Q2 2023 Entegris Inc Earnings Call
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The call over to Bill Seymour, Vice President of Investor Relations.
Yeah.
Good morning, everyone earlier today, we announced the financial results for our second quarter of 2023 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 look.
And 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 can find a reconciliation table in today's news release as well as on our IR page of our website at <unk> Dot com.
On the call today are Bertrand <unk>, our CEO and Linda <unk>, our CFO with that I'll hand, the call over to Bertrand.
Thank you Bill and good morning to all and welcome again, Linda to the Integra steam.
I'll start by saying that I am pleased with our solid execution in the second quarter, especially in light of the dynamic industry environment.
During the quarter, we delivered strong results within or above our guidance.
Sales were $901 million EBITDA margins were over 27%.
non-GAAP EPS was <unk> 66 cents.
Let me make a few additional comments on our financial performance.
Sales were down sequentially as expected, but we did see growth in product lines that are of increasing importance to our customers' technology roadmaps.
These include liquid filtration and etching Chemistries, which also explain the relative strength in our AMC and SCM divisions in the second quarter.
Meanwhile, performance was mixed but in line with our expectations in our Capex driven solutions.
While we saw a contraction in sales the fruits and gas filters consistent with the decline in <unk>, we did see steady demand for our fluid handling and gas verifications.
Solutions in line with the level of new fab construction activity, which so far this year remains resilient.
In terms of profitability, we continued to execute well and performed in line with our expectations.
Next I would like to highlight a few important items that the team is focused on.
First on the CMC integration.
One of the guiding principles of the integration is the fast and effective migration to a common ERP system.
To that end, we have already completed three major ERP transitions in the past 12 months and.
Don't want to Jinx, it, but we expect to complete the final go lives migration in just a few days.
A major accomplishment for the team.
Certainly an accomplishment that puts us on track to achieve our $75 million of run.
Run rate cost synergy target by the fourth quarter.
As you know debt pay down is a high priority for us and divestitures of noncore assets already significant lever, we are using to reduce our debt.
So far this year, we have entered into definitive agreements for the sale of three businesses totaling more than $1 billion in proceeds.
Two of these businesses were part of CMC materials.
The first of those was QED, which closed in March with $135 million in proceeds.
The second was the sale of electronic chemicals, which we announced on may 10th for $700 million in proceeds.
We have already received regulatory approval for the EDC transaction in several jurisdictions, including the U S.
And just as a reminder, we do not need a regulatory approval in China for this transaction.
We are.
Currently Whitley waiting for a few final regulatory approvals and continue to expect easy transaction will close by the end of this year.
And on March on June 5th we announced the termination of our distribution agreement for copper plating Chemistries with element solutions in exchange for $200 million, we received $170 million at the time of announcement and expect to receive the balance.
No later than this once customer transitions are completed.
We have used all of the proceeds received from the QED an element transactions for debt pay down and the $700 million of proceeds from the sale. When realized are also expected to be used to pay down debt.
That brings us to one more potential divestiture.
<unk>.
Which sells drag reducing agents for the oil and gas industry, and which also wasn't part of CMC materials. The pin business has performed very well so far this year and we do intend to sell this business.
We will provide an update on this when we have more to communicate.
Another important update I would like to share is that we.
We will be combining the SCM and Aps divisions, starting next month.
STM and <unk> businesses are highly complementary.
Both unit driven.
Majority of what they sell our specialty materials there are consumed in the manufacturing of semiconductors, our customers will benefit from a more robust end to end solution set critical to their roadmaps with solution set that reduces their time to yield and provides superior cost of ownership.
Frankly, we considered doing this immediately at the close of the CMC transaction, but we did not have a definitive line of sight to the divestitures we were contemplating.
Now that those divestitures or Don or solidly into works combining the two divisions into one will enhance its size scale and focus.
And as we always do we continue to look at our cost structure and align it with the current industry environment to that end, we would expect our total head count to be down approximately 5%. This year, even net of new hires in our new facility in Taiwan.
<unk>.
What it is critical we get our cost structure, where it needs to be in the short term. It is equally critical we get are ready when the industry ultimately returns to growth.
And the capacity expansions in Taiwan, and Colorado Springs are vital for us to fully realize our long term growth potential.
Our facility in Taiwan is expected to begin initial shipments later this year and Colorado Springs will begin shipments in early 2025.
In addition, we are also using this downturn to our advantage spending valuable time, collaborating with our customers, while making elevated levels of R&D spending to support our promising R&D pipeline.
Looking at the rest of 2023.
For the full year, we continue to expect the market will be down in the mid teens.
And given our strong position in the new technology nodes. We also continue to expect to outperform the market by at least six points.
Putting it all together, we continue to expect our pro forma sales in 2023 to be down approximately 8%.
We also continue to expect EBITDA will be approximately 27% to 28% of revenue for the year.
And we are increasing our full year 2023, non-GAAP EPS expectation to greater than $2.50 per share.
While our expectations for industry a recovery in the second half of this year are modest.
We are extremely optimistic about the long term secular growth of the semiconductor industry on the way to one trillion dollars.
By 2030.
The growth is being driven by overall demand for both logic and memory chips and the many end markets that will drive that growth, including the much discussed emergence of AI and of course power electronics and high performance computing to name just a few.
In addition to that device architectures like gate, all around and higher layer count structures are becoming much more complex trends, which ultimately play to our strength.
These trends and Integra <unk> breadth of capabilities in materials science and materials purity are expected to translate into a rapidly expanding content per wafer and market share growth for integrity.
Finally, I wanted to take a moment to thank our customers for their trust and confidence they place an integrity.
And I would like to thank the integrity team for their dedication and strong execution as we navigate this dynamic industry environment.
Let me turn the call to Linda Linda.
Good morning, everyone and thank you Bertrand I have had a terrific first three months at Integra traveling entire U S sites and getting to know the team I'm delighted to be on a team that is eager to win and I'm proud to review the solid results on this first call as the new CFO of Integra.
Our sales in the second quarter were $901 million down 11% year over year on a pro forma basis.
And down 2% sequentially.
<unk> were up 30% year over year on a reported basis.
As a reminder, the CMC transaction closed in July 2022.
FX negatively impacted revenue by approximately $9 million year over year on a pro forma basis and negatively impacted revenue by $5 million sequentially in Q2.
FX headwinds were primarily driven by the Japanese yen.
Yeah.
Gross margin on a GAAP and non-GAAP basis was 42, 6% in the second quarter within our guidance range.
The sequential decline in the non-GAAP gross margin was driven by lower volumes and the Taiwan facility ramp up costs.
In addition, we had an FX benefit in Q1 that did not repeat in Q2 as expected.
Operating expenses on a GAAP basis were $117 million in Q2.
non-GAAP items totaled $67 million and included a $155 million gain on the termination of our distribution agreement with element.
Operating expenses on a non-GAAP basis in Q2 were $183 million slightly below our guidance.
As you would expect we continue to manage our cost structure in this dynamic environment.
Operating income on a GAAP basis in Q2 with $268 million and non-GAAP operating income was $201 million.
Adjusted EBITDA in Q2 with $245 million or just over 27% of revenue within our guidance range.
The GAAP tax benefit in the quarter was driven by the E C asset held for sale treatment.
The non-GAAP tax rate was approximately 16%.
GAAP diluted EPS was $1 31 per share in the second quarter, which includes a gain on the termination of our distribution agreement with element.
non-GAAP EPS was <unk> 66 cents per share above our guidance.
Now looking at our performance by Division.
The year on year sales comparisons I am referencing are on a pro forma basis for the S. T E N E. P S divisions.
M C sales in the quarter of $284 million were up 3% from last year and up 5% sequentially.
The sequential sales growth was driven by liquid filtration and gas purification solutions.
Adjusted operating margin for M. C was 35, 5% for the quarter.
The sequential margin decline was driven primarily by costs associated with the ramp of our new facility in Taiwan.
And the impact of lower plant production due to the inventory reductions.
A&H sales in Q2 of $190 million were down 15% versus last year and down 13% sequentially.
As Bertrand indicated the sequential sales decline and a M H with driven by products more tied to Wi Fi like soups and was partially offset by growth in fluid handling products, which are more tied to fab construction, which again has been more resilient.
Adjusted operating margin for Am H was approximately 19% down sequentially primarily driven.
Lower volumes and the ramp of our new facility in Taiwan.
S. C E M sales in Q2 of $200 million were down 11% year over year and up 1% sequentially.
The modest sequential sales increase was driven by growth in ethane chemistries.
Adjusted operating margin for S. E M was approximately 10% for the quarter in line with our expectations.
The modest sequential margin decline was primarily driven by unfavorable mix.
ACS sales in Q2 of $241 million were down 21% year over year and down 4% sequentially.
The year over year sales decline was primarily driven by the overall decline in the memory market.
And the impact of the sales restrictions in China.
Sales declined sequentially was driven primarily by lower volumes across most product lines, particularly in memory and memory applications.
We did continue to see strong growth in S. I see salaries in the quarter.
Adjusted operating margins for a PFS of approximately 23%.
We're up modestly sequentially.
Moving onto cash flow and the balance sheet.
Second quarter cash flow from operations was $127 million and free cash flow was $11 million.
We continue to be committed to improving free cash flow.
Excluding electronic chemicals inventory balances.
Which were moved to asset held for sale, our inventory was down 5% in the second quarter.
That is progress.
More work needs to be done and this will remain a major area of focus for the team in the second half of the year.
Capex for the quarter was $116 million.
We have moderated our capex investments in response to market conditions, and now expect to spend approximately $450 million in total capex in 2023.
Lower than our previous expectation of $500 million.
Next let's discuss our capital structure.
We remain committed to lowering our leverage.
Toward our target of three five times gross leverage by the end of 2024.
<unk> mentioned, a key component of our debt Paydown includes divestitures.
At the end of Q2, our gross debt was $5 $6 billion.
Our net debt was $5 billion.
This equates to a gross leverage ratio of 5.2 times and a net leverage ratio of four seven times pro forma for the announced cost synergies.
Our variable rate that is expected to be a bit more than 10% of the total outstanding debt.
The blended interest rate on our debt portfolio is approximately five 5%.
Overall, a very solid rate considering the interest rate environment, we've experienced since we announced the CMC deal.
Yeah.
Moving on to our Q3 outlook.
We expect sales to range from $875 million to $900 million.
We expect the EBITDA margin to be approximately 26% to 27%.
We expect GAAP EPS to be 23 to 28 cents per share.
And non-GAAP EPS to be 57 to 62 cents per share.
Let me provide some additional modeling items.
We expect gross margin to be 41% to 42% in the third quarter.
Both on a GAAP and non-GAAP basis.
The modestly lower margin compared to Q2 reflects the temporary impact of the termination of our distribution agreement with element.
Higher costs associated with the ramp of our new facility in Taiwan.
And lower plant volume is driven by our continued focus on inventory reduction.
We expect GAAP operating expenses to be approximately 245 million in Q3.
And non-GAAP operating expenses to be approximately $180 million.
Depreciation is expected to be approximately $45 million in Q3 and.
And $50 million in Q4.
This depreciation estimate reflects moving the electronic chemicals business to held for sale status starting in the second quarter.
And timing of our capital expenditures.
We expect interest expense to be approximately $80 million per quarter going forward until we collect the proceeds from the pending divestiture of V C.
We expect the non-GAAP tax rate for the second half of the year to be approximately 15%.
The lower expected tax rate in both the second half of this year and going forward is due to the integration of CMC into the Integra <unk> business model.
Just to be clear all of the guidance. We have provided today both for Q3 and the full year includes both the electronic chemicals business until it closes.
And the distribution agreement, we have with element until that fully transitions.
I'll now hand, it back to Bertrand for some closing remarks.
Thank you Linda in this uncertain environment, we are showcasing the resilience of our unit driven business and strong market position.
I am also very pleased with the team's execution.
Making great progress on.
The divestiture of noncore assets.
All critical CMC integration milestones are being met.
And we will realize the full cost synergies by year end as planned.
We are effectively balancing short term cost management, while making the right investments for the future.
And we're making those investments because we have conviction in the long term secular growth of the semiconductor industry and because of our strong conviction in the growing importance of our value proposition, which will translate into an increase indeed integrity content per wafer.
Tigris outperformance with that operator, let's open the line for questions.
Okay.
The floor is now open for questions.
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And our first question is coming from Toshi Hari with Goldman Sachs.
Yeah.
Yeah.
So much for taking the question I do apologize for the background noise.
My first question is on the market environment, you mentioned for the full year, you're still expecting.
Your Tam or Sam to be down in the mid teens. So so consistent with what you had said three months ago, but I'm guessing you've experienced quite a few puts and takes over the past three months just based on what your peers have said on trailing guys being stronger and perhaps advanced logic foundry memory being weaker but curious if you can kind of.
Walk through some of the pluses and minuses that you've experienced over the past three months.
If you could point to.
Your expectations are for both Capex and at my side for the full year that would be great.
Mhm.
Yes, good morning.
As I said I mean, the industry remains very dynamic and it.
Is still challenging to really forecast with a great degree of accuracy and we've seen a lot of.
Puts and take in the market, but our views on balance have not really changed all that much since last quarter.
When it comes to MSI, we do not really expect any meaningful recovery in the back half of the year.
We expect a little bit of an uptick in advanced logic and I'd like to you as well in DRAM.
But this will be offset by some downdraft pressure coming from <unk>.
Three D NAND wafer starts and midstream wafer starts so again, a lot of puts and takes here and not a lot of freedom recovery in the back half of the year and on the Capex front. We believe that we have reached bottom in Q2, but we do not really expect any recovery inside so so that's for the <unk>.
The industry backdrop.
That's really what leads us to that view that the industry will be down in the mid teens for us.
And as you said in that context, we are pleased with our performance.
You know all integrity content per wafer continues to grow we are seeing actually more wafer productions migrating to the leading edge, especially in memory.
Lot of the cuts in wafer starts and memory are taking place in older generations of memory.
And we're seeing more production transferring to the leading edge, where we have higher wafer start how your content per wafer. So that's positive.
We are continuing to gain share and we also.
Resolving some supply chain constraints that were headwinds in 2022, so that's the basis for the level of outperformance that we expect to deliver in.
In 2023.
Okay.
That's super helpful. Thank you and then as my follow up I.
I guess on your last point regarding your rate of outperformance I think for this year you've noted.
6% or higher which once you guys are consistent with.
That's up three months ago I.
I know 2024.
But as you think about you.
You're a customer technology road map.
Your presence across the important inflections in memory.
Logic and foundry.
Do you think repeating 6% plus or minus outperformance in 'twenty four is a high bar I know in your long term model at the midpoint.
Lower than 6%.
But given no gate all around.
Okay.
Would it be too much to expect another.
6% outperformance 24, thank you.
So to say.
Would say two things.
I would probably start by saying that it's too early for us to talk about 2024, and it probably will end with that same statement, but in between those two.
Beginning points and ending points I would say that number one.
<unk> believes that wafer starts would be a little bit more positive next year.
And we are keeping an eye on on the node transitions that our customers have been talking about them and we expect to see a fair amount of activity.
In terms of no transitions, but again, we know that things change and.
That's why I would say that it's too early for us to go into into too many specifics.
Got it thank you.
And our next question comes from John Roberts with Credit Suisse.
Yeah.
And in foods, just the normal lumpiness of new fab construction timing or is it more delays in new fab construction I don't know if you can untangle, if those effects and why it wasn't fluid handling affected similarly.
It's a great question and so it really has to do with the timing of that.
Demand for those products and solutions when Fabs are being built so typically fluid handling products are being ordered.
Boarded and used really early on when the buildings all build went to sub fab.
Chemical loops all being.
Installed so that actually happens relatively early in the construction projects and if you look around there's been a fair amount of activity in terms of new fab constructions. This year.
And fluid handling products have been benefiting from that.
When it comes to <unk>, the timing of the shipments of those products usually coincide more with.
The tool deliveries.
And as we know the tool intakes have been slowing down right and that's what that's created some some lumpiness in our food business.
That's the business that was actually fairly stable in Q1, but we saw actually a very significant decline sequentially in Q2.
And if you'll go back in time, you will see that that Lumpiness is something that we see.
Site, they offer new to downturn, those shipments, especially to the largest semiconductor manufacturers can be several millions of dollars and they can have a big impact.
Each quarter.
We said that our competitive position remains extremely strong, especially in the leading edge fabs.
So it's really a question of timing of shipments as opposed to any concerns you may have.
Competitive spending.
Thank you very much.
Okay.
And our next question comes from Sidney Ho with Deutsche Bank.
Great. Thank you. It's good to hear that you are reiterating your expectation for industry MSI revenue growth this year.
My first question is Uh huh.
Something about <unk>.
<unk>.
At least in the near term it looks like the demand for GPU is crowding out server demand how does that impact Integra is any way you can help us.
Sexualizes shifting budget from CPU GPU, how that impacts your business I don't even though that's one of them one for one trade off but there's integrity content higher for GPU or CPU.
<unk> includes both products from <unk> that would be great.
Yes, it's a great question I would just say that you will remember that AI, it's exciting I think it's going to be a big.
Cattle is forced to make semiconductor demand in the years to come but today. It remains relatively small it's been growing very rapidly, but it's small.
When it comes to the difference in integrity content between.
Cpus and Gpus I would say that we are very well positioned on those two types of architectures.
One difference, which is positive is that gpus typically are larger sized dies.
And as.
As we had I believe mentioned during our recent analyst day, those larger size dies.
Create actually some complexity in terms of.
<unk> management.
And that actually requires much more focus in terms of the purity of the.
The chemistries that are used.
And that obviously creates a very significant opportunity for all micro contamination.
Filtration solutions.
Okay. That's helpful.
Follow up question is.
Looking at this geopolitical tension seems to step up a bit the last few months clearly China is trying to build a self sufficient ecosystem here can you talk about the competition in domestic chemicals and material supplies, especially for lagging edge products, which is what all of these new fab seems to be focusing on thanks.
Mhm.
So Sidney I think we've seen the emergence of domestic <unk>.
<unk> in China. This is not new many of those companies were created 10 15 years ago or even longer.
And that's been a big push.
By our domestic Chinese customers to qualify.
Does domestic alternatives.
So far in <unk>.
Many cases, we've been able to demonstrate the superior value proposition of Integrous and I would say that we've been able to hold their share pretty effectively.
And I think that will likely continue to be the case in the short to midterm, having said that I fully expect to see the emergence of very capable Chinese competitors are longer term. So that's something that we're going to continue to watch but.
The punch line is that today, we continue to compete very effectively in China and you can probably see that in our results in China, which I mean, we saw a big step down obviously following the new export control restrictions between Q2, Q3, and Q4 and Q1.
But then of things things have stabilized and we are seeing growth as you know.
The mainstream fabs in China, starting to to ramp up production.
Thank you very much.
Okay.
And our next question comes from above is loaded.
<unk> with BMO capital markets.
Hi, good morning, Linda.
Taiwan facility can you quantify how much was the startup cost impact for the second and maybe the third quarter.
And we are working on some new announcements in the region.
More on AI.
More on the advanced packaging side of things any color, Dan I don't know the opportunity set and how it relates to the ramp up of utilization that you would expect for an ecosystem.
Yeah. So.
I mean, the reason we invested in Taiwan is that we actually.
Continue to believe in the importance of the Taiwanese ecosystem, we expect to see significant investments into.
In the years to come and we wanted to be in a position to appropriately support the growth of our customers and their extended ecosystem. So that's why we are investing.
And as we said.
We.
Had a great opening a few months back or customers are.
Giving us sort of the conviction, we need to really accelerate.
The qualification of new manufacturing lines. So that's our focus we're not going to give you a very precise number in terms of the cost headwind what I can share with you just as an anecdote is that.
To put some context is we had about 100.
And please.
<unk> B, which is towards the commercial side, that's the name of all sides. So.
At the end of 2022, we expect that number to be about 250.
At the end of this year and remember that we do not expect any meaningful.
Levels of production by the end of this year. So it is going to be a drag.
We've talked about it very openly now for several quarters.
And that's what you are seeing to a great extent in the margin guidance that Linda was providing.
Got it and then on the <unk>.
<unk> integration.
You have spoken about revenue synergies in the past basically own co developing deposition materials slowly is going towards that.
Combining the two segments in spite of that journey, but any color on how that is progressing.
You're already talking to customers and on this any color on that.
Yes. Good question, so as we said there would be.
So a number of different phases for us to unlock the revenue synergies. The phases first phase is really around cross selling and we are really focused for that first phase on mainstream fabs and into particular power electronics and we off actually made some really great inroads.
Combining <unk> with our FSIC pads.
And and really connecting door solutions too.
The best known methods of filtration. So we are actually using the.
The sharp increase in volume productions in S. I see as a great catalyst to validate.
Is this value proposition.
So that is happening that's happening now with success and then the next phase will be about <unk>.
Product co optimization, and we will be doing that in the context of the new nodes.
The engagement of customer engagements are very active as a promising we've had a lot of those meetings around the world in the recent months.
But again, none of that will really be visible on the top line for probably another year or two.
Thank you.
And our next question comes from Charles <unk> with Needham.
Hi, Thank you for letting me ask I've got two questions maybe two questions here.
First one for you.
You provided.
Some color in terms of end market demand I wanted to ask about Angola.
So specifically on the high side.
Relative to your expectation, let's say one quarter ago.
The foundry logic mature.
The DRAM and NAND.
Relative to the expectation of a one quarter, though how does each of the end market about trending up versus down and specifically I want I want to understand your full year.
Guidance seems to imply.
Maybe the revenue bottom either in Q3 or Q4, but the one quarter ago. You didn't expect maybe Q2 was the bottom. So really just wanted to tie these two things.
That'll help us understand what's changed from a quarter ago. Thank you.
Yes, as I said I did a lot of it is very choppy in the industry right now and.
And our views of our way forward for sure.
No.
We are today, probably a little bit more bullish about DRAM than we were a.
A few months ago, recognizing that we have less exposure to DRAM than we do two three do not right and I think we are probably a little bit more pessimistic about.
<unk> today than we were you know.
A couple of quarters ago, which translates into <unk>.
Probably more modest fuse in terms of wafer starts for <unk>.
<unk> now and in the back half of the year. We are also seeing some push outs and node transitions and we do that both of which have some impact on our business.
Advanced logic is expected to recover.
And in a modest way.
In in the back half of the year and that's good news for US We're also seeing.
Interesting node transitions in the back half of the year and that's good news for us as well.
And then for mainstream I think we always expressed some concern that there could be some softening in the back half of the year, that's something we.
Always kind of anticipated and we are seeing certainly the metro meta utilization of all of this.
We're taking that into account in our forecast for the full year.
Thank you.
I really want to ask.
More long term question.
<unk> and Etfs.
We did hear from one group team members.
They recently Yang Investor event earlier.
Actually in July .
That some of the future opportunities would include advanced packaging.
I thought advanced packaging wasn't really.
Major focus integra has in the past about that it's interesting to see.
Advanced packaging being wild with that growth opportunities.
Leukemias.
And over a longer period of time.
Can you.
Help us understand why the change.
Especially advanced packaging a lot of the.
Complexity may not be.
It may not be accessing wafer fab space.
Why do you see a major opportunity there.
Just help us understand what you're asking.
Thank you.
Yeah. So so so you're right that there are a number of road maps indeed.
In the industry that in the past traditionally did not require.
The advanced solutions that.
We are developing it's true for advanced packaging. It was true also for DRAM.
Good news is that all of those roadmaps are becoming much more demanding in advanced packaging I think we expect a much greater degree of.
Precision automation a degree of.
Clean and S required in their processes. We also believe there would be more punishing step required with that.
The bonding of the wafers.
And all of that will open up opportunities for our A&H products and types of wafer carriers slow recent pads for the polishing applications.
And then very likely also opportunities for our situation and cleaning product line. So that's something that we're very focused on.
Today.
And again to expand out I would say that just similar to soon have you in terms of the DRAM.
<unk> roadmap again typically.
The integrity content per wafer on a DRAM.
Chip is we're less than three D NAND or logic, but this is sanjay.
Case of DRAM, we're seeing a push for more.
Transition, we're seeing a push for three D architecture on the backside of the chip all of which will create opportunities for all micro contamination.
Solution set.
It will.
Would it require new precursor for the new films and.
Hydro selective etching Chemistries would also be required for the upcoming DRAM architecture. So if you look across the board and into semi conductor.
Industry, we are increasingly.
I'm excited about the various roadmaps and we believe there would be menu opportunities for us to continue to increase the integrity content per wafer.
Thank you.
Yeah.
And our next question comes from Kieran de Bruin with Mizuho.
Hi, good morning, Thanks for taking my question.
Good morning.
I wanted to just to just to start off maybe on SCM can we talk about the mix that you've been seeing like how we should be thinking about margins going forward. If there's any color on how you think about exiting the year.
As some of these kind of mixed headwinds seem to lap or abate as we as we get into the end of the year that would be helpful. Thank you.
Yeah. So when it comes to a see him I remember that we've been very clear now for several years that this is an area, where we see a lot of opportunities I mean back to the comment I was making in the context of D. Around three D NAND or even just the advanced packaging I think that now.
And that's the time to really a neighborhood of new materials and Chemistries that will.
Support the ambitious road maps of our customers. So we want to be investing and that's why the bottom line performance of STM is very modest this year around 10% we expect.
Some very modest recovery in the back half of the year, but really the recovery will come with the.
The adoption of the new materials that we are developing.
And we need those materials to reach high volume if you'll go back to the analyst day last year.
You will notice that SCM was expected to be lower.
The.
Yeah did you want to.
Due to the lower margin business off of the four divisions.
And that is a function of the level of investment we are we intend to make them.
But remember in terms of.
The stone our reporting with the combination of Aps and as the we intend to to have a three segment reporting starting Q3.
Yes, that's very helpful. And then maybe just on the combination of SCM and Aps.
I think back in the Investor Day, Aps was growing at like a two to 400 basis point above market, whereas SCM as in kind of the broader range of like the three to 600 basis points. When we factor in revenue synergies and the integration of <unk>.
How do you think about that combined segment should we be thinking about it in that kind of three to 600 basis point range going forward or is there probably going to be a little bit of a lower growth rate versus the broader market. When we think about the combination of both businesses and if so has the ambition to get it back up to kind of that three to 600 basis points. Thank you.
Yeah. So we we have a high degree of conviction in the power of this combination and the ability to really different up the unique end to end solutions for our customers.
And that's going to translate into superior growth longer term right and so.
So we will we will reset those expectations, we're thinking about having potentially an analyst day in the first half of next year.
And that's going to be an opportunity for us to actually reset some of those expectations in terms of top line growth potential and bottomline potential for each of the three divisions.
Fantastic. Thank you.
Okay.
And our next question comes from Alexia <unk> with Keybanc capital markets.
Thanks, and good morning, everyone. This is Ryan on for Alexi.
I guess the first question I would have just starting in M C.
You guys flagged.
Headwinds from lower production into Q.
First I was wondering if you guys might be able to quantify that for US and then secondly, just what are your expectations on you know potential headwinds from the same thing in the back half. Thanks.
Yes, I mean, I think they'll do a dose.
Supply chain constraints have been easing that's the point I was trying to make them. They are some modest lingering supply chain constraints, but it's really not very material. So.
So we expect I mean.
Of course year to date micro contamination as being the <unk>.
The shining star of our full portfolio.
It's.
It's up 2% year to date.
In particular, our liquid filtration platform has been growing very.
Very nicely, we delivered a record quarter actually in Q2. This year in spite of the industry conditions that you are well aware off so again, it's a it's just a validation of the growing importance of those filters when it comes to yield optimization when it comes to.
Chip.
Reliability.
And we expect again does this business to continue to do very well and in back up with you.
Great very helpful.
And then just secondly, just.
Looking at kind of like what the implied EBITDA as for <unk> it looks like theirs.
A fairly strong step up in <unk>. So I'm just wondering if you could talk about.
Some of the drivers there thanks.
Yeah. So as we think about you know moving into four Q I mean, a lot of it is going to be mix as we've seen so far we have seen some strength in our unit driven businesses like M C, which does have a good mix impact with that business.
And then you know we do have the the AR on the Capex side, the businesses tied more to the fab construction, so that will be a big piece of it secondly, we are going to continue to focus on cost control. So it's really critical as we balanced throughout the year to balance cost.
Controls against investment so as we think about that balancing.
That is what we're focused on we did hold our guidance for the full year and hold our guidance on the EBITDA margin. So that is another piece of the puzzle that where we're balancing.
Okay.
And our next question comes from Timothy Arcuri with UBS.
Yeah.
Thanks, a lot can you talk about the puts and the takes on the model with these different moving parts I mean, obviously, we're going to lose E. C. You lose some revenue, but it obviously helps margins you had the termination of the element solutions deal you get some cash, but you have to kind of rebuild that channel for these plating chemistries.
You know that might not be a factor because you just use your existing channels. So I'm just kind of wondering if maybe you could take December and you could sort of rightsize the base for US you know what it looks like sort of on a pro forma basis.
As you enter 2024 thanks.
Yeah, So Tim are probably going to take the lead here just to probably say that it's there are a lot of moving pieces to your point and it would be.
Probably more confusing than helpful to really try to.
<unk> everything I would only cite a couple of factors, though one is.
The Ah <unk>.
Termination of the distribution agreement with <unk> for instance, we'll have actually a pretty significant detrimental impact on gross margin in Q3 and potentially Q4.
The reason being that.
While we collected the proceeds we still need to serve existing customers, but we will do that at zero margin.
Until all of the customer transitions are complete.
Completed and that's going to have an impact of about.
Half a point of gross margin roughly.
And I think there are a lot of puts and takes.
The takeaway for you is really that indeed once all of those divestitures are completed.
The financial profile of the company will be different and will be more attractive and that's one of the reasons why.
I think that we have to do an analyst day sometime in the first half of next year.
Two actually.
Show you.
What integrous looks like once all of those divestitures are completed and talk about the long term potential of the platform, but that's not something we're going to be doing on the call today.
Thanks, a lot for joining okay, yeah, I guess, there's a lot of moving parts.
So there was a question before on China I guess my my question I mean, certainly they are making huge investments, they're making big investments in Chemistries and.
Things that they ultimately hope will displace you know companies like you but.
How do you handicap that there was a question sort of generally about the risks, but how do you isolate what's your portion of revenue is going into that.
The domestic China chipmakers, so I know that as that as you reported it's roughly 15% of revenue, but that's not it but that's not just domestic China chipmakers, how do you sort of handicap and ring fence, what is going into the domestic China guys.
Yes, so what we've said it's about it's about two thirds would be domestic I mean, the high level.
And.
So that's something that obviously given the current.
Uh huh.
Regulations, we are.
Paying very very close attention to and we are engaging with individual customers.
Asking them to represent to us that they are operating their fabs within the permissible.
Technology nodes.
And that's something that we're going to continue to to to operate for every precisely so.
I'm not sure exactly what is behind your question Tim maybe you can you can help me but.
Yeah, I guess, we're trying to I I I asked because it does appear likely that there's going to be some.
Push to restrict.
Even lagging edge nodes.
I don't know what theyre going to do but certainly there's weathers, where there's a <unk>.
Smoking, there's typically fire. So I'm just wondering how you could get nicked in that so I'm, just kind of trying to ring fence whats going to the domestic China companies, which you know most of which would be lagging edge because of the current restrictions.
Yes, I mean, I can only talk to you about the existing restrictions I will not speculate on.
A new wave of of.
Spot controls or any other measure I mean, that's I don't have any unique knowledge and I won't speculate on that we'll talk about it if there is anything specific there.
That is connected.
Perfect. Thank.
Thank you.
Sure.
And our next question comes from Mike Harrison with Seaport Research partners.
Hi, Good morning can you hear me okay.
Good morning, yes.
Yes.
Thanks.
Was hoping.
Maybe you could talk a little bit about the mix that you're seeing within the clean origination business. You said that volumes sequentially were lower across most product lines, but I know you called out that that's how I see opportunity, which I believe is small today, but growing nicely.
Curious are you expecting to see a faster recovery within some of the more advanced flurries as you look at the second half and into 2024.
Yeah, So I would say that.
When I look at the EPS results are mostly in line with our expectations.
Especially given the very depressed.
Environment that we've experienced and in memory.
The bright spot has been and we expect it to continue to be the DSI see application both for salaries and pads.
That part of the business has been growing year on year growing sequentially and we expect that to continue to be the case in the back half of the year, but we also expect to turn a corner and silicon applications.
And I would expect the overall EPS to have a better second half than than the performance. We saw in the first half.
Alright. Thank you and then just in terms of the Capex reduction.
Your outlook for this year can you give us any sense of whats being delayed I assume that's not any delay in the ramp up of Taiwan.
Is any of that related to the.
The work that Youre doing in Colorado Springs.
Yeah, we remain very focused on the growth in Taiwan and in Colorado Springs. So it's it's nothing specific to that timing you know it was a general delay and also as we said you know we're looking at the market environment.
Having less capex is going to benefit us from a cash standpoint, and ties very well to the market environment as well as our goal is to continue to pay down debt.
Perfect. Thank you very much.
And our next question comes from Chris Capps with loop capital markets.
Hi, Good morning, Thanks for squeezing me in so my question is were focused on the Aps and the slurry business.
Just provide some color there, but I'm curious if you could just characterize if theres been any change in the competitive landscape for <unk> generally given the memory end market weakness and then more specifically just curious how the tungsten slurry business is doing maybe is gauged by content per wafer when looking at those advanced.
More complex <unk> NAND architectures and also how is the advance oxide slurry business doing given what I believe is a.
Advantaged proprietary position there.
Yeah. So look I mean, I would say that right now the competitive position.
It has not changed all that much right and then so we are not.
Losing any share we're not gaining.
Any share that would impact short term results I would tell you that there are a number of new design wins that we've been able to to get awarded that are very interesting and very exciting, especially around advanced dielectrics.
And that actually is both in logic and memory. So.
What is it that's one of the reasons I answered the question the way I did to a previous question about it can we legitimately expect.
Our EPS to grow at a at a growth rate similar to SCM.
And new deals to come and I would say, it's a fair expectation and that goes back to the commitment we made to unlock positive revenue synergies as we learn to better optimize and co optimized solutions across the platform as I said customers are very receptive to this.
Possibility and hypothesis and we're working very very hard to.
To actually unlock the full potential of the platform and that's going to translate into growth both in salaries and a number of ancillary products.
Got it that's helpful. Just one follow up and I'm just inferring from your end.
Answer there that the.
The content per wafer per person per.
Or die if you will in advanced memory is increasing but it sounds like it's maybe more driven by oxide polishing versus tungsten any comment there or maybe maybe it's both in terms of visibility around process right. Yeah, I'm not I'm not sure I want to go I'm not sure I'm going to go into that level of specificity.
And in these calls, but I think across the board, we're making some good progress.
Thank you.
Okay.
And we have reached our allotted time for a question and answer session. I will now turn the floor back over to Bill Seymour for some closing remarks.
Okay.
Thank you everyone for joining today. Please follow up with me. If you have any questions have a great day and you can now disconnect.
Thank you. This concludes today's Integra <unk> second quarter 2023 earnings Conference call. Please disconnect. Your lines at this time and have a wonderful day.