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 open for your questions following the presentation. [Operator Instructions]. I would now like to turn the call over to Bill Seymour, Vice President of Investor Relations. Sir?

Good morning, everyone. Earlier today, we announced the financial results for our first quarter 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 is 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 can find a reconciliation table in today's news release as well as on our IR page of our website at entegris.com. On the call today are Bertrand Loy, our CEO, who is joining us from Taiwan; and Greg Graves, our CFO. With that, I'll hand the call over to Bertrand.

Thank you, Bill. Good morning to all. I would start by saying that I am very pleased with our performance in the first quarter, 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 million, EBITDA margins were 27% and 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. This outperformance was driven in large part by our strong position at the leading edge technology node and also from the impact of easing supply chain constraints, particularly for AMH and MC divisions. 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. First, 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 million run rate cost synergy target by the fourth quarter as originally planned. As you know, debt paydown is also high priority for us and divestitures of non-core assets are a significant lever we can use to reduce our debt. As you've seen so far this year, we have entered into agreements for the sale of two businesses for a total of $835 million. The first divestiture was QED, which was part of CMC. We sold QED for $135 million. That sale closed in Q1. And in April, we use the proceeds to pay down the bridge loan. And yesterday, we announced an agreement to sell the…

Good morning, everyone. And thank you, Bertrand. On to our results for Q1. Our sales in the first quarter were $922 million, down 4% year-over-year on a pro forma basis and down 3% sequentially. Sales were up 42% year-over-year on a reported basis. FX negatively impacted revenue by $18 million year-over-year on a pro forma basis and positively impacted revenue by $12 million sequentially. GAAP gross margin was 43.5% and non-GAAP gross margin was 44.3% in Q1, above our guidance of 43%. 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 million in Q1. This included $184 million of non-GAAP items, specifically $89 million of goodwill impairment related to the sale of the Electronic Chemicals business, $58 million of amortization of intangible assets, $17 million of integration costs, and $21 million of other net costs. Non-GAAP operating expenses in Q1 were $204 million, within our guidance range. We expect GAAP operating expenses to be approximately $262 million to $267 million in Q2 and non-GAAP operating expenses to be approximately $185 million to $190 million in Q2. 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 million and non-GAAP operating income was $205 million. Adjusted EBITDA in Q1 was $252 million or 27.3% of revenue and was above our guidance. Looking below the line, the GAAP tax rate in the quarter was negative as we had a pretax loss. The…

[Operator Instructions]. Our first question will come from Toshiya Hari with Goldman Sachs.

Bertrand, maybe first one for you. I guess a multi-part 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? My second part would be some of the drivers behind the outperformance. You talked about leading edge customers, no transitions and also easing supply constraints. I was hoping you could expand on those two.

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 to unpack my statement. MSI, we expect wafer stocks 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 three months ago. 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 overall annual growth rate of about down in a high-single digit. So we talked about the reasons for that outperformance. 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 aren't changed. And I believe clear to the audience, the need for higher levels of purity is 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. You'll 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 equipment, 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 how we expect the year to play out.

As my follow up, I guess a couple of questions on the cost side. You guys talked about some headcount reductions, some small site closures, you're guiding Q2 OpEx to $185 million to $190 million. As we think about the second half run rate from an OpEx perspective, is the $185 million to $190 million kind of the new base that we should be working with? Or could there be further reductions, given some of the initiatives going on today and perhaps synergies with CMC? And then, specifically on SCEM, margins were up sequentially 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 SCEM for your margins to perhaps normalize higher?

I'll go ahead and take that. So, OpEx, you should think about that $185 million to $190 million as sort of the run rate as we go through the year. If you think about that on a pro forma basis, it's about $10 million higher than where we were last year in the second quarter. But if you unpack that, it's all ER&D. And as Bertrand mentioned, and we're sort of driving with one foot on the gas, one foot on the brake, and we're trying to watch the costs around the SG&A side of the house and the ER&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 SCEM division, as you highlighted, we did have a slight improvement in the operating margins there. I think as we think about the balance of the year, there are a couple of 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, with the exception of those two, I talked about to two pockets where we've got very low volumes relative to historical standards. And those aren't core areas, per se.

Our next question will come from Kieran de Brun with Mizuho Group.

Congratulations on a good quarter. I was wondering, in APS specifically, 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. Your outlook for the consumable portion of the business, like, throughout the remainder of the year and how you how you expect that to trend. You've 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.

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. The other reason we like to talk about it is that our market position in these particular applications is very, very strong, both for slurries 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, 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 will 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. 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.

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

Yeah, you're right. 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 timeline 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. And frankly, I wouldn't miss the opening, 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 the 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, 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. We expect the first shipments to customers, so billable shipments by Q3, but it will be modest. And then the ramp really will take place in 2024. And I would expect to be maybe reaching full capacity sometime into 2025.

Our next question will come from Sidney Ho with Deutsche Bank.

Thanks for the update on the full-year guidance. Do you still expect second half revenue to be slightly skewed toward 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 RAM being a big driver in the second half. Has there been any changes to your expectations about these nodal transitions for 3 nanometers as well as for on the memory side as well?

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 the year. And that's going to be a function of recovery in MSI and also the benefits of some of the node transitions. 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.

Related to the Electronics Chemicals business, can you talk about the financial profile of that business in terms of revenue and profitability? I 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 the Analyst Day the last time? And what about your CapEx outlook going forward?

First 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 present it to you, at the end of last year, we knew that we wanted to divest the EC business. 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 million of cost synergies. When it comes to the financial profile of that business, I would just say that, think about 2022 sales, around $360 million. And think about an EBITDA number between $50 million and $55 million. And again, EBITDA is directional, this is a carve out. But that's the range you should probably have in mind.

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

Our next question will come from Charles Shi with Needham & Company.

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 than MC and AMH to be holding up slightly better. Given that SCEM and APS are more unit driven, the other two are more CapEx driven, so can you help me understand a bit more how to reconcile that – looks like CapEx still holding relatively strong in Q1, but you see a little bit more of the sequential decline in especially MC, but SCEM and APS which are supposed to be more unit driven, probably should have done more, but you're actually doing okay.

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. 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 what I was mentioning earlier which is really the easing of a number of number of supply chain constraint. MC, it's a little bit of a tale of two cities. You have, on the one hand, products that are components used in equipment platforms. And demand for those products, obviously, 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. You 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 it was good timing because of the strong demand for those products. When it comes to SEM 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 the decline is a function of the exposure to memory. Those two divisions, I've seen actually fairly steady decline in demand, starting late last year. We saw continuation of that in Q1, 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.

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

Mainstream certainly has been an area of strength across our portfolio. It was true in Q1. We expect that to continue to be true in Q2. And certainly, one of the reasons we have more 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. 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. And that fab customer business represents roughly 55% of our revenue.

And within that 70% of the fab business levered to logic foundry, how much of that is mature or mainstream side of the logic foundry?

That part gets a bit trickier to quantify because sometimes we don't have perfect visibility, but, I would say, think about 60/40, 60% of that would be advanced, 40% would be mainstream, roughly.

Our next question will come from John Roberts with Credit Suisse.

When you talk about easing of supply chain, I assume you're talking about the US-China trade restrictions that were impactful in the fourth quarter. Had they largely gone away or half gone away or how has been the sequential progression in your solutions to that headwind that you had in the fourth quarter?

The easing of the supply chain constraints really referred to something different. It's really about two things. One 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. And as I said, the situation, we're not entirely out of the woods, but we've made great progress versus where we were last year.

And the US-China technology restrictions are not having an impact at this point?

The impact is something that we quantified the previous quarter's call. We spent a lot of time working with the US administration at the end of Q4 and our Chinese customers collecting certifications from our customers or performing due diligence on their operations. And we quantified the permanent impact, negative impact to our top line to be about $20 million, a loss of $20 million of revenue, permanent loss by quarter. And we saw, actually, about that number impacting mostly SCEM and APS in Q1.

Our next question will come from Aleksey Yefremov with KeyBanc Capital Markets.

Bertrand, do you have any views on node transitions as it relates to your business sort of beyond the back half of this year?

Beyond the back half of this year, what I can tell you is that for this year, we think that those node transitions are largely on schedule. Beyond this year, we don't really like to comment on that. It would be speculative. There's a lot that can change between now and then. 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 node 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 plays to our strength because we believe we can help them. We can help them with 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. It's too early.

On just the current year, should we think about demand for your product broadly as sort of coincidental with fab utilization, or would it be somewhat lagging? Or maybe leading the industry growth, the industry trough?

My answer would differ by division. There's a much stronger correlation to wafer starts with SCEM 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. They are totally expected and understood on our side, but sometimes externally, it's a bit hard to read.

Our next question will come from Chris Kapsch with Loop Capital Markets.

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. Just on the on the result, 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 performance 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 vis-à-vis what may continue to be [indiscernible] language? In other words, it's known that you have more [indiscernible] record wins 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 – a view that that's where the demand will hold in better vis-à-vis maybe some of the legacy nodes or some of the more mature nodes.

Chris, this is exactly what's happening. We're seeing steady Entegris content per wafer increase, node after node. Even when you hear about wafer start reductions in memory, you know that a lot of those reductions are taking place in the lagging node. So at some level, it gives us – it creates additional opportunity for us to continue to push forward and to enjoy greater content per wafer. So, the algorithm that we laid out for you in the last two or three analyst days, it's in full gear and we are seeing the benefits of that. 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. I don't want to be bragging, we're going to 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.

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 – it shows up at 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 die production, even if the yields are low. So, there's a disproportionate benefit to the leading edge consumable supplier when these node transitions happen. Wondering if that dynamic is playing in to the extent that you have visibility to it.

Yes, it is playing in two 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 – 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 chemistries coming into the fabs. And it translates into greater opportunities for more point of filtrations, 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 exact – those are exactly the types of investments we've been making here in Kaohsiung in Taiwan. We are adding capacity to our advanced filters. We're adding capacity to our high purity drums 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 nodes.

Our next question will come from Mike Harrison with Seaport Research Partners.

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?

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 Q2. 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.

On the APS 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 as 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 can be more successful on the pad side.

As I mentioned, actually, we are very excited about emerging opportunities in SiC applications, not just for the slurries, 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, 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.

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. And have a great day. Thank you.

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.