Good day everyone and welcome to Entegris Fourth Quarter 2019 Earnings Release Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Bill Seymour, Vice President of Investors Relations. Please go ahead, sir.

Good morning, everyone. Earlier today, we announced the financial results for our fourth quarter of 2019. 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 are contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. 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 will find a reconciliation table in today's press release as well as on the Investor Relations page of our website at entegris.com. On the call today are Bertrand Loy, our CEO; and Greg Graves, our CFO. Before I turn the call over to Bertrand, in case you didn't see it, we've recently sent out a save the date for our 2020 Investor and Analyst Day, which will take place on May 11 in New York. We will be sending out the event details and registration information in the near future. With that I'll hand the call over to Bertrand.

Thank you, Bill. I will make some comments on our fourth quarter and full year performance and provide our view on how we see things going into 2020. Greg will follow with more details on our financial results and our guidance for the first quarter. We'll then open the line for questions. I am really pleased with our strong performance in the fourth quarter, which resulted in record sales, EBITDA and EPS. The quarter played out largely as we expected; sales grew 8% sequentially and 6% year-on-year. Our SCEM division grew 15% sequentially; growth was driven by specialty materials and by sales of deposition materials for advanced technology nodes, predominantly in logic applications. Our MC division sales grew 9% sequentially, also benefiting from sales into new nodes. The sales growth and effective expense control translated into improved profitability and our gross margins, EBITDA margins and EPS were all up significantly in the quarter. Looking at the full year of 2019, we achieved record sales, up 3%. Sales were down 3% on an organic basis in 2019 and we estimate the broader market was down 7%, which means we outperformed the market by 400 basis points on an organic basis for the year. This significant organic outperformance was driven in large part by continued traction of our leading-edge solutions in areas of increasing importance to our customers, including our strong position and wins in liquid filtration and advanced deposition materials. I am particularly pleased that despite a challenging industry environment, we maintained our R&D investments during 2019 while delivering strong profit results. Another highlight of 2019, was the organizational realignment we put in place in the summer. This reorganization has been fully implemented now and will make us a leaner, more agile and more responsive to our customers. And finally, as…

Thank you, Bertrand. The fourth quarter was an excellent quarter for Entegris. Q4 sales of $427 million were in line with our guidance. Sales were up 6% year-over-year and up 8% sequentially. Q4 GAAP diluted EPS was $0.42 per share, down 26% year-over-year and up 40% sequentially. On a non-GAAP basis, EPS of $0.55 was up 17% year-over-year and up 10% sequentially. Moving on to gross margins. Both GAAP and non-GAAP gross margins were 46.3% in Q4. In line with our expectations, GAAP gross margin improved 300 basis points sequentially and non-GAAP gross margin was up 170 basis points sequentially, primarily driven by higher volumes and improved mix. We expect gross margin to be approximately 46% both on a GAAP and non-GAAP basis in Q1. GAAP operating expenses were approximately $114 million in Q4 and included a total of approximately $20 million from amortization of intangible assets, integration costs and deal costs. Non-GAAP operating expenses in Q4 were $93 million, slightly above the high end of our guidance. We expect GAAP operating expenses will be $111 million to $113 million and non-GAAP operating expenses to be $96 million to $98 million in the first quarter. Q4 GAAP operating income was $84 million or 19.7% of revenue and non-GAAP operating income was a record at $105 million or 24.5% of revenue. Our GAAP tax rate was approximately 20% for the full year and our non-GAAP tax rate was 18%. For 2020, we expect both our GAAP and non-GAAP tax rate to be 19% to 20%. It's worth noting for modeling purposes the first quarter typically has the lowest tax rate of the year. Adjusted EBITDA was also a record in the quarter at approximately $125 million or 29% of revenue, which was up approximately 200 basis points, both sequentially and year-over-year.…

[Operator Instructions] We will now take our first question from Patrick Ho of Stifel. Please go ahead.

Bertrand first off, maybe for you, in terms of your outlook for 2020 and I guess some of the moving pieces there. In 2019 you talked about strength in advanced deposition particularly in Q4, driven by some of the transitions we're seeing in both foundry, logic and memory. Can you give a little bit of color on the SCEM business and where you see not only opportunities in 2020 but may be some of new products or I guess new areas where you can capitalize upon the growth in the industry in 2020?

Yes, good morning, Patrick. Thank you for the question. So we have indeed made a lot of progress over the last two, three years in our customer engagements in advanced foundries, in advanced memory and we - because of the value proposition that we have to offer that is centered, as you know, on new enabling materials as well as contamination control solutions, we believe that we are really uniquely positioned to benefit from all of the future nodes not just in 2020, but for many years after that. So that really means that I would expect significant outperformance for our deposition materials. So I would expect significant outperformance for our new etching solutions. We have also very aggressive objectives for a number of new specialty coating solutions that we've been developing and introducing in the market in the last 18 months and of course, we continue to have some very aggressive objectives for our liquid filtration platforms, both for bulk and for point-of-use applications in wet etch and clean and photoresist applications. So I think that instead of singling out any particular product platform in our portfolio, I think that what makes Entegris truly unique is the breadth of the solutions that we can offer to the industry road map and frankly the fact that we have many product lines that we expect will be outperforming the industry significantly.

And maybe Greg and my follow-up question. You guys have been around for a long time, you've been able to manage the supply chain, both on the upcycles and the downcycles. But given that you have had some small acquisitions recently, how do you I guess manage working capital management in this environment, particularly as it starts to strengthen and build through the year? How do you integrate these acquisitions and make sure that you get the same turns that you've been able to do in the past?

Okay. So really. I'll take that. I'll talk about two big components for us. First of all, accounts receivable was for us at year-end every year runs about 50 days. I mean, I think we've done a very good job there. We continue to do a good job even with the companies that we've acquired in some cases, for instance, SAES had a greater bias to Asian customers. The DSOs there tend to be a little bit longer, so you did see when we acquired them our DSOs jumped by a couple of days. On the inventory side, I mean this year the inventory management is going to be a real balancing act and we've got a major initiative around our MRP systems where we're focused on the one hand, reducing inventory, but at the same time giving our - given our expectations that we expect to see improvement in the industry, combined with the uncertainty around the globe particularly in China, I would say we're going to be cautious. Our long-term goal is to reduce inventory. We're just not sure this is the year to be aggressive about it given we could potentially have some supply chain constraints through the year if we are too aggressive.

[Operator Instructions] We will now take our next question from Toshiya Hari of Goldman Sachs. Please go ahead.

Bertrand, you talked about your total market potentially growing 4% in 2020 and sorry if I missed this, but can you talk about how you're thinking about the CapEx side of the market as opposed to the wafer side of the market. And then within CapEx, if you can differentiate between WFE what your equipment OEMs are likely to see versus kind of bricks and mortar, the infrastructure side that would be helpful. Thank you.

Yes. Thank Toshiya, so let me start with MSI since it's still the primary driver for our business. So and as you know, 70% of our revenue is really driven by the fab activity. So MSI assumption for 2020 is about 4% and that's something that we believe is normal annual growth rate for MSI. When it comes to CapEx, so 30% of our revenue is tied to CapEx, but most of that, as you know is really tied to new fab construction and that is about 20% of our total revenue, tied to fab construction, which really means that our exposure to WFE is only approximately 10% of our total revenue. So, please keep that in mind when we have our annual assumption for CapEx or the total industry CapEx at about 5% and we recognize the WFE will indeed grow likely faster than 5%. But at the same time we do not expect new fab projects to be growing very much year-over-year.

Thank you, Bertrand and as a quick follow-up, you also mentioned in your prepared remarks that acquisitions that you've made over the past couple of years have contributed towards $100 million in sales and roughly 10% in earnings. Obviously without talking specifics on your pipeline, you feel like you can replicate that or repeat that over the next few years. Do you think the M&A pipeline is robust enough to kind of deliver some of the result over the next two to three years. Thanks.

Yes, so let me maybe just clarify what you said at the beginning, so $100 million approximately of incremental revenue in 2019 versus the reported 2018 results, the accretion is $0.10 not 10%, $0.10 in 2019 as compared to the reported 2018 results. But then to answer your broader question. Yes, I mean, we believe that we are an effective acquirer, a very good integrator of the platforms that we have acquired and we have demonstrated time and time again that we can create significant long-term value for both our customers and our shareholders. I would say that we have a healthy pipeline of potential acquisition targets and that gives us reasonable hope that we can find more opportunities like DSC, MPD, Anow and Sinmat which is a company we just recently acquired and that will give us an opportunity to expand our served market. So yes, I think that the growth or the additional growth of 2 to 3 points I was pointing to relates to deals that we have already executed and I would hope that we'll be able to find other small to mid size acquisitions to complete in 2020.

We will now take our next question from Sidney Ho of Deutsche Bank. Please go ahead.

Well, thank you very much for taking my questions. My first question is on the 2020 guidance, the revenue guidance. I appreciate all the details behind that guidance of 8% to 10%. How do you think the progression of the year is going to look like for both the market itself and for Entegris. Will we see a spike in certain quarter like what we saw in 2019 and kind of relate to that what are you assuming in the guidance both for Q1 and for 2020 in terms of the impact of the coronavirus?

So let me start with the coronavirus question. I would say that obviously the impact on the virus on the industry is nearly impossible to quantify precisely. But based on what we know today, we do not believe that the impact to our supply chain, to our operations or to our customers will be material on a full year basis and we will obviously continue to monitor that very closely. But I will admit that we did relax a little bit the bottom and of our Q1 guidance just to take into account the potential risk of longer shutdown. So that's something that we took into consideration for our Q1 guidance. But we decided not to try to quantify that risk on a full year basis because we don't think it will have a material impact to the full year performance of Entegris. Then going back to your first part of the question, we expect steady improvement in our performance every, every quarter and that's going to be a function of two things. The first part is that we expect a number of industry segments to strengthen over the years and I'm here thinking more specifically about DRAM and mainstream fabs in particular. And then the back end of the year will also see a number of significant node transitions both in advanced foundry but also in advanced memory and that's the reason why I would expect the second half of the year to be stronger than first half of the year for us.

May be going back to Q4, if I kind of look at your revenue by geography. Taiwan was strong, that makes a lot of sense. Korea, somewhat surprising to see down quite a bit and in terms of China, that's very strong. Within China, can you talk about maybe the dynamics between the multinationals and the domestic China and is the - any acquisitions make that comp a little bit different. Thanks.

Yes. So you're correct, very strong performance in China and China today for us is a 15% market, very important market, that's one of the reasons we continue to make significant investments. We announced the opening of a tech center in Shanghai earlier in 2019. But the strong performance really was across all divisions and in Q4 if anything, we posted record revenues for both microcontamination and AMH and I'm pleased to say that a lot of that growth comes from new business opportunities with domestic Chinese semiconductor manufacturers, so very strong performance obviously. The reason why sequentially the performance was so significant really comes from a number of new fab projects that we benefited in Q4 and that obviously helped our food platform, helped our fluid handling product lines and our gas purification system. So that's the reason why you can see that plus 27% sequential growth in China, but on a full year basis still remains actually very strong, plus 5% in China. The story behind the sequential decline in Korea is in fact that we enjoyed - in the first three quarters of the year, we enjoyed some very strong demand for our gas purification systems and fluid handling solutions, as a number of Korean - of our Korean customers equipped several new mega fabs. But those projects came to an end in Q3. So that's really what's behind that contraction, sequential contraction in Q4. Having said that I would point to the fact that SCEM which is really more of a unit-driven business in Korea did perform really well and that's a reflection on the success of the new molecules that we introduced and - or even being evaluated with the higher layer count architectures in Korea for advanced memory.

If I can squeeze in one more. Regarding the acquisition of Sinmat, can you help us understand the size of that market and the growth potential. Also, maybe where the profitability of that business today, where is it going to go and looking at a bigger picture is that a business that you can leverage to the broader semiconductor wafer CMP market. Thanks.

So today Sinmat is developing specialty slurries for ultra hard materials like silicon carbide and gallium nitride and if you - I mean, and that's really going to be our focus in the next few years. We believe that this particular market segment will grow very significantly. Today that market is probably less than $50 million. I would expect that market to double or more over the next 4 to 5 years. So a lot of growth ahead of us. So when you think about our objectives, when it comes to the integration of that platform we really intend to run that platform fairly independent from the rest of Entegris. The reason we can do that is that we are fortunate enough that one of the founders, Dr. Singh, has chosen to stay on board and what we really want to do is really help him and his team be very successful not only in the U.S. but also in Asia. So the goal is really to enable that growth by giving Sinmat access to our global distribution network, but also by continuing to invest in their quality systems and manufacturing processes to just continue to enhance their value proposition. So we are very excited. I think it's a great technology, great team and we believe that business will be growing at 20% plus annually for the next few years.

We will now take our next question from Paretosh Misra of Berenberg. Please go ahead.

On the demand side, how when node changes that you're seeing in 2020 different from 2019, any contrast you can provide perhaps in terms of how big they are versus last year and maybe also what are the implications for you in terms of mix, et cetera?

Yes. So the reason we are actually very excited with what we expect to see in memory is that first of all many more semiconductor manufacturers will be transitioning to more demanding nodes. And those nodes are again relying on more layer accounts, which really makes the aspect ratio more challenging that will lead to the introduction of new etching solutions and the adoption of new deposition materials that can be deposited in thinner films and can actually bring better electrical property to the architecture. So again a number of new opportunities that we've been working on now for a number of years and we believe that many of those opportunities for our SCEM division will come to fruition in 2020.

Interesting. And then as a follow-up on your cost structure any major changes that you're seeing, any costs that are going up this year versus last year that we should be aware of?

No, not in particular. I mean I think we delivered strong gross margins in Q4. Our model for 2020 assumes that there is a margin progression through the year and gross margins continue to improve. Our OpEx, which we said, will be up a few million dollars in Q1, we'd expect that to be sort of the new paradigm potentially creep up a little bit more as we move into Q2 and Q3, but that's all - but that's all consistent with the guidance that Bertrand said of an EPS above $2.30 and which also happens to be consistent with our target model.

We'll now take our next question from Chris Kapsch of Loop Capital. Please go ahead.

I appreciate the comments on the enthusiastic prospects associated with the memory market coming back. I'm just curious like as if there is a couple of things that could benefit your demand profile, one is just the, I guess utilization rate improving and two as you point out the transition to advanced nodes. Just curious, which one is are you more excited about as you look to 2020. And it's - also if there's any way to frame up your the content per dye or per wafer as the memory market transitions to some of those advanced nodes with the more complex and more layers associated with the architecture?

Yes, the quantification for wafer is always tricky to do. We do that at a customer level but that's not something we can comment on publicly. But I would tell you that this is actually pretty significant for some of our customers and that's why I would answer the first part of the question by saying that what I'm most excited about really are the node transitions simply because we know that more wafers ultimately will be produced at those new architectures. So that over time the wins that we have scored on some of those architectures will compound on sales and help us sustain that excess growth rates for number of years.

And then in the fourth quarter, it was, it was in fact node transitions I think that helped contribute to the strong quarter. But at the margin level was pretty impressive both sequential and year-over-year. Curious is that a function of node transitions and since you called out in 2020 the expectation that the second half you'd have more benefit from advanced node transitions in both logic foundry as well as memory. How do you see those transitions influencing your margins maybe progress - as we progress through sequentially through 2020?

Yes, so first of all on Q4. I mean, the improvement in the gross margin was really two-fold. First of all, I mean, we obviously had quite a bit better volume and in particular we had better volume in areas where we had previously talked about having capacity that was being underutilized within our SCEM business and then we had frankly we had better product mix and so those were the two big contributors to the margin improvement in Q4. As we work through the year I mean, a combination of - as you point out some of the products with regard to new nodes within deposition, etch, liquid filtration will obviously have good margin structures but also we expect the volumes to improve throughout the year as well.

We will now take our next question from David Silver of CL King. Please go ahead.

So a couple of questions for Bertrand and then I had a question for Greg. So this first question has been answered I think in part, but I was just trying to integrate some thoughts. But when I look at your fourth quarter results and there is a nice sequential pickup in SCEM, nice sequential pickup in microcontamination, the kind of flattish results in the more capital-intensive AMH unit. Would painting with a fairly broad-brush here but would I be correct to say that the fourth quarter reflects the ramp up of production of kind of the leading-edge nodes at your customers, let's say as opposed to the start-up with new fabs or price increases or something like that. So in other words Intel and Taiwan Semi had talked about rising utilization for their newest chips. Is that a fair reflection of what we're seeing in your results. And maybe for the near term they might track the utilization at some of your major customers? Thank you.

Yes, David. So I think you are, you're correct. I mean, you should think about AMH. The reason why it was sequentially flat is really, as I mentioned, in a different context early on the call, we saw a fewer new fab projects in the quarter and that had the dampening effect on our fluid handling business and that's one of the primary reasons why AMH is flat sequentially. When it comes to SCEM and microcontamination both had exceptional Q4s, both had record quarters in Q4; SCEM up 15%, microcontamination up 9% and that's really a function of more wafers being produced at those more advanced nodes both in logic, foundry, but also in memory. And frankly, I think that's the momentum that we expect to going to continue in 2020 and in the future years.

I did want to ask a question I guess about EUV. So maybe compared to a year or two ago when EUV will be anticipated but not quite ready. I think it's kind of been firmly established at the leading-edge fabs now, pretty much throughout the industry. Could you maybe just talk about your strategy. Well, first of all, how you think the early signs of the puts and the takes or the positives versus potential changes required a transition in your business? How are you positioned to take advantage of that and what's your forecast for the growth in your EUV-related products and services? Thanks.

So broadly stated I would say that EUV is a wonderful technology for the semiconductor industry. I mean it will allow us as an industry to continue to have really old dreams about shrink and about complex architectures and that's what is going to be enabling 5-nanometer this year and we will in short order I'm sure go to 3 and beyond and that's wonderful because those new architectures will be requiring new materials, but more precise etching chemistries and more importantly, would be increasingly vulnerable to contaminations. And if you think about the value proposition of Entegris, we will be ideally positioned to develop the solutions required for the industry to continue to advance on the road map. So they have - we have and we have mentioned a few specific products like EUV Pod and others, so we have some direct opportunities around mask management or even around the scanner. But really what we are most excited about are the indirect opportunities up and down the supply chain. And what I mean by that is that purity requirements will become much more stringent for a broad array of chemistries and materials and those requirements will drive the need and the usage for more advanced filtration, pure packaging solutions across the ecosystem. So as a leader in contamination control, as a leader in ultra pure packaging solutions, I think we are ideally positioned to capitalize on all of those new opportunities that will come with the adoption of EUV.

And then for Greg, I had more of the structural question I guess and maybe the timing or is related to the kind of the current favorable structure of long-term interest rates. But when I look at your cash flow statement for 2019 it was a record year across a number of cash generating measures. But it was also a year where you kind of outspent the cash flow you generated internally. Bertrand has talked about being a consolidator of the industry that was the Sinmat deal in January. Is now a time to kind of look at maybe a broader - maybe make a move to add financial flexibility or capability as you continue to execute on your strategy that in my opinion might - you might outspend your internal cash generation for the next year or two as you did in 2019 out there. Thanks a lot.

So we are constantly looking at our options. I mean I think what we're committed to is maintaining that strong BB rating which implies a leverage level of somewhere - max leverage level on an ongoing basis somewhere around 2.5 times. Well, what I would say as well is like we said we're constantly looking at our options. The market for - the debt market is extremely strong right now. I'm not saying we'll do anything in particular, but like I said, we're constantly assessing our options.

We'll now take our next question from Amanda Scarnati from Citi. Please go ahead.

Last year, you mentioned a couple of specific product lines that had quantifiable revenue that gave you confidence in your growth. Is there anything on the horizon in 2020 that you can sort of quantify or that we can look to throughout the year to see if these metrics are being met in terms of new product introductions or existing order flow at customers.

Yes, I mean that it's true that several years ago we chose to give a little bit more color around certain product lines but we quickly realized that we don't really have any product line that would amount to more than $30 million to $40 million a year or so given the fact that we have new product line that are really very, very material to a topline performance in the recent past. We have elected not to single out any product platform. That's something that we may choose to do differently and that's certainly a question we are asking ourselves as we start thinking about how to structure our Analyst Day in May. So stay tuned we may have a little bit more details around certain product lines during the Analyst Day but again that's not something that we intend to do today.

And then just in terms of sort of the acquisition pipeline, you mentioned a healthy pipeline of activity. Are you looking more towards smaller acquisitions that would sort of, slow up the product portfolio may be piecing together given opportunities lost with Versum or are you looking for something that could be sort of major and transformative and if that were to be the case, what would be sort of a net leverage that you would be comfortable going to for a larger deal?

So we have a business development team of two to three persons and they are really focused on small to mid-size transactions. I mean those are the transactions that are actually the most actionable and this is also a pipeline that we've been nurturing now for many, many years. So that remains the primary focus of that team.

And Amanda as it relates to leverage, I think we've been pretty consistent that we will be willing for a transformational transaction, push leverage into the 3.75 area up from kind of the current number of around 2.5 and we're comfortable that we can maintain our current rating structure if it's a temporary increase, that's how we would view it.

We'll now take our last question from Krish Sankar of Cowen & Company. Please go ahead.

Bertrand thanks for the color on China and you guys had pretty good growth of 5% the last year. Just a question on that, is this mainly coming from the CapEx side of your business or are you seeing strong unit-driven sales or possibly how will the unit-deal driven sales evolve this year from China given that at least one of the domestic memory customer has an aggressive ramp plan?

Yes. Thank you for asking that clarifying question, obviously I was not clear enough in my first answer, but what I was really describing was the sequential growth, Q3 over - Q4 over Q3 sorry, and if you look at our growth overall for the past four years in China, we have a compounded annual growth rate of 22% and that is mostly unit driven. So again, great performance across all divisions and across all product platforms and in particular really great performance in microcontamination, which is mostly filtration and unit-driven products as well as a number of new chemistries and materials in SCEM.

And then the final question is who is the biggest competitors for Sinmat today?

So Sinmat has a number of competitors, it would be some of the traditional suppliers of abrasive materials.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation, you may now disconnect.