Good day, everyone, and welcome to Entegris' Q2 2022 Earnings Release Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Bill Seymour, VP of Investor Relations. Please go ahead, sir..

Good morning, everyone. Earlier today, we announced the financial results for our second quarter of 2022. 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; and Greg Graves, our CFO. Before I hand over to Bertrand, there is a few items I'd like to mention related to the CMC acquisition.

First, because of the timing of the close of the transaction our second quarter results that we reported today include only legacy Entegris Q2 results, and do not include CMC Materials results. However, to help provide some context, Bertrand will make some brief comments on CMC Materials’ fiscal third quarter sales.

And because of the timing of the closes, I'm sure you can understand we are providing only sales and EBITDA guidance for the third quarter and the full year 2022 for the combined company.

To assist in your modeling, we will also be providing pro forma recast historical financials on a consolidated basis and for the four divisions before the Analyst Meeting.

On that note, you should have seen and save the date for our virtual Investor and Analyst Meeting on September 22, where we will provide an update and additional details on the CMC Materials integration and the overall financial outlook for the combined platform. With that, I'll hand the call over to Bertrand..

Thank you, Bill, and good morning to all. Before I get started, I want to say how excited we are to welcome our new colleagues from CMC Materials to the Entegris team. Now let's turn to our results. During the second quarter, sales growth and our operational execution were once again very strong.

However, foreign exchange had a meaningfully negative impact on our bottom-line performance. For the quarter, sales were up 21% year-on-year. Growth was significant across all three divisions, driven by continued strong demand for our products and solutions and great execution by our supply chain teams. EBITDA margins were 30%.

Non-GAAP EPS was $1 for the quarter, slightly below our guidance range. Excluding the negative impact of foreign exchange, our EPS would have been approximately $0.15 higher in the second quarter. Greg will provide more color on the foreign exchange impact shortly. Let me make a few additional comments on our second quarter sales performance.

In the quarter, we continued to benefit from a strong industry environment with robust fab activity and elevated levels of CapEx in the semiconductor industry. In particular, we saw strong activity at the advanced nodes, where we enjoy greater Entegris content per wafer. This led to our significant market outperformance during the quarter.

Growth was particularly strong in several unit-driven product lines of increasing strategic importance to our customers, including liquid filtration, advanced deposition materials and selective edge chemistries, which in the aggregate were up 24% year-to-date.

Growth was also very strong in CapEx-driven products related to new fab construction projects, including fluid handling, FOUPs and gas filtration and purification products, which, in the aggregate, grew over 40% year-to-date.

Moving on to some very high-level comments on sales results for CMC Materials third fiscal quarter, excluding revenue from the exited wood treatment business, total revenue for CMC Materials was up approximately 11% year-on-year and up 3% sequentially in the quarter.

In particular, slurries revenue increased 15% year-on-year and pad revenue was up 10%. We are very excited about our combination with CMC Materials, and the promise of the combination has also been validated in our discussions with customers post close.

They see the value in our end-to-end suite of process solutions and the positive impact this will have on device performance and development times.

In connection with the completion of the transaction, Entegris has established a new operating model, including adding a fourth division, Advanced Planarization Solutions, and we have expanded our executive leadership team. The integration plans that we have been developing diligently since Q1 are now being executed.

We have already communicated the detailed organizational structure internally and everyone impacted by our integration plans has been notified.

As a management team and as an organization, our focus going forward will be on rapidly and effectively completing the integration of CMC Materials, driving revenue and cost synergies and paying down the debt.

As it specifically pertains to post-close portfolio decisions, we have spent a great deal of time analyzing the various parts of CMC's portfolio of businesses to assess their respective long-term strategic fit to the combined platform, including identifying potential candidates for sale.

We remain focused on this and we'll update you at the appropriate time. We also look forward to discussing in greater detail our integration plans for CMC and our growth strategy for the combined company in our upcoming Analyst Meeting on September 22.

Now transitioning to our outlook for the full year, the legacy Entegris business is tracking in line with our previous expectations for 2022, driven by very strong demand for our products and solutions and continued excellent execution by our supply chain teams.

We also expect the positive momentum of the legacy CMC Materials business will continue into the second half of the calendar year. Putting it all together on a pro forma basis, excluding CMC's wood treatment business, we expect revenue for the combined company to exceed $4 billion and grow in excess of 16% in calendar 2022.

And we expect pro forma EBITDA of the combined company to be approximately 30% of revenue in calendar 2022. We continue to have a high degree of conviction in the positive, secular growth dynamics of the semiconductor market.

On top of this, our customers' road maps are calling for both the introduction of more complex device architectures as well as further miniaturization of the critical dimensions on the wafer. This plays directly to Entegris' strength because we operate at the crossroads of material science and materials purity.

And these two core capabilities are quickly becoming some of the most critical enablers to the semiconductor technology road maps. And as we have laid out, these trends are leading to a rapidly expanding Entegris content per wafer.

With the addition of CMC's suite of solutions, Entegris now offers the industry's most comprehensive electronic materials portfolio for applications in the fab environment and across the semiconductor ecosystem.

With this combination, we are better positioned than ever to address our customers' most demanding process challenges and support their ambitious technology road maps while helping them achieve a faster time to solution. Wrapping it up, we are pleased with our strong growth year-to-date and our prospects for the rest of the year.

Looking ahead, we will continue to be pragmatic, closely monitoring industry developments and ready to make adjustments as needed. And with approximately 80% of our revenue now unit-driven, our platform should prove to be even more resilient regardless of the macro environment.

Finally, I want to take a moment to thank our customers for the trust and confidence they place in Entegris. And once again thank our newly expanded Entegris teams around the world for their incredible focus and commitment. Now let me turn the call to Greg.

Greg?.

Thank you, Bertrand, and good morning, everyone. Before I move on to discussing our Q2 financial results, as Bertrand said, FX had an abnormally large impact on our results in Q2. In my many years as CFO, we have rarely mentioned FX because the impact has usually been insignificant.

This is because there is a reasonably close match between the underlying currencies in which we sell and our expenses. I'll discuss this impact in more detail as I go through the major P&L items, but it's fair to say, we expect a more muted impact from FX going forward.

Our sales in the second quarter were a record $692 million, above our guidance, up 21% year-over-year and up 27% sequentially. Year-over-year sales growth was negatively impacted by approximately 3% from FX. GAAP and non-GAAP gross margin were both 45% in Q2.

FX was the dominant driver of the lower-than-expected gross margin with a negative impact of approximately 2 points. FX impacted gross margin significantly because from a costing perspective, there is generally a two-month lag between when product is built and when it is sold.

And over the last several months, there was a dramatic decline in the exchange rate of some foreign currencies, particularly the Japanese yen. GAAP operating expenses were $152 million in Q2 and included $25 million of non-GAAP items from amortization of intangible assets and deal and integration costs.

Non-GAAP operating expenses in Q2 were $127 million, which was below our guidance. Q2 GAAP operating income was $158 million. Non-GAAP operating income was $183 million or 26% of revenue, up 21% year-on-year and up slightly sequentially. Adjusted EBITDA was $207 million or 30% of revenue, up 19% year-on-year and up slightly sequentially.

Looking below the line, FX also impacted the other income expense line, resulting in a $10 million expense in Q2. Our foreign entity balance sheets are valued each month and this reflects the loss on the revaluation during Q2. The GAAP tax rate was 15% in Q2, and the non-GAAP tax rate was 17%. Q2 GAAP diluted EPS was $0.73 per share.

Non-GAAP EPS of $1 per share was up 18% year-over-year and down 6% sequentially. The estimated FX impact to non-GAAP EPS was approximately a negative $0.15 in total. $0.10 related to gross margin and $0.05 of impact on the other income expense line.

Before I move on to the divisional performance, I wanted to comment on our capital structure post the close of the acquisition. The new debt we used to close the transaction totaled just under $5.3 billion.

This consists of $2.5 billion of SOFR plus 300 basis points term loan, $1.6 billion of 4.75% investment-grade secured notes, $895 million of 5.95% unsecured notes, and a $275 million, 364-day SOFR plus 455 basis points unsecured loan.

To mitigate the interest rate risk on the floating debt, we have hedged a portion of the $2.5 billion term-loan, which will effectively fix the rate on that portion beginning in January 2023. The initial hedge amount is $1.95 billion and ramps down to zero over the next three years.

Based on the mix of variable rate loans and fixed rate bonds, our average interest rate for the next two quarters is expected to be approximately 5%. Including the two existing unsecured notes totaling $800 million, our total gross debt is now just under $6.1 billion and our estimated net debt is $5.3 billion.

This equates to a gross leverage of 5.1 times and net leverage of 4.4 times, including announced synergies. As Bertrand said, we are very focused on deleveraging, and we'll discuss more on our capital structure at our upcoming analyst meeting.

To further help you in your modeling, we expect interest expense of approximately $80 million per quarter starting in Q3. Turning to our performance by division, Q2 sales of $208 million for SCEM were up 15% year-over-year and up 6% sequentially.

Year-on-year growth was primarily driven by advanced deposition materials and surface preparation solutions. Adjusted operating margin for SCEM was approximately 22% for the quarter down year-on-year and sequentially. The year-on-year margin decline was primarily driven by the FX impact on gross margin.

Q2 sales of $274 million for MC were up 20% from last year and 3% sequentially. Growth was strong across all major product lines in MC, including gas filtration, liquid filtration and gas purification. Adjusted operating margin for MC was 37% for the quarter, up year-on-year and flat sequentially.

The year-on-year increase was driven primarily by solid cost management, which offset the negative FX impact on gross margin. Q2 sales of $224 million for AMH were up 30% versus last year and 13% sequentially.

Year-on-year sales growth was strongest in products that benefited from the high level of fab investments, including wafer handling and fluid handling and measurement solutions. Adjusted operating margin for AMH was 21%, down year-over-year and sequentially. The margin decline was driven primarily by the FX impact on gross margin.

CapEx for the quarter was $108 million. We continue to expect to spend approximately $500 million in CapEx for the full year for Entegris stand-alone, half of which is for our new facility in Taiwan. As previously stated, we expect 2022 to be the high watermark on capital spending as it relates to Entegris stand-alone for the foreseeable future.

Second quarter cash flow from operations was $111 million and free cash flow was $3 million. Moving forward, we will be very focused on inventory management and expect cash flow to improve in the second half of 2022. During Q2, we paid $14 million in quarterly dividends. Now for our Q3 outlook for the combined company.

We expect sales to range from $1 billion to $1.04 billion. We expect EBITDA margin to be approximately 30%. In closing, excluding the FX impact, we are very pleased with the quality of execution and our strong growth momentum.

The addition of CMC Materials will strengthen our position as the trusted supplier to the leading semiconductor companies and their ecosystem. We are very focused on quickly and efficiently integrating CMC to unlock the full potential of the new platform, and we will work actively on deleveraging the balance sheet.

And once again, I would like to welcome our new colleagues to the Entegris team. Operator, we'll now open up for questions..

Thank you. [Operator Instructions] And we'll take our first question from Toshiya Hari with Goldman Sachs. Please go ahead..

Hi. Good morning. Thanks so much for taking the question. I had two questions, if I may. The first one, Bertrand, is more on the legacy CMC side of your portfolio. You shared a couple of data points in terms of how the individual businesses grew in the second quarter. It was encouraging to see the slurry business accelerate.

In terms of year-over-year growth, I think you called out 15% growth. Similarly, on the pad side 10% year-over-year growth.

Can you talk about some of the drivers there? And when you give that full year pro-forma growth outlook, what kind of growth rates are you assuming for the legacy CMC side?.

Yes. So Toshiya, thank you for the question. So I think, again, pleased with the performance of the CMC Materials platform in their fiscal Q3 quarters.

Going now to more of a calendar year perspective, I would expect the CMC – the legacy CMC Materials platform to be up in the second half of the year versus the first half of the year to the tune of 4% to 5%, which is pretty much in line with how we would expect the legacy Entegris platform to behave as well.

So we expect to continue to see steady momentum from the slurry platform, some interesting wins in advanced logic and advanced memory and some interesting momentum also on the pad business, and also very pleased with the performance of the QED platform, which is polishing methods and metrology equipment used in precision uptake applications.

And we'd expect that part of the business to do actually pretty well as well in the back end of the year. So overall, I would expect steady performance in the back end of the year across the CMC legacy platform and the legacy Entegris platform as well..

Great. Thank you for that Bertrand. And then the second one is for Greg on the gross margin side. I appreciate you're not providing gross margin guidance for the combined company for Q3.

But if you were to focus on stand-alone Entegris for a moment, how are you thinking about the balance in Q3? I think you noted that you'd expect FX to be more muted or the impact to be more muted in Q3.

But curious on how you're thinking about the puts and takes around gross margin, cost inflation, FX, perhaps pricing of your products going forward? If you can kind of provide a bridge, if you will to where you're implying that would be great? Thank you..

Yes. So let me talk about the margins generally. So first of all, we continue to benefit from strategic pricing increases. As you'll recall, we didn't do across-the-board increases but only increased prices where there were – where we saw increases in our own inputs, but we've certainly benefited from those price increases the past several quarters.

The currency issue, we do expect to – I mean, assuming currencies stay stable and they've actually – the dollar has actually weakened a bit the last few weeks, but assuming they stay stable, we expect to see an improvement in margin from that.

I would say as it relates to supply chain-related issues, I mean, they are – we're certainly not through them, but they're abating. I mean, obviously, freight costs are still relatively high. They've come in a bit from their peak. And so you've got some puts and takes in the margin.

If I were guiding specifically for the stand-alone Entegris, we would probably talk about something approximately 47%. And when I think about the combined company, I would think about a number, an approximate number on a non-GAAP basis of about 45%..

Very helpful. Thank you so much..

And we'll take our next question from Sidney Ho with Deutsche Bank. Please go ahead..

Great. Thanks for taking my question. Last quarter, you talked about organic outperformance of 5 percentage points to 7 percentage points in 2022. And based on your comments, Bertrand, that seems to be on track.

If the market does slowdown in terms of wafer starts or CapEx as most investors are expecting, will you be able to maintain that outperformance or even expand it I think when we talked about 2023 here? And further on, if you look at the CMP business, which I know you will talk about the details at your Analyst Day, does that business have a similar profile in terms of outperformance potential as your organic business? And I have a follow-up question..

Yes. So a lot of questions here, Sidney. So let me just start maybe with the last one, and just maybe defer answering that question to the Analyst Day that we have scheduled for September 22. But I think at the highest level, I would say that the same premise exists for some parts of the CMC Materials portfolio, specifically around slurries and pad.

As the technology road maps of our customers continue to progress, we see an increasing content opportunity for both legacy Entegris and legacy CMC. We're going to try to put some specific numbers behind those statements. So stay tuned on that.

But back to the legacy Entegris performance so far this year and what we expect for the balance of the year, you're correct. We expect the level of outperformance to remain intact in the back end of the year even if we see some softening of the industry.

And the reason is that we are seeing a very steady transition of wafer production to the advanced nodes where we have greater content per wafer. It is true a logic, but it is true as well in memory. So when there is talk about a weakening in the memory sector, remember that most of that weakening will take place on the trailing edge nodes.

And I would expect, in fact, maybe an acceleration of the migration towards the more advanced nodes where we have greater content per wafer. So net-net, I would expect a very attractive outperformance in 2022, for sure..

Okay. That's helpful. Maybe my follow-up question is that some of the equipment OEMs did receive a notification from the U.S. Government about new licensing requirements for China related to sub-14 nanometer development in production.

How much of a headwind do you expect that to be for your business? And more specifically, which businesses and what products will get impacted the most? I think in the past, you have got a license for most of these – your business, if I remember correctly? Thanks..

Yes. So we have not received such a letter. So as a materials company, we have not received the letter that some equipment makers have received. So the impact would be an indirect impact and would be whether or not those restrictions could slow down their growth in their business with China.

So I think it's really too early for us to speculate on what the indirect impact to us could be short term. I think longer term; my guess is that the global demand for memory will have to be serviced from other parts of the world. And I would expect new investments to be commissioned in Korea, in Japan, in the U.S. and elsewhere.

And I would expect first to benefit from some of those new fab constructions and then down the road, we would actually expect to sell a lot of our consumable offering to these new fabs as well. So remember that our overall OEM business is about 15% of our revenue. So every equipment maker has a different degree of exposure to memory in China.

So I'll let you run the numbers. But remember that our business model is very resilient. It's resilient because we sell over 20,000 products, we don't really have any significant customer concentration, and as you can see from the numbers I'm sharing with you, I'm not overly concerned about this particular restriction on sales to China..

Thank you..

And our next question comes from Amanda Scarnati with Citi. Please go ahead..

Hi. Good morning. The first question I have is sort of on the demand environment on the semi side. We've been hearing that there's been some shift in some timing of new designs. Can you just talk about how that impacts your outlook, I know you talked about being able to outperform based on some of these new designs coming online.

So what are things looking like for you over the next couple of quarters?.

Yes. So Amanda, I think – if I want to summarize it, I would say, the chip demand and CapEx activity is expected to remain pretty strong through 2022. And certainly, the demand for our products is expected to remain at record levels because of the growing importance of what we do for our customers. So that's the headline.

And the additional data point I will share with you is that today, at Entegris, we still have an unconstrained demand that is higher than our guidance. So even if the industry slows down a little bit, we should be able to carry our momentum through the balance of the year..

Great. The next question I have is on the CMC side, and they've been working on some internal improvements to their operating expenses and their structure prior to the acquisition. Can you just talk a little bit about how that looks? I know you mentioned, Greg, that EBITDA is expected to be about 30% for the quarter.

Does that include any sort of benefit of things that CMC has done over the last quarter? Or is this sort of the baseline of where the expectation could be going forward?.

Yes. So I wouldn't necessarily set that as the baseline going forward. I mean, that's something that we'll talk about at our Analyst Day on September 22. It does include some benefit from their future forward program where they had reduced operating costs. It also includes a very small amount of the synergies that we've already realized.

Like I said, I think we'll provide more color on what we expect the longer-term operating model to be in September..

Thank you..

We'll take our next question from Patrick Ho with Stifel. Please go ahead..

Thank you very much and congrats on the quarter and the closing of the deal. Bertrand, maybe first off, I know a lot of people were talking about the near-term environment and obviously, wafer starts, and you've noted now several times that you still see a very healthy demand environment through the rest of this year.

Can you give a little bit of color on how your model continues to get more resilient given a lot of the different markets and the different products you offer and how that kind of diversification and resiliency only further strengthens your ability to manage through these potential cycles?.

Thank you for the question, Patrick. Yes, I mean, look, we're very pleased, obviously with the performance this year. We are essentially growing at twice the rate of the industry with the legacy Entegris platform.

And the reason for that is the incredible penetration that we are seeing for a number of new products that we have introduced over the last few years and we keep mentioning those products. They are the same as the ones I mentioned last quarter.

So advanced liquid filters, which are essential for our customers to reach optimum yields in the advanced nodes and increasingly used also upstream in all of the lanes of chemistries coming into the advanced fabs. So our SAM has been expanding, our market share has been expanding.

We are seeing great progress as well in a number of new deposition materials, selective-edge chemistries that we've been introducing. And again, we're seeing great momentum in memory, in particular, the advanced nodes for those new materials and those new chemistries. Very pleased, obviously with the performance of our AMH division.

It's a platform that we probably don't talk enough about, but our market share for wafer carriers in the new fabs is probably close to 90% at this point. And the growth rate for that particular platform year-to-date is in excess of 50%.

So far in excess of the industry CapEx, and that's an indication of, obviously, market share gain and fantastic traction in the marketplace. And the same would be true for a number of older products like our fluid handling product lines, which are becoming increasingly an industry standard for the sub-fab chemical loops.

We have the cleanest, most resistant fleet handling solutions, and that is obviously increasingly important for our customers as they are trying to achieve higher levels of purity in the process, levels of purity which, as you know, translates into greater yields and greater long-term reliability of their chipsets.

So again, our offering, as we like to say, is becoming increasingly important to the success of our customers. That translates into greater Entegris content opportunity per wafer, and that is really what drives our performance.

And we have a high degree of conviction that those trends are just beginning, and we expect more of that momentum for the years to come..

Great. That's it for me. Thanks again..

Thank you..

Our next question comes from Kieran De Brun with Mizuho. Please go ahead..

Hi. Good morning.

I was just wondering if you can touch a little bit more on the cost management that you saw within the microcontamination control and how we should think about your ability to manage additional costs if the environment continues to be challenging in the second half of the year and maybe into 2023?.

Yes, this is Greg. I'll take that. I mean I think within MC, I don't want to make it sound like it was anything calculated, like we're driving for a lower cost structure because we're concerned about a downturn.

I just – when we looked at the P&L overall, they had – with the 20% growth; they had meaningful operating leverage in the model as a function of where their cost structure was relative to the revenue. And as a result, those – the leverage from that essentially offset the balance of the impact related to FX.

So I don't – I mean – but I will comment on cost management overall. And that is – I mean, this is – as we move forward from here, the question is always around variability in the cost structure, ability to manage the cost structure if the industry were to soften.

And I would just highlight that this is a management team that's been through funding significant growth. We've been through downturns. And so I'd just ask that you kind of give us credit for knowing how to manage the cost structure as we move forward..

Absolutely. And just one quick one in terms of the China lockdowns during the second quarter. Is there – were there any kind of meaningful impact or any impact that you saw in the business? And if so, how do you think about making up any of that kind of lost demand in the back half of the year? Thank you..

I'm sorry; I didn't hear the beginning of the question..

Sorry.

Were there any impacts in the second quarter due to the lockdowns in China on your business?.

The lockdowns. I'm sorry. Yes. Yes. So actually, I'm glad you're asking that question because it gives me an opportunity to commend the work of our team in China, who within a few weeks at the end of the quarter were able to turn the situation around and essentially deliver results in line with our expectations after essentially a two months lockdown.

So great performance, and at the end of the day, the net result is really immaterial to our performance in Q2..

Great. Thank you..

We'll take our next question from Alexi Yefremov with KeyBanc Capital Markets. Please go ahead..

Thanks. Good morning everyone. Bertrand, I wanted to come back to your comment about acceleration of migration to advanced nodes.

Are you commenting on something that you just picked up over the last few months? Or is this kind of the general trend that you've been talking about for a while? And related to that, one of your largest customers was talking about delays with new nodes.

So is this something that you're not worried about? Or is this just too far into the future that maybe you're not prepared to talk about yet?.

Well, first of all, remember that our success doesn't really depend on any one specific customer. We have really a broad customer base.

And when we talk about migration to the leading edge our definition of leading edge is really the last two or three nodes, right? And you've seen actually the production of our content per wafer expanding now from 28-nanometer to 7-nanometer and going forward to fab and beyond. So again, it's just a steady increase. And so that's for logic.

And we're seeing the same in memory now with most players running the majority of their fab capacity at 176 and higher, and we're continuing to see that very positive migration to those more advanced nodes, where we have new wins in terms of the new deposition materials, I was mentioning, adoption of selective edge chemistries as well which were not used at 128 layers, for instance.

So again, we are seeing that steady increase and that's really compounding itself. So I’m not flagging any particular node or any particular customer. It's just a secular trend that will be a very positive tailwind for our business..

And I guess, just to clarify your comment, are you incrementally more positive on this, having seen how it evolved over the last, let's say, few months? Is this why you made the comment?.

I think this is a trend that we've seen now for many, many years and so there is really nothing unusual. I think what is unusual today is the degree of aggressiveness in the technology road maps of our customers, the desire to accelerate the cadence of those node transitions.

And even if they are off by a month or two, by large, the pace at which the industry is migrating to newer nodes and introducing more challenging architectures is today much greater than what it was five years ago or ten years ago. And that's obviously very positive for us..

And a quick follow-up for Greg on margin guidance for third quarter of 30% and the same for 2022.

Is third quarter seeing less of an FX headwind? And as a follow-up, do you expect that FX headwind to improve in the fourth quarter?.

Our assumption is that the impact of FX will be relatively equal in Q3 and Q4. I mean, as I said, we'd expect if currency is – our assumption is that currencies will be stable. And if currency is stable, it should have a very modest impact in both Q3 and in Q4. And as I said, the last two or three weeks, currencies have actually come in our favor..

Thanks a lot..

And our next question comes from Mike Harrison with Seaport Research Partners. Please go ahead..

Hi good morning.

I was wondering if you can give us an update on the Taiwan facility expansion? And maybe comment on how concerned you might be about geopolitical risk in Taiwan?.

Look, I mean, so the construction of the new manufacturing site is largely on schedule. And that means that we are expecting the first tools to move. In the second half of this year we expect customer qualifications for a number of products to begin in the first half of 2023.

Remember that the major product lines to be produced in the Taiwan site will be liquid filters, high-purity drums and deposition materials, so products very important to our local semiconductor maker customers as well as their expanded supply chains.

When it comes to the geopolitical risk, look, I mean, we've been obviously considering this risk from the very moment we thought about investing in Taiwan. I don't think that the risk is any greater today than it was a couple of years ago when we made the decision to invest.

The decision to invest is really to be close to our largest customer, to help this particular customer advance its roadmap and to be a more effective and responsive supplier and development partner. And that's the strategic rationale behind the investment. And I think we're going to see a lot of benefits and returns from that investment.

So again, we are monitoring the news, obviously, but I don't think – I mean, we have lot of anecdotes, a lot of – but I think given the situation of Taiwan and China, I would expect those types of ongoing pain points to continue to make the news..

And you mentioned that you were evaluating potential portfolio changes as you look at the CMC materials business. Obviously, or they have exited the wood treatment business, but there's also a pipeline chemicals business that would appear to not fit with your core in semiconductor materials.

Can you confirm whether there is a process currently underway to divest the pipeline chemicals business? Thank you..

Yes. So what I can confirm is, we're looking a lot at the overall portfolio of legacy CMC Materials, and that's what I can say. I think that when it comes to individual portfolio decisions, now it's not the time for me to elaborate. But we will share with you more information when the time is right..

Thanks very much..

Thank you..

Our next question comes from David Silver with CL King. Please go ahead..

Hi, thank you. Bertrand, I was wondering if you might share your thoughts on, I guess, your customers' reactions to the accelerating pace of industry consolidation in electronic materials. So I mean, the consolidation has been underway for quite a while for sure.

But both the size of the targets and the pace really seems to have picked up quite a bit over the last year or so.

And in your – maybe if you could just share at a high level, just the key points that maybe your customers have, the pluses of dealing with a larger, stronger supplier, but I don't know, maybe difficulties with managing, protecting intellectual property or gaining proper diversification of suppliers.

I mean, what are the customers thinking about now as the pace of industry consolidation on the supplier side seems to be accelerating?.

No, this is a great question. And we would start by sharing with you that our customers have been very supportive of this combination. And what they are seeing, first of all, all of our customers are realizing of the growing importance of materials to the success of their technology road maps.

Yet, they also quickly realized that the material space is still very fragmented. And it means that most materials companies are not well equipped to answer the call of duty. Our customers are expecting us to spend a lot more in R&D going forward.

They're expecting us to also make significant investments in our infrastructures so that we can support them in the U.S., obviously, but also in Taiwan and in Korea. And in order to be able to do this and yield acceptable financial returns, which is important to all of you here on this call, you need scale.

And I think that's what our customers understand, and that's why they are very supportive of consolidation in the materials space. In addition, very specifically to the combination between Entegris and CMC Materials, they see the highly complementary portfolios of the two companies.

They see the promise of being able to accelerate the development of new deposition materials while developing the right polishing solutions and the post-CMP cleans. All of that will translate into greater on-wafer performance, lower defectivity and shorter time to solution. So what is not to like from a customer's standpoint.

So that's what we're hearing from customers, and we are obviously super excited to start working with them on new development programs..

Thanks for that. There is one other topic I was hoping you could share your thoughts on. And that's the recently passed legislation, the chips act. And I'm not really looking for a rundown of the whole bill or program.

But specifically from your perspective, I mean, what is in the bill that you think might be constructive for the key suppliers to the chip industry such as yourselves, in particular, in developing a network sufficient to handle the increased demand potentially from the wave of new domestic – large-scale domestic fab development maybe coming on starting 2024 or so? Any thoughts on that would be appreciated.

Thank you..

Sure. Well, first of all, we are obviously very encouraged by the passage of the bill. I think it's great for the U.S. It's great for the U.S. semiconductor industry. And I think it will be the source of thousands of new job creation. So a lot of reasons to be excited.

And then of course, we expect, as a result of that, a number of new fabs to be built in the U.S., which will provide many new business opportunities for Entegris. Specifically, what it means for Entegris, first of all, we were pleased that the bill did contain language that would make materials companies eligible to some of those financial aids.

So in that context, we are assessing where to best locate some of the new capacity investments that we were planning on doing. If you look at our recent investments, they have been mostly made in Asia. But the passage of the bill is going to force us to pause and ask ourselves whether or not we should be onshoring some of those upcoming investments.

So that's the discussion we are having internally. That's the discussion we will have also with the policymakers when the time is right..

Thank you very much. I appreciate all the color..

Thank you..

Our next question comes from Paretosh Misra with Berenberg. Please go ahead..

Thanks. And good morning. So CMC also had an electronics chemicals business that had a bunch of high-purity chemicals and other products, I think, they acquired from KMG.

So my question is, how is your Specialty Chemicals segment, SCM, similar or different versus that business in terms of products, where they are used in the process or geographic exposure or pricing, et cetera?.

Yes, so there was really no overlap between our chemical portfolios. If you look at the electronic chemicals of legacy CMC Materials, it would be products like IPA, ammonia, high-purity sulfuric acids, and so these types of products which legacy Entegris was not in the business of developing and selling. So very complementary product lines.

And in terms of geographical exposure, I think you know that there was actually a lot of activity, a lot of opportunities in Europe and in North America for CMC Materials, less so in Asia..

Got it.

And then just, I know most of your business is units driven, but just curious, what are you seeing in the CapEx side of the business? And what sort of growth rate you expect this year?.

So the market assumptions that we're using for the full year guidance are CapEx up around 20%. And as a footnote, I would share with you that we have MSI up in the mid-single digit for the year. And as I was mentioning, a lot of our strategic CapEx-driven product lines have been doing extremely well.

I was mentioning wafer handling to our food product lines. I was mentioning fluid handling as well. But I think we mentioned in the prepared remarks, the strong performance from our gas purification systems as well as our gas filtration business, which have been growing at about close to 40% year-to-date.

So again, strong performance across all of our CapEx-driven business, far in excess of the overall industry CapEx growth..

Great. Thanks for the color..

Thank you..

We'll take our next question from Timothy Arcuri with UBS. Please go ahead..

Thank a lot. I had two. I had a question on AMH. Greg, I think AMH is up 13% sequentially. I think it was expected to be mostly flat. So that was most of the upside in June, and that's obviously the CapEx-driven piece of your business. So the question is, what kind of happened there? And if I flatline AMH, it's going to be up like 25%.

And WFE is going to be up maybe 10% this year. I mean, I know you're talking about CapEx being up 20%, but I mean all the companies now because of the supply chain issues are all talking about WFE being up more like 10%. So is there some component in AMH of your customers building inventory? I'm just kind of wondering if you can tie that? Thanks..

Yes, I would say, no concern about our customers building inventory. And you are right, I mean, AMH is going to significantly outperform even the CapEx side of the market.

I think it really boils down to – I mean, we've got really strong product positions on the wafer handling side of things that go into fabs, specifically the food market where our share is depending on how you measure it, 80% or 90%, I mean, we rarely lose a new FOUP opportunity.

And then we've got tremendous momentum in new fab construction with a lot of our fluid handling products as well as good momentum with the equipment makers on the fluid handling side. So that business has frankly just executed very well..

Yes. Yes, it seems like it. So Greg, then my second question is just around deleveraging and the timing and the targets. I mean, you're at 4.4x net right now. What's the target? And what's the worst case if floating rates keep on going up? I mean, more than half of the debt is floating. So can you just walk us through what the target is and what the....

Yes. So let me take the second piece first. We have – actually of the $2.5 billion term loan which is a floating rate instrument, as of earlier this week, we have hedged about 80% of that. It's a hedge that steps down over time, so that we have the flexibility to continue to repay.

But we've hedged about 80% of it and that steps down over – the amount hedged steps down over the next three years. So we said in the next two quarters, expect our rate to be about 5% with what we have hedged as that will inch up a little bit into the mid-fives next year, but we're like, as I said, we're capped on 80% of that.

So we really just felt like it was important to take given the uncertainty to take the interest rate risk off the table. So we've done that. As it relates to leverage targets, we really haven't changed our view. Our long-term view is that we want to move the gross leverage down toward – inside of four and towards three as quickly as we can.

Deleveraging will be our number one priority – other than continuing to invest in capital for the business, deleveraging will be our number one priority as we move forward. But like I said, the goal is to get that gross leverage down inside of four moving towards three.

And our long-term target hasn't changed, which is a number somewhere around two times..

Cool Greg. Thank you..

That concludes today's question-and-answer session. At this time, I will turn the conference back to Bill Seymour for any additional or closing remarks..

Thank you very much. Just a reminder, we said it a few times on the call, but our virtual Analyst Meeting is scheduled for September 22, starting at 10 a.m. Eastern. We'll be sending out more details on that pretty quickly. And in that regard, please reach out if you have any questions. Again, thank you very much, and have a good day..

And this concludes today's call. Thank you for your participation. You may now disconnect..