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

Thank very much for joining us for our Annual Technology and Internet Conference. I'm Toshiya Hari. I cover the semiconductor and semiconductor capital equipment space here at Goldman Sachs. We're very excited and very honored to have Bertrand Loy, President and CEO of Entegris with us this morning. The fireside chat will be about 40 minutes in length. Bertrand will kick us off with opening remarks, I'll follow with a list of questions, but we'll also take questions from you all through the webcast. With that, Bertrand, thank you so much for attending and supporting the conference. It's always great to see you, albeit virtually. The floor is yours.

Thank you, Toshiya. Good morning, everyone, and thank you again for the opportunity to join you at the Goldman Sachs tech conference, albeit virtually. Just a word on Entegris first before we open the floor for questions. But in a nutshell, Entegris is the leading supplier of process solutions designed to help our customers improve the performance of their products and improve their manufacturing yields. The solutions that we develop come in many different forms. They can be advanced materials, they can be high precision filters and they can be advanced materials handling solutions. The focus of Entegris historically has been the semiconductor industry, where the process challenges are the most complex in the world, and therefore, where we can create the most value, not only for our customers, but also for our shareholders. The business model of Entegris, I would argue, is pretty unique in the industry. We have a very broad product offering. We serve a very broad array of customers. We sell not only consumable products to our fab customers, but we sell across the industry ecosystem. We sell high-purity filters and hydrated packaging solutions to chemical suppliers and we sell high-value components to the equipment makers. So our solutions are very sticky. There are high switching costs and that's why our business model is actually very resilient and very stable. We operate an Entegris at the crossroad of materials and material security and our value proposition is unmatched in the industry and not only that, but our value proposition is increasingly important to the industry. The best way to think about it is that new materials, to a great extent, defines chip performance and the purity levels that you achieve in your manufacturing process in semiconductor manufacturing defines the process yields so because of the growing importance of what we do, we have been able to outpace the industry organically over the past 5 years, and we expect to be in a position to continue to do that. During our recent Analyst Day, we guided to an average growth rate of about 9% to 10% over the next 3 years and in our recent earnings call, we guided for 2021 to an organic growth rate slightly in excess of that. The final thought is I want to leave you with is that as a management team, we are not only focused on top line growth, we are also very focused on optimizing our bottom line, and we have demonstrated, over the past years, all of the leverage that exist in our business model, and we certainly intend to continue to deliver improving bottom line in the years to come as we continue to grow our top line. With that, Toshiya, I'll turn the floor back to you for questions.

Bertrand, thank you very much for the introduction and the overview. I guess kicking off with the 2021 outlook that you alluded to, you guided your business to grow in the 11% to 13% range for 2021. I believe the market backdrop that you're assuming is growth of 7% to 8%. So to your point, again, another year of very solid outperformance that you're guiding to. Can you remind us -- and to level-set the audience, can you remind us how you're thinking about your wafer start business, the market and also the CapEx business? And as you sort of think about the range of outcomes for the full year, what are some of the key swing factors that could fluctuate your business to the upside or the downside?

So before I provide color on the industry assumptions, remember that the primary driver for our business would be wafer starts. I mean they influenced about 70% of our revenue, so all of the consumable products that we supply to our fab customers. And then 30% of our business would be components that we sell to the equipment makers or systems and solutions we sell when new fabs are being built, so 30% of our business will be defined by the level of CapEx in the industry. So in that context, I mean, with that as a backdrop. We expect, in 2021, MSI, which is a proxy for wafer starts, to be up 6% to 7%, and we expect the industry CapEx to be up 10% to 15%. So our guidance of 11% to 13% implies an outperformance of 400 to 500 basis points over the industry. So when we provide annual guidance early in the year, we try to strike a balance across a wide range of scenario. So in other words, internally, we debate the likelihood of different assumptions and the potential impact of external factors. So in 2021, in particular, we spent a lot of time discussing the potential impact of the U.S. administration may have on the U.S.-China tension and how it could impact the industry, in general, and Entegris, in particular. But we, more importantly, spend a lot of time reviewing the planned node transitions that our customers have been talking about going into 2021 and what those node transitions could mean for Entegris. And because we are early in the year, we try to take the kind of the middle-of-the-road approach and especially when we factor the impact that we expect from those node transitions simply because we know from experience that things change and that customers may experience some delay as they transition to those new nodes. So to the question -- to the part of your question about what drives upside or downside, I would say that the underlying industry trend may vary from the starting assumption. And then the other thing that could actually change is the timing and the success of the node transitions. And so we will, obviously, update you as we proceed through the year, and as we gain some more visibility to those transitions and how it would impact Entegris.

Thank you. Supply constraints, Bertrand, is top of mind for many of the investors in the audience and your customers and customers' customers. I feel like we wake up every day to read some sort of headline about automotive OEM, A or B, not being able to produce because of component shortages. Are there any pain points in your supply chain today and because of all of this, have you seen any odd or peculiar order patterns on the part of your customers?

So we've been tracking COVID-related supply concerns very, very closely, as we did obviously throughout last year. And there are a few pain points that are fairly isolated and under control, so nothing really concerning. So the situation, I would say, is pretty stable for us today. I don't see any systemic constraint in terms of supply, so no real concern there. On the demand front, we did see some of our customers build safety stocks last year in 2020. We mentioned that it probably represented about 1% of our top line last year, a little bit less than that. So think about $10 million to $15 million, largely linked to our China business, as some of our Chinese customers were trying to protect against potential sanctions, U.S. sanctions. So going into 2021, we expect some level of destocking in China throughout the year. It is factored into our annual guidance. So the 11% to 13% is taking this scenario into consideration. But we don't expect -- we don't -- we are not seeing any new buy-aheads from our customers. I mean you should know that for our large customers, we usually offer consignment inventory arrangements and facilities. So in other words, title is not transferred until those customers use our products. So again, I think that the very high levels of backlogs and the booking velocity that we are seeing as we enter the year are, I think, really a function of high fab utilization rates and some of our customers preparing for node transition. So I would say it's a healthy picture, at least this is how we understand it at this point.

Understood. Bertrand, on customer node transitions, as you noted in your opening remarks and as you've been consistently messaging to the market, it's a very important driver for Entegris, listening to your customers, the suppliers, whether it be logic, foundry, DRAM and NAND, they all have very aggressive targets when it comes to node transitions. When you think about how those impact your business, where are the biggest opportunities, call it, over the next couple of years?

So I mean, first, just maybe a little bit of background on what those node transitions means for customers, right? I mean they are very important, obviously, because those road maps, those technology road maps, offer a way for our customers to differentiate from their competitors. They're trying to achieve higher performance for their chipsets, lower cost and higher reliability. So that's really how you should think about those technology road maps. They are a means to an end. The good news today is that all of the semiconductor-leading manufacturers are really well capitalized. They are financially sound and that means that they can really afford those very aggressive road maps, as you said, Toshiya, because they are very ambitious and very challenging indeed. And when you are a semiconductor manufacturer with a very aggressive road map, you're trying to derisk it. And the way to do that is by very carefully selecting the partners, the suppliers that you want to collaborate with in order to enable your road map. And I think that Entegris has demonstrated that they have -- we have a lot to contribute to those road maps. Historically, it was mostly the case in advanced logic and foundry because those road maps were significantly more aggressive and ambitious than memory, but things have changed and are changing very rapidly in memory as well. I mean they are all migrating in memory to taller architectures, smaller features and acceptable yields are much harder to reach in this context in memory and this is why our value proposition is becoming increasingly important for them. And I think we commented that last year, our memory segment grew 30% year-on-year, so meaningfully above the corporate average. And I think it's a proof point to the claim that we make that -- the Entegris content per wafer on a relative basis. It's going to be growing faster in memory than it will in logic simply because the memory road maps are just becoming increasingly challenging and are in need of our value proposition more so than in the past.

And as a follow-up to that, Bertrand, again, you mentioned that your memory business grew 30% last year. I'm guessing your NAND business relative to your DRAM business grew a little faster given the node transitions there. Based on what you know, in terms of your customer road maps and how you can contribute to those road maps, whether it be deposition materials or specialty coatings or filtration or what have you, do you think the growth rate in your NAND business going forward, could that accelerate further or should we expect growth rates to remain kind of in the ballpark where they are today?

Yes. So I think during the Analyst Day, we used the example of the growth we expect in terms of Entegris content as the NAND architectures migrate from 64 layers to 256 layers and we believe that the opportunity will grow by a factor of 3x, so obviously, we expect significant growth there. Now in terms of how will you see that externally, it's a difficult question to answer. I mean, obviously, we are looking at it on a customer-by-customer basis, and we will see step function increases. But because of the variety of the solutions that we are offering and because of the number of customers that we are serving, I think that you will most likely see a more gradual increase in the growth rate. I mean remember that we are not an equipment company. We sell a lot of small quantities of high-value consumables and for us, a blockbuster platform is at scale a product platform of $50 million to $100 million on average.

Got it. Thank you. Shifting gears, a little bit. I wanted to ask you about EUV. A few years ago or several years ago, there were some concerns about EUV coming in and potentially having a negative impact on your business. Your view and the market's view on that has evolved since and at this point, I think, it's a net-net positive for Entegris as EUV proliferates across your customers. At this point, it's primarily a leading-edge of foundry/logic phenomenon. Going forward, I think there are expectations that the leading-edge DRAM companies may introduce EUV. Based on what you know and what you hear, Bertrand, how do you see EUV evolving over the next, say, couple of years and how do you see that impacting your business?

Yes. So I think you're right in your comment, Toshiya. The EUV technology is being adopted by the industry and, frankly, I think the pace of production is picking up. And this is great news, great news for the industry and great news for us because it will open up a number of new opportunities. If you think about EUV, it means that the industry will now be able to migrate to smaller features. And that's true in logic, that's true in DRAM, as you were mentioning and those smaller features will be more susceptible to contaminants. So that's really the context in which you should understand the comment I'm about to make, which is that at Entegris, we really offer a broad range of contamination control solutions to lower defectivity at those very advanced nodes when features are getting smaller. So we have a broad array of solutions that we offer in these advanced EUV lithography processes. Examples would be Airborne Molecular Contamination filters for the scanners or around the scanners. We offer photoresist filters. We offer high-purity containers for these advanced EUV resists and then a broad array of microenvironment solutions for the library of mass. So it's just -- those are just examples of what we do to help the lithography process. If you just think about it conceptually at very high level, I would say that EUV litho enables miniaturization by creating the physical patterns on the surface of the wafer and Entegris -- in fact, we, at Entegris, we enable miniaturization by enabling the required purity levels for the process to yield. And obviously, yield optimization is increasingly challenging as the road maps continue to progress.

Thank you. Your business in China, Bertrand, grew, I think, 15% in 2020, which I believe is largely in line with the overall business. For context, what portion of your business in China today is tied with more of the multinationals like TSMC and Samsung and what portion of your business is tied to the native Chinese customers? And you noted that the geopolitical tensions drove some pull-in in demand toward the end of late 2020. But how are you thinking about your China business in 2021?

Yes. So about half of our business in China comes from local Chinese customers and the other half would be sales to foreign participants operating fabs in China. So as I mentioned in my prepared remarks, I think that the U.S.-China tensions have been a little bit of a roller coaster for the industry and the ecosystem and for us, at Entegris. But fortunately, so far, the impact of these tensions have been immaterial to our business. It just added complexity to ensure that we comply with the new rulings. And it added some delays to some shipments as we await for proper export licenses for our U.S.-made products. But again, as I said in the recent earnings call, we -- given the nature of what we do, given the end use of our products, we certainly expect those licenses to be granted. But of course, we won't know until we get the formal approval. So like everybody else in the space, I think we are kind of in a bit of a wait-and-see mode. I think right now, we don't expect much growth in 2021 for the China business. But we are actually also very much focused on finding ways to tilt our business model so that our Chinese customers could continue to view us as a viable supplier. So in that context, we are looking at various options in terms of potentially increasing our manufacturing footprint in the Asia Pacific region but also leverage a recent acquisition that we made in China, Anow, that could potentially provide an option for us to manufacture some of our products in China, which is something that we have not done up until now. So again, as most industry participants, we're trying to understand what the new U.S. administration will bring, and then we will adjust our long-term plans accordingly. But on 2021, we expect fairly muted growth in China.

Bertrand, as a quick follow-up, just on sort of the broader big picture strategy in China, you just spoke to perhaps being a little bit more flexible and perhaps a little bit more creative and how you address demand in China. But when you think about China as a region and your long-term strategy, has anything changed given the geopolitical tensions or are you still kind of going full throttle as it relates to addressing demand in China?

I think we're still going full throttle, Toshiya. This is probably the way I would answer it with only to caveat of the compliance requirement, right? So we are, obviously, very focused first and foremost on complying with the new rulings. But beyond that, our commitment to the region and our commitment to the Chinese ecosystem remains the same as before.

Understood. Kind of related to that, I think there's an increase in trend toward a localization of semiconductor manufacturing. We all know of the Arizona fab with TSMC. I think there have been media reports of about one large Korean memory manufacturer potentially building a fab in Texas. I think there have been media reports about TSMC working with the Japanese government to build assembly and test plant or operation in Japan. I think Entegris is one of the few semiconductor materials companies that truly operates on a global basis. You've got manufacturing in the U.S. and China and Taiwan and Japan, Southeast Asia. Could this trend be a positive catalyst for you guys to gain further share or do you not necessarily think so?