Q3 2023 Entegris Inc Earnings Call
Please standby your program is about to begin.
[music].
Okay.
Welcome to the Integra <unk> third quarter 2023 earnings conference call. At this time, all participants have been placed on listen only mode at the floor will be open for your questions. Following the presentation.
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I'd now like to turn the call over to Bill Seymour, Vice President of Investor Relations.
Okay.
Good morning, everyone earlier today, we announced our financial results for our third 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 looking statements additional information.
Information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC.
Please refer to the information on the disclaimer slide in the presentation.
On this call. We will also refer to non-GAAP financial measures as defined by the SEC regulation G. You can find a reconciliation table in today's news release as well as on our IR page our website at <unk> com.
On the call today are Bertrand Loy, our CEO and Linda <unk>, our CFO with that I'll hand, the call over to per truck.
Thank you Ben and good morning.
I'll start by saying that I'm pleased with another quarter of solid performance.
And then just three environment that continues to be challenging in Texas team delivered results that were in line or better than our guidance and.
And we made good progress on all our key commitments.
First on our financial performance.
Sales were $888 million and EBITDA margin was 26, 5%.
Both squarely at the midpoint of our guidance range.
non-GAAP EPS was <unk> 68 cents exceeding all guy didn't switch.
Let me make a few additional comments on our sales performance.
Sales were down 1% sequentially in line with our guidance the drivers of that decline were similar to last quarter.
For our unit driven products sales were down across most product areas, that's utilization rates in both logic and memory continues to bump along the bottom. However, we did see growth in product lines that are of increasing importance to our customers' technology roadmaps in particular.
We saw growth in advanced deposition materials, and wet etch and clean liquid filters and.
In addition, we had another strong quarter and S. ICD recent pads, reflecting the growth of that industry segment, and our strong market position.
In addition, like last quarter.
<unk> was mixed in our Capex driven solutions sales were down for our Fuchs and the other products tied to WEC in contrast to the steady demand for our gas purification systems, and sensing and control products, which are tied to new fab construction.
Next I would like to provide an update on our key commitments. The team is focused on first on the CMC integration.
We wrapped up all the ERP conversion on time in August and we are on track to achieve the 75 million run rate cost synergy target this quarter.
We execute each for ERP conversions within 13 months after closing of the CMC acquisition. This is a major accomplishment for the team and a testament to our integration capabilities.
I think the whole company on one common ERP platform will allow us to better serve our customers with a streamlined end to end supply chain and operational capabilities.
Although revenue synergies.
We have seen early wins and combining products into CMP module, including salaries pads formulated cleans and filters.
Further out there's growing interest from our customers end to end solutions and our ability to co develop solutions to support the adoption of materials like molybdenum and audit practices.
Our customers see great benefits and integrity solutions as they enable faster development times and improve speed to yield, which ultimately fall dam means faster time to market.
Next divestitures and pay down here, we have made significant progress on our commitments on October 2nd we closed the sale of our electronic chemicals business to Fuji film.
Regarding the termination of a distribution agreement with element solutions.
It's largely wrapped up and customer transitions are almost complete we expect to receive the balance of the proceeds for this transaction by the end of the year.
Finally on the pin business, which sells drag reducing agents for the oil and gas industry. As we mentioned last quarter. We are working on the sale of the pin business. The sale process remains ongoing and we will update you when we have more to share.
Summing it up so far this year, we have sold three businesses not including the pin business.
And we are using to $1 billion in proceeds from those sales to significantly bring down our debt just as we said we would.
In addition, as you will hear from Linda these transactions well driving both gross margin and EPS accretion.
Lastly, as we discussed we are focused on improving our free cash flow and specifically inventory turns we saw very good improvement in inventory reductions in the third quarter, which put a bit of pressure on gross margin, but contributed to improving cash.
ROE for the quarter, Linda I will also discuss this in more detail shortly.
Let me now cover a few other important items before moving on to the outlook.
First on our new facility in Taiwan as planned we have begun initial shipments from to Kaohsiung facility. These volumes remain very smart, but reflect the steady progress although can team is making.
We continue to expect to ramp to higher volumes of production during the second half of 'twenty 'twenty four.
New capacity, a new facility in Taiwan is critical to addressing our long term needs.
Last quarter, we shared that we were combining D. S. T E. P. S divisions, starting in the third quarter at.
This combination that's being completed the new division is cold material solutions material solutions will provide our customers the opportunity to leverage our end to end capabilities, which we believe will accelerate their roadmaps by reducing their time to yield and by providing battery device before.
Incent superior cost of ownership.
And believe that this division has tremendous opportunity for growth and margin expansion.
Last week, we submitted an application for chips Act funding.
For our new Colorado Springs facility, which we originally announced in December 2022.
We believe that this project is squarely in line with the goals of the department of Commerce to strengthen the domestic semiconductor ecosystem and improve the resiliency of the domestic supply chain.
We look forward to continuing our engagement with the chips program office on a project.
Turning to the recently released export controls for China, We do not expect to see any new material direct impact to our business.
Next a few updates on our corporate social responsibility program in the next few weeks, we will be publishing our latest CSR report.
We are proud of the progress we have made since launching our program in 2020.
But we also know we can do even more in Texas recognizes climate change is a critical issue for the world at large and our communities.
Oh, that's note I am pleased to announce that one of the new goals. We are introducing it's a commitment to reduce our scope one and scope two greenhouse gas emissions by 42%.
In addition, we are pleased that integrity was recently awarded the gold sustainability rating from Eco Vedis, which puts us in the top 3% of all companies demonstrating a strong commitment to corporate social responsibility, our colleagues and our corporate values.
Now looking at the rest of 'twenty 'twenty suite.
Littlest changed view of the market, we believe the industry both for logic and memory, that's likely reached the bottom in terms of utilization rates. However, we do not expect any meaningful improvement in the market in the short term.
As it pertains to in Texas, given our strong market position, we continue to expect to outperform the market by at least six points in 2023.
Despite the challenging short term market conditions, we remain very optimistic about the long term growth prospects for the semiconductor industry and for Integra is the market will return to growth on the way to doubling in size to one trillion dollars.
At the same time as the industry is entering a period of unprecedented technology change and device complexity.
With chips shrinking below one nanometer and with the proliferation of three D structures across most device architectures and this means the industry is moving towards in Texas.
Because our value proposition is unique and increasingly important to our customers' road maps, especially in the areas of material science the Chileans purity.
End to end solutions that enable faster time to yield.
This will ultimately translate into a rapidly expanding content per wafer and superior growth for exactly that.
Let me now turn the call over to Linda Linda.
Good morning, everyone and thank you Shaun.
Our sales in the second quarter were $888 million down, 11% year over year and down 1% sequentially.
FX negatively impacted revenue by approximately $4 million year over year.
And negatively impacted revenue by about $6 million sequentially in Q3.
As a reminder, the third quarter results and our original guidance still included the full revenue impact of the electronic chemicals business and the business, we are selling to element solutions.
Gross margin on a GAAP basis was 41, 3% and was 41, 4% on a non-GAAP basis in the third quarter within our guidance range.
The expected sequential decline in the non-GAAP gross margin was driven by lower plant volumes from our continued focus on inventory reduction.
The temporary impact of the termination of our distribution agreement with element solutions and the continued ramp of our new facility in Taiwan.
Operating expenses on a GAAP basis were $250 million in Q3.
Operating expenses on a non-GAAP basis in Q3 hundred and $72 million below our guidance.
Adjusted EBITDA in Q3 with $235 million or 26, 5% of revenue at the midpoint of our guidance range.
The GAAP tax rate was negative in Q3.
The non-GAAP tax rate was nine 3% below our guidance.
Both our GAAP and non-GAAP tax rates were positively impacted by the recent IRS announcement that temporarily allows for certain additional foreign tax credits.
GAAP diluted EPS was <unk> 22 per share in the third quarter.
non-GAAP EPS was <unk> 68 cents per share above our guidance.
Driven by lower operating expenses modestly lower interest expense and the positive impact of our lower tax rate.
This is partially offset by the negative impact of the FX in our other income and expense line.
Yeah.
No.
Yeah.
John said, our third quarter results now reflect the combination of the S. C M and Aps divisions into the new division material solutions.
We have provided historical recast financials for the three divisions in our earnings slides.
M C sales in the quarter of 286 million were up 2% from last year and up 1% sequentially.
The modest sequential sales growth was driven primarily by wet etch and clean liquid filters, which are unit driven and.
And gas purification solutions, which are tied to facilities based capex.
Adjusted operating margin for M. C was 35, 4% for the quarter.
Essentially flat sequentially.
Okay.
A&H sales in Q3 of $180 million were down 14% versus last year and down 5% sequentially.
The drivers of the sequential sales decline and a M. H were similar to last quarter.
Products, which are more tied to fab construction like sensing and control solutions continued to grow and products more tied to ws he likes it declined.
Adjusted operating margin for a M. H was 17, 8% down sequentially, primarily driven by lower volumes.
For the new division material solutions.
Sales in Q3 of 436 million were down 16% year over year and down 1% sequentially.
The modest sequential sales decline was driven by lower volumes across certain product lines, particularly in memory applications.
This was offset by strong growth in S IC slurry and pads exam deposition materials and specialty coatings.
Adjusted operating margin for MFS was 16, 8% for the quarter.
The modest sequential margin decline was primarily driven by the temporary impact of the termination of our distribution agreement with element solutions.
Okay.
Moving on to cash flow, we continue to be committed to improving free cash flow and as an organization. We have put a lot of focus on lowering inventory to that end.
These efforts are showing great results with inventory down almost $80 million sequentially in Q3.
Capex for the quarter was $78 million, we continue to expect to spend approximately 450 million in total capex in 2023.
Third quarter free cash flow improved significantly to $122 million.
This was driven primarily by our progress toward our goal to reduce inventory this year by approximately $100 million.
Next let's discuss our capital structure.
At the end of Q3, our gross debt was $5 $5 billion and our net debt was $4 $9 billion.
Gross leverage was five five times and net leverage was four nine times pro forma for our announced cost synergies.
During the third quarter, we made a $75 million voluntary debt payment and.
And executed a 25 basis points repricing of our term loan.
During the fourth quarter, we will pay down approximately $730 million of debt with the proceeds from the electronics chemicals divestiture and the remainder of the proceeds from the element transaction.
As a result of this pay down by the end of the year, we expect our gross debt to drop to approximately $4 8 billion and gross leverage to approximately five times.
The blended interest rate on our debt portfolio will be approximately five 5%.
And the proportion of the portfolio that is variable will be close to zero.
Moving on to our Q4 outlook.
Before I start to be clear our guidance and our results for the fourth quarter will not include the sold electronic chemicals business and will include only a minimal P&L impact from the business, we sold to element solutions.
We expect sales to range from $770 million to $790 million in Q4.
To the point I just made this does not include approximately $90 million of sales from the sold electronic chemicals and element businesses.
So on a comparable basis and implies an approximate 2.2% sales decline.
From Q3 to the midpoint of our guidance for Q4.
We expect the EBITDA margin to be approximately 26% to 27%.
We expect GAAP EPS to be 25 to 30 cents per share.
And non-GAAP EPS to be 55 to 60 cents per share.
Let me provide some additional modeling items.
We expect gross margin to be 42% to 43% in Q4.
Both on a GAAP and non-GAAP basis.
The higher margin compared to Q3 reflects.
It reflects the positive impact of the divestitures and strong cost controls.
Offsetting by the impact of further inventory reductions.
Okay.
We expect GAAP operating expenses to range from 220 million 21 million to 226 million in Q4.
And non-GAAP operating expenses to range from 165 million to 170 million.
Depreciation is expected to be approximately $40 million in Q4.
Okay.
We expect interest expense to be approximately $66 million in Q4.
That amount does not include a full quarter impact of the expected debt paydown.
We expect the non-GAAP tax rate for the fourth quarter to be approximately 12%.
Yeah.
Early next year, we're planning to do a brief virtual analyst meeting.
Well, we will update the financial model moving forward well.
We will send more information on this in the coming few months.
I'll now hand, it back over to Bertrand from Us for some additional closing remarks.
Thank you Linda.
The soft industry environment, we continue to focus on the things that are within our control.
And in that context, we are very pleased with the quality of our execution. We are successfully wrapped up.
Simpson integration and expect to realize the full cost synergies by year end.
We have made great progress in divesting noncore assets and all are using the proceeds to pay down debt.
We are effectively balancing short term cost management, while making critical investments for the future.
Where do you think this industry downturn to actively engage with our customers on their technology Roadmaps and we have strong conviction in our long term growth potential of the industry and the growing importance of our.
Value proposition.
With that operator, let's open the line for questions.
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Our first question is coming from Toshi Hari with Goldman Sachs. Please go ahead. Your line is open.
So much.
I had two questions first just on the overall market backdrop, I think you mentioned that.
Your outlook really hasnt changed but curious what.
What you're seeing.
And their respective applications or end markets, you know DRAM, NAND, leading edge logic and foundry and importantly, the trailing edge I think things seem to be slowing down a little bit. So you know what you're seeing across those four buckets and I know, it's premature to talk about 2024, and don't expect you to give to give us some market forecast but.
What are some of the key swing factors that we should be monitoring as we think about 'twenty four both in terms of the market, but also importantly, youre right about performance.
Yes, Thank you toshi.
When it comes to the market both in terms of Q3, and what we are expecting going into Q4. This is really largely in line with our assumptions for the second half of the year.
We are seeing some modest recovery in advanced logic. So it's good that this particular segment is stabilizing after the steady decline for three or four quarters.
But on the logic side this is offset by.
The contraction that we're seeing in mainstream Fabs, we saw a little bit of that in Q3, and we expect that.
Generation and an acceleration of that contraction in mainstream fabs.
In Q4.
Memory remains mixed we.
So DRAM improving as expected about three D. NAND has remained fairly depressed with wafer starts continuing to come down in Q3.
And we expect no real recovery in AR in Q4, so roughly again industry conditions that we all.
Grind on the previous call.
When it comes to 'twenty 'twenty four.
It's it's a bit early for us to go into a lot of specifics that would probably only limit my comments to saying that we expect.
Wafer starts to be more favorable.
In 2024, but again, we'll provide some more.
Quantification of that statement when we report our Q4 earnings in February.
Great. Thank you and then as my follow up maybe one question on gross margins for Linda.
So Q4.
Guidance I guess at the midpoint is 42 and a half I guess, you're guiding to about 120 basis points of or improvement.
Of improvement sequentially, you talked about divestitures cost controls and I.
I guess those two as.
Tailwind and then.
The work Youre doing on the inventory side is as a headwind can you kind of break down some of those drivers and how they are impacting your guide.
And also curious if FX is playing a role at all thank you.
Yeah, absolutely so.
A couple of things.
As a as we said the gross the gross margin will be accretive from the divestitures, but we're not seeing the full accretion at this time.
Cause of the plant utilization, which is partly driven by you know the inventory reductions the inventory.
Our reductions are incredibly important to US right. We're focused on free cash flow, we had an incredible third quarter with the $80 million inventory reduction and it's allowed us tablet very strong free cash flow number this quarter.
So you have that tailwind from the divestitures slightly offset by some of our core initiatives, including the inventory reductions. So you know as we continue to plan and evolve you know as you mentioned, we're always going to be looking at cost controls are crossed across our P&L.
And we have done that as another offset and we will continue to do that but you're thinking about it right with that balance between the divestitures and some of the key initiatives that we're driving right now is a bit of a headwind.
And Linda sorry, the inventory reductions.
Is it fair to assume that you'll be done exiting this calendar year or could that could that continue into 'twenty four.
Well to me working cap is always important and you know we're going to always maintain a focus on working cap, we have a bigger opportunity this year.
Because we started with a higher level of inventory, but but definitely you know things aren't going to stop on that focus when we head into 'twenty four so it will continue but I think youll see the numbers come down 80 million is an incredibly big number.
As we go into Q4, but what we're targeting to try to see as another $40 million to $50 million inventory reduction and then you know as Bertrand said, we'll be giving more color as we go into 2024 with our analyst day, but.
<unk> effort.
Very helpful. Thank you.
Yeah.
We'll take our next question from Charles <unk> with <unk>. Please go ahead. Your line is open.
Hi, good morning, Thanks for taking my question.
First of all I kind of wanted to ask because if I back out that $19 million.
Contribution from <unk>.
The distributor agreement.
Great and then do you have with element solutions relative to the guidance you provided a quarter ago. It looks like Q4 is still slightly below what what what was implied in your guidance about a.
A quarter ago, So wonder why exactly.
It makes it into that relatively lighter.
Our outlook for Q4 is that still mostly the memory or theyre somewhat mature foundry logic.
Related weakness back into the numbers.
Yes, so good question.
So again, if you look at the midpoint of our guidance.
It's about $780 million that's.
About 2% down sequentially and that's really a reflection of a few factors first the market continues to be soft.
As implied.
In my previous answer.
We also want to recognize that Q4 is seasonally a weaker quarter for us.
Then the final factor is really the level of.
Utilization that we expect to see in some of our mainstream customers.
Just maybe a little bit.
Steeper for reduction at what we were expecting a few months ago.
But on balance again, I think that this is.
Solid quarter, where we expect to continue to outpace the industry and again if you.
Take that quarter into a broader context of the year.
As we mentioned we expect.
To be down about essentially 7% on a comparable basis.
As you know if you'd look at excluding QED.
Electronics chemicals, and the anthem business from both all of 2022.
In 2023 numbers.
The top line on a comparable basis would be down.
7% to 2023 over 2022, which again is essentially six points of outperformance against the industry, which is in.
In line with the commitment that we have made all along since the beginning of the year.
Thanks Betsy.
Maybe just.
Just a very quick follow up what's the assumption for MSI. This year, obviously, there's some production cuts.
On the memory side that I know of course that you just mentioned the mature side.
I wonder what's the latest thinking in terms of MSR for quanta.
One of the way with I think the way, we think about it right now as we think about MSI down in the low to mid teens for the year.
We expect capex to be down approximately.
20%.
And so the industry down and.
To do that.
The low to mid teens, so I'm gonna say MSI down low teens.
Capex down approximately 20%.
The industry blend down low to mid teens.
Thanks for that trial.
And we'll take our next question from Mike Harrison with Seaport Research Partners. Please go ahead. Your line is open.
Hi, good morning.
Bertrand you gave a little bit of an update on the <unk>.
One facility and the ramp up process, which sounds like it's still going to take.
A few more quarters.
Just curious if you can kind of walk through quantitatively.
How we should think about that margin drag and the impact that it had in Q3.
And then how that is going to compare in Q4 is it going to be a pretty similar drag until we get.
Those commercial volumes starting up in the second half of next year, how should we think about that.
Yeah. So the drag on margin would be very very similar in Q3 Q4 and as we enter the beginning of next year.
The reason for that is really the pace at which we expect to compete.
Sure.
Efficacious so.
Remember the deal screen major types of products that we intend to manufacture in Taiwan.
The first one would be our deposition material products.
Qualification.
For those products have gone extremely well we are essentially complete and we are starting to accept such as orders from customers for deposition materials.
Next would be or.
Who is handling products, specifically, our high purity drums.
We have completed our internal qualifications, but the customer qualifications for those products can take up to six to nine months. So we do not expect to see any significant volumes until the second half of next year.
And then last but not least I mean, the last play out would be the liquid filtration manufacturing in Taiwan.
This will be by far the largest.
Value of production coming out of that building.
And we are very actively completing our intent.
Qualifications, but we don't expect customer qualifications to be completed until the second quarter of next year. So again.
We don't expect really significant volumes of production into the second half of the year and that really means that they won't be really a lot of relief on the P&L Dragon two until that point in time.
Alright, that's very helpful. And then kind of a housekeeping question regarding the interest expense number for Linda.
You mentioned that the 66 million guidance in Q4 doesn't really fully reflect all of the paydown from divestitures maybe.
Maybe maybe some cash flow and obviously some changes that you've made with with.
With refinancing so what is the starting point in 2024 with the modifications that you've made and the pay down that you expect to make before year end.
Yes that interest expense number would be approximately $62 million. So you know the reason it wasn't all paid down this quarter is because of the stay at with staggered throughout the quarter that 730 based on the hedge.
Excellent thanks very much.
And we'll take our next question from Sidney Ho with Deutsche Bank. Please go ahead. Your line is open.
Great. Thank you and good morning.
For 'twenty 'twenty four is good to hear that you guys are you reiterating your view that wafer start will get better.
Specifically for first half do you expect any kind of inflection point on both the same.
Second half are there any areas that you think could see a seasonal and cyclical increase how about areas that may see this like we talk about mature node or maybe some of the capex really the strength youre seeing this year.
Sidney I.
I appreciate.
You being curious about 'twenty to 'twenty, four but as I said earlier.
And I would stick to that it's it's too early for us to talk about 2020 full but I promise you that we will do that in February.
Okay, well I'll ask a different question then.
In your prepared remarks that trial, you highlight the strength of silicon carbide slow recent pad.
Over the past few weeks, we started to hear some weakness in silicon carbide I'm curious what are you seeing in that business.
Is your business tends to be a leading indicator for things to come or just give us a sense of where things are there.
Yeah. So good question and indeed this business has been growing very rapidly for us.
The two sides to D opportunity I mean, one would be things related to the new fab constructions. So.
You know wafer carriers large gas purification systems, so products that you're all very familiar with but the one area that we've been highlighting in the last quarters.
Consumable products they are.
As I see salaries and pads.
As well as post CMP cleaning solutions.
Specifically when it comes to us they see slow reason pads, we've seen very rapid adoption.
Solar solutions and those solutions, obviously are being used.
Hum.
As a function of the level of fed activity. So it's true that some customers are talking about Bruce.
Bringing down utilization rates, but there's just so much new capacity, that's coming online that we.
We don't expect to see a very good first.
Back to that business. That's a matter of fact, we are actively adding capacity I'm in this business has essentially doubled.
In 2023 compared to 2022, it's still small and it's you know think about it as something like about $40 million annually.
But it's growing very rapidly and we are adding capacity ahead of what we expect to be very significant demand for those solutions.
Okay. That's helpful. Maybe just quickly.
Quickly a question for Linda.
I may have missed it on the call, but can you quantify what the drag on the gross margin from the Taiwan facility and what the impact on the distribution agreement being terminated I think last quarter, you talked about that potentially being a half a point of headwind just just wanted to get those numbers up.
Yeah, you're correct last quarter on the the drag from the element solutions.
The transition of the distribution agreement to be approximately 50 basis points.
As far as the specific dollar drag or a per cent drag from the Taiwan facility, we haven't quantified that.
Bertrand said you know it is going to be an impact on gross margins until we fully ramped up that facility.
Okay. Thank you very much.
We'll take our next question from Alexia <unk> with Keybanc capital markets. Please go ahead. Your line is open.
Thanks, and good morning, everyone. This is a this is ryan on for Alexia.
Just want to start with a congratulations on coming up with a new name for material solutions. So some nice work there.
First question for me I, just kind of wanted to.
To dig into what Youre seeing on the memory side, a little bit I mean, where do you where do you think kind of inventories sit in the chain.
It seems like some commentary.
From some industry peers, it's been a little bit better. So I'm just wondering like what you guys are kind of seeing there. Thanks.
Yes look I mean, it's we don't have perfect visibility and we rely obviously extensively on what we are hearing from from our customers directly and we are hearing.
The same type of updates as what you're mentioning I think that the.
Most of our customers have been very effectively reducing inventory levels in the channels.
And.
We have seen actually some level of stabilization in.
Fab utilization, which again would.
Suggests that this is indeed happening we also.
Seeing some firming up of memory pricing, which is another.
Indicator typically of.
Nevertheless.
The balance between supply and demand in our in memory. So again, we don't have perfect visibility when just looking at the same indicators as you are.
And that leads us to believe that we are close to the bottom.
But as I said, it's just too early to talk about.
Green shoots and and recovery, we don't really have that level of visibility yet.
Great. That's helpful. Thank you and then just last one for me here just any update on in terms of node transitions, what you're currently seeing in any early previews.
If you can give us into next year. Thanks, so much.
So for this year, we've seen all of the node transitions in logic taking place.
On time, which was really good news for US important news for US and you saw evidence of that in our.
Our business performance in Q3 in Taiwan.
When it comes to memory, we signaled to all of you that we were expecting delays in the node transitions in three D. NAND and we saw that we were expecting originally going into the year we are expecting.
Many customers to transition to two hundreds 200, plus layer architectures before the end of the year and that is not happening, but we are hoping to see high volume production at 200 layers plus.
Early 2024, but again, we will update you.
With more specifics on 2024 and in a few months.
Yeah.
We'll take our next question from Tim Arcuri with UBS. Please go ahead. Your line is open.
Thanks, a lot we're trying to I'm not going to ask you about all 24, but I'm just wondering if maybe you can guide us just for what a normal.
Seasonal March would be like if you sort of think about I mean, I know that there's a lot of moving parts and you're trying to sell Pam, but is there some way to sort of like.
Sort of tie into our normal seasonal March can you just speak about what you consider to be a normal March.
Oh.
Yeah again, so so without.
Normal in March I mean, it seems like every year, there's been a little bit.
Unique recently.
But I mean typically again we.
We see.
Q2, and and Q3 being our strongest quarters.
In a regular year.
And then Q4 typically is seasonally down versus Q3 that would be what I would call it a bit.
The normal March but.
The question, then becomes we see normal and steady conditions in 2024 or would we see actually a steady increase in wafer starts and fab utilization and is that going to impact.
What would be normal.
Or.
Pattern in 2024, and again I'm not going to go down that path, but I just wanted to caveat that.
Normal you may or may not be what we do.
In 2024.
Sure sure. Okay, and then can you talk about.
Competition in China.
We keep hearing about.
Yes.
Materials companies I mean, they're not they don't seem to be competing with you all that much but.
But that the there was a lot of subsidization of the materials supply chain in China. So can you just speak about how competitive you think there'd be coming with you do you see them.
And if so where.
Yes, I mean as you you're right I mean, we're seeing a lot of.
Chinese competitor.
Competitors that on paper would provide similar types of products, but so.
So far they have not been able to really match.
Matched the performance of distributions. We are we did fill up and we are hearing that loud.
Loudly and clearly from a Chinese competitors of Chinese customers.
They see the value of using our solutions.
That helps them improve their device performance that helps them improve their use and they are sticking to the integrity solutions when available and.
So again, we're keeping a close eye on what's happening in China, but you know.
So far we feel very good about our competitive position in China.
Okay.
Sure.
We'll take our next question for Chris Capps with loop capital markets. Please go ahead. Your line is open.
Yes. Good morning, a question focused on the new material solutions segment. So I think it was on a pro forma basis, if you will the the.
The revenues, you mentioned down 16% year over year, 1% sequentially.
As though the key drivers there.
The softness the fab utilization rates are a function of wafer starts just looking for a little more color did the end zone transaction contribute contribute to those variances I assume one stating those pro forma to reflect the anthem deal.
Then you called out memories. So just wondering if the weakness within this new materials solutions segment.
Skewed towards memory and within that is it skewed towards deposition products that were formerly F E M.
For three D. NAND architectures are or is it maybe more of a function of the CMP module inquiries for her.
<unk> technology nodes, perhaps one or is it balanced.
There's different product segment.
Yeah. So if you look at our mature solutions Youre right Youre, correct, Theyre down about 15% year to date.
And I would remind you that this is the division with the greatest exposure to memory number one but also remember that this is the division that suffered.
Latest feedback from the export restrictions to China.
Enacted in October 2022, right.
So when you recast for that.
Could you do the division is performing in line.
With our with our expectations.
And <unk>.
For us.
In 2023, the focus for the division as being.
To engage with customers on those new materials and trying to develop.
Those co optimized solutions across.
The array of capabilities that we have any takeaways from the film to the.
Polishing solution solar way too.
Post CMP cleaning solutions and that's being Chemistries.
I would say that we are very pleased with the quality of those engagements which have been validating.
The potential that we see for this division. So again this year not particularly exciting for the reasons I was mentioning exposure to memory.
Impact of China.
But if you look under the Hood.
A lot of really exciting opportunities in terms of new materials and.
No new series of opportunities and.
And Sir it ancillary party ancillary cleaning and etching chemistries.
Okay Fair enough just one follow up on your comments about the memory market and in the sort of push out in the.
The ramp of H B M for two X X layered architectures that just given the downdraft in the memory I'm just wondering if it you know it's you know pronounced enough that there is.
Instances, where these advanced memory makers look to accelerate the roadmap to.
Now to two.
Cause the roadmap right now goes to 300 plus layers all the way to 1000, plus players obviously that disproportionately beneficial to you given the content per wafer I'm just curious if there's instances where they look at this you know.
Sort of soft backdrop, as an opportunity to accelerate that.
Transition to advanced nodes or is it really they have to crawl at 200 layers before they walk out you know 300 layers or.
How is that dynamic playing out thank you.
Yeah. Good question. So it's true that I mean again this year was a difficult year for memory at all levels Deputy utilization reduction, but also decommissioning of some older Fabs. So all of that had.
Some devastating impact on this particular part of our business now it is true that some customers are thinking about skipping.
So all of that is something that we will be discussing with them over the next several months and quarters.
And we've seen that in the past. So the question will be do they have enough confidence and conviction to do that and when does it plan to execute on it of course, all role as a supplier would be to be ready for them. If they choose to you know to accelerate the introduction of it who knows.
And as you pointed them you.
You know the more layers on a three D. NAND chips the better it is for integrity. So we for sure we'd be very focused on giving them the comfort they need to potentially keep notes.
But it's it's too early for us to really talk about it.
Interesting. Thank you.
We will take our next question from diverse Latoya with BMO capital markets. Please go ahead. Your line is open.
Hi, good morning, but Linda thanks for taking my questions.
You mentioned like for like sales expected to be down 2% sequentially in fourth Q.
As we think about EBITDA or EBITDA margins, specifically you have some additional noise from the Taiwan facility ramp up or they weren't reduction actions, you'll be taking if we exclude those moving pieces can you share some thoughts on how your underlying margins are performing maybe around price versus cost how they are trending up.
Any color there.
Well, let me let me just talk about it this way and I'm hopefully this addresses your question you know as I think about our Q4 EBITDA margins.
Let's step back we talked about gross margin being accretive from the divestitures with you know some of the the other pressures on the gross margin from inventory reduction and all the the transitional period, we're going through as a company.
But it was I think about getting down to EBITDA, you know as the CFO I'm always looking at how we balance cost and investment and this quarter. We just completed the divestitures you see the transition of the distribution agreements well on its way the.
The divestitures are lower opex businesses going forward, Yeah, we're always going to be looking at our cost structure, we're going to make the critical investments that we need to make in R&D.
Regarding SG&A, we're going to make sure we have the right level of SG&A to balance ongoing and what we need for the ongoing support of the business.
So what I would think about where we are now in this transition area a year.
You know most importantly, as we think about this cost structure and we think about it over the long term.
We still remain incredibly committed to deliver the 40% EBITDA flow through so this is just a transitional year with gives and takes.
Understood.
Maybe the next one can you give us an update on the Colorado Springs project has there been any change in the investment size or timing there given some of the delays in the industry.
$600 million early 2025 and then.
I believe you had mentioned IRR for the Taiwan project to be in the mid twenties.
The chipset funding does.
Colorado Springs to get close to that.
[laughter] Alright, so let me answer the question on Colorado Springs, So you're right that the total investment.
Over the next several years will be approximately $600 million right.
Now the first phase that we are we have initiated.
It's going to be a 100000 square foot facility, it's going to be about $250 million.
And that's really the basis upon which we are seeking funding on the U S Chips Act.
We continue to expect that the production for that first phase will be early 2025.
And we expect the returns to be attractive, but we need help from the U S administration in order to get returns similar to what we were able to commit to in our Taiwanese investment.
And that's the basis for a discussion for the U S administration.
Got it thank you.
Thank you.
And there are no further questions I will turn the floor back over to Bill Seymour for any closing comments.
Thank you and thank you for joining our call today. Please follow up with me directly if you have any additional questions have a good day you can now disconnect. Thank you.
Yeah.
Thank you and this does conclude today's Integra <unk> third quarter 2023 earnings Conference call. Please disconnect. Your lines at this time and have a wonderful day.
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