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

Okay. I think we're live. Good morning, everyone. Thank you so much for joining us. My name is Toshiya Hari. I cover the semiconductor space at Goldman Sachs. Very excited, very delighted to have Bertrand Loy, President, CEO and the Chair of the Board from Entegris with us this morning. I do have a list of questions, but I think Bertrand, you wanted to kick off with some opening remarks.

Well, Toshiya, thank you first for having me. I think, just looking at your notes here. I know you have a lot of questions. So I'm not sure I need to maybe do a very, very long introduction, just to say that Entegris has emerged as the leading electronics materials company, just to size the company, we reported our Q2 results recently with the revenue just short -- in excess of $900 million, an EBITDA of close to 27% of revenue. We obviously are very focused on integrating the CMC Materials platform, which we acquired about a year ago, I'm sure you will have many questions around that, Toshiya, so I'm not going to elaborate too much. And this downturn, this industry downturn that we've been facing at some level has been a blessing in disguise when it comes to executing on the integration activity and really positioning the company for future growth. So I'll stop here and let you fire away your questions, Toshiya.

Right. Yes. Thanks, Bertrand. So before we dive into some of the market questions and business questions specific to Entegris. I wanted to start off at the high level. As a CEO of the company, Bertrand, obviously, you're pulled into all sorts of directions, but what are some of your top priorities as you think about your business for the next 12, 18 months? And how are you spending your time?

Yes. So there are a number of different priorities for us right now. I mean, obviously, it's about really managing the short-term with keeping an eye on the long-term prospects for the industry and for Entegris. And I think that we've done well, managing those competing priorities. So at 1 level this year, what we want to demonstrate to all of you is that Entegris has a very resilient business model. You are all aware of that we've been able to sustain a very compelling level of growth well in excess of the industry for the past many years when the industry was in full upswing. I know that many of you had questions about whether we could deliver similar levels of outperformance in a downturn. And I think we're in the process of proving that point this year. On the top line, on the bottom line, as I was saying, close to 27% EBITDA in a year where there's still a lot of inefficiencies related to the integration of CMC Materials, in particular. So that's one big priority for us. Another big priority coming with the CMC acquisition was the commitment that we made to delever the balance sheet very rapidly. We set a very aggressive objective of being at 3.5x gross leverage by the end of 2024. A big component of that has been a number of divestitures that we have announced, and we are obviously very busy completing those transactions, getting the regulatory approvals, et cetera, et cetera, but very intense focus on that. And then the third part is really getting ready for the future, right? At some point, this industry will resume growth and will ramp again. And now is the perfect time to be ready for that. And what I mean by that is being very actively engaging with our customers finding ways to help them accelerate their roadmaps. Another area of focus is also qualifying our new manufacturing center in Taiwan. We made a big investment in Taiwan, in Kaohsiung. And there's no better time than a downturn to really get your customers to qualify those new manufacturing lines so that we are ready for the ramp in Taiwan and on a global basis next year.

That's great. Thank you. Maybe one question on the market. I think you expressed your view on the most recent earnings call, but how are you thinking about the CapEx environment? How are you thinking about the wafer start environment? And for the latter, for the wafer starts, if you can differentiate between DRAM, NAND, leading-edge logic foundry and trailing edge, that would be helpful.

Yes. So let's start with CapEx, which is the smallest part of our business, 20% of our revenue will be driven by the level of industry CapEx. We don't expect, really, any recovery for the balance of the year. That's really what we indicated on our recent call. And again, as I said, about 20% of our revenue is driven by the industry CapEx. The more important part for us to keep an eye on would be wafer starts. Our -- most of our revenue are unit-driven, they are consumable products that are used in the daily production cycles of the semiconductor fabs. And there, the picture is contrasted. We are seeing some signs of lives in advanced logic, and we expect this part of our business to do better in the second half of the year. We're also expecting to see some improvement in DRAM. But that has to be contrasted with continued pressure in 3D NAND, in particular, as well as certain parts of mainstream, mainstream being the trailing edge-type customers that we serve as well. So that's why if I want to summarize what we expect from an industry standpoint, I think that the second part of the year is not going to be very, very exciting from an industry standpoint.

Got it. That's helpful. And then shifting gears a little bit and talking about sources of outperformance. As you pointed out, you've consistently outperformed your markets during upturns and now during this downturn. I think your current full year revenue guide implies about 6 to 7 percentage points of outperformance. And I know the sources are broad in nature, right? You don't focus on 1 or 2 things. But if you were to highlight a couple of technology transitions or market share expansion opportunities. What would they be? What are you most excited about?

Yes. So first of all, 4 divisions, we have 4 divisions. All 4 divisions are expected to outpace the industry in different ways. But the areas where we see the most compelling growth will be microcontamination. We are seeing a constant push for miniaturization in this industry, a greater focus on not just the yield optimization, but also focus on achieving better long-term reliability for the chips, right? I mean, when you hear semiconductor manufacturers talking about the growing importance of semiconductors in the automotive bill of materials. Well, that translates into not just requirements for faster compute and power efficiency, but also long-term reliability, and we've been able to correlate long-term reliability of the chip with the absence of latent defects created by very, very small contaminants. So we are seeing increased demand for advanced filters, both in advanced semiconductor manufacturing but also in trailing edge semiconductor manufacturing, in order to achieve those higher reliability levels. So that is obviously very visible in the results of our microcontamination division. Another bright spot for us this year will be power electronics. We are seeing obviously significant investments in SiC fabs. We are very involved in providing the right level of polishing for the substrates. And we are seeing that part of the business growing very rapidly. It's still small today, but it's been doubling pretty much every year now for the last several years, and we expect that to continue in the foreseeable future. So again, a few bright spots in a sea of fairly depressed news from an industry standpoint.

Got it. And as a quick follow-up, I think in your long-term financial model, you're assuming 3 to 6 percentage points of outperformance. And this is on a 3 cycle basis. Some years, you'll be better, some years perhaps not. But given your recent track record over the past couple of years, I feel like you've consistently outperformed the upper end of that. Is 3% to 6% still the right outperformance range in your view? Obviously, you're probably not going to update us here, but any thoughts on that?

Yes. Well, I know you like to push us, Toshiya, and I appreciate the encouragement here. It's true that if you look at the last 3, 4, 5 years, actually, we've done consistently more than that. But I don't want to get carried away, right? I think that -- I mean, the way, first of all, we have been having enough conviction to commit to that 3 to 6 points of outperformance, is really looking at our pipeline of opportunity, risk adjusting it -- and then, again, seeing a path to this steady outperformance for the next 3 to 5 years, right? So it's essentially defying gravitational forces for many, many years. And implied in my comment when I said that we are risk adjusting the pipeline, it means that if everything goes well, yes, there's a pathway for us to do more than that. But we know from experience that we don't control everything. We don't control exactly the timing of adoption of a particular new material or a particular new solution that we're developing for our customers. We don't control sometimes the commercial success of their own chipset. So again, it's easy to get carried away, but I think we wanted to maintain a little bit of cushion so that if things don't go perfectly right, we're still going to be within the commitment that we're making to you. Because at the end of the day, we take those commitments very seriously, and so 3 to 6, of course, we'll try to do better than that. But 3% to 6% is a good proxy for what you can expect from Entegris.

Got it. Given the increase in process complexity and given the critical role you play and your customers achieving some of their important targets from a purity perspective, I know you're being pulled into customer projects earlier than perhaps previously. Can you sort of share maybe some anecdotes where you are seeing that? And dry resist might be a good example for you to touch on?

Well, I think broadly, if you look at the semiconductor industry, the reason we are excited for the future is that the roadmaps of our customers are becoming increasingly ambitious, increasingly complex. And that complexity is really the source of the opportunities that will fuel that outperformance, right? So how do we define complexity? Well, complexity is a function of the types of architectures that our customers are trying to enable. It's a function of the number of process steps required to enable those architectures. And finally, it's also the desire to push for more miniaturization. So the compounding effect of all of those forces create the need for our customers to move away from the traditional materials that they've been using and to migrate to new materials with better electrical properties. Those materials typically are harder to handle. They are less stable. They're more expensive. So it requires all sorts of solutions to be able to deposit those materials with the right cost of ownership. And then again, with the push for further miniaturization, there's a constant fight to get to acceptable yields. And a lot of that is really enabled by higher levels of purity. And Entegris is uniquely positioned to -- is core to our customers through their journey, right? We are the only company in the world having both leadership position in material science and leadership position in contamination control. And the combination of those capabilities makes Entegris is very, very unique. And that's on that basis that we get invited to contribute to their roadmaps more often than before and earlier than before. It's -- again, it's a question of the value that our customers see in our offering, it's also a virtuous cycle, right? I mean, the more value you contribute, the more trust you build with your customers, the more they will open up to you, in terms of things that you are known for. And in some cases, like in the case of dry resist, sometimes their traditional suppliers are not able to develop what they're looking for and they come to us because they know that we have some of the best material scientists in the industry. And then usually when we make a commitment to develop solutions, we will do everything to do that within a very, very short timeframe. So that's another way we've been able to sustain the level of growth outperformance is not just improving on the known platforms, platforms known to you, but also adding new slivers, if I could call them that way of addressable markets, new applications that historically we have not been serving.

And the dry resist case, not only are you partnering with your customers, but you're also partnering with an OEM -- an equipment OEM as well, right? So...

It's actually, mostly always the case, right? I mean, materials need a tool, a piece of equipment to be deposited on the wafer and the level of precision expected by our customers are such that a lot of the joint developments are really done in the 3-way agreements, including the end user, an equipment maker and us.

Got it. That makes sense. In terms of all the potential technology inflections, I think gate-all-around and backside power are 2 that come up very frequently in our conversations with people like ourselves, with investors. From your vantage point, where are your customers in that transition? And what do you enable and what sort of the opportunity set for Entegris?

Yes, I think it's a good example of the types of complexity we're seeing on the roadmap. So you're calling out specifically the logic roadmap, but we're seeing similar types of exciting opportunities with the multilayer architecture in 3D NAND, et cetera. But to stay with your question, on the backside power delivery, I mean, the rail will be buried and will be expected to withstand very high temperature copper as a material won't be able to withstand the types of temperature. So the industry will need to move to a different material, which material remains to be seen. It could be tungsten, it could be molybdenum, it could be ruthenium. But that will open up a number of opportunities for us, opportunities in terms of -- if it's tungsten, its opportunity in terms of slurries, in terms of post-CMP cleaning, if it's molybdenum, the same would be true, but the opportunity could extend to the deposition material itself. So again, the architectures are still being finalized but it's coming at us really quickly, I think, within a year or so. I think all of those process recipes will be finalized. And then as you probably know, I think there will be also some wafer thinning requirement, which will be accomplished by the traditional wafer grinding, but also will most likely require some CMP polishing, so opening up new opportunities for us, opportunities with the true silicon buyers, the diameters of those [ TSVs ] are becoming smaller. So there again, the material of choice will evolve, opening up new opportunities and so on and so on. So if you think about Entegris, we are really providing a lot of small, highly engineered solutions, right? So sometimes that's what makes our story hard to follow is that we don't have a big product platform that will generate hundreds of millions of dollars. We are extremely good at identifying small niches, small needs by our customers, and we are willing to deploy R&D resources to, again, enable those very precise point solutions. But that's really what makes our products so sticky, right? We are very much embedded into the process recipes of our customers. It's true for our materials. It's true for our chemistries. It's true for filters. It's true for the 50,000 products that we develop and sell to our customers.

Got it. That's helpful. Shifting gears a little bit. I think it's been a little more than a year since you closed the CMC acquisition. I think it's the first transformational deal for you since ATMI. Can you describe to the audience what kind of progress you've made in terms of the integration? Any surprises, positive or negative? And what's still on your to-do list as it pertains to the integration process and delivering on the synergy targets and so on and so forth?

Yes, it's right about a year since we closed.

Time flies.

It's -- yes, indeed, but it's been great. It's been really good. So we have 3 major work streams, if I can call them that way. I mean, the first one would be about systems and processes and integrating 2 companies into one, and we're making fast progress. I'll come back to that. The second work stream is really about improving the balance sheet and [ twirling ] us on the path to delever to 3.5x gross leverage by the end of '24. And then the third one is really getting ready for the future, reignite growth within the CMC platform. And there, again, we're making progress. So on the first one, we actually completed the ERP migrations. And CMC Materials was actually never fully integrated. So they had fixed ERP platforms. That's not our philosophy. Our philosophy is to run our global business on one SAP platform, common processes, common systems, not just for SAP, but for our stage-gate process that we use to manage innovation at Entegris. So we've been completing all of those steps literally a few weeks ago. So we are in a position now to finalize the legal entity consolidation, which will be the final key to unlock the $75 million of savings that we have committed to. Completing the legal entity consolidation, by the way, will have another benefit, which is we're going to be able to fold the CMC Materials into our business model, and that's going to have some good positive effect from a tax planning standpoint, and you're starting to see some evidence of that as well in our recent results. So going well, that's the first work stream. I couldn't go into a lot of details. But second work stream is really around deleveraging the balance sheet. Key to that has been a number of divestitures that we have announced. And there again, we're making a lot of progress. So the last 2 for us to do, one is closing the sale of the Electronic Chemicals business to Fujifilm. We are well on our way to collect all of the required regulatory approvals. I still hope to close that deal before the end of the year. And with that, will come $700 million of proceeds. And there's another piece of the CMC platform that we have earmarked for divestiture that the drag-reducing agents or the oil and gas business of CMC Materials. I don't have any specific updates that I'm ready to share with you, but just want to say that that's another piece that we expect to sell. So essentially, give or take about $1 billion worth of proceeds that we expect to collect within the next several months. And then the final work stream, which is really the most exciting part of it is the revenue synergies and really starting to reignite the growth mindset within the CMC platform and actually, the positive surprise if there was any, is that the organization is responding really, really well. I think CMC is very excited about the way we think about innovation, the way we manage our pipeline, the willingness to invest in R&D at a level that CMC historically was not willing or able to do. And so a lot of time spent with customers, again, understanding areas and their roadmaps where we could contribute new value and committing new development work with those customers. So again, I cannot talk too much about that at this point, but I like what I'm seeing. And most of all, I like the way the heritage CMC team is reacting to those new objectives.

So Bertrand, based on what you said, is it fair to say that the 2025 and 2028 revenue synergy targets that you had presented at the Analyst Day, you're still very comfortable with those targets?

Yes.

Okay. Got it. The competitive landscape, I wanted to ask about, and I think this is sort of an underappreciated part of the story where you, in most cases, either compete with a business unit within a large conglomerate that lacks focus or a very small scale company or business that lacks the financial resources to compete with you. And I guess we all need to be careful with what we wish for. But during downturns, there are opportunities where potentially competitors underinvest in the business and you guys continue to invest and you gain share. Is that something that you feel like is happening or is on to come? Is there an opportunity for you to gain share across your businesses?

Yes. I mean, we have been gaining share, and we expect to continue to do so. And you're right in characterizing the competitive landscape. We compete with very different types of competitors. On the one hand, you would see business units or very large chemical platforms. On the other extreme, you would see small regional competitors. And our strength is that, I think that when compared to business units of large chemical companies, we are -- we have a much greater level of focus on the customer, a much greater application knowledge, the speed that our larger industrial competitors don't have. We are also willing to do a lot of customization. As I was mentioning earlier, a big product platform for us is $50 million or more, and we don't have that many of those. And this type of business model doesn't really fit very well with the large chemical platforms. On the other extreme, the regional competitors do not have the scale to support the customers on a global basis. And what you're seeing increasingly now is semiconductor manufacturers have global expansion plans. And they expect their suppliers to provide the same level of rigor and support anywhere they decide to build their next fab. And we have been willing to invest in industry-leading tech centers in Taiwan, in Korea, in the U.S. and Japan. And that has actually allowed us to attract some of the best talent in all of those countries. We have been willing to invest in local manufacturing as well. So we are completing these cycles of learning and strengthening the customer-centricity model that we have. So I think all of those little things actually is really setting Entegris apart. And that's one of the reasons why we've been able to compete so effectively on the applications that we choose to serve.

That's great. We have about 5 minutes left. I'm going to pause here and see if anyone in the audience has questions. I'll keep going. So maybe a question on sort of the geopolitical landscape and how it's impacting your business. I guess from a -- you're well-positioned because, to your point, you've got very strong robust operations globally. But has this evolution in the geopolitical backdrop impacted your strategy, obviously, you've got a big facility in Taiwan ramping. You've made an announcement for Colorado. Again, you're well-balanced, and I feel like you're agnostic to all these things, and you're going to be successful as long as semis are growing. But how do you navigate this current backdrop? And has your strategy evolved at all?

Yes. So I was mentioning earlier, I think our business model has always been to be close to our customers. And we have made some very steady investments now for the last decade in all of the major semiconductor market. So that has served us really well, especially at a time when our customers are really, increasingly thinking about building different regional clusters for their own business models. So the world is changing and we're trying to stay close to the recent developments. When it comes to our investments, we're going to continue to be thoughtful and flexible. I think that for us, investing in Taiwan was a no-brainer for sure. A lot of people were concerned and have been concerned about the geopolitical risk, which I think is totally inflated, probably a discussion for another day. But I think that, that investment is just going to strengthen our relationship with a very important customer in its ecosystem in Taiwan. The decision to invest in Colorado Spring, really, was based on the belief that we could potentially qualify for the U.S. CHIPS Act subsidies. It's fair to say that without that belief, we probably would have made the investment elsewhere. But again, we're going to continue to try to make sure that we have the right level of development activity as well as manufacturing activity in all of the major markets and we'll try to continue to be smart about those choices.

Got it. And somewhat related to that, the export restrictions introduced by the U.S. government. I think you talked about -- you gave a range initially and then you sort of landed somewhere else. But in hindsight, what's been the net impact? How should we think about that aspect of the business?

Yes. So the way we think about it is that we most likely have lost permanently about $80 million of annual revenue, revenue tied to losing access to a number of customers who are focused on the most advanced nodes in China. When it comes to the rest of our customer base in China, we've been very pleased to see that, that business has come back. And actually, you can see that in the results that we published in Q1 and Q2. So I don't know what comes next. But I think that the impact of the known export restrictions, as I said, are well sized and that's about $20 million per quarter.

Got it. Got it. Maybe in the last 90 seconds, a question on the deleveraging efforts and how you think about capital allocation. Obviously, you're digesting this fairly large acquisition. You've talked about the focus on bringing down gross debt to 3.5x. But outside of that, any thoughts on how you allocate capital? How should we be thinking about that?

So first and foremost, right now, again, it's about getting to that 3.5x gross leverage ratio by the end of 2024. After that, we'll update you. I mean, those of you who know us will probably remember that we've always had a very transparent capital allocation framework. We have had also very transparent target models. We will update all of those early next year. I think that by then, the dust should have settled in terms of some of the divestitures that we've made. Hopefully, we'll have some greater clarity on which way the industry is going. So it will be a good time for us to unveil some of those new models. But expect us -- again, I'm not making a short-term or short timeframe comment here. But if you think about the next 5 to 10 years, expect Entegris to continue to be active on the M&A front. Expect us to continue to be a very thoughtful, transparent capital allocator. We believe that we can create value by first reinvesting in our business. So investing in R&D and CapEx is going to be priority #1. Acquisition -- well-calibrated acquisition will be probably the second objective. And then stay tuned. We'll talk about what we do with any potential excess cash when the time is right. But right now, excess cash will be applied to paying down the debt.

That's great. With that, we're out of time. Bertrand, thank you so much for coming to the conference.

Thank you.

Thank you for your time.