Entegris Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 12 speakers on the call.

Operator

Welcome to the Entegris First Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on a listen only mode and the floor will be opened for your questions following the presentation. Sound quality. I would now like to turn the call over to Bill Seymour, Vice President of Investor Relations. Sir?

Speaker 1

Good morning, everyone. Earlier today, we announced the financial results for our Q1 of 2023. 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, and actual results could differ materially from those projected in the forward looking statements. Additional information regarding these risks and uncertainties contained in our most recent annual report and subsequent quarterly reports that we filed with the SEC.

Speaker 1

Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non GAAP financial measures as defined by the SEC and Regulation G. You can find a reconciliation table in today's news release as well as on our IR page of our website at integris.com. On the call today are Bertrand Lalat, our CEO, who is joining us from Taiwan and Greg Graves, our CFO. With that, I'll hand the call over to Bertrand.

Speaker 2

Thank you, Bill. Good morning to all. I will start by saying that I am very pleased with our performance in the Q1, especially in light of the dynamic semi market backdrop. During the quarter, we delivered strong results Above our guidance on all fronts, sales were $922,000,000 EBITDA margins were 27% The non GAAP EPS was $0.65 Let me make a few additional comments on our financial performance. While sales were down sequentially for us in the quarter, we believe we significantly outperformed the market.

Speaker 2

This outperformance was driven in large part by our strong position at the leading edge technology nodes and also from the impact of easing supply In terms of profitability, gross margins were up Sequentially and EBITDA margins were essentially flat. Next, I would like to highlight a few very important items that the team is focused on. 1st, on the CMC integration. The integration is proceeding very well. We are on track to complete the migration to a common ERP platform by the end of the third quarter, which also puts us on track to achieve the $75,000,000 run rate cost synergy target by the 4th quarter as originally planned.

Speaker 2

As you know, debt pay down is also a high priority for us, and divestitures As you've seen so far this year, we have entered into agreements for the sale of 2 businesses for a total of 8 and €35,000,000 The first divestiture was QED, which was part of CMC. We sold QED for €135,000,000 That sale closed in Q1 and in April, we used the proceeds to pay down the bridge loan. And yesterday, We announced an agreement to sell the electronic chemicals business, which was also a part of CMC, to Fujifilm for $700,000,000 at a low teens multiple. We expect the EC sale to close by the end of 2023. We think Fujifilm will be a great owner for the Electronic Chemicals business.

Speaker 2

They will be well positioned To support the growing market demand for its high purity process chemicals in North America, Europe and beyond, With the high level of quality and service that fab customers require, the proceeds For the sale of EC, when realized, will also be used for debt pay down. Another priority for the team has been aligning our cost structure to the current industry environment. To that end, we have taken several actions to lower costs, including headcount reductions and a few small site closures. These actions, in addition to the CMC synergies, will help reduce our cost basis. While effectively managing our cost structure is important, we also Continue to make investments that are critical to our long term growth and success.

Speaker 2

To that end, We have maintained our significant R and D investments with particular focus on differentiated and high growth products like Advanced Deposition Materials, CMP slurries and liquid filtration. Also critical to our long term growth are our announced capacity expansions. Our new manufacturing facility in Taiwan is approaching completion with initial production expected to begin in the Q3. I was proud To participate in the opening ceremonies of this facility in Kaohsiung yesterday, the site will be a showcase of Entegris' commitment, not only as a technology leader, but also as a world class manufacturer. We believe these attributes represent a real competitive advantage as the technology roadmaps of our customers Become increasingly challenging and require incredibly precise and stable manufacturing capabilities delivered from their most Trusted suppliers.

Speaker 2

We also expect to break ground soon on our new facilities Our new manufacturing center in Colorado Springs, which is targeted to begin initial commercial operations in early 2025. Both the Taiwan and Colorado Springs facilities are critical to address our long term capacity needs, And both have excellent financial return profiles. Looking at the rest of 2023, Forecasting the industry this year continues to be challenging. However, based on discussions with our customers and using third party estimates, We expect that semiconductor fab utilization will likely bottom in Q2. For the full year 2023, we now expect the market will be down in the mid teens or a bit more than the down 13% we cited on the last earnings call.

Speaker 2

Given our strong position in the new technology nodes, we now of the 3 to 6 points outperformance range target we discussed in our recent Analyst Day. Putting it all together, we continue to expect our pro form a sales in 2023 to be down on percentage basis in the high single digits. Wrapping up our outlook for 2023, We also continue to expect EBITDA will be approximately 27% to 28% of revenue for the year. And we expect full year 2023 non GAAP EPS to exceed $2.30 per share. Our approach this year is playing both defense and offense, being mindful of cost, but also Preparing to quickly reaccelerate when signs of an improving market emerge.

Speaker 2

The semiconductor industry remains poised for significant long term growth on the way to $1,000,000,000,000 by 2,030, driven by exciting catalysts such as AI and EVs to name just a few. In addition, the pace of node transitions continue to be on track and device architectures are becoming much more complex, trends which ultimately play to our strength. Entegris' breadth of capabilities in Materials Science and Materials Purity will enable us to offer unique solutions to help our customers improve device performance and shorten their time to yield. These trends And our increasingly mission critical solutions are translating into rapidly expanding content per wafer and market share growth for Entegris. Finally, I want to take a moment to thank our customers for the trust and confidence they place in Entegris.

Speaker 2

And I also want To thank the Entegris team for displaying strong adaptability and a keen focus on our customers in a challenging industry environment. Before I hand over to Greg, I want to welcome Linda La Gorga to our team as our new CFO. Linda will be officially joining us next week, And we cannot wait to have her on board. But today, I want to take a minute to again thank Greg for his immense contributions to Entegris And for being such a great partner to me and the rest of the leadership team for all these years. So now let me turn the call to Greg.

Speaker 2

Greg?

Speaker 3

Good morning, everyone, and thank you, Bertrand. On to our results for Q1, our sales in the Q1 were $922,000,000 down 4% year over year on a pro form a basis and down 3% sequentially. Sales were up 42% year over year on a reported basis. FX negatively impacted revenue by $18,000,000 year over year on a pro form a basis and positively impacted revenue by $12,000,000 sequentially. GAAP gross margin was 43.5% And non GAAP gross margin was 44.3% in Q1, above our guidance of 43%.

Speaker 3

The sequential strength in non GAAP gross margin was driven by favorable FX rates and product mix. We expect gross margin to be 42% to 43% in Q2, both on a GAAP and non GAAP basis. The modestly lower margin reflects less favorable FX trends and the impact of lower volume. GAAP operating expenses were $388,000,000 in Q1. This included $184,000,000 of non GAAP items, Specifically, dollars 89,000,000 of goodwill impairment related to the sale of the electronic chemicals business, $58,000,000 of amortization of intangible assets, dollars 17,000,000 of integration costs and $21,000,000 of other net costs.

Speaker 3

Non GAAP operating expenses in Q1 were $204,000,000 within our guidance range. We expect GAAP operating expenses to be approximately $262,000,000 to $267,000,000 in Q2 and non GAAP operating expenses to be approximately $185,000,000 to $190,000,000 The sequential decrease in non GAAP OpEx from Q1 to Q2 is primarily driven by a decrease in non cash equity compensation expense, which is higher in Q1 than other quarters. Q1 GAAP operating income was $13,000,000 and non GAAP operating income was 205,000,000 Adjusted EBITDA in Q1 was $252,000,000 or 27.3 percent of revenue and was above our guidance. Looking below the line, the GAAP tax rate in the quarter was negative as we had a pre tax Loss. The non GAAP tax rate was approximately 17%.

Speaker 3

We expect the non GAAP tax rate for the Full year 2023 will also be approximately 17%. Q1 GAAP diluted EPS was a negative $0.59 per share. The negative GAAP EPS was driven primarily by the Goodwill impairment taken in Q1 related to the electronic chemicals sale. Non GAAP EPS was 0.6 $0.5 per share above our guidance. Turning to our performance by division.

Speaker 3

For ease of analysis, the year on year comparisons I am referencing here are on a pro form a basis for the SCEM and APS divisions. Q1 sales of $269,000,000 for MC were up 1% from last year and down 5% sequentially. The sequential sales decline was driven primarily by lower sales of our CapEx driven solutions in MC. Adjusted operating margin for MC was approximately 37% for the quarter, flat year on year and down slightly sequentially. The sequential margin decrease was driven primarily by lower volumes.

Speaker 3

Q1 sales of $219,000,000 for AMH were up 10% versus last year and up 2% sequentially. Sales growth year over year was driven by strength in wafer and fluid handling solutions. Adjusted operating margin for AMH was over 22%, down year over year and up slightly sequentially. The modest year over year margin Klein was primarily driven by higher OpEx investments. Q1 sales of $198,000,000 for SCEM of the sale of QED in mid Q1.

Speaker 3

Adjusted operating margin for SCEM was over 11% for the quarter, Down year over year, but up sequentially as expected. The sequential margin increase was driven by lower OpEx And improved execution and favorable FX. Q1 sales of $250,000,000 for APS We're down 16% year over year and down just 1% sequentially. The sales decline in APS was driven by Lower sales of CMP consumables except for SiC slurries which had significant growth. Adjusted operating margin for APS was approximately 23% for the quarter.

Speaker 3

Operating margin was down year on year, but was up sequentially despite the sequential sales decline. The year over year margin decline was primarily driven by the lower volumes. The sequential margin improvement was the result of solid cost controls. Moving on to cash flow and the balance sheet. 1st quarter cash flow from operations was 152,000,000 And free cash flow was $18,000,000 It is worth noting that Q1 is typically the lowest free cash flow quarter of the year is this is when we pay out variable compensation related to the prior year.

Speaker 3

CapEx for the quarter was 134,000,000 We continue to expect to spend approximately $500,000,000 in total CapEx in 2023, a significant portion of which will be for our new facilities in Taiwan and Colorado Springs. We also continue to expect CapEx will decline to a longer term run rate of approximately 10 As we have said, we are highly focused on improving our cash flow and especially inventory turns. While inventory increased in Q1, our inventories have started to decline and we expect the A bit on our capital structure. As Bertrand referenced, in April, we paid off the balance of a short term high interest loan associated with the funding of the CMC transaction. Excluding that $135,000,000 at the end of Q1, our gross debt was $5,800,000,000 and our net debt was $5,200,000,000 This equates to a gross leverage ratio of 5 times and a net leverage ratio of 4.6 times Pro form a for the announced cost synergies.

Speaker 3

As a reminder, going forward, after taking into account the hedge we put in place, Our variable rate debt is expected to be a bit more than 10% of total debt outstanding. The blended interest rate on the debt portfolio is approximately 5.5%. As Bertrand said, we are very focused on debt pay down and deleveraging. On that note, we expect to steadily lower our leverage toward our target of 3.5 times gross leverage by the end of 2024. Our liquidity position continues to be solid.

Speaker 3

As of the end of Q1, we had over $700,000,000 of cash on hand, $135,000,000 of which was used to repay the short term loan in April and well over $1,000,000,000 of total liquidity, including our $575,000,000 undrawn revolving credit facility. Now for our Q2 outlook. We expect sales to range from $870,000,000 to $900,000,000 We expect the EBITDA margin to be approximately 27% to 28%. We expect GAAP EPS to be $0.09 to $0.14 per share and non GAAP EPS to be $0.53 to $0.58 per share. A few additional modeling items.

Speaker 3

We expect interest expense of approximately $84,000,000 per quarter for the rest of 2023. Depreciation is expected to be over $55,000,000 in Q2, up from $47,000,000 in Q1 and increasing to over $60,000,000 in Q4. And to be clear, all the guidance we have provided today, both for Q2 and for the full year 2023 includes the electronic Integris has never been better positioned. The semi market, even given the challenging near term environment, Is much more diverse than it used to be and has many drivers for attractive long term secular growth. Our model is 80% unit driven and as a result is more resilient than it used to be.

Speaker 3

We have increased opportunities to grow our content per wafer and continue to outperform the market. Our model has significant variable cost, which helps us in a down year. And while we do have significant debt, The debt structure is rock solid. It's approximately 90% fixed rate. There are no meaningful covenants and no meaningful maturities until 20 28.

Speaker 3

We are of course committed to paying down the debt and have options to do that including using the $700,000,000 of proceeds from the EC sale post close. In closing, I want to thank my team for all of the great support over the years. And finally, I want to welcome Linda to the team. She is the right person at the right time. Operator, we'll now open up for questions.

Operator

Thank you. The floor is now open for questions. To provide optimal sound quality. Thank you. Our first question will come from Toshiya Hari with Goldman Sachs.

Operator

Your line is now open.

Speaker 4

Hi, good morning guys. Thank you so much for taking the question. Bertrand, maybe First one for you, I guess a multipart question on how to think about revenue going forward. You talked about The market being down in the mid teens, as kind of your outlook, I was hoping you could Differentiate between how you're thinking about wafer starts, WFE and construction CapEx. And you mentioned that you expect The market to trough in Q2, is that a statement for all three buckets of your business, if you will?

Speaker 4

And then my second part would be some of the drivers behind the outperformance. You talked about leading edge customers, no transitions and also easing supply

Speaker 2

A lot of questions here to share. So I will try to remember them all, but don't hesitate to come back online if I have forgotten anything of significance. Let's start with the annual guidance, a little bit more detail and to unpack my statement. MSI, we expect wafer starts to be down in the mid teens, so A little bit worse than last time we spoke. Our Forecast right now for CapEx is down near 20%, so pretty much in line with our views About 3 months ago.

Speaker 2

So that gives you the blend of down mid teens for the industry. The way to think about the year at this point is that, again, we expect MSI to bottom. We believe that it's going to be true in Advanced Logic and Memory, and we expect Some recoveries, some sequential growth in the subsequent quarters for the balance of the year. So that's the way to think About the year and if you do the math, you will see that it gives you a rate of outperformance of about 6 to 7 points and an overall annual growth rate of about Down in the high single digit. So we talked about the reasons for that outperformance.

Speaker 2

So it's continued Strong level of demands for some of our strategic products, in particular, liquid filters, which are in very high demand. The reasons for that are unchanged and I believe clear to the audience, the need for higher levels of purity It's unabated in this industry. Purity is very important at the leading edge to achieve Optimum yields, and it's increasingly important for mainstream fabs to achieve Long term reliability of the chips. Another factor for the outperformance is, again, the easing of a number of supply chain constraints. You can see evidence of that, in particular, in MC and AMH.

Speaker 2

You recall last year, we talked about Some new internal capacity coming online in the back half of the year. So we've been able to ramp up Some of those new equipments, in particular in liquid filtration and fluid handling. And then we are seeing also some new capacity coming online with some critical suppliers of Resin in particular. So I think those are the various factors behind the performance in Q1 and You know how we expect the year to play out.

Speaker 4

That's very helpful. Thank you. Thank you, Bertrand. And then as my follow-up, I guess a couple of questions on the cost Todd, you guys talked about some headcount reductions, some small site closures. You're guiding Q2 OpEx To 185 to 190, should we as we think about the second half run rate from an OpEx perspective, Is the $185,000,000 to $190,000,000 kind of the new base that we should be working with?

Speaker 4

Or could there be further reductions, given some of the initiatives Going on today and perhaps synergies with CMC. And then specifically on SCM, margins were up From Q4 to Q1, but they remain pretty low relative to where you were a year ago, year and a half ago. So what needs to happen Within SCM for your margins to perhaps normalize higher? Thank you.

Speaker 3

Okay. Yes. So I'll go ahead and take that, Toshiya. How are you Good morning. So OpEx, you should think about that 185 to 190 Sort of the run rate as we go through the year, if you think about that on a pro form a basis, it's about $10,000,000 Higher than where we were last year in Q2, but if you unpack that it's all ER and D.

Speaker 3

And as Bertrand mentioned, we're sort of driving with 1 foot on the gas, 1 foot on the brake, and we're trying to watch the costs around the SG and A side of the house and the ER and D side of the house, but we do want to make sure we're continuing to invest for the long term. As it relates to the SEM division, as you highlighted, we did have Slight improvement in the operating margins there. I think as we think about the balance of the year, there are a couple parts of that business Where the volumes are very low and they have relatively high fixed costs, so we need to see higher volumes in those portions of the business. And I would just say in general, the margin is going to improve. It's primarily a volume related issue.

Speaker 3

With the exception of those 2, I talked about 2 pockets where we've got very low volumes relative to historical standards. And those would be non those aren't core areas per se.

Speaker 4

Got it. Thanks so much, Greg, and congrats again on your retirement.

Speaker 3

Yes. Thank you.

Operator

Thank you. Our next question will come from Kieran Gibran with Mizuho Group. Your line is open.

Speaker 5

Hi, good morning. Congratulations on a good quarter and again congratulations Greg. I was wondering In ATS specifically, I mean, it seems like you're seeing really good demand for the silicon carbide slurries. Maybe you can parse out what's driving that Strong demand, like how you're thinking about that business going forward? And then your outlook for the consumable portion of the business And like throughout the remainder of the year and how you expect that to trend?

Speaker 5

I mean, you covered it, I guess, more broadly in terms of where the Total business is trending, but if we can just dial down a little bit more into APS, that would be helpful.

Speaker 2

Yes. So we like talking about the SiC slurry business because, first of all, there are a number of very significant investments taking place In this particular segment, many customers are investing massively to build new capacity. And then the other reason we like to talk about it is that our market position in these particular applications It's very, very strong, both for storage and for pads as well, by the way. So It's small today, but we expect this part of the business to grow very rapidly. We saw that in Q1.

Speaker 2

We expect to see that, As Greg mentioned, through the balance of the year. So that part of the business will be expanding And we'll be a little bit swimming against the current here. For the rest of the consumable business, I think, again, we expect that part of the business to be down sequentially In Q2, that's largely a function of further slowdown in wafer starts, especially in Advanced Logic. And then we expect a steady but modest recovery in the back half of the year. As I mentioned in our previous earnings call, we continue to expect our liquid Filtration product lines to do the best across the portfolio.

Speaker 2

And as I was just saying, as an answer to the previous question, It's largely a function of the growing importance of materials purity for our customers and therefore, the growing importance of The solutions we provide for them. So that's the way to think about consumable revenue for the balance of the year.

Speaker 5

Great. Thank you. And then maybe just a really quick follow-up. The Taiwan facility seems to be on track or even ahead of schedule. And how do we think about the contributions as you ramp up that facility in the back half of the year?

Speaker 5

And then I know it's early for 2024, but any initial thoughts on how to kind of think about that business and the additions to your portfolio? Thank you.

Speaker 2

Yes. So yes, you're right. I mean, this facility is coming online, in fact, On plan, but that in itself is quite an accomplishment given the fact that we announced the investment late 2020, And this massive construction took place during a global pandemic. So the fact that we are able to hit The time line and to do all of that within budget is quite an accomplishment. And frankly, that's why It was important for me to travel to Taiwan to recognize the team.

Speaker 2

And frankly, I wouldn't miss the opening and An opportunity to interact with a lot of our major customers who attended the opening. So this is going to be a great showcase for Entegris. Not only are we adding new capacity, but we are also investing in the most advanced Manufacturing site when it comes to liquid filters, when it comes to high purity drums, when it comes to low k and high k Dielectric Materials. So again, exciting times, exciting week for us, obviously, between reporting strong results and Opening this very important facility. When it comes to its contribution, as we've said many times, I mean, this year, it's going to be a little bit of a drag To margin in the back half of the year, we are still in the middle of internal and customer qualifications.

Speaker 2

We expect the first shipments Two customers. So billable shipments by Q3, but it will be modest. And then the ramp really will take place in 20 And I would expect to be maybe reaching full capacity sometime in 2025.

Speaker 5

Great. Thank you. I'll turn it over.

Operator

Thank you. Our next Question will come from Sidney Ho with Deutsche Bank. Your line is open.

Speaker 6

Thank you and good morning. Thanks for the update on the full year guidance. Do you still expect second half revenue to be slightly skewed towards the second half? I guess revenue to be slightly skewed towards the second half of the year. I think last quarter you talked about 3 nanometer ramp being a big driver in the second half.

Speaker 6

Has there been any changes to your expectations about these nodal transitions for 3 nanometers as well as on the memory side as well?

Speaker 2

Yes, Sydney. So right now, I think on balance, I would say that second half will be essentially flat with The first half. So we expect, as I mentioned earlier, Q2 revenue to be the lowest point this year for us. But after that, we expect the sequential increase every quarter to be relatively modest through the balance of

Speaker 5

the year.

Speaker 2

And that's going to be a function of recovery in MSI and also the benefits of Some of the note transition. So that's again where we expect to do better than the market. But on balance, as I said, second half Think about second half as flat to the first half.

Speaker 6

Okay, that's helpful. Related to The Electronics Chemicals business, can you talk about the financial profile of that business in terms of revenue and profitability? Think you guys talk about what it was in 2022. But also related to that, does the announced divestiture of the business change the way you think about The cost and product synergies you laid out in your Analyst Day the last time and what about your CapEx outlook going forward?

Speaker 2

Sure. All good questions. So the decision 1st of all, the decision to divest is really The result of really careful and objective assessment of the various parts of the CMC portfolio. We talked about it during the Analyst Day we had at the end of last year. And by the time we Presented to you at the end of last year, we knew that we wanted to divest The EC business.

Speaker 2

So we took that into account, and it was factored in the cost synergies that we were targeting. So no change to that commitment to deliver $75,000,000 of cost synergies. When it comes to the beyond the financial profile of that business, I would just say that think about 2022 sales around $360,000,000 And think about an EBITDA number between $50,000,000 $55,000,000 And again, EBITDA is Directional, this is a carve out, but that's the range you should probably have in mind.

Speaker 3

And Sydney, as you think about that business as you get, call it $700,000,000 in proceeds, the operating income is obviously lower than the EBITDA, We're going to pay off debt that currently is at a rate of 7.7%. So the impact on the P and L of this divestiture is neutral to slightly positive.

Speaker 6

Great. Super helpful. Thank you very much.

Operator

Thank you. Our next Question will come from Charles Hsieh with Needham and Company. Your line is open.

Speaker 7

Hi. Thank you for letting me ask a couple of questions. Really want to understand a bit of the near term dynamics Here, when I look at your segment revenue performance in Q1, I would have thought That SCEM and APS to be down a little bit more than what you have reported and MC and AMH Given that SCEM and APS are more unit driven, the other 2 are more CapEx driven. So Can you help me understand a bit more how to reconcile that looks like the CapEx still holding relatively strong in Q1, but you See a little bit more of the sequential decline in especially MC, but FCEM and APS, which are supposed

Speaker 2

Yes, good question. And there's certainly more than meets the eye. So I'm happy to Try to unpack that a little bit more for you. So remember first that when we talk about our CapEx exposure, a lot of that exposure is to new fab constructions. And there was, believe it or not, a Fairly steady level of investments in new fab construction projects.

Speaker 2

That helped sustain our Fluid Handling business in particular, and that's Largely what helped our AMH business to perform so well year on year and sequentially. The other part of that is MC, it's a little bit of a tale of 2 cities. You have, on the one hand, products that are Components used in equipment platforms and demand for those products is under a lot of pressure, so it's down fairly significantly, but it was offset nicely by our liquid filtration business, As I mentioned earlier, strong demand for those products. We understand the need for greater purity and what it does for our customers. And then We also benefited from new capacity that came online late last year and there was good timing because of the strong demand for those products.

Speaker 2

When it comes to SCM and APS, I agree with your statement. I think we were pleased with the performance. It was largely in line with what we were expecting. And it was the decline is a function of the exposure To memory, I mean, those two divisions have seen actually fairly steady decline in demand starting late last year. We saw continuation of that in Q1.

Speaker 2

As expected, we are actually encouraged By the recent trend and we're seeing actually signs of improvement for those businesses going forward and that's one of the reasons why we believe that we expect to turn the corner in Q2.

Speaker 7

Thank you, Batwa.

Speaker 8

I think that

Speaker 7

the other question, I think you talked about MSI Or fab utilization to bottom in Q2, I think you specifically called out advanced the foundry logic And the memory, do you have any view about the mature node found the logic side of MSI? And if you can, can you kind of quantify to us how much of the exposure of your business to that part of the foundrylogic side of the market? I know you're probably more levered to the advanced, but some color on that part of the market would be great. Thank you.

Speaker 2

Yes. So mainstream certainly has been an area of strength across our portfolio. It was through in Q1. We expect that to continue to be true in Q2. And certainly, one of the reasons we have more The muted expectations for the back half of the year is that we have some concern about the sustainability of demand from those mainstream fabs, And that's something we try to factor into our guidance for the back half of the year.

Speaker 2

When it comes to Our overall exposure, it's something that is hard to do. But directionally, I would say that we have About 70% exposure to Logic and Foundry and about 30% exposure to memory For our fab customer business, right? And that fab customer business represents roughly 55% of our revenue.

Speaker 7

And within that 70% of the fab Business, lever 2, logic, foundry, how much of that is mature or mainstream side of the logic

Speaker 2

So that part gets a bit trickier to quantify because sometimes we don't have perfect visibility. But I would say think about sixty-forty, 60% Of that would be advanced, 40% would be mainstream, roughly.

Speaker 7

Thank you, Bertrand, for the clarification. Thank you. Sure.

Operator

Thank you. Our next question will come from John Roberts with Credit Suisse. Your line is open.

Speaker 9

Thank you and welcome Linda. I'm sure you're listening in and best wishes again Greg. When you talk about easing of supply chain, I assume you're talking about the U. S. China trade restrictions that were impactful in the 4th quarter.

Speaker 9

Have they largely gone away or half gone away or how's there been the sequential progression in your solutions to that headwind that you had in the 4th quarter?

Speaker 2

So the easing of the supply chain constraints really refer to something different. It's really about Two things. 1 was the number of internal capacity constraints that we had all the way until the end of last year. But as I mentioned, a number of New process equipment lines came online, so we resolved most of our internal limitations. And then the second part was really Getting access to enough quantities of certain raw materials.

Speaker 2

And As I said, the situation we're not entirely out of the woods, but we've made great progress versus where we were

Speaker 7

last year.

Speaker 9

And the U. S.-China technology restrictions are not having an

Speaker 2

impact at this point? Yes. So the impact is something that we quantified during the last the previous quarter's call. We spent a lot of time working with the U. S.

Speaker 2

Administration at the end of Q4 and our Chinese Collecting certifications from our customers are performing due diligence on their operations. And we Quantified the permanent impact, negative impact to our top line to be about $20,000,000 a loss of $20,000,000 of revenue permanent loss by quarter. And we saw actually about that number impacting mostly SCM and APS In Q1.

Speaker 10

Thank you.

Operator

Thank you. Our next question will come from Aleksey Yefremov with KeyBanc Capital Markets. Your line is open.

Speaker 11

Thanks and good morning everyone. Bertrand, do you have any views on node transitions as it relates to your business sort of beyond the Back half of this year?

Speaker 2

Beyond the back half of this year. What I can tell you is that for this year, We think that those note transitions are largely on schedule. I mean beyond this year, we don't really like to comment on that. It's just It would be speculative. There's a lot that can change between now and then.

Speaker 2

But I would say that for this year, the node transitions are largely On track, and we know that all of our customers are expressing a desire to continue to maintain the cadence of no transitions. It's In their best interest to maintain a rapid transition to the new nodes, that's the source of competitive advantage for them. And we believe that, Again, they're going to do everything they can to maintain a very rapid cadence, which Placed to our strength because we believe we can help them. We can help them with very unique new materials and we can help them Solve their contamination issues, which means achieve faster time to yield. But again, I'm not going to comment on 2024.

Speaker 2

It's too early.

Speaker 11

Fair enough. And then on this The current year, should we think about your demand for your products broadly as sort of coincidental was Fab utilization or would it be somewhat lagging or maybe leading the industry growth, the industry trough?

Speaker 2

My answer would differ by division. There's a much stronger correlation with to wafer starts with SCM and APS, the correlation is good, but not as strong with MC in particular, the reason being that sometimes when customers actually Ramp up production in a fab, they will use large quantities of filters, for instance, to just purge the lines, The chemical loops in the fabs, so that will create a little bit of a bump upfront. And then those volumes actually will recede to what would be the normal level of daily consumption. So That's why sometimes when you have a large node, you can see some weird trends. I mean, they are totally

Operator

Thank you. Our next question will come from Chris Kapsch with Loop Capital Markets. Your line is open.

Speaker 10

Yes, good morning. This is rare for me, but I do want to give a shout out to Greg, just The history there, you've been through a lot with the company. Kudos to all your accomplishments. I appreciate the relationship over the years and Wish you the best and hope to keep in touch. So good luck.

Speaker 10

And so just on the results Yes.

Speaker 3

Thank you, Chris. I appreciate it.

Speaker 10

Sure. So just terrific narrative, especially considering the macro. I do have a follow-up And it's really focused on this, not just your sales resilience, but really the comments about the outperformance relative to the Market being greater than expected. I'm just curious Bertrand, is this a statement about where you see The end market recovery being stronger visavis, what may continue to Be slower language, in other words, it's known that you have more process per record win and therefore more content per wafer, if you will, At these advanced more complex nodes, so for you to outperform greater than expected, is it really just a statement about view that That's where the demand will hold in better visavis maybe some of the legacy nodes or some of the more mature nodes?

Speaker 2

Yes. I mean, Chris, this is exactly what's happening. I mean, we're seeing steady Entegris Content per wafer increased node after node. Even when you Here about wafer start reductions in memory, you know that a lot of those Reductions are taking place in the lagging notes. So at some level, it gives us increased Additional opportunity for us to continue to push forward and to enjoy greater content per wafers.

Speaker 2

So the algorithm that we Laid out for you in the last 2 or 3 analyst days, it's In full gear, and we are seeing the benefits of that. And we're seeing the we have often had the question about Whether the algorithm would stop working in a downturn and here we are demonstrating that Entegris is truly a resilient business on a cross cycle basis. We've been able to deliver Very compelling outperformance in an upturn, and I think that we are obviously not immune to a downturn. Our revenue will be down. But Relative to the rest of the industry, I believe that we will be able to deliver some fairly Strong result.

Speaker 2

I want to be bragging, it will be down. So there's really no reason for us to be bragging about A down year, but I think on a relative basis, I think we will prove to be resilient.

Speaker 10

Got it. And just as a follow-up, the one thing that I've Observed over the many years is that when there's node transitions, particularly more challenging ones that initially, I mean, it shows up in the chipmaker in the form of gross margin weakness, but the initial ramp, there's low yields, which Effectively results in higher consumables in order to get the dye production Even if the yields are low, so there's a disproportionate benefit to the leading edge consumable supplier when these node transition happen. Wondering if that dynamic is playing in to the extent that you have visibility to it.

Speaker 2

And yes, that was It is. Yes. It is playing in, in 2 ways. It's playing in, In the fab environment, exactly as you described it, Chris, but it's also playing Upstream in the supply lines because increasingly, I mean, as our fab customers transition to more Demanding nodes, they will push their bulk chemical suppliers To significantly increase the purity levels of a broader array of Process chemistry is coming into the fabs, and it translates into great opportunities for more point of filtration Using more advanced filters that need to be replaced more frequently upstream in those supply lines, and it's also going to drive Consumptions of more high purity drums. And those are exactly the types of Investments we've been making here in Kaohsiung and Taiwan.

Speaker 2

We are adding capacity to our advanced filters. We are adding capacity to serve the extended ecosystem of Our strategic fab customers here on the island, but it's happening everywhere in the world Where there is a big push to the advanced notes.

Speaker 10

Very helpful. Thank you.

Speaker 2

Thank you.

Operator

All right. Thank you. Our next question will come from Mike Harrison with Seaport Research Partners. Your line is open.

Speaker 8

Hi, good morning. I'm curious on the microcontamination control business And the weakness that you saw on the CapEx or more equipment related side, do you view those CapEx related products as leading indicators? And do you view the Q1 weakness as maybe just a temporary impact or air pocket or do you expect further weakness On the equipment side?

Speaker 2

So typically, those are indeed leading indicators of what to Expect in terms of WFE. And so we expect those product lines to continue to face some headwinds going into And then we frankly have very little visibility for the back half of the year. But internally, right now, we are Not counting on any recovery for those products in 2023.

Speaker 8

All right. Thank you for that. And then on the ATS business, I'm curious if you could comment on opportunities you're seeing in the pads side of the business. That was always an area that CMC SAW is having a lot of growth potential. I think they had some challenges delivering on that growth, but I'm curious If you're maybe seeing more success already or expecting that you could be more successful on the pad side?

Speaker 2

It's a good question. So as I mentioned, actually, we are very excited about emerging opportunities in SiC applications, not just for the series, but for the pads as well. In addition to that, we've seen some nice progress for Silicon applications, it's still early days, but that part of the business has been over the last few quarters has been performing actually Better than expected. And to your point, we have High expectations for this business to continue to perform better than it has historically.

Speaker 8

All right. Thank you very much.

Speaker 1

All right. Thank you very much. Thank you for joining our call today. Please follow-up with me. This is Bill Seymour, if you have anything else you want to cover.

Speaker 1

And have a great day. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's Entegris First Quarter 2023 Earnings Conference Call. Please disconnect your line at this time and have a wonderful day.

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Earnings Conference Call
Entegris Q1 2023
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