Q4 2020 Entegris Inc Earnings Call
Good day, everyone and welcome to Integra fourth quarter 2020 earnings release today's call is being recorded.
At this time for opening remarks, and introductions I'd 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 fourth quarter and full year of 2020 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 of course 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 regulation G. You can find the reconciliation table in today's news release as well as on our Investor Relations page of our website Tigris Dot com.
On the call today are they're trying the law, our CEO and Greg Graves our CFO.
With that I'll hand, the call over to bear trial.
Thank you Bill and good morning, everyone.
Throughout the pandemic our priorities remain the same ensuring the safety of parting takeaways as colleagues and value partners.
I'm proud of what we have achieved here do you think it's challenging here all of the while delivering for our customers.
Turning first to our fourth quarter performance I want to start by saying that I am pleased with our results and the strong close to a record year.
The fourth quarter sales grew 21% year on year on 8% sequentially and above our guidance.
Year on year of growth was strong across all three divisions as.
We benefited from several of node transitions from strong overall demand for our products from solutions.
While gross margins declined in Q4, we leveraged the lower opex into adjusted EBITDA growth of 4% sequentially and 19% year over year.
Finally, the fourth quarter non-GAAP EPS of <unk> 71 cents was above our guidance up 29% year on year on the up 6% sequentially.
Looking at the full year of 2020, we achieved record says up 17%, while sales were up 14% on an organic basis, which means we outperformed the market by several hundred basis points for the year. The significant outperformance was driven in large part by our strong position in wins.
With leading edge solutions like liquid filtration the guidance.
Deposition materials fluid handling solutions in other areas of increasing importance to our customers.
In 2020, we once again showcased the leverage now the model with EBITDA flow through of close to 40% translating into strong EBITDA growth of 24% EPS growth of 32% and free cash flow up almost 70%, excluding the net voice termination fee from.
2019.
I'll focus on operational excellence paid dividends during the year.
Even in the backdrop of the challenges of the pandemic, we achieved all the best year on record in quality and safety of <unk>.
Entity leather as well Hunter.
Times better than just 10 years ago at $5 25, Sigma and the injury rate, what's the lowest level ever.
During the year consistent with the framework, we laid out you know and then each day, we allocated a total of more than $417 million of capital, which included Reinvestments in our business in the form of the $132 million in Capex and the Huntington $36 million in R&D.
And we returned almost $90 million to shareholders in dividends and buybacks.
In addition last year, we completed two acquisitions fitting that which makes the CMP slurry is for silicon carbide and gallium nitride substrates.
G MTI the leader in the design and production of high precision analytical instruments for CMP and formulated the cleaning chemistries.
These acquisitions are good examples of the types of technology and applications, we want to add to the integrity of platform high quality value accretive differentiated businesses in high growth markets.
I am also very proud of last year's announce of contiguous states of corporate social responsibility program.
The program represents a true commitment by the management team and the board of Integra is recognizing the responsibility we have to our people partners the environment and our communities.
We did set ambitious goals for each of our force yourself pillars, which are closely connected not on each of our value system. The golf so to the value proposition of integrity and business strategy.
It would be more to come on CSR and ESG later this year.
Wrapping up 2020.
Our excellent performance of showcased the strength of our teams execution and all of a highly resilient differentiated unit driven business model.
I cannot say enough how proud I am of the dedication ingenuity and perseverance of our team came on.
Australia during such a challenging year.
Looking ahead.
We continue to be very optimistic about the long term fundamentals of the semiconductor market.
Accelerating chip demand and the higher proportion of wafers produced at the leading edge provide the play base for very attractive sick of the industry growth.
On top of this on in Texas.
Benefiting from the growing importance to device architectures of the two intersecting themes of the process materials and materials purity.
We expect these key trends will continue to result in a rapidly expanding Sam and increase the integrity content per what are you sure.
For 2021, specifically the semi market outlook appears to be very healthy driven by unexpected rebound in global GDP.
Strong overall should demand and the robust industry capex investments boosted by strength in <unk> high performance computing P C and a recovery in automotive and.
Industrial demand.
Looking at our own business, we expect our sales growth in 2021, two range from 11% to 13%.
Let me unpack that for you.
For the full year 2021, we expect the market based on our unique capex mix would be up approximately 7% to 8%.
And given our strong position and win in the new technology nodes, we expect to outperform the market by approximately three to 400 basis points consistent with what we laid out during our recent analyst day.
On top of this we expect approximately one of the basis points of growth from sales of our RMS high purity bags used for the distribution and storage of the COVID-19 vaccine.
Summing all of these items up gives us all of it.
The 1% to 15% sales growth expectations for 2021, and we expect the EBITDA flow through of our model to continue to be in line with all the target model and.
And we expect to achieve the full year 2021, non-GAAP EPS in excess of $2.85.
In conclusion, I am very pleased with the performance and the resilience of our business in 2020, and I am excited about our prospects in 2021.
Lastly, I want to think of customers from the trust and confidence the placing integrity.
And again, thank you to the integrity of teams around the world.
The incredible efforts and execute.
Now, let me turn the call to Greg.
Greg.
Thank you Bertrand the fourth quarter was another record for Integra.
Q4 sales were 518 million above the high end of our guidance and up 21% year over year and 8% sequentially.
Q4, GAAP diluted EPS was <unk> 63 per share.
Non-GAAP EPS of <unk> 71 cents was above the top end of our guidance range and up 29% year over year and 6% sequentially.
Moving on to gross margin GAAP and non-GAAP gross margin were both approximately 45% in Q4 versus our guidance of approximately 47% the law.
Lower than expected gross margin was driven primarily by three factors first.
First was the discrete inventory evaluation adjustment in S E.
Second was the impact of lower factory utilization as we made a deliberate effort to reduce the inventory levels across the company and we experienced weak demand in our non semi businesses and third was manufacturing inefficiencies related to capacity additions for significant new product ramps.
We expect gross margin to improve sequentially and be approximately 45, 5% both on a GAAP and non-GAAP basis in Q1.
We also expect gross margin will improve throughout the rest of the year and be approximately 46, 5% for all of 2021.
Yeah.
GAAP operating expenses were approximately of $118 million in Q4 and included approximately $14 million of non-GAAP items from amortization of intangible assets integration and other costs.
Non-GAAP operating expenses in Q4 were $104 million, which was in line with our guidance.
We expect GAAP operating expenses to be approximately $118 million to $120 million in Q1.
We expect non-GAAP operating expenses to be approximately of $104 million to $106 million in Q1.
Q4, GAAP operating income was $113 million non.
Non-GAAP operating income was $127 million or 24, 5% of revenue.
Adjusted EBITDA was approximately $148 million or 28, 7% of revenue EBITDA margin for the year was 29, 2% pop of 170 basis points compared to 2019.
During the fourth quarter other income, which is usually pretty minimal was positive $5 3 million.
This was driven by our foreign entities balance sheets benefiting from a weak U S dollar.
Our GAAP tax rate was 18, 6% and our non-GAAP tax rate was $19 one per cent for the quarter lower than our guidance of approximately 21%.
For the full year 2021, we expect both our GAAP and non-GAAP tax rate to be approximately 19 per site.
It's worth noting for modeling purposes that the first quarter typically has the lowest tax rate of the year.
Turning to our performance by Division.
Q4 sales of $169 million per S E.
We're up 15% year over year and up 12% sequentially. The year over year growth was primarily driven by advanced deposition materials cleaning chemistries specialty gases advanced coatings and a modest impact from the Sinbad acquisition.
On a sequential basis growth was primarily driven by specialty gases and advanced deposition materials and advanced coatings.
Adjusted operating margin for S. E M was 18% for the quarter down over 400 basis points sequentially.
The decrease in operating margin was primarily related to the weakness in non semi business and the discrete inventory valuation adjustment previously mentioned.
Q4 sales of $206 million per M. C were up 21 per cent from last year and up 6% sequentially.
Liquid filtration and bulk gas purification drove the sales growth both year on year end of sequentially.
Adjusted operating margin per M C was 35%.
Up modestly both year over year end of sequentially.
The year over year on sequential margin increase was driven primarily by higher volumes and solid cost management.
Q4 sales of 152 million for MH, we're up 29% versus last year and up 5% sequentially.
The sales increase was driven by growth across all major product platforms the impact of the <unk> acquisition.
And sales of our <unk> high purity bags used for the COVID-19 vaccine that Bertrand referenced.
And the other item that impacted <unk> sales in Q4 with catch up royalty income earned from the <unk> precision.
Related to the recently announced licensing agreements associated with the use of our reticle pod technology for both conventional and UV lithography.
Adjusted operating margin for <unk> was 23% of 500 basis points year over year and down slightly sequentially.
Fourth quarter cash flow from operations was very strong at $204 million driven by significant working capital improvement.
For the full year cash flow from operations was $447 million and free cash flow was $315 million and as Bertrand said up almost 70% versus 2019, excluding the net <unk> termination fee we received in 2019.
Capex for the quarter was 52 million and for the full year or was the $132 million.
In 2021, we expect to spend approximately $200 million in Capex.
Three quarters of that spend will be for growth investments.
This level is higher than the seven to eight per cent of sales we target for annual Capex spend. However, there are a couple of unique investments I'd like to highlight.
The first is related to capacity additions to accommodate the rapid expected growth of the high purity bags for the COVID-19 vaccine.
The second and more significant items is $40 million in Capex for the first stage of a three to five year of 200 million dollar investment.
Of our new facility in Taiwan that we announced last year.
This new facility will ultimately support all three of our divisions.
Consistent with our capital allocation strategy. During Q4, we used approximately $11 million per our quarterly dividend and we repurchased 15 million of our shares.
For all of 2020, we have repurchased approximately 780000 shares at an average price of $57 per share.
Now for our Q1 outlook, we expect sales to range from $510 million to $525 million, we expect GAAP EPS to be 61 to 66 cents per share.
And non-GAAP EPS to be 69 to 74 cents per share.
In summary, I would like to express my gratitude to the entire integrity team for an amazing year in 2020, especially considering the challenges we faced with the pandemic and the strong revenue ramp throughout the year.
Yeah.
Operator, we'll now open up for questions.
Yeah.
Thank you the question and answer session will be conducted electronically if you'd like to ask a question. Please do so by pressing the star key followed by the digit one on your Touchtone telephone.
The speaker phone please be sure of your mute function is turned off the lot of your signal to reach of our equipment. Once again. Please press star one to ask a question and we will take our first question from Mike Harrison with Seaport Global Securities.
Hi, good morning.
Congratulations on the on the nice finish to the year and the strong guidance here.
I was wondering if you can talk a little bit about some of the key applications that are driving.
The better of sales outlook than than I think some of US were modeling maybe talk a little bit about how much of the outperformance would be related to the share gains and to revenue synergies from some of your recent acquisitions and also talk about how much additional tailwind you should be getting from.
From node transitions as we get into 2021.
On the sort of questions here Mike.
So I would say that so first of all thank you for the nice comments and.
We are indeed, very excited about the prospects going into 2021 day.
True backdrop is strong, but as you pointed out we expect to meaningfully.
The performed the industry once again.
<unk>.
Suites of 400 basis points core semiconductor applications.
Then by about 100 basis points.
Coming from the New initiative in life Science.
As it relates to the core semi outperformance.
It will be just a continuation of the themes we developed during the recent out of these days. So it's really about the capitalizing on.
On the new opportunities that we see for already quickly between share and deposition of until you actually can be the suites and the new advanced memory in the defense logic architectures as you understand the are opportunities for us to improve the integrity content per wafer at those advanced nodes and we intend.
To fully capitalize on bad debt.
You know in 2021 has more wafers produced.
Most advance nodes and then as I was mentioning day, something new for us in 'twenty 'twenty, one and debt is the.
You know of great success that we've been able to.
Generates a lot of interest for this bag with the unique attributes that is proving to be extremely important for our storage and transportation of.
The coverage.
The COVID-19 vaccine and.
We saw some some interesting uptick in sales in Q4, and we expect 2021 to be a breakthrough year for.
But this application.
Yeah.
Alright, and then on the on the non semiconductor business weakness.
Can you just talk a little bit about whether that was related to underlying market weakness or more timing.
And maybe comment also on what Youre seeing in automotive. So we're hearing that there are some some shortages going on in chips there.
Thanks.
Yeah, So I think you're probably referring to come in the Greek man made.
Around the significant absorption that we saw in some of our non <unk>.
I mean.
And I think mostly it relates to the growth side product line.
This particular material and is used across a broad array of industrial applications.
And as we mentioned.
A few times during 2020.
This particular business was under severe pressure I think that this business its down essentially 30%.
In 2020 as compared to 2019, and remember that we had actually added significant capacity.
About a year ago.
Hoping to capitalize on new opportunities, new industrial opportunities, which obviously didn't really pan out in 2020, we've seen some recovery in this business in Q4, but certainly not enough to offset the very slow start to the year.
Alright, thanks very much.
Sure.
Next we'll go to the she got Hari with Goldman Sachs.
Hi, guys. Good morning, and thank you very much for taking the question Bertrand.
I had two questions from you guys. If I may the first one on the full year outlook, you spoke to a potential growth rate of 11% to 13% for integra and in 2021.
Which is obviously very very strong that said I guess, if we take the midpoint of your of Q1 guidance revenue guidance and if we sort of flatline that throughout the remainder of the year, we sort of get to the midpoint of that 11% to 13% range. Typically you know knowing your business things you know sort of.
Of the strengthened throughout the year am I am I missing anything or are there any concerns and from the second half of how should we think about your full year guidance and then I've got a quick follow up.
So what I think the way you want to think about Q1, which I think is really of the heart of the question is how to think about the Q1 outperformance.
How to think about the the 2021 outperformance in the context of the Q1 guidance and the the way I would.
The answer the question as to remind you that.
Out of the node transitions happen later in 2020.
And that our Q1 2019.
The Q1 2020 was also where we experienced the strongest headwinds from from COVID-19, so in other way.
Q1, 2020 was obviously.
Somewhat of an easier comprising of for us.
Understood and then as my follow up just on gross margin and maybe this one's for Greg.
You are you you mentioned a couple of items that drove gross margins a little lower of relative to your guidance for Q4 I'm curious if any of these were kind of more structural in nature of where they all sort of transient one time issues and how should we think about the gross margins not just for 2021, but throughout the next couple of years.
Thank you.
Yeah, so of high tissue.
First of all I would say that the issues around the gross margin were really non systemic and we had probably the best year that we've had in the last five in terms of ASP erosions and nothing there no meaningful changes in the material and put dynamics. So.
Primarily discrete in nature.
So the piece related to the inventory adjustment that simply won't recur.
And then.
Well look for the trial of already commented on that specialty materials business and we will look for some increases in volumes to help us out.
There, but I mean, if you look at the margin by Division I mean, the gross margin issue is essentially all related to S. Yeah. So as we think about you know we guided to.
$45 five.
Our Q1, which is up slightly up slightly from Q.
Four of them pretty much in line with where we were for the full year. In 2020, we think 46 five for all of 'twenty, One and then I would expect it to the the gross.
And to have.
The slight upward bias over the next couple of years as volumes continue to improve.
Thank you very much.
And as a reminder, ladies and gentlemen that star one if you'd like to ask a question next we'll go to of Sidney Ho with Deutsche Bank.
Thanks for taking my questions on congrats on the strong quarter and guide.
Because they're just coming back to the 2021 out of love kind of pop in London, the 13%.
Can you maybe talk about the growth expectations by segment.
And if I look back in history of the revenue for the Calvin you kind of use typically second half weighted.
<unk> 40 per <unk> per cent of the first half do you think this year will be much different from that true.
The Sydney, who do the way of which was to answer the question is saying that we expect.
The micro contamination and SDN divisions to really need.
The growth in 2021, and I expect those two divisions to grow in the mid teens.
And it would be expecting of niche to be probably in the in the high single digits on the on the full year basis for 2021.
In terms of the shape of the year.
I don't think we want to go too deep in details here, but I think directionally of thank you Youre right, we would expect.
More of a new fab construction projects.
The later in the year end debt will benefit all the Capex business.
Later in the year and as you know there are many customers that are also planning on the number of significant node transitions. The later in the year, which should also positively impact our business.
As we.
Proceed deeper into 2021.
Okay. That's helpful and then my follow up.
Question, the last quarter, but you talked about there was some pull in from Chinese customers I think of export controls have you seen those that could be become more more normal life all of it.
So both of them.
Wafer instead of inventory and whatnot and it turned.
Also the latest debt are you.
Do you guys have any issues shipping products to to SMIC.
Okay. So first on in terms of the inventory balance we source more of that in Q4, and I would say that on on a full year basis.
We estimate that a little less than 1% of our top line probably.
Was a function of on.
Some of the customers most of the Chinese customers.
Yup.
There's some inventory.
Right now as a result of that we expect.
Hopefully more clarity more transparency from the new U S administration and.
We would expect.
Of that trend to subside in 2021 of them.
Matter of fact, we expect most of the flow of Chinese customers.
To.
Consumed the investor with the inventory that had been.
The building up in 2020, and as a result, right now in the forecast with tomato of China business to be essentially flat versus 2020.
Well when it comes to.
I see I would tell you debt.
At the practical level.
We spend a lot of time the says the two components to that of the products that we manufacture outside of the U S.
And.
Took care of food analysis of a bit of materials.
We have reached the conclusion that the U S content for those products is de Minimis and therefore, we are currently shipping.
Two twists and I see from all of our.
Non U S locations.
For the U S made products.
We have put all of the shipments on hold right now.
And we are applying for licenses.
And we're waiting for approval and we have no reason to believe based on all kind of the understanding of the rule. We have no reason to believe that those licenses would be denied but again we.
We won't know for sure until we get the approval.
Alright, thanks for the detailed explanation and congrats again.
Thank you.
Okay. Thanks, we'll go to the Patrick Ho with Stifel.
Thank you very much and congrats on a great quarter and a nice 2020 Burch on first off in terms of.
The outlook for 2021, the last few years, you've talked about new products like the.
Debt position and the liquid filtration being key drivers from your outperformance as we look ahead to 2021 do you have anything I guess on the new products front.
What gives you excitement over the next few years will you'll start seeing some of the ramp up in 2021.
Yeah.
So Patrick I would probably be very boring and I'd, probably tell you just much of the same we believe the dollar of advanced filtration and purification solutions will continue to be increasingly important for the industry.
And Ah that trend.
He is not going to stop anytime soon as our customers continue to transition to more challenging architectures.
And I think if you recall, what we presented during the analyst day.
Jim on the you know of CTO described to you in great detail.
How are the deposition materials and all of our selective etch chemistries would be essentially for the higher the accounts architectures, the memory and the gate all around technology in the in advanced logic. So again those would be the new products.
The products that drove the growth.
In 2020, and I would expect the same products to drive the growth in 2021 would be on.
Great. That's helpful and maybe my follow up for Greg you had a great working capital quarter.
The in December which drove the strong cash flow generation. One can you detail on what type of linearity you saw just given how you were able to correct. It sells very well.
On to you expect to get some of the ones I guess normalized levels.
In the March quarter.
Yeah. So Patrick Yeah first of all thanks for noticing that I mean, our team would be we talked a lot about working capital management of our team would be happy to notice the people are paying attention. So that's great.
So first of all on DSO, so best quarter that I cannot but I remember I mean, our dsos coming out of 47 days. While we also benefited from the fact that I think we've talked about it before that the calendar year ends right out of the end of a sort of on calendar quarter, whereas the other quarters. This year ended a few days before the calendar.
Quarter, and when you end of few days before.
The collecting until the calendar quarter of lot of Asian customers pay right on the day. So that was while dsos were down, but a fair amount of the benefit related to and the right on the calendar day.
So and then.
If you're thinking about the inventory that's been something we've talked about all year long, but of our turns were three five times, which is the best levels. We've had in probably about eight quarters. So we felt good about what the team did there as well, especially given the sort of the business volumes were facing.
Great. Thank you very much.
Yes.
Next we'll go to Weston Twigg with Keybanc capital markets.
Hey, Thanks for taking my question.
I just wanted to dig into a couple of revenue streams here first on the aramis bags. It sounds really interesting you gave us the growth estimate for this year, but can you help us just kind of figure out roughly how large that business was in Q4.
No. This is the this is sitting on your business that has experienced explosive growth ex U.
Look back at.
2019 revenue for this product line was about $1 million.
On the full year 2020 that number is just above $10 million.
And we would expect that product line to reach.
And hopefully exceed $2 billion in the.
2021.
Okay.
Okay, that's very helpful.
And then similarly from the grass I.
Sorry go ahead, just maybe just maybe as the.
A little bit of context here are you I think or no debt.
We don't really have many product lines that would exceed $50 million.
In the annual topline.
Top line so.
We are really considering this.
All of them as a product line.
You know growing in the.
The strategic prototyping all of these things.
Yeah.
I guess actually just following up on that.
D D.
Do you see that.
As.
The new vaccine technology.
I am of Donna and Pfizer.
Pfizer as it comes out as it rolls out and maybe other vaccines are made using the same technology is this is this going to be kind of a standard packaging and transportation.
The product across more of vaccine lines do you think.
So I think that I would actually even even expand debt the description of the market opportunity.
We're really targeting all of the the novel biologic therapies, So think about the no vaccine antibodies and cell therapies.
Not just around the fight against COVID-19, but really you know oncology.
The type of the.
A particular area.
Yes so.
Again, what our customers really like in these bags are the fact that they are uniquely resistant to very very cold temperatures donut Brito.
And then the convinced then give us the organization. So this is the.
Two very very unique attributes in the marketplace for these banks and this is widely on getting so much attention right now.
Okay.
That's very helpful. And then I just wanted to ask about the graphite business. I think you mentioned that it is starting to recover can you remind us you mean product lines, I think and I know that there's some.
Exposure to the phones for example, but and then what would drive of recovery in the graph on your business. This year to get some of that hit the <unk>.
Utilization rates up a little bit in the mail.
Factory capacity of space.
Yeah, so less of that business is a pretty diverse business I mean, if we were selling.
Half of it that's used for cutting application of metal cutting applications into the electronic system.
The discharge machining business.
Selling into the glass forming market, including the in glass forming for on.
Handset applications, we have in aerospace part of the business. There's the medical part of the business still very diverse the part of the business that was weakest.
Last year was primarily that.
Core industrial business, the machining related business as well as the business that we sell into the handset market and we have we saw improving trends in that business in Q4, and we expect to see.
Better trends when we look at the full year 2021.
Yeah.
Okay. That's helpful.
Thank you.
The next we'll go to our parents Misra with Baron Berg.
Thank you good morning.
What do you expect to be the bigger driver of the 3% to 4% outperformance in this year, what would that be logic or memory and any of our contrast, you could provide the same last year and this year, but you got to the key technological transitions Ah that debt.
Kind of take place this year.
So potash I, let's start maybe with 2020 I mean, we saw a very significant increase in our memory.
Market, we grew close to 30% and in memory. The growth in logic was also very attractive it was in the into 'twenty.
On the Sun in advanced logic, and I would expect.
The opportunities going into 'twenty, one to be of very much of the same nature again more wafers being produced at 96 layers and higher.
And that's going to drive more consumption of the new material used in the opinion chemistries that was describing and of.
Of course, we expect of a very strong environment for advanced logic with more the.
The advanced logic wafers are being produced in 2021.
So I would say the memory will probably still be the primary driver, but the advanced logic would be of very close second.
Thanks for the color of the car.
And my second question of what's just about the competitive landscape so given the strong industry demand.
But you're also forecasting the same eight per cent for next year are you seeing increased competition from suppliers and if there are any specific products, where you're seeing more competition either from any of the.
That's from producers on our local Asian naphtha producers.
Well we.
We'd never the success.
The success for granted and we continue to focus intensely on making sure that.
Oh of differentiation is very real and very unique.
And I would say debt as of right now we feel very good about our competitive position and.
This is one of the reasons why we have.
That degree of confidence in our ability to outpace the market from 2021 and beyond.
Great. Thanks, guys and good luck in 'twenty and 'twenty one.
Thank you.
Next we'll go to Chris Capps with loop capital markets.
Yeah. Good morning, just following up on the outperformance relative to the the industry that you mentioned.
Thank you.
He said that the skewed toward the.
And in the segments and then in a the the.
The last question you mentioned that it's really.
I'm, probably going to be led by memory, and then of band logic, but I'm curious like to the extent debt.
On the outperformance was led by memory it sounds like it deposition materials and therefore at the I'm.
I'm wondering within you know given the strong outlook for revenue growth within M. D. Does that also skew memory or is it balanced the cross memory and logic foundry any color on that and then all of it one follow up.
Yeah, I think I mean look.
The the need for higher share at 11.
Exists both in advanced logic, and advanced memory to your point that those requirements on more stringent and advanced logic, but.
Advanced memories of catching on.
Quickly on the thing we had the slide during the recent analyst day talking about that and then trying to frame that on the on a per wafer basis. So.
You are correct in your statement that.
The advanced logic would be still the primary driver from micro contamination.
But again memory, maybe on a close second on this one and then.
The opposite would be true for ACM with memory being the primary driver and.
The advanced logic being the.
Of course, they can.
No.
One of the uniqueness of the integrity of platform is that we have exposure towards segments.
The logic chemical manufacturers Oems and.
And we have.
Tremendous opportunities across all of those segments and I think that's what is behind the resilience of.
Our business model.
And frankly, I think that's what gives us the <unk>.
Strength and the conviction that we have in <unk>.
The growth <unk>.
<unk>.
Okay. Thanks for that and then just the follow up is that you mentioned that in terms of revenue growth in 2021, the mid teens in F. E M P and high single digit of M H and given that empty. It's your highest margin business in and then given that the.
The driver probably and that makes me the.
Advanced products that come with higher margins so the.
The connecting the dots it seems like the implication for your margins might be higher than what you Directionally talked about so I guess the question is there is there some.
Drag maybe this way you can quantify the drag in the graphite business on the <unk> segment.
Segment in the.
<unk> fourth quarter and are you expecting that the persist.
Enter into and through 'twenty, one or any way to reconcile that that strong growth of your highest margin segments VW the more muted margin improvement expectation. Thanks.
Yeah, Okay. So a lot the aircrafts so let's first talk about the.
The grew up the operating margin, which I guess the tangential.
Tangential to the gross margin in S. E. So the vast majority of that or yeah.
It had to wind that we experience the nonrecurring in nature I referred to.
And adjustment related to inventory that was about one per cent of gross margins across the company, but it was all within the S E L.
That's not going to persist the volumes that we talked about as being a headwind that was also in the SCM business, we expect those volumes to the.
The improved throughout the year, we're not necessarily expecting a big snapback in Q1, but do you expect those volumes to improve throughout the year.
So when you think about the three divisions I mean, we're.
Already on the target with regard to MH.
We were already on our three year target with regard to the MSC business. So I mean can they do better than theyre doing share, but I mean of 35% are sort of right in the middle of our long term target.
And then.
Yes kind of in a nutshell I mean, you're right I mean, the the.
Advanced products are of the faster growing products, so mix should play an important role in the margin as well.
Okay.
Okay. So I guess just on all parts of out my modeling, but it just sounds like maybe there's.
Is there.
From other mixed drag from 'twenty and 'twenty, one or maybe there's some upsides of the overall margin profile relative to what you know so we said 46 five per cent for the year, which is up from where we finished the full year 2020.
I'm not if you're looking for me to say, there's upside on that I'm not going on I'm coming off of quarter that was 45%. So it's not I'm not in the mood to push the number for <unk>.
2020 was set at 46 five.
Yes.
Alright, that's helpful. Thanks for the color Greg.
Yeah.
Okay.
Next we'll go to Krish Shankar with Cowen and company.
Yeah, Hi, Thanks for taking my question and congrats on the really strong with the votes on all of two questions for you. The first of all of those on the memory.
It looks like the memory field who's gonna grow year over year of this year.
Since in most of the node transition from customer and it's so we send them to go the capacity how would that impact your the med needs to get out of a follow up.
So yes, I think we have said to me is seeing and expecting a lot of node transitions in memory.
I think we don't own any of the euro. So we are we are seeing plans. We are having all of the right discussions in terms of getting ready for those conditions, but we've learned the hard way and there's the new street to not.
You know.
Get ahead of yourself too I mean, some of the customers sometimes choose from a number of reasons to two delayed and of traditions and.
Disappoint in the your I think we were just looking at a very attractive.
Tape of and I'm looking at it as I'm speaking of.
Planned no transitions, it's like looking at in <unk>.
And then you end the celebrating in the nice restaurant, but I mean, we want we want to see those node transitions happening deals of the big factor. There was mentioning is that we expect a lot of wafers to be.
The run at a 96 layers in the higher I think in 2020 about.
<unk> to 60% of the wafers, we're at 96, so higher.
I expect that number to be.
The 70 to 75 per cent in 2021, so that's going to help us see us awhile.
And then you had decided the bashing.
Yeah, and then I have a follow up on a fitting that clearly looks like but this is the tremendous potential in this kind of accused of anything you can it's going to be meaningfully the numbers do you have to wait for silicon carbide can be used in all electric vehicles in 2024 downstream or do you think it can scale of before that.
I think it would be the steady progress I mean, we are working with the number of customers that have aggressive capacity addition, plans and as those.
Gallium nitride on Silicon carbide substrates are more broadly adopted in the electric vehicle. So I think we can see the business.
Growth very nicely on them.
In the face of steady basis for the next few years.
So I agree with you I think of a.
Promising business for us.
Okay. Thanks, blips on the accretion.
Yeah.
Next we'll go to David Silver with C. L King.
Yeah, Hi, thanks.
So I have kind of of more.
The quarter related question, then on maybe a more strategic one but.
In the fourth quarter I was hoping you might be able to add a little color to the inventory adjustment or what came behind that so in other words was that a collection of items that are maybe part of the normal year end true up or you know what I'm kind of wondering is Bertrand you've talked about you know new debt.
<unk> materials being a focus of the.
C N unit and I'm wondering if you know the.
The timing of the inventory valuation adjustment and took signals of <unk>.
<unk>.
Two of new technology, or a new material.
Within your portfolio. So are you phasing out kind of current generation products and transitioning to the maybe a new AGM or or other type of product. Thanks.
Yeah, So David it at the first of all let me say did that relate to deposition materials.
The vast majority of it related to one <unk>.
Immaterial issue that's sort.
Bill So built up over a series of quarters, we noticed that they have.
Didn't quite look right on one of our inventory lines of one of our manufacturing plants and as we analyze the week so.
Moving to correct it and it was as simple as that.
And it was all I mean, I said it was about one per cent of gross margin. The vast majority of that in the 75 basis points of that related to one item and then we had another small inventory adjustment as we moved one of our new businesses on the S E T.
Hey.
Sure.
Okay. Thank you for that and then I'm just kind of the Big picture question and following up I think on an earlier question about trends in the automotive side of things, where a number of companies who have expressed an inability to receive the required.
Number of chips, you know I'd also say I guess, there was an announcement in the last day or two that I kind of thought was unusual but the Taiwan economic Minister made the statement, where he was kind of directing the domestic chip industry to maximize production four of chips.
For the global automotive industry.
And I'm just wondering if you could maybe provide a little bit of background. There I mean, I am not aware of kind of this type of shortage situation permeating such a large industry.
On to the point, where I guess government officials are at least publicly kind of directing the industry to maybe prioritize some chip production types over others I'm. Just wondering if you know how you kind of interpret the those items and.
Whether that will have an effect on the types of where the rates at which your businesses are in demand over let's say the next few months.
So I cannot comment on on what is behind the.
On spin by the Taiwanese government, but.
What is behind.
The trends is that many many of.
The automakers are.
Migrating the debt chipsets away from 65, or 45 nanometer processes to 28 and below.
And that's positive for us because it means that more wafers would be produced at more advanced nodes, where we have higher.
Tegra is content. So again, it's it's just part of the general trend that we've been flagging I think it's true for us.
You know high performance computing, but it's becoming increasingly true for automotive and other industrial applications as well.
The value positive for the industry and that's very positive for us in Texas.
Okay, Great and then just one last one maybe for Greg but the.
The other income I guess, the unusually somewhat higher than normal profit on that line is that the royalty income issue you cited or is that that day to something else no no. Its an issue that it really relates to.
Technical I mean, the the way we value.
Dollar denominated assets and legal entities, where the functional currency as others on the dollar it's strictly of balance sheet thing, it's not a cash flow thing, but it relates to the consolidation of our legal entities. When the dollar used to when the doubt I mean, the dollar had been relatively stable. So we haven't seen much of that.
In the recent past.
The function of the dollar weakening against the other currencies, but it's non operating.
That's why it's below the line.
Gotcha. Thank you very much.
Okay.
And that does conclude today's question and answer session and does conclude today's conference. We thank you for your participation everyone.
You may now disconnect.
Okay.
Thank you.
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Okay.
Yeah.
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