Entegris, Inc. (ENTG) Earnings Call Transcript & Summary

Okay. Great. We'd like to get started. Thank you all for coming. I'm Toshiya Hari, I cover the U.S. semiconductor and semi-cap equipment space at Goldman Sachs. Extremely happy and honor to have Bertrand Loy, President and CEO from Entegris with us here today. I do have a long list of questions. But before I start drilling Bertrand with questions, I'd like hand over to you for prepared remarks.

Good afternoon, everyone. Great pleasure to join you here Toshiya at this convention. Just let me say a few words about Entegris for those of you who are not familiar with the platform. Entegris is a specialty chemical company with revenue of about $1.6 billion in 2019. We are a solution provider to some of the most complex manufacturing processes in the world. Our primary market is the semiconductor industry, and I'm here to tell you that this is actually a pretty good place to be. The semiconductor industry will benefit from a number of very positive secular growth drivers in the years to come. And for Entegris, there will be actually a number of additional trends and factors that will make this particular space particularly attractive and that has to do with the growing importance of new materials and the need for greater purity for the next generations of chips in order to enable the next level of performance that the chip manufacturers are trying to achieve. So all of that will allows us to not only enjoy the higher tide in the semiconductor industry but we expect to be in a position to continue to outperform the industry by 200 to 300 basis point as we have done now for a number of years consecutively. The other thing that makes us different as a supplier to the semiconductor industry is that our business model is very unique, a lot more stable, arguably, than the business model of the equipment makers. A lot of what we do would be consumable products that are recurring in nature. And our solution set is very, very sticky. Finally, the reason why we have greater resilience in our business model is that we don't really have quite the same customer concentration than what you would expect in a traditional supplier to the semiconductor industry. So a good place to be. I think, a very robust business model, greater resilience. And the industry backdrop in 2019 did provide actually a perfect opportunity for us to demonstrate that. So talking about 2019, we're very proud of the quality of our performance and execution. We grew our top line 3% in a down market. The industry contracted about 7%. So how did we manage to set a new record in 2019? Well, we benefited from the positive contributions of a number of acquisitions that we have completed in the previous 12 months. But more importantly, organically, we were able to outpace the market by 400 basis point, capitalizing on the 2 trends I was mentioning earlier, and that is the greater materials intensity and the need for greater purity for all of those process materials and process chemistries. If you look at the bottom line in 2019, I think, we really did a pretty good job at managing the need to achieve short-term results without compromising the required investments for our long-term success. And the net of all of that was an expansion of our EPS by 2%. We had an earnings call just a few weeks ago, and it was an opportunity for me to share with the audience that we are pretty optimistic about what's ahead of us. 2020 should be a good year for the industry and should be even a better year for Entegris. We expect the industry to grow at about 4% year-on-year. And we expect that we will be in a position to outperform the industry once more by 200 to 300 basis point, as we capitalized on a number of new node transitions in logic, foundry and memory. And then final contributing factor to the top line growth of 8% to 10% that we expect to generate this year will come from the benefit of a number of acquisitions that we have completed in the last 12 months. So with that, Toshi, I'm ready for your questions.

Great. Thanks very much for the overview. Bertrand, I guess you touched on this a little bit. But for 2020, on your earnings call, you noted that you expect wafer starts to grow 4% or MSI to grow 4%, CapEx to grow 5%. I'm guessing those numbers have improved over the past couple of months, couple of quarters, perhaps. A, I guess, is that an accurate statement? And B, in which parts of your business do you feel like it's improved the most over the past couple of quarters? Or which customer set or which applications have you seen the most improvement?

So yes, if you think about the underlying assumptions for our guidance of 8% to 10%, there were a few things that moved around. I mean first, I would say that we were very closely monitoring the rate of recovery in the memory space. I mean memory was really what dragged the industry into this downturn last year. So it was important for us to get a better sense of the industry conditions we could expect in 2020. And I would say that we are increasingly optimistic on the NAND front, but we continue to have some concerns about the rate of recovery in DRAM, in particular. Increasingly bullish on advanced logic and advanced foundry, but still uncertain about the rate of recovery in mainstream fabs. So that 4% growth rate is, in fact, a little bit lower than the secular growth rate that we would expect MSI to grow at. For me, the secular growth rate for MSI should be in that 5% to 6% range. So 4% is slightly below that, and it's really a function of maybe some degree of conservatism about the rate of recovery in DRAM and the rate of recovery in mainstream fabs. On the -- and -- so MSI impacts about 70% of our business. 70% of our business will be consumable products, filters and chemistry that are used every day in the production cycles of the semiconductor makers. And then 30% of our business would be CapEx driven. And for the CapEx -- on the CapEx side, again, a mixed picture with, I think, a positive rate of recovery on the WFE front, but probably a more muted level of spending for new fabs, which is actually probably the one part of the business that where we continue to be fairly conservative going into next year.

Okay. That's very helpful. And then I wanted to ask on company-specific drivers, products, specifically. I know no single product for Entegris accounts for more than 2% or 3% of revenue. And you're not particularly keen on pinpointing 1 or 2 products. But to the extent, you do have highlights for 2020 or focus areas as the CEO of the company. Can you kind of talk about those for us?

Sure. I mean, again, the reason why we are able to defy gravity, and we're able to grow faster than the industry year after year is because we have been very successfully able to position our new materials on the technology road map of the advanced memory and advanced logic technology leaders, and we have also been able to provide very compelling filtration solutions to their growing contamination challenges, enabling them to achieve higher yields and enabling them to produce more reliable chips. So if you think about 2020, we believe that this will be another year where we should enjoy some really meaningful node transitions in the foundry world, in particular, but also in advanced NAND later in the year. So that should bode well for deposition materials, that should bode well for our selective edge product solutions. And of course, our filtration platform should continue to benefit from those trends as well.

Okay. Great. For the 70% of your business that's tied to wafer starts and is more recurring in nature, my understanding is that there are 3 drivers: one is, obviously, the number of wafers that are being processed; the second would be the materials intensity; and third would be the level of purification that's required for those steps. The first variable, I think, as outsiders, we have access to data sets and your customers or customers' customers are sometimes very clear with the number of wafers that they're being -- that they're processing, but variables number two and three, there isn't much information out there. So I was hoping you could help us by kind of quantifying how impactful those drivers are for your business? Maybe looking back but also, more importantly, going forward, how important are those 2 drivers for your business?

Yes. So that -- the way you peel the onion is one way to do that. I think there are 3 probably even more layers on what you have. The first one, as you said, would be just number of wafer starts. The second one would be the growing number of process steps at the advanced nodes. The third one would be how many wafers are really produced at those advanced nodes, and that picture continues to evolve with more and more wafers being produced at what is today considered leading. And then you have -- to your point, you have the fact that a lot of the technology leaders have to migrate to highly engineered materials and process solutions. So moving away from commodity materials. So we have actually some pricing advantage as we position some new molecules on the road map. And then the fifth one would be the need to achieve greater purity as well. So you're right that the first 3, you have market data, and last 2, you don't. And so I'll try to maybe provide few examples to answer your question. But if you think about 3D NAND, in particular, the big challenge for the industry has been the aspect ratios of those structures. And with that comes a lot of potential opportunities for a supplier like us, opportunities around new materials that could be deposited on the surface of the wafer in thinner films with better electrical properties, allowing actually the stacking of more layers. And I want to believe that collectively, as we collaborate with the leading-edge memory makers, we will be able to add more than 128 layers and maybe go all the way up to 200 layers without having to stack wafers on top of one another because of the introduction of new materials. So I hope we can enable that. We're certainly collaborating very closely with the industry to make it a reality, and that's exciting. Similarly, those very high aspect ratios require different type of etching materials, and we have developed some very unique solutions to accomplish that, to preserve the uniformity of the etching up and down the trenches and the holes in the structure. And again, that's going to create very significant opportunities for us on a per wafer basis. So that's for the materials intensity. And then when it comes to the need for greater purity, what I need you to understand is that the way you achieve those higher levels of purity is not just by adding more advanced filters in the fab environment. The way you achieve that is, of course, by adding more advanced filters in the fabs, but you also need, in fact, to introduce more points of filtration deeper into your supply chain, upstream into your ecosystem. And all of those situation points will have to use more advanced filters, and you will have to actually increase the frequency of replacements of those filters. So what I'm describing to you here is really the conditions for our SAM to explode, and that's really what we see now at the number of node transitions. And then, of course, ultimately, I think that we have been as a company able to execute really, really well. And we've been able to also pick up some market share in the process. So that's really -- those are the various components behind our growth formula, if you want.

Okay. Thank you for the clarification. Shifting gears a little bit. The coronavirus is obviously top of mind. I think my understanding is that Entegris, you guys embedded some risk into your guidance. But I guess, what are you seeing as the CEO of the company in terms of potential supply chain disruptions, changes to demand signals from customers? Has any of those kind of materialized at this point? And if you can kind of help us maybe quantify how much risk do you think is in your business in the March quarter, that would be helpful.

So -- no, I won't give you a quantification, but it's true that we opened up the bottom end of the guidance to take into account some of the risk that we see short term. We -- and I'm not going to speculate about potential impact on the very end demand, I don't have really enough visibility to that. I would be speculating like everybody else in this room. What I can -- what I can talk about is of the things that we have clear visibility to, and that would be our supply chain, that would be our operations, and that would be our customers. So if you look at our supply chain sort of right now, there are really no significant pain points to speak of. That's something that we're watching really, really carefully. We have daily reports. We have a couple of area where there is some level of risk, but it's being managed. And again, I don't think it will amount to much in the end, assuming operations are resumed in next week or 2, which like it would will be the case. Our operations in China consists of partnerships, and then fully operated or fully owned filtration company that we acquired in Q4 of last year. Our partnerships are all up and running already today and supplying our local customers. The operation we acquired in Q4 is shut down, that operation is in Hangzhou, and it is in a locked down area, very much like Hubei, but we expect to actually resume production on Monday. We have the permit to do that, and we're just getting ready to just make sure we can do that while guaranteeing safety of our employees has we do that. When it comes to our customers, we have some customers shut down. Those are mostly the display customers around Wuhan. But believe it or not, most of our semiconductor customers are actually up and running, even the ones in the Hubei area. So it's slow, certainly, and that's what we try to take into account in our guidance for Q1, but the business is still active.

Okay. Sticking to the topic of China. You recently opened a technology center in Shanghai. You talked about Anow acquisition. Clearly, you're committed to the region. Can you talk a little bit about the growth potential that you see in that region on a 3- to 5-year view?

So China has been a growing and very vibrant part of our strategy today. China represents about 15% of our revenue. We've been growing at about 22-plus percent for the last 4, 5 years. And frankly, we expect that to continue. We expect that to continue simply because when you think about what the Chinese semiconductor manufacturers are trying to do, they're really trying to catch up in terms of developing their own process technology, and their best bet to accomplish that is to rely on the best equipment solutions, the best material solutions, the best filtration solutions. So when it comes to us, we have actually a really, really exciting market share in China. And I would expect that to continue because as of today, there are really no domestic alternatives in China. So that's why we are very much committed to investing what it takes to support our domestic customers, and not just domestic, but our customers in China, and that's why we made the investment in a tech center, and that's what we're going to continue to also, in a very controlled way and selective way, continue to manufacture more in China.

Got it. I guess given the geopolitical backdrop, investors generally are increasingly concerned about potential export restrictions or other restrictions that may prevent the broader semiconductor industry in the U.S. from shipping to China. As the CEO of Entegris, and you also sit on the Board of SEMI, what's sort of a nature of conversations that you're having with the government today? How has that evolved? Is it changing at all? If you can -- to the extent possible, are you comfortable? What does it like in terms of conversations with the government?

Yes. So I have the honor of being the Chairman of the SEMI Association, which is the global association representing the interest of the electronic supply chain. So materials companies, equipment companies and as such, I've been very involved in setting the tone around the position statements that the association has been making. And because we are a global association, it was very important for us to, first of all, as an association, to agree on some core principles that we all believe in, and we established that memorandum around [Technical Difficulty] of IT, importance of free trade, free movement of goods. And I would tell you that those discussions with the Japanese and the Korean governments back in the fall, proved to be very, very effective. I mean we had very extensive discussions, expecting them to potential collateral damages that may take place if there would be some further escalation of the tension between the 2 countries. And I think that the role of the association was actually very effective in that context. I don't think that we've been as successful with Washington, but we're going to continue to try. And we've been trying to educate the U.S. Government about the importance of the semiconductor industry as really being the bloodline of the modern economies. We've been also spending a lot of time describing the complexity of the modern supply chains, upon which this industry strive. And we've also spent a lot of time explaining that the semiconductor industry in the U.S. is actually one that is extremely successful. I mean if you think about materials companies, U.S. materials companies, U.S. equipment makers, we have collectively about 40% of the materials and equipment market. We collectively and our extended supply chains provide jobs to 350,000 employees in the U.S. And we are a great contributor to the exports out of the U.S. Actually, we have a trade surplus, a very significant trade surplus. We export -- as an industry, 80% of what we make in the U.S. is exported. So of course, this is an industry that is very, very focused on all of the export restrictions that could actually get in the way. So I hope, again, that reason will prevail, ultimately. If not, then I think that the industry will have to take measure to alter its business model. And I think that all of the participants are actually currently in the process of assessing, if we need to change, where we develop our IP? If we need to change, where we manufacture in order to be able to operate should the world order change? So none of us want to have to do that, but that may actually be in the end state.

And I guess, based on your recent conversations with the government, does it feel like they have a better appreciation of your viewpoint? Or is that something that you can -- do you feel like things are better now? Or is it less understood?

I don't think I have the perfect visibility to that. I think that we are all encouraged, obviously, with the recent progress on the U.S.-China front. And I hope that this is a good positive indication of future things to come, but I will leave it at that.

Okay. Got it. Shifting gears a little bit. On the competitive landscape, as an outsider, it's always a little tricky in trying to gauging who, who you're competing with and what product area because it feels like you either compete with a small business embedded in a very large conglomerate or a small startup that's perhaps private? I mean I guess that's one of your competitive moat because you have scale and you're broad and so on and so forth. But if you can kind of speak to the additional parts of your business that kind of construct that competitive moat, that would be helpful.