice President and Chief Financial Officer; Randhir Thakur, Executive Vice President and General Manager of the Silicon Systems Group; Joseph Flanagan, Senior Vice President of Worldwide Operations and Supply Chain; Mary Humiston, Senior Vice President, Human Resources; Joseph Sweeney, Senior Vice President, General Counsel and Corporate Secretary; and Tom Edman, Group Vice President and General Manager of the Display Group. Thank you.

I now call the meeting to order and would like to ask Joe Sweeney to begin the formal part of the meeting. Joe?

Joseph J. Sweeney

Thank you, Mike. Good morning, everyone. I'm Joe Sweeney, Applied's Corporate Secretary. Since Mike has called the meeting to order, we can begin.

Richard Smith of the law firm Orrick, Herrington & Suttcliffe has been appointed to act as inspector of elections today. He's at the side of the room. Richard is standing.

Representatives of KPMG, the company's independent registered public accounting firm, including Ed Cannizzaro, global lead audit partner, are also at the meeting today. And Christian Gentle. [ph] Mr. Smith has supervised the accumulation and counting of proxies received and filed for the meeting. If there's any stockholder who delivered a proxy and wants to revoke the proxy, or if there's a stockholder who now wishes to turn in a proxy or to obtain a ballot, or if there's anyone representing a stockholder who's absent who has not yet turned in a proxy, please go to the table by the side of the room and speak with Mr. Smith.

If you've delivered a proxy and you've not revoked it, there's no need to submit a ballot unless you want to change the way you voted. The polls will be open as to the matters to be voted on at this meeting until I declare the polls closed.

I have an executed affidavit of distribution of the notice of the 2012 annual meeting of stockholders of Applied Materials, which states that the notice of the meeting has been mailed in the manner set forth in the bylaws. The affidavit will be filed with the minutes of the meeting. I also have the written oath signed by the inspector of elections that he will faithfully execute the duties of inspector with strict impartiality and according to the best of his ability. This oath will also be filed with the minutes of the meeting.

Mr. Smith will now report the number of shares represented at this meeting in person or in proxy.

Richard Vernon Smith

Mr. Chairman, I report that 1,121,607,229 shares of common stock are represented in person or by proxy at this meeting. Since there were 1,294,293,003 shares of common stock of Applied's outstanding at the close of business of January 11, 2012, the record date, more than a majority of the outstanding stock entitled to vote is present or represented here today.

Joseph J. Sweeney

Thank you, Mr. Smith. On that basis, I declare a quorum to be present at the meeting.

The next order of business is the description of each matter to be voted on at this meeting. At this time, the polls are now open for voting. If you wish to vote in person, please request a ballot from Mr. Smith. Stockholders who have voted on the Internet or by telephone or who sent in proxies do not need to take any further action unless you want to change your vote. If you request a ballot, please deliver your completed ballot to Mr. Smith, the inspector of elections, at the side of the room. The inspector of elections will count the votes and report the results of the vote. And I will announce the vote count prior to the close of the meeting.

The first proposal to be voted on is the election of 11 directors. Under Applied's bylaws, in order to be elected, a director nominee must receive the votes of a majority of the votes cast with respect to such nominee, which means the number of votes for a director nominee must exceed the number of votes against that nominee. Applied's Corporate Governance Guidelines state that in the event an incumbent director receives more "against" votes than "for" votes, he or she is expected to tender an offer of his or her resignation after certification of the stockholder vote. The Corporate Governance and Nominating Committee, composed entirely of independent directors, then will consider the offer of resignation, taking into consideration all factors it deems relevant and recommend to the board the action for the board to take. The board must take action on the recommendation within 90 days following certification of the stockholder vote.

The nominees for directors are Michael R. Splinter, Aart J. de Geus, Steven R. Forrest, Thomas J. Iannotti, Susan M. James, Alexander A. Karsner, Gerhard H. Parker, Dennis D. Powell, Willem P. Roelandts, James E. Rogers and Robert H. Swan.

Since no other nomination for the office of director was received by Applied during the time period provided in the bylaws, the nominations are closed. Each stockholder, under Delaware law and Applied's bylaws, may cast for each nominee a number of votes equal to the number of shares which he or she is entitled to vote, or such stockholder may withhold votes for any nominee or nominees. Therefore, if you own 100 shares, you may cast 100 votes for each director but no more than 100 votes for any one director.

Mike Splinter and I have been appointed by stockholders as their proxies for this meeting, and we have cast ballots for directors in accordance with the instructions in the proxies received from stockholders.

The second proposal to be voted on is the approval of Applied Materials' amended and restated Employee Stock Incentive Plan. The proposed amendments are described in our proxy statement.

Approval of this proposal requires the affirmative vote of the holders of a majority of the shares present in person or by proxy and entitled to vote on the proposal at this meeting. I will entertain a motion to approve the amended and restated Employee Stock Incentive Plan. Is there a second?

[Voting]

The third proposal to be voted on is the approval of Applied Materials' amended and restated Senior Executive Bonus Plan. The proposed amendments are described in our proxy statement. Approval of this proposal requires the affirmative vote of the holders of a majority of the shares present in person or by proxy and entitled to vote on the proposal at this meeting.

I will entertain a motion to approve the amended and restated Senior Executive Bonus Plan. Do I have a second?

[Voting]

The fourth item to be voted on is the approval, on an advisory basis, of the compensation of Applied's named executive officers, as described in the 2012 proxy statement. Advisory approval of such executive compensation requires the affirmative vote of a majority of the shares present in person or by proxy and entitled to vote on the proposal at this meeting.

I will entertain a motion to approve, on an advisory basis, this executive compensation. Is there a second?

[Voting]

The fifth proposal to be voted on is the ratification of the appointment of KPMG as Applied's independent registered public accounting firm for the current fiscal year. Ratification of the appointment of KPMG as Applied's independent registered public accounting firm for the current fiscal year requires the affirmative vote of a majority of the shares present in person or by proxy and entitled to vote on the proposal at this meeting.

I will entertain a motion to ratify the appointment of KPMG as our independent registered public accounting firm for the current fiscal year. Is there a second?

[Voting]

Stockholders who have obtained ballots or proxies on proposals which I just described, and who have not yet turned them into the inspector of elections at the side table, please do so now. If any stockholders have not yet completed their ballots, please complete and return them to Mr. Smith, the inspector of elections, as soon as possible. The inspector will count the ballots and proxies and report the results of the vote prior to the close of the meeting.

I don't see anyone moving towards the table with the inspector of elections or at it, so I'll now declare the polls to be closed.

The inspector of elections has completed the count of the ballots and proxies with respect to all matters to be voted on at this meeting, and he has reported the results of the meeting to me -- of the voting, sorry.

With respect to proposal #1, the election of directors. Each of the following directors received more "for" votes than "against" votes for his or her election as a director: Michael R. Splinter, Aart J. de Geus, Steven R. Forrest, Thomas J. Iannotti, Susan M. James, Alexander A. Karsner, Gerhard H. Parker, Dennis D. Powell, Willem P. Roelandts, James E. Rogers and Robert H. Swan. Accordingly, I declare these individuals to be the duly elected directors of Applied for the ensuing year and until their successors are elected and qualified.

With respect to proposal #2, a vote on the approval of the Applied Materials amended and restated Employee Stock Incentive Plan, there are no fewer than 641,884,749 shares voted in favor; 287,567,475 shares voted against; 2,696,113 shares abstaining; and 189,458,892 broker non-votes. Accordingly, I declare this proposal to be adopted.

With respect to proposal #3, a vote on the approval of the Applied Materials amended and restated Senior Executive Bonus Plan, there were no fewer than 879,826,973 shares voted in favor; 49,301,899 shares voted against; 3,019,465 shares abstaining; and 189,458,892 broker non-votes. Accordingly, I declare this proposal to be adopted.

With respect to proposal #4, a vote on the approval, on an advisory basis, of the compensation of Applied named executive officers as described in the 2012 proxy statement, there were no fewer than 860,105,141 shares voted in favor; 68,365,789 shares voted against; 3,677,407 shares abstaining; and 189,458,892 broker non-votes. Accordingly, I declare this proposal to be adopted.

With respect to proposal #5, a vote to ratify the appointment of KPMG as the company's independent registered public accounting firm for the current fiscal year, there were no fewer than 1,096,603,454 shares voting in favor; 18,124,516 shares voted against; and 6,879,259 shares abstaining. Accordingly, I declare this proposal to be adopted.

I will file with the minutes of this meeting the ballot of appointed proxies, the affidavit of distribution, the oath of inspector of elections and the report of the inspector of elections. I have also asked the inspector of elections to retain, on Applied's behalf, all original proxies and ballots.

There being no further business to come before the meeting, I will entertain a motion to adjourn.

[Voting]

Is there a second? All in favor? Any opposed? By voice, then, it's carried. I declare the 2012 Annual Meeting of Stockholders of Applied Materials to be officially adjourned. Thank you.

At this time, Mike Splinter will make a presentation and be available for a question-and-answer session. I advise you that today's presentation contains forward-looking statements, which are all statements other than those of historical fact, including those regarding Applied's performance, capital allocation, integration of Varian, strategic position, market outlooks and opportunities. All forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those stated or implied by such statements, including but not limited to those set forth in Applied's filings with the SEC.

Forward-looking statements are based on management's information as of March 6, 2012, and Applied assumes no obligation to update this information.

Today's presentation also contains non-GAAP financial measures. Reconciliations of the non-GAAP measures to GAAP measures are contained in the accompanying slides, which are available on the investor page of our website at appliedmaterials.com.

And with that, I'd like to bring back Mike Splinter, our Chairman, President and CEO.

Michael R. Splinter

Thank you, Joe. In fiscal 2011, Applied posted record financial results, delivering our highest-ever revenue, operating cash flow and earnings per share. We increased net sales by 10% to $10.5 billion, generated an operating income of $2.4 billion and GAAP earnings per share of $1.45. We capitalized on the strength of our markets while making operational improvements to drive efficiency and profitability.

I'd like to take this opportunity to thank the entire Applied Materials team for their outstanding achievements last year. Today, Applied is at the center of major global trends in electronics and energy that are transforming the global economy. These trends provide a platform for us to grow the company, extend our technology into adjacent markets and create value for our stockholders.

In electronics, we are seeing the long-promised convergence of technologies and telecommunications, computing, user interfaces and open platforms. The age of mobility is creating new innovation, new products and new opportunities. Tablets and smartphones are fundamentally transforming the way we access and share information. While adoption of these devices is still in its early stages, they are already having an impact on Applied, as our Semiconductor and Display customers invest in new capacity and leading-edge technology.

The second global trend impacting our growth is energy, specifically increasing momentum in the adoption of renewable energy, energy-efficient products and energy storage technologies. As the solar photovoltaic industry scales, we are seeing an acceleration of the cost learning curve, which reinforces our positive long-term view of the solar market. These trends are accelerating as new global class of consumers rises for markets like India and China with a thirst for these technologies and a growing need for energy. These new consumers are not only transforming the economics of the markets we serve but they are also driving innovation as companies look for solutions tailored to the unique needs of these markets.

We entered 2012 in a strong financial position and committed to our capital allocation priorities of making investments that provide attractive long-term returns, increasing our dividend in line with business growth, and using share repurchases as a preferred means to return excess cash to stockholders. In fiscal 2011, we increased share repurchases by 34% over fiscal 2011 (sic) and we also raised the dividend per share by 15%.

Looking back at the past 5 years, we have returned $3.7 billion to stockholders through share repurchases and an additional $1.7 billion through dividend payments, a total of $5.4 billion overall or 70% -- 74% of our free cash flow in that period.

Today, Applied announced a 13% increase in our quarterly dividend to $0.09 per share. In addition, Applied's board approved a new stock repurchase program, authorizing up to $3 billion in repurchases over the next 3 years.

Shortly after the close of our fiscal year, we completed our acquisition of Varian Semiconductor. That acquisition extends Applied's portfolio with best-in-class ion implantation technology, a market that represents an annual opportunity approaching $1.5 billion. Global demand for mobile devices is fueling new innovations in the complex transistors at the heart of the next-generation chips. The combination of Applied and Varian creates the industry leader in transistor technologies. This allows us to partner with our customers to find innovative solutions for the smaller, faster, more power-efficient devices that are enabling the mobility age.

I would now like to spend a few minutes providing you with an update for each of our business segments, starting with our Silicon Systems Group. 2011 was another strong year for the semiconductor industry, with wafer fab equipment spending reaching $35 billion. The mobility trend is driving demand for application processors and solid-state storage, which translates to robust investments by our foundry, logic and NAND memory customers.

SSG delivered a solid performance in 2011, increasing net sales to $5.4 billion. We launched 15 new products, refreshing and extending our product line, while increasing our investment in next-generation technology that will keep Moore's law alive for the next decade.

In parallel, the industry is preparing to transition to 450-millimeter wafers in the next 5 to 7 years. While we remain disciplined in managing our development expenses, this increasingly complex environment plays to the strength of Applied Materials.

With our market-leading technology, broad product portfolio and talented team, we are ideally positioned to grow faster than the market in the years ahead. Applied Global Services achieved record revenue of $2.4 billion in 2011, driven by growth in our spare parts and services business. By adopting our services solutions, customers are able to maximize their factory productivity and reduce overhead costs. Building on these advantages, we increased the number of tools we have under contract in Asia by approximately 20% last year.

Asia is critical to AGS' success, as over the next 5 years, 75% of the global wafer starts are expected to be in the region.

The mobility trend is also evident in the display industry. Our Display Group established leadership positions in the emerging touch panel and high-resolution mobility display markets, which accounted for approximately 1/3 of the group's $699 million of revenue in 2011. While mobility expands Applied's opportunities in display, the LCD television market remains the most important driver of capital investment. Although global TV sales continue to increase modestly, the growth rate is not sufficient to drive new capacity additions in the short term. At the same time, the industry is entering a period of incredible innovation. The leading manufacturers are increasing their focus on improving the customer's visual experience with higher resolution screens and 3D displays, creating new equipment opportunities for our deposition technologies.

2011 was an outstanding year for our Energy and Environmental Solutions group, with record net sales approaching $2 billion and operating income of more than $453 million.

During the period of rapid capacity expansion in the solar photovoltaic industry, we capitalize on our strong product portfolio, increasing our market share and delivering solid operating performance. End market demand exceeded all expectations in 2011, with installations ending the year in excess of 26 gigawatts. This was driven by an acceleration of panel consumption in Europe late in the year combined with strengthening demand in China, Japan and the United States.

We expect double-digit growth in panel installations during 2012, reinforcing our positive long-term view of growth in the solar market. However, we see weaker demand for equipment in 2012 as the industry absorbs the large amounts of capacity shipped over the past 3 years.

This is one of the most exciting periods in Applied Materials' history. The industries we support are strong and growing. We expect a record third straight year of wafer fab equipment spending in excess of $30 billion in 2012. There are an unprecedented number of technology inflections on the horizon. By bringing together Applied and Varian, we are well positioned to partner with our customers and gain share in our markets. Every day, the creativity and hard work of our employees help enable the global trends in electronics and energy that are improving the lives of people around the world. These trends provide an incredible foundation for us to extend our technology leadership, grow the company and create value for our stockholders. Thank you for your investments in Applied Materials.

Joseph J. Sweeney

Thank you, Mike. We'll now open the floor for any questions from the audience. There are microphones positioned at each side of the room.

Question-and-Answer Session

Joseph J. Sweeney

Well, if there are no questions, then we can complete the presentation at this time. We'd like to thank our board members and executive management who are here with us today. To our stockholders, thank you again for the investment in Applied Materials. And we'll now call the meeting to a close. Thank you, Mike.

Michael R. Splinter

Thank you, Joe.

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