Q2 2022 Entegris Inc Earnings Call
Good day, everyone and welcome to the Integra 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 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 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 will find a reconciliation table in today's news release as well as on our IR page of our website at Integra Dot com on the call today are <unk>, our CEO and Greg Graves our CFO .
Before I hand over to Bertrand Theres, a few items like I'd like to mention relates 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 Integra <unk> Q2 results and do not include CMC materials results.
However to help provide some context <unk> will make some brief comments on CMC materials fiscal third quarter sales.
And because of the timing of the close as 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.
Just assist in your modeling we will also be providing pro forma recast historical financials on it but it's all the data basis and for the four divisions before the analyst meeting.
No you should have seen the save the date for our virtual investor and analyst meeting on September 22nd 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 per truck.
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 integrity 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.
Or even by continued strong demand for our products and solutions and great execution by our supply chain teams EBITDA.
EBITDA margins were 30% and 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 15 cents 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 your advanced nodes, where we enjoy great of integrity content per wafer. This led to our significant market outperformance during the quarter.
Growth was particularly strong in several unit driven product lines shelf, increasing strategic importance to our customers.
Including liquid filtration and advanced deposition materials, and selective etch chemistries, which in the aggregate were up 24% year to date.
Growth was also very strong and capex driven products related to new fab construction projects, including fluid handling fuchs 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 salaries revenue increased 15% year on year and pads revenue.
<unk> was up 10%.
We are very excited about our combination with CMC materials and the promise of the combination as also been validated in our discussions with customers post close they see the value in our end to end suite of process solutions and a positive <unk>.
This will have on device performance and development times.
In connection with the completion of the transaction Integrous has established a new operating model, including adding a fourth division advanced planning organization 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 of <unk>.
Management team and as an organization our focus going forward will be on a 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 spend a great deal of time analyzing the various spots of cmc's portfolio of businesses to assess their respective long term strategic fit to the combined platform.
Clothing 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 22nd.
Now transitioning to our outlook for the full year.
The legacy Integra is 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 a positive momentum of the legacy CMC materials business.
We'll continue into the second half of the calendar year.
Putting it all together on a pro forma basis, excluding tmc's wood treatment business, we expect revenue for the combined company to exceed $4 billion.
Grow in excess of 16% in calendar 2022.
We expect pro forma EBITDA of the combined company to be approximately 30% of revenue.
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' roadmaps are calling for both the introduction of more complex device architectures as well as further miniaturization of the critical dimensions underway for <unk>.
This plays directly to Integra sees strength, because we operate at the crossroads of materials science and materials purity and these two core capabilities are quickly becoming some of the most critical enablers to the semiconductor technology Roadmaps and as we have.
Laid out these trends are leading to a rapidly expanding integrity content per wafer.
With the addition of Cmc's suite of solutions Integrous now offers the industry's most comprehensive electronic materials portfolio for applications in the fab environment <unk>.
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 roadmaps, while helping them achieve a fastest 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.
That form should prove to be even more resilient regardless of the macro environment.
Finally, I want to take a moment to thank our customers for their trust and confidence they place an integrity and once again, thank our newly expanded integra as 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 and or an abnormally large impact on our results in Q2 in my many years as CFO , we have rarely mentioned FX because the impact is usually been insignificant.
This is because there is a reasonably close match between the underlying currencies in which we sell and our expenses I will discuss this impact in more detail as I go through the major P&L items, but.
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 the negative impact of approximately two points.
<unk> 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 in over the last several months there was the dramatic decline in the exchange rate of some foreign currencies, particularly the Japanese yen.
Okay.
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 <unk> 73 per share.
non-GAAP EPS of $1 per share it was up 18% year over year and down 6% sequentially.
The estimated FX impact to non-GAAP EPS was approximately a negative 15 in total.
<unk> related to gross margin and five cents 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 five 3 billion.
This consists of $2 5 billion of sulfur plus 300 basis points term loan <unk>.
One $6 billion of 475% investment grade secured notes $895 million of 595% unsecured notes and 206 75 million 364 day sulfur plus 455 basis <unk>.
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 five one times and net leverage of four four times, including announced synergies.
As Bertrand said, we are very focused on deleveraging.
And we will 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 <unk> 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 <unk> was approximately 22% for the quarter down year on year and sequentially.
Year on year margin decline was primarily driven by the FX impact on gross margin.
Q2 sales of $274 million for AMC were up 20% from last year and 3% sequentially growth was strong across all major product lines in MMC, including gas filtration liquid filtration and gas purification.
Adjusted operating margin for MMC 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 MH, we're 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 solution.
<unk>.
Adjusted operating margin for <unk> 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 Integra 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 Integra stand alone for the foreseeable future.
Second quarter cash flow from operations was $111 million in 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.
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 Integrous team.
Operator, we'll now open up for questions.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
And we will take our first question from 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 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 your growth I think you called out 50% 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 Michelle 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 a 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 45%, which is pretty much in line with how we would expect the legacy integra as a 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.
Punishing methods in 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 backend of the euro across.
C&C legacy platform and the legacy Integra is platform as well.
Great.
Thank you for that we are trying it and then the second one.
As for Greg on the gross margin side I appreciate you're not providing gross margin guidance for the combined company.
Q3, but if we were to focus on Standalone integra as a firm.
For a moment how are you thinking about the balance in Q3, I think you noted that you would expect FX to be 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 what youre, implying that that would be yes.
Yes, So let me talk about the margins generally.
So first of all we continue to benefit from strategic pricing increases as Youll recall, we didn't do across the board increases would only increase prices where there were.
We saw increases in our own inputs, but we've certainly benefited from those price increases.
For the past several quarters.
The currency issue, we do expect to I mean, assuming currencies stay stable and they've actually the dollar actually weakened a bit the last few weeks, but assuming they stay stable, we would expect to see an improvement in margin.
That I would say as it relates to supply chain related issues I mean they are.
We're certainly not through them, but they are 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 Standalone integrity, we 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 will 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 outperforming.
Seven percentage points in 2022 and based on your comments that seems to be on track.
If the market does slow down in terms of wafer starts of Capex. That's most investors expecting will you be able to maintain that outperformance or even expand it I think when you talk about 2023 here.
And if.
If you look at the CMP business, which I know you'll talk about the details of your analyst day does that business have a similar profile in terms of outperformance potential ask you again.
I had a follow up question.
So a lot of questions here Sydney. 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 .
<unk>, 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 slowed isn't bad.
As the technology Roadmaps of fluff customers continue to progress we see.
And increasing content opportunity for both legacy integrity and malignancies at CMC.
We're going to try to put some.
Specific numbers.
Behind those statements.
So stay tuned on that but back to the legacy Integra is 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 backend of the year, even if we see some softening of the industry and the reason is that we are seeing very steady transition.
Wafer production to the advanced nodes, where we have greater content per wafer is tween 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.
<unk>.
We would expect in fact, maybe an acceleration of the migration.
<unk> do more advanced nodes, where we have greater content per wafer. So net net we'd expect a very attractive outperformance.
In 2022 for sure.
Okay. That's helpful.
My follow up question is is it some of the equipment Oems who received a notification from the U S government about new licensing requirements.
Related to sub 40 nanometers development and production how much of a headwind do you expect that to be for your business and more specifically.
What products will get impacted the most I think in the past you have gotten license for both of these.
Your.
If I remember correctly.
Yeah. So we have not received such a letter so as the as a materials company we have not received.
Net to debt.
Some equipment makers.
I've received.
So the impact would be an indirect impact and would be whether or not <unk>.
Instructions could slow down their growth in their business with China. So I think it's really too early for us to.
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, you will have to be.
Serviced from other parts of the World and I would expect new investments to be commissioned.
In Korea in Japan, and the U S and elsewhere.
And I would expect first to benefit from some of those new fab constructions and then down the road.
Actually.
<unk> to.
Set a lot of our consumable.
Offering to these new fabs as well so we're.
And remember that our overall.
OEM business is about 15% of our revenue.
So.
Every equipment maker as a different degree of exposure to two memory in China. So I'll, let you run the numbers, but I'll.
Remember that our business model is very resilient resilient because we sell over 20000 products, we don't really of any significant customer concentration.
And as you can see from the numbers I'm sharing with you I'm not overly concerned about this.
<unk>.
Restriction on sales to China.
Thank you.
And our next question comes from.
Amanda.
<unk> with Citi. Please go ahead.
Hi, good morning.
First question I have is sort of on the demand environment.
Side, we've been hearing that there's been some shifting some time in new designs.
You talk about how that impacts your outlook I know you talked about being able to outperform some.
Some of these new designs coming online.
So what are the things looking like for you over the next couple of quarters.
Yes, so Amanda I think.
To summarize it I would say the chip demand in 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 would share with you is that today and Integra is we still have.
Unconstrained demand that is higher than our guidance, so even if the industry slows down a little bit.
Should be able to carry our momentum through the balance of the year.
Great. Thanks.
Your next question I have is on <unk>.
And they've been working on from internal improvements to their operating and their structure.
Structure prior to the acquisition.
You just talk a little bit about how that looks I know you mentioned, Greg that you could get to.
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 it sort of at the site where the.
Could be going forward.
Yeah. 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 22nd.
It does include.
Some benefit from.
There are future forward program, where they hit where they had reduced operating costs.
It also includes a.
Very small amount.
All of the synergies that we have already realized.
But like I said I think we will provide more color on what we think.
We expect the longer term operating model to be in September .
Okay. Thank you.
We will 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 Burkhart, maybe first off I know a lot of people were talking about the near term environment and obviously wafer starts. So 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 of how you model continues.
Just to get more resilient given a lot of the different markets in the.
Different products, you offer and how that kind of diversification and resiliency.
The only further strengthened 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 Integra is platform.
And the reason for that is the incredible penetration.
We are seeing for the number of new products that we've introduced over the last few years and we keep mentioning those products. They are the same.
The ones I mentioned last quarter, so advanced liquid filters, which are essential for our customers to reach.
<unk> yields in the advanced nodes and increasingly used also upstream in all of them.
Lanes of Chemistries coming into the advanced Fabs. So all Sam has been expanding our market share has been expanding.
We're seeing great progress as well in a number of new deposition materials.
<unk> etch chemistries that we've been introducing and again, we're seeing great great momentum in memory in particular at the advance nodes for those new materials and those new Chemistries.
Very pleased obviously with the performance of our MH Division.
Platform.
We probably don't talk enough about but.
Our market share for <unk>.
Wafer carriers in the new Fabs is probably close to 90% at this point in 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.
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 resistance.
Fluid handling solutions and that is obviously increasingly important for our customers.
They are trying to achieve higher levels of purity in the process.
<unk> security, which as you know translates into greater yields and greater long term reliability of their chipset. So again, our offering as we like to say is becoming increasingly.
Important to the success of our customers that translates into greater <unk>.
<unk> 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.
<unk>.
Beginning and we expect more of that momentum for the years to come.
Great Thats it from me Thanks again.
Thank you.
Yeah.
And our next question comes from Brian <unk> 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 micro contamination 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. Thank you.
Yeah. This is Greg I'll take that.
Think within M. C. I don't want to make it sound like it was anything calculated like we are driving for a lower cost structure, because we were concerned about a downturn.
Yeah.
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 that 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 as we move forward from here.
The question is always around variability in the cost structure ability to manage the cost structure of the industry, where just soften and I would just highlight that the 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 give us credit for knowing how to manage the cost structure as we move forward.
Absolutely.
And just one quick 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 signed the business and if so how.
Or 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.
Was there any impact in the second quarter due to the Lockdowns in China on your business with the Lockdown I'm, sorry, Yes, yes, 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 locked.
Locked down so so great performance and at the end of the day. The net result is is really.
Immaterial to our performance in Q2.
Great. Thank you.
We will take our next question from Aleksey <unk> with Keybanc capital markets.
Please go ahead. Thanks.
Good morning, everyone pretrial and I wanted to come back to your comment about acceleration of migration to advanced nodes.
Ah you're commenting on something that could you just picked up over the last few months or is this kind of the general trends that you've been talking about for for a while.
Related to that one of your largest customer customers was talking about delays was new nodes.
So is this something that you are not worried about or is it just too far into the future.
Maybe youre not prepared to talk about yet.
But first of all remember that all success doesn't really dependent on any one specific customer we have a 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 to prediction.
The.
Sure.
Of.
Our content per wafer expanding now from <unk>.
28 nanometer to seven nanometer and going forward <unk> and beyond so so again, it's just steady.
Increase in.
And that is also that's for 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 as I was mentioning the adoption of select <unk>.
Chemistries as well, which were not used at 128. They use for instance, so again, we are seeing that.
That steady increase.
And that's that's really compounding itself.
So I'm not flagging any particular node or any particular customer is just a secular trend that will be.
Positive tailwind for our business.
And I guess just to clarify your comment to you.
Incremental you're more positive on this having seen how it evolved over the last let's say few months.
Is this why you made the comment.
Yeah.
I think this is a trend that we've seen now for many many years and so there's really nothing.
Unusual thing what is unusual today is.
The.
Degree of.
Aggressiveness in the technology Roadmaps of our customers desire to.
Accelerated 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 new nodes and introducing more challenging architectures is today much greater than what it was five years ago 10 years ago and.
And that's obviously very positive for us.
Thank you and a quick follow up for Greg on margin guidance for third quarter of 30% on the same for 'twenty two.
Great.
Third quarter seeing less of an FX headwind and then 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 in a relatively equal in Q3 and Q4.
As I said, we'd expect.
Currency is that our assumption is that currency will be stable and if currencies stable it should have.
Very modest impact in both Q3 and in Q4.
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 sites is largely on schedule.
And it means that.
We are.
Expected to 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.
Taiwan site would be liquid filters high tricky drums.
In deposition materials, so products are 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.
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.
He is really to be close to our largest customer.
To help.
This particular customer advance its road map and to be more effective.
And responsive supplier and development partner and that's.
The strategic rationale behind that.
The investment.
And I think we're going to see a lot of benefits.
Benefits and returns from that investment so.
Again, we are monitoring the news, obviously, but I don't see I mean, we have a lot of anecdotes and out of but I think given the situation of.
Taiwan, and China, we would expect doorsteps of ongoing.
Pain points too.
To continue to make the news.
Okay.
You mentioned that you were evaluating potential portfolio changes as you look at the CMC materials.
Business.
They are exiting or they've exited the wood treatment business, but theres 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 is 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.
Your next question comes from David Silver with CL.
Please go ahead.
Yes, 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 <unk>.
Solidago 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 maybe.
Maybe if you could just share at a high level.
The just the key points that may be your customers have the.
As of dealing with a larger stronger supplier, but.
I don't know may be difficulties with managing.
Protecting intellectual property or <unk>.
<unk> proper diversification of suppliers I mean, what what are the customers thinking about now.
As the pace of it.
Industry consolidation on the supplier side it seems to be.
Accelerate yes.
No. This is this is a great question and we stopped.
Sharing with you that.
Our customers have been very supportive of this combination.
What.
They are seeing first of all.
All of our customers are realizing of the growing importance of materials.
To the success of that Technology Road maps.
Yet the 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 all customers are expecting us to spend a lot more in R&D going forward. They are expecting us towards who will make significant investments.
Our infrastructures so that we can support them.
U S. Obviously, but also in Taiwan and in Korea.
And in order to be able to do this and.
<unk> acceptable financial returns, which was 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 material space. In addition, very specifically to do combination between integrity and CMC materials D C. The Haile.
Complementary portfolios of the two companies do you see the promise of being able to accelerate the development of new deposition materials, while developing.
The right polishing solutions.
The plus CMP clean so all of that will translate into greater on wafer performance lower activity and shorter time to solution. So what is not to like from a customer standpoint. So that's what we are hearing from customers and we are obviously.
Super excited to start working with them on new development programs.
Thanks for that just one other topic I was hoping you could share your thoughts on.
And that's.
The recently passed legislation the chipset.
And I don't really I'm, not really looking for a rundown of the whole bit.
Phil or program, but specifically from your perspective, 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 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 very 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 would be the source of.
Thousands of new job creation, so a lot a lot of reasons to be 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 Integra is specifically what it means for Integra is first of all we were pleased that the bill did contain language.
That would make materials companies the literal board to some of those.
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've 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 so that's the discussion we're having internally that's the discussion we would have also with the policymakers when the time is right.
Thank you very much I appreciate all the color.
Thank you.
Our next.
Comes from paradigm.
With Baron Baird. 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 that quite from <unk>. My question is how is your specialty chemicals segment, SCM similar or different versus that business.
In terms of products.
They are they are used in the process, our geographic exposure our pricing at et cetera.
Yes, so there was really no overlap between.
Between our.
Chemical portfolio is if you look at the electronic chemicals of legacy CMC materials.
Would be products like IPA ammonia.
<unk> is a free cash so.
These types of products, which legacy Integra is.
It 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.
Most of your business units driven but just curious what are you seeing in the capex side of the business and what kind of growth rate you expect this year.
So the market assumptions that we're using for the full year guidance.
Our capex up around 20%.
And as a footnote I would share with you that we have MSI up in the mid single digit four.
For the year and as I was mentioning a lot of our strategic cap.
Capex driven product lines have been doing extremely well it was mentioning.
Wafer handling saw food product lines, I was mentioning fluid handling as well but.
I think we mentioned in the.
In the prepared remarks, the strong performance from our gas purification systems as well as our <unk>.
Gas filtration business, which.
They've been growing at about.
Close to 40% year to date, so again strong performance across all of our Capex driven business, Florida in excess of the overall industry industry Capex growth.
Great. Thanks for the call.
Thank you.
We will take our next question from Timothy Arcuri with UBS. Please go ahead.
Thanks, a lot I had two.
I had a question on.
Anh, Greg I think.
<unk> was 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 A&H, it's going to be up like 25% and <unk>.
<unk> is going to be up maybe 10%. This year I mean, I know youre talking about capex being up 20, but I mean, all of the companies now because of the supply chain issues are all talking about WP being up more like 10. So so is there some component in A&H of of your customers building inventory I'm just I'm just kind of wondering if you can tie that.
Yeah, I would say.
No no concern about our customers building inventory and Youre right I mean, a M H.
Is.
Only outperform even the 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 flu market where our share.
As you know depending on how you measure it 80%, 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 is frankly, just executed very well.
Yeah Yeah.
It seems like it so Greg then my second question is just around the leveraging and the timing and the targets.
For Forex 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.
So let me so let me take the second piece first.
We have actually of the $2 5 billion dollar.
Term loan, which is a floating rate instrument.
Earlier this week, we have hedged about 80% of that it's a hedge that steps down over time. So is 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.
We said in the next two quarters.
Expect our rate to be about 5% with what we have hedged that will inch up.
A little bit into the mid fives next year, but we're like as I said or capped on 80% of that.
So we've.
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.
Yes.
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 Hasnt changed which is a number somewhere around two times.
Great. Thank you.
And 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 20 <unk>.
Starting at 10, a M. Eastern we will 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.
This concludes today's call. Thank you for your participation you may now disconnect.
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