Q1 2021 Entegris Inc Earnings Call
Ladies and gentlemen, you can view and host for today's conference call. At this time of assembling today's audience and plan to be underway. Shortly thank you for your patience and please continue to hold.
[music].
Good day, everyone and welcome to <unk> and <unk> first quarter 2021 earnings release call. Today's call is being recorded at this time I would like to turn the call over for opening remarks and introductions over to Bill Seymour VP of it.
Mr Relations. Please go ahead Sir.
Good morning, everyone earlier today, we announced the financial results for our first quarter of 2021.
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 and our forward looking statements.
Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we file with the SEC.
Please refer to the information on the disclaimer slide and the presentation.
On this call. We will also refer to non-GAAP financial measures and decided by the SEC and regulation G.
You can find a reconciliation table in today's news release as well as all of our IR page of our website at Integra Dot com.
On the call today are Bertrand Loy, our CEO and Greg Graves our CFO.
With that I'll hand, the call over to per truck.
Thank you Bill and good morning to all and I hope, everyone is staying healthy and safe and the present environment.
Turning to our first quarter performance sales grew 24% year on year of growth was strong across all three divisions as we benefited from accelerating industry conditions several of node transitions and strong overall demand for our products and solutions growth.
Margin improved sequentially as we expected and was up over 100 basis points from the fourth quarter.
Adjusted EBITDA was up 25% year on year, and non-GAAP EPS was up 27% year over year.
Let me provide a little bit more color on our Q1 revenue performance.
From a product standpoint, we continued to benefit from accelerated demand for our leading edge solutions, especially and liquid filtration and advanced deposition materials and specialty coatings.
Sales to memory customers were up 40% year on year and.
Sequentially.
You'll recall integrity content per wafer is rapidly increasing and the new hire lay accounts memory devices and.
In addition, our and I Miss high purity bags, which are being used for the distribution and storage of the COVID-19 vaccine recorded stronger sales than planned.
Our team successfully ramped new capacity.
While sales growth was strong overall, we did face some challenges in what proved to be a very dynamic industry environment, particularly in the areas of freight capacity as well as supply chain and labor constraints in certain U S locations, we are aggressively managing day.
Situations and we expect them to ease as we progressed through the year.
That said demand for our products and solutions continues to be very strong and our order book is at record levels, which bodes very well for us as we look ahead to the second quarter and the balance of the year.
More specifically for the full year, our outlook for the industry and Integra is has improved significantly.
The semi market looks very healthy bolstered by a robust global GDP outlook and strong overall chip demand driven by accelerated digitalization and <unk> and high performance computing.
In addition, we have recently seen significant increases and now.
Customers' capex plans for the year.
Given this backdrop for the full year 2021, we now expect of market there.
Based on our unit Capex mix will be up 13% to 14% compared to our previous expectations of up seven 8%.
And as I said the demand for our solution set continues to be very strong and as a result, we expect to outperform the market and now expect our sales growth for the full year of 2021, two range from 17% to 19% compared to our previous expectation.
<unk> of up 11% to 13%.
Finally, we expect the EBITDA flow throughs to be in line with our target model and now expect full year 2021, non-GAAP EPS to exceed $3 and 15 assets compared to our previous expectation of non-GAAP EPS greater than $2 and 85.
Looking further ahead and we are very optimistic about the long term fundamentals of the semiconductor market.
Accelerating chip demand and a higher proportion of wafers produced at the leading edge provide a great base full of very attractive secular industry growth.
On top of this and in Texas, we are benefiting from the growing importance of process materials and materials purity to new device architectures.
We expect that these key trends will continue to result in a rapidly expanding set of market and increasing integrity content of wafer and.
All of this is supported by the strength of our team's execution and our highly resilient differentiated unit driven business model.
Finally, I want to take a moment to thank our customers for the trust and confidence depletion of integrity and thank the integrity teams around the world for their incredible work.
Now, let me turn the call to Greg Greg.
Thank you Bertrand and good morning, everyone. Our sales in Q1 were $513 million up 24% year over year and down slightly sequentially.
Moving on to gross margin GAAP and non-GAAP gross margin were both 45, 8% slightly above our guidance of 45.5.
The biggest drivers of the increase were the expected improvement and SCE Ams gross margin following a weak Q4 and better overall factory performance.
We expect gross margin to be approximately 46, 5% both on a GAAP and non-GAAP basis. In Q2. We also continue to expect gross margin will continue to improve throughout the rest of the year and be approximately 46, 5% for all of 2021.
GAAP operating expenses were $121 million in Q1 and included $14 million of non-GAAP items from amortization of intangible assets integration and other costs.
Non-GAAP operating expenses in Q1 were $107 million, which was slightly above our guidance range.
We expect GAAP operating expenses to be approximately $122 million to $124 million and Q2, we expect non-GAAP operating expenses to be approximately $108 million to $110 million.
Q1, GAAP operating income was $114 million.
Non-GAAP operating income was $128 million or 25% of revenue in line with our expectations and up both year on year and sequentially.
Adjusted EBITDA was approximately of $150 million or 29% of revenue and was also in line with our expectations.
Moving to below the operating line.
Looking at the other income expense line and.
Negative move during Q1, and the same currencies that favorably impacted us in Q4 resulted in other income expense going from 5 million positive in Q4 to 4 million negative in Q1.
Our GAAP tax rate was 14% and our non-GAAP tax rate was 15% for the quarter.
For Q2, we expect our GAAP tax rate will be approximately 12% and our non-GAAP tax rate will be approximately 16%.
For the full year of 2021, we expect both our GAAP and non-GAAP tax rate will be approximately 18%.
Q1, GAAP diluted EPS was <unk> 62 per share.
Non-GAAP EPS of <unk> 70 per share was up 27% year over year and down slightly sequentially.
EPS would've been approximately <unk> <unk> higher in Q1, excluding the negative currency impact on the other income expense line item I just mentioned.
Turning to our performance by Division.
Q1 sales of $167 million for SCE and.
We're up 15% year over year and down slightly sequentially as expected.
The year over year growth was primarily driven by advanced deposition materials cleaning chemistries specialty gases and advanced coatings.
Adjusted operating margin for <unk> was 21% for the quarter up over 300 basis points sequentially.
The sequential increase and operating margin was primarily related to the improvement and the gross margin I just mentioned.
Q1 sales of $207 million for MFC were up 30% from last year and up slightly sequentially.
Liquid filtration and gas purification drove the sales growth year on year.
It's worth noting the gas filtration had its best quarter in years and is seeing the benefit of increasing <unk> spending and the industry.
Adjusted operating margin for MMC was 34% up significantly year over year and down slightly sequentially.
Q1 sales of 149 million for MH, we're up 28% versus last year and down 2% sequentially.
The year over year sales increase was driven by growth across all major product platforms strong sales of our aramis high purity bags and the impact of the <unk> acquisition.
The sequential sales decline can mostly be attributed to the catch up royalty income from <unk> precision that occurred in Q4.
Adjusted operating margin for <unk> was 22% up almost 400 basis points year over year and down slightly sequentially. The year over year margin increase was driven by the higher sales volume and solid cost management.
First quarter cash flow from operations was $53 million and free cash flow was $10 million.
As a reminder, Q1 typically has the lowest cash flow of the year, primarily due to the variable compensation payment that is made during the first quarter.
Capex for the quarter was 43 million given.
Given the strong demand environment, we now expect to spend approximately $225 million and Capex this year.
$25 million from our previous expectation.
These investments are in support of our global product introductions capacity expansions, including the era of Ms bags and for the initial phase of the previously announced investment and our new Taiwan facility.
Consistent with our capital allocation strategy. During Q1, we used approximately $11 million for our quarterly dividend and we repurchased $15 million of our shares.
And you probably saw that we recently took advantage of a favorable debt market and announced and priced $400 million of senior unsecured notes due in 2029 and an interest rate of 365%.
We will use the proceeds as well as cash on hand and of small draw on our revolving credit facility to pay off the existing $550 million $4, 625% notes due in 2026.
This effectively extends the due date three years and lowers the rate by 100 basis points.
As a result of the refinancing we are expecting $23 million of one time costs, primarily related to the call premium for the existing nodes that will impact GAAP EPS in Q2.
And on an ongoing basis with the changes to our debt. We are now expecting interest expense to be approximately $10 million per quarter, starting in Q3 of $2 million reduction from recent levels.
Now for our Q2 outlook.
We expect sales to range from $538 million to $545 million.
We expect GAAP EPS to be 56 to 61 per share and non-GAAP EPS to be 77 to 82 per share.
In summary demand for our products and solutions is the highest its ever been validating the importance of our offering and the strength of the market.
And we look forward to a strong Q2 and another record year.
Operator, we'll now open up for questions.
Thank you if you would like to ask a question. Please signify by pressing star one on your telephone keypad.
And we're using a speaker phone. Please make sure you made assumption is and ask you. All of you have taken to return equipment and that's again star one to ask a question. We will take our first question from <unk> Hari of Goldman Sachs. Please go ahead.
Good morning, Thanks for taking my questions and congrats on the strong outlook.
You you revised up your market outlook for 2021 from 70% to 70% of 13% to 14% can you and sorry, if I missed this but can you differentiate between how you're thinking about the capex outlook for the industry versus wafer starts and.
And in terms of of how Youre thinking about your own business, the 17% to 19% growth for the year. If you can provide a little bit more color by segment that would be helpful. Thank you.
Sure happy to do that this year.
So we were a piece of need to to increase our guidance for the year of those non Brazil organic first of all.
And back to your question in terms of what's behind the.
Industry.
Assumption, while we expect.
And this side to grow in the low teens for the year.
And then on the Capex front, we expect Capex and again I'm talking about the industry Capex not just Wi Fi and we expect capex to be up and the low twenty's.
And that gives you a blend of about 13% to 14% for the industry.
And then again outperformance, it's about four to five points for integrity. So very much in line with the commitments that we made during our recent analyst day.
And then how are you thinking about the segments for trial and is there any additional color that you can provide for the full year.
Well and touch.
First of what is going to drive the day be outperformance first and think it's going to be a continuation of the trends that we saw in Q1 and a lot of benefits that we expect to continue to see.
From the memory segment.
<unk> now and as you know.
And is a big opportunity for for Integra is net of fins.
<unk> selectivity and formality.
He becomes particularly important.
As more wafers will produce that to 128 layers and more.
And we expect about 30% of the wafers to be produced at 128 net use of more of this year as compared to 10% last year. So that's going to be a big driver for us.
And that will benefit dollar.
Advanced deposition materials and it will benefit.
And specialty coating product lines.
And of course, it will benefit our liquid micro contamination product line as well.
Great. That's super helpful and then as a quick follow up.
And we're trying to in your prepared remarks, you talked about some challenges related to freight and supply and labor.
And how meaningful were those headwinds in Q1 I'm, assuming there was some revenue impact from those challenges and what are your expectations in terms of Q2 and the back half of you talked about some of these easing as you progress through the year, but should we expect some of these challenges to persist and in Q2 and perhaps Q3. Thank.
Thank you.
Yeah as I said in my prepared remarks, we are all very very focused on.
Managing their use constraints that we saw and experienced in Q1 and I cited three different types of constraints.
One was the supply chain shortages that we experienced.
Our own capacity limitations and and the last one was.
Great.
I think.
On the supply side, we expect.
And do those situations to ease out in Q2 Q3 of.
As it relates to our own capacity we of.
And number of initiatives to add that would actually add capacity and Q2, and then more additional capacity coming into into the balance of the year.
And then trade institution that hopefully will get better as the general economies start to.
Two of to open up.
But again all of those of their use constrains and the plans to mitigate the MLR that's been taken into account and our revised annual guidance.
Thank you congrats again.
Thank you. Our next question comes from Sidney Ho of Deutsche Bank. Please go ahead.
Great. Thanks for taking my question.
My first question is on margins.
Adjusted gross margin will get still get three of 46 and half of sand for the full year, but given that gets started and of course quarter and second quarter why won't that gross margins go higher and kind of relate to that if I kind of look at the operating margin side.
Especially for SCE, and nice improvement, there 300 basis points quarter over quarter.
Looking forward can you help us understand what are the key drivers to get to your target of 25 and 27%.
So first of all Sidney on the gross margin so.
Through the first half.
We had of $45 five or a little over 45 five quarter. In Q1 was 45 eight we expect 46, five and Q2, so that brings us to an average of a little bit over 46 to get to 46 five for the full year. It implies back half margins of about 47%.
And so that those are our assumptions as it relates to gross margin. So we see some improvements.
Related to volume, we're counting out we're not counting on better than average product mix. We're counting on typical typical product mix for those of our primary assumptions on the gross margin.
And then.
The second part of your question.
Could you repeat that I heard the 25%, but I didn't get the starting point, yes related operating watches for SCM again, good improvement in Q1, how do we get from from the roughly 21% range. How do you get to that 25% to 27% of what are the key driver of students.
To get there so it's really three things I mean, they've got.
We will see continued gross margin improvement there and that business.
We expect to see and continue to manage there they've made much of their investment in E. R&D and SG&A. So we would expect there to be pretty significant leverage on the improved.
Gross margin and then.
<unk> consistently about improving volumes and our specialty materials.
Lash graphite business as we move throughout the year that would be at that should be helpful as well.
Okay. That's helpful. Maybe I'll follow up question is.
Can you relate to the earlier question.
You answered, but beyond second quarter, and what kind of pace of Billy do you have in the second half of the year at this point when compared to the same kind of in the past few years, especially given the semiconductor wafer shortage list.
And maybe asked differently and demand continues to improve do you think you'll be able to see much variability of full year revenue forecast given supply shortages out there.
Thank you Sidney I would say that the visibility is actually pretty good right now.
And our order book is at record levels as we mentioned earlier.
So that gives us.
Good level of comfort for.
For the rest of the year and that's really what we've reflected into <unk>.
And to the full year guidance, we talked about.
Capacity and and do constrains of.
That we are working on resolving.
All of obviously very focused on that I mean short maturity about and I'm talking about Q2, it's really about getting day most out of the current equipment and infrastructure. So it's really most of your staffing China and she and the U S.
But we have been hiring and we are training and number of new shifts and we intend to operate at seven and 24 and in most sites.
Starting sometime in mid and later in Q2, and then and backend of the year and second half of the year of new equipment is going to come on line.
Kind of provide additional relief and particularly for our liquid filtration platform.
And then if you go beyond that next year, obviously, we're going to start seeing the benefits of a number of new investments, including the new Taiwan site and that's important because our growth objectives. Obviously go well beyond 2021, we either of you.
<unk> growth objectives for.
Many of those to come so we're very focused on the capacity short term midterm and long term.
Great. Thank you very much.
Yeah.
Thank you our and.
Next question comes from Mike Harrison of Seaport Global Securities. Please go ahead.
Hi, good morning.
Good morning.
And micro contamination control you mentioned that your gas filtration business had the best quarter and years. It sounds like that was more equipment driven.
So can you number one talk about what is driving the strength and the gas filtration business and then maybe talk about the sustainability as you think about equipment sales being maybe a leading indicator for some of the consumable sales.
With it and that business.
So Mike your assessment is correct.
And all gas filtration business had a record quarter and a lot of that comes from.
The increased levels of <unk>.
<unk> spending.
And we expect dose levels of demand to continue at least for the balance of the year.
And that's going to continue to benefit of that product line.
And again for many quarters to come.
When it comes to the long term implications of all of that actually what we are most excited about it and tegra as is.
And I'm not just so much the current level of new fab construction, but it's really a few years from now and 2023 and beyond when all of that new capacity is going to come on line those new fabs will be.
You know running.
Processes and most advanced processes in logic and in memory, where we have of higher content per wafer. So obviously pleased with the short term increase and Capex and what it means for some of our product line spud.
More and excited about the long term prospects as those new Fabs come online.
Alright, and then within the.
Advanced material handling business.
And I believe you showed.
Revenue growth in the high Twenty's, there, but you mentioned the strength and Airbus and the impact of the <unk> acquisition can you give us a sense of what organic growth.
And would have looked like and that and each business versus the 28% number that you showed.
Yeah. So I mean, just to remember given the timing of.
Some of those acquisitions I mean, the day inorganic impact is relatively modest and.
If you exclude the day life science business I would say that.
B and a high teens for Anh.
Versus Q1 of last year.
Is that the question.
Yes.
That answers it and maybe just one last one you overshot the operating expense number by by about $1 million anything.
Any color you can provide on AR and what drove that overrun.
Mike not really anything in particular, I mean, I would say if I could point to one thing and I referred to it earlier that some of the investments and.
E R&D within our divisions.
Probably spent a little bit more than we initially anticipated and thats not something honestly when we're spending more on R&D as long as it's.
Within reason and I feel good about that.
Alright, thanks very much.
Thank you. Our next question comes from Chris Scott Sheffield Capital markets. Please go ahead.
Yeah. Good morning. Thank you. So you characterized your order backlogs are at record levels, both from the formal remarks and and in response to another question I'm just wondering if.
If you could characterize any instances where were your that demand growth of those orders are outsized relative to your revised market expectations and.
Also is there any sense that some of this demand it is.
Above and beyond sort of the industry conditions in other words are there instances where customers are just desperately trying to build buffer stocks or is this just you know.
Reflecting true end market demand.
So do.
And I think what we're seeing is really true end market demand and I think the easy.
A high level of demand for advanced chips and for mainstream.
Chip.
And the demand for our products really.
Comes from the high level of Fab Utilizations that we've been seeing across most segments.
Today I would argue that many of our advanced.
Customers in particular are running with very low levels of finished stocks.
And in some cases and comfortably low levels of safety stocks. So I think that again, there is a solid pent up demand for our solutions and that is based on actual demand drivers as well as a desire by some of our customers to get back to more normal levels of safety stocks for some of our products.
Fair enough. Thanks, and then just to follow up on you mentioned and I think it was.
And your memory.
Our sales into the memory of that.
I think 40% and you also made some comment about.
And the architecture shift that's ongoing there in terms of expectations for the year. So just wondering if if the current strength is it is it reflective of just across the board fab utilization rates and the memory and market or does it reflect a shift.
And he happening.
Any color on that.
And so where the cadence of that and the direction trajectory of that business would be helpful. Thanks.
So if you look at the fab utilization, especially in <unk> NAND and.
Really not of lot of change Q1 versus Q4.
And so a lot of the benefit that we saw was coming from the migration to higher layer count devices and as it was mentioning earlier.
And you know that this is the type of architectures, where we have higher content per wafer.
And then I would say that the rate of adoption.
Of the new mature units that we've developed for those architectures and new Chemistries that we have developed and it's just accelerating as expected and as we presented doing all of recent analyst day.
So again, it's a trend that will be.
Beneficial to us this year, but we expect more conversion to one point you need to let us in 2022 2023 and.
If you go beyond 2021, we would expect.
More migration to 256 layers and beyond where we have yet.
Increased opportunities per wafer.
Helpful. Thank you.
Thank you. Our next question comes from Patrick Ho Stifel. Please go ahead.
Thank you very much and congrats on the nice outlooks for the year, but kind of maybe first off on <unk>.
And then I wondering logic side true.
Traditionally you've seen continued capital intensity increases in your micro contamination control business as well.
Can you just remind investors and myself included and in terms of some of the materials opportunities.
And that are currently ongoing and whether you need to see the industry trends.
And the nano wires gate all around.
And that next step up on the materials and.
Yes.
Yeah. So we are of course, we've been talking a lot about memory.
And Patrick you're reminding us that we are also great opportunities on the logic.
And the front end and you're right I think that.
We mentioned total opportunities and we quantified those opportunities and in November.
Last year and and deal real.
The opportunities would be four four net tunes new high came the two of us.
And selective etch Chemistries wind stopped to also be introduced.
And with gate, all around and architecture. So the next few years will be equally exciting in and logic.
And when it comes to node transitions and logic I think that the second half of this year 2021.
We would see some large customer transitioning to true node, so that will actually drive the adoption of some of those new materials and there was more advanced filtration solutions as well so I would say that for us the first half of the use of more of a memory story.
The second half of the year will be both memory and advanced logic.
Great that's helpful and maybe as my follow up question for Greg in terms of Opex is going up slightly in the June quarter and.
And did mention bringing on additional labor how much of that labor content going to impact the rest of 2021 in terms of the opex slot.
Yeah.
So when we see the increases in Opex.
Primarily investments in E R&D and some modest increases in SG&A, when we talk about labor, we're primarily talking about.
Cost of sales and adding additional labor to help us meet the demands for our products.
Right.
Great. Thank you very much.
Thank you.
Our next question comes from them and that's kind of an idea of Citi. Please go ahead.
Hi, good morning, and I just Wanna.
And talk a little bit about I see licensing earlier and no corner. There was news report that and talked about you gave lots of games and licenses back and just talk about the scope of what that looked like and and if theres any ongoing discussion with the U S government and type of debt.
Pending sales.
And to China or any of the shallower sections of that actually that you're seeing.
Yeah.
So good morning, and moving first.
Let me start with the broader part of your question first and then of course, the industry as a whole and integrity and particularly as each of them.
And engaged with the U S administration and right now.
And it's important and especially in the early days of of the new bite and administration and.
But I think generally speaking I think that we.
We need to accept that the semiconductor industry because of its broad strategic importance. It's like you can remain and.
And the Oreo of tension between between the two nations so.
Going back to the first part of your question.
And like everybody else right now we are very focused on complying with the existing routes and.
And for US as we discussed in our.
Our previous earnings call. It means applying for export licenses for all of our U S made products.
And getting some time to the administration to review and.
Prove those licensees what I can share with you is that.
We have.
Some of our licensees.
Received approver since the beginning of the year.
But there are some sort of still under review and we are waiting approval.
But all of that has been factored into all.
Q2 guidance and all of our annual guidance and we've been modeling different scenarios.
Great and do you think and the fact that there's so many semiconductor shortages.
Yeah in fact, I asked and I see it and what are the larger foundries and that creates a little bit more of an easing of maybe material sales.
Or is it just sort of.
Product is that true that you've already built.
Getting licenses for.
Okay.
Don't have that specific insight into.
How do you administer issue and he's making decision on on.
And granting.
Granting those sports licenses and would you say that repeats two of received approval and many of our licensees and I think that we are making good progress and I am hopeful that we will get approval on the balance of the licenses that are still pending approval, but okay and we won't know.
And we hear from the administration.
Great. Thank you.
Yeah.
Thank you. Our next question comes from David Silver of CL King. Please go ahead.
Yes, hi, thank you.
And I was wondering if we could just maybe talk a little bit about the aramid.
Product line. So there's a couple of moving parts here, but back on Investor Day, I think you called out the aramis product as something that was going to account for a full.
And 1% of company growth and 2021 and.
Since then of number of things have changed you've raised your growth targets you've completed a.
Pasadena expansion and I believe you've called that out so I'm just wondering.
And you could may be.
Update us on the expectations for the air Miss.
Our growth this year and then secondarily is there what's the current capacity expansion one of the play and theories or is that the final capacity expansion for you know for some time now thank you.
Okay.
Yes. So it is indeed, a great story for us.
And then 2020 was really obviously, a turning point for them.
This particular technology all of our strategy has always been.
To target emerging biologics and the reason we wanted to target.
Gene and cellular therapies is that they have very unique.
Supply chain, and and very unique requirements involving free cell processing.
Where does <unk> bags performed really really well and as a matter of fact, we believe that all bags or just the best solutions and the market right now the of lower extractable slower mutuals and that makes them the cleanest.
Bag of available and they are more resistant than any other bag and the market can withstand gannett's to realization and didn't do not.
Break do not leak Wendy of frozen so.
With that as a backdrop.
The projections for this platform and in 2021.
He is now closer to $40 million or a little bit more than when we last spoke.
And that's the reason why we just we are adding capacity we and.
We invested about $10 million and capacity last year, we plan to invest about $30 million. This year by the way those numbers obviously included in the Capex guidance that Greg.
Gave you and just to be clear of those investments go well beyond supporting the needs of the global COVID-19 vaccination campaigns.
Strategy here is really to support the needs of.
And all biotech customers as they develop the sort of that piece of the future.
Okay. Thank you for that I had maybe another question about <unk>.
<unk> changed and in general and in particular kind of your global footprint.
And at a number of points, you've talked about wafer fab utilization of extremely high rates and the site.
And at some of your customers running with uncomfortably low safety stocks.
Your job I guess as a trusted supplier.
And we.
And meet their needs as they evolve so whether it's in.
Whether it's 70 and hand, capex budget or other areas.
What are some of the tactical.
And that's that you're taking and the current business environment those too.
Before at your customers and I guess exploit.
And usually robust demand from Virginia.
You.
That you're seeing.
Okay.
Yes, it's a great question of thing already.
Tempted to Ensign Italia and as I said, we are very very focused on.
At all levels of integrity right now to make sure that we have enough capacity.
Coming on line and backend of this year and and ensure that we have enough capacity longer term.
And two to live up to the.
And the increasingly pay.
Pace at which the demand for products is evolving and ER and to meet customers' expectations. So again, a lot of focus of short term on staffing and then mid term on.
And rock King to capacity potential of a number of investments and new equipment that we have already made and.
That would be coming on line and that kind of the year and then longer term it's all about.
Expanding our footprint.
And to Taiwan East side and.
A good example of what we're trying to do we're trying to not only just add capacity, but we're trying to do.
Do that closer to our customers so that we can reduce.
Cycles of learning during the development Phase and then of course, then reduce our lead times when we start manufacturing locally.
Locally and then generally speaking what we're trying to do is really just of greater capabilities on the ground close to our largest customer.
Net of support them long term.
Once the Taiwanese investment will be completed in 2023, we would expect that about 50% of how production would be and Asia Pacific, which as you.
No way of most of the semiconductors.
Being made today that may change and future of lot of discussions about that but at least for now it will rebalance our global.
Capacity on a global basis.
Okay, and then one last one maybe for Greg, but Greg.
Greg I think you called out negative foreign currency translation this quarter as a and a line item that may be nicked the bottom line by a couple of pennies.
Can you, maybe and I apologize if I missed this but can you remind me what the key I guess currency relationship or relationships that lead.
Negative effect, there and I'm, assuming a weak U S dollar, but not not sure maybe versus Korea, Taiwan or whatever and then maybe what's just the if you could call out the key relationships and maybe we could track that over the next few months. Thank you.
So let me comment.
Generally so from a P&L perspective down to the operating line. We continue to believe we have a relatively natural hedge because we're selling and multiple currencies, but we're also.
Both manufacturing and have Opex and multiple currencies. So like I said at the operating line, it's not a perfect hedge, but it's a pretty good hedge.
Below the operating line other income expense is what I commented on and the script really has to do with the revaluation of the balance sheet of our foreign subsidiaries. So it has nothing to do with a revenue of our expense structure and the key currencies that.
Our involved are the Korean won.
Japanese yen and and the most recent quarter of the Euro actually had some impact and it's not it's too simple to say that it's how they do versus the dollar.
And it's not.
And it relates to what is the functional currency.
Of the subsidiary entity and so it is something I mean, I can walk you through it in great detail, although I wouldn't want to do that on this call, but it really like I said it has to do with the revaluation of <unk>.
Assets that are denominated and something other than the functional currency.
Okay so of weaker.
A weaker dollar versus the yen and the one is what you were calling out that.
Correct.
A weaker dollar versus.
Yeah and for sure.
Versus the one I would have to go back and look at it of what but the movement and the one the one moved and the opposite direction and Q4 that it moved and Q1s, we had a benefit in Q1 and a negative impact and.
Okay, we had a benefit in Q4 and a negative impact in Q1 excuse me.
Got it okay. Thank you very much.
Thank you.
Our final question comes from Patrick Schmidt shot of Baird. Please go ahead.
Thank you good morning, and thanks for taking my question.
And your SCM business.
Across the three product categories.
Gases, Cana and chemicals and deposition materials. Any contrast, you could provide on growth rates and just trying to get a sense of all three categories of similar growth rates are one is growing at much faster than the others.
So first I mean, you got it right British I. Thank those of the fastest growing business units from this division.
Think about deposition materials growing.
And are in and the low 30% so very.
Significant growth and.
And then.
Specialty materials and is a little bit of a tale of two cities because we have.
Advanced coatings and growing very very fast.
And then gratified business didn't steal and.
And of slow recovery mode, but the combination of all of that gives you a mid teens roughly and the.
And Spi and he's also performing and dose levels and that includes.
And <unk> products, which as you know.
A product that we introduced last year and is really going to be and one.
And one of the big growth contributors for Etsy and going forward.
Sure.
Thanks for that color of petrol and then my follow up the average.
Wondering if you could comment on the M&A landscape and the micro contamination business are there opportunities and micro contamination outside semiconductor of that might be attractive to you.
Yeah.
Well, if you look at it.
Now and the strategic rationale behind.
Now acquisition, you're absolutely correct that we believe there are opportunities for us to venture in adjacent applications and.
The best way for us to supplement the existing capabilities that we have internally is too.
And two to find some of those tuck ins and now is a very important piece to that puzzle and were going to continue to look at other alternatives as well.
When it comes to a now and I must also admit to the fact that the current pandemic and travel limitations of have been a little bit of a headwind incidence of.
The cross polymerization and it was expecting to see between the U S developing teams and the China Beach teams, but.
The business is very healthy and I hope that.
I'm joined develop and where it can start the <unk>.
It would be quickly, but but you're right. It's one of the.
Q <unk>.
Focus when it comes to to M&A, the other area of being being materially since we've discussed and the number of locations.
Thank you that's all I had and I appreciate you calling from.
Sure.
Thank you that concludes today's question answer session and ladies and gentlemen. This concludes today's conference call and thank you for your participation you may now disconnect.
Okay.
Yeah.
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