Q4 2024 Entegris Inc Earnings Call
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Speaker Change: Welcome to the Integra fourth quarter and full year 'twenty 'twenty four earnings conference call. At this time, all participants have been placed on a listen only mode and the floor will be opened for your questions. Following the presentation.
Speaker Change: You would like to ask a question at that time. Please press star one on your telephone keypad. If at any point. Your question has been answered you may remove yourself from the queue by pressing star too.
Speaker Change: So others can hear your questions clearly, we ask that you pick up your handset for best sound quality.
Speaker Change: Lastly, if you should require operator assistance. Please press star Zero I would now like to turn the call over to Bill Seymour Vice President of Investor Relations.
Bill Seymour: Good morning, everyone earlier today, we announced the financial results for our fourth quarter of 2024.
Speaker Change: 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.
Speaker Change: Additional information information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we filed with the SEC.
Speaker Change: Please refer to the information on the disclaimer slide in the presentation.
Speaker Change: On this call. We will also refer to non-GAAP financial measures as defined by the SEC regulation G. You can find the reconciliation tables in today's news release as well as on the IR page of our website at <unk> Dot com.
Speaker Change: As we referenced in last quarters call, we have combined our M C and a major divisions. The name of the New Division is advanced security solutions our Aps.
Speaker Change: To assist you in your modeling we have provided in the appendix of the earnings slides recast financials for this new division going back eight quarters.
Speaker Change: 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 Bill and good morning, I am pleased that we were able to cap off 'twenty 'twenty four with strong performance in the.
Bertrand Loy: The fourth quarter, our revenue, excluding divestitures grew 11% year on year and was above our guidance range.
Bertrand Loy: This performance was driven by the highest quarterly sales for material solutions in over two years and all time high quarterly sales for advanced purity solutions.
Bertrand Loy: Profitability was also solid in the quarter gross margin and EBITDA margin were within guidance and non-GAAP EPS was above our guidance.
Bertrand Loy: Looking at the full year.
Bertrand Loy: Semiconductor customers with significant exposure to advanced logic, and <unk> performed very well, but the rest of the industry remained weak throughout 2024 and.
In addition, there were no significant technology node transitions in logic or memory, which limited our opportunity to further increase our content per wafer.
Bertrand Loy: With this industry backdrop, I am very pleased with our overall results.
Bertrand Loy: During the year, excluding divestitures and the impact of currency.
Bertrand Loy: Revenue grew more than 5%, yielding an estimated market outperformance of three to four points.
Bertrand Loy: Sales of our material solutions divisions were up 11% for the year excluding divestitures.
Bertrand Loy: For M. S growth was particularly strong in CMP consumables advanced deposition materials and selective etch chemistries.
Speaker Change: For additional context, I would like to highlight that last year CMP slurry revenue grew 14% in CMP pads grew 24%.
Bertrand Loy: We are also encouraged by new critical peel off positions, including more than doubling our slurry content from N three two and two.
Bertrand Loy: This performance is a testament to the great work. The team has done since our combination with C. M C.
Bertrand Loy: Theres still more to be done to harvest the full benefits of the CMC deal, but the team is making excellent progress.
Bertrand Loy: Advance curative solutions Division sales were flat in 'twenty 'twenty four driven by difficult comparisons from the significant backlog, we were working through during 'twenty 23 and.
Bertrand Loy: And mirroring the performance so overall semi market strong growth in advanced logic and advanced packaging for E. P. S was offset by weakness in midstream and memory.
Bertrand Loy: However, EPS ended the year strong as expected with sequential growth in most product areas.
Bertrand Loy: Moving back to our consolidated results from a profitability point of view, both our gross margin and EBITDA margin were up in 2024, excluding divestitures.
Bertrand Loy: Our EBITDA margin expanded more than 100 basis points year on year to reach 28, 7% slightly above our target commitment.
Bertrand Loy: We were able to improve our bottom line leverage while increasing our R&D investments by 14% in 2020 for these investments are critical to winning new P. All positions such as multi deposition muddy etch in next generation three D NAND.
Bertrand Loy: And point of use photoresist filters in advanced logic.
Bertrand Loy: These new pure wins drive the increase of integrity content per wafer and ultimately fuel our top line market outperformance.
Bertrand Loy: There are a few additional items I would like to highlight.
Bertrand Loy: Last year, we paid down almost $625 million of debt.
Bertrand Loy: A portion of that coming from the proceeds of the divestiture of the pipeline and industrial materials business in early March 2024.
Bertrand Loy: Debt reduction will continue to be a focus area for us in 2025, and Linda will expand on that shortly.
Bertrand Loy: Our new facility in Kaohsiung, Taiwan continues to make progress we have completed qualifications for products, including trumps tubing deposition materials and some liquid filters, we expect to complete most of the remaining critical product qualifications by the end of this year.
Bertrand Loy: We are also progressing rapidly and our new Colorado site.
Bertrand Loy: Added to that in December we finalized an agreement with the U S Department of Commerce.
That provides us up to $77 million in funding under the chips and Science Act.
Bertrand Loy: Tools have started to move into the facility and we expect to initiate customer qualifications in the second half of this year.
Bertrand Loy: Moving on to 'twenty to 'twenty five.
Bertrand Loy: As we entered the year, we have yet to see evidence of a significant semi market rebound.
Bertrand Loy: And our customers visibility outside of advanced logic, and AI driven applications continues to be limited.
In that context for the full year 2025, we expect the market based on a unit and Capex mix will be up between one and 3%.
Bertrand Loy: We believe that this is a prudent view of the industry at this point in the year until we see concrete evidence of a sustained market recovery across major end markets.
Bertrand Loy: On top of this industry growth, we expect to outperform the market by four to five points in 2025.
Bertrand Loy: This outperformance will be largely driven by additional content opportunities in new logic and memory nodes.
Bertrand Loy: This outperformance also includes the negative impact of the latest restrictions on sales to China.
Bertrand Loy: Which we estimate to be an annual incremental loss of revenue of $30 million to $40 million in 2025.
Bertrand Loy: Putting it all together, we expect our sales in 2025 would be approximately $3.4 billion at the midpoint of our guidance range up approximately six 5% on a pro forma basis.
Bertrand Loy: We expect EBITDA will be slightly above our target model or just over 29% of revenue and we expect non-GAAP EPS to be at or above $3.25.
Speaker Change: Let me now turn the call over to Linda Linda.
Linda: Good morning, and thank you Bertrand.
Linda Linda: Our sales in the fourth quarter of $850 million or up approximately 11% year over year, excluding the impact of divestitures.
Linda Linda: On an as reported basis, our sales were up approximately 5% year over year and sequentially.
Linda Linda: Foreign exchange negatively impacted revenue by $4 million year over year.
Linda Linda: And negatively impacted revenue by $2 million sequentially in Q4.
Linda Linda: On a full year basis, FX negatively impacted revenue by $23 million, reducing our 2024 sales growth by almost one point.
Linda Linda: Gross margin on a GAAP and non-GAAP basis was 45, 6% in the fourth quarter within our guidance range.
Linda Linda: Operating expenses on a GAAP basis were $237 million in Q4.
Linda Linda: Operating expenses on a non-GAAP basis in Q4 were $188 million in line with our guidance.
Linda Linda: Adjusted EBITDA in Q4 was 29, 2% of revenue also in line with our guidance.
Linda Linda: The GAAP tax rate in Q4 was approximately 9% and the non-GAAP tax rate was 12%.
Linda Linda: The lower than expected tax rate was driven by favorable income mix.
Linda Linda: GAAP diluted EPS was <unk> 67 per share in the fourth quarter non-GAAP EPS was <unk> 84 cents per share above our guidance range.
Linda Linda: Sales for our material solution division in Q4 with $361 million up 14% year on year, excluding the impact of divestitures.
Linda Linda: Sales were up 4% sequentially.
Linda Linda: The largest contributors to the sales increase both year on year and sequentially, where CMP consumables advanced deposition materials and etching chemistries.
Linda Linda: Adjusted operating margin for EMS was 21, 7% for the quarter.
Linda Linda: The 100 basis points sequential margin increase was driven by operating expense leverage.
Linda Linda: Sales for the new advanced purity solutions Division in Q4 were $491 million up 9% year on year and up 6% sequentially.
Linda Linda: I'm a product perspective, the year on year sales increase was driven by fluid handling wafer handling and gas purification.
Linda Linda: The sequential sales increase was driven by growth in liquid and gas filters and dispense pumps used in advanced packaging applications.
Linda Linda: Adjusted operating margin for Aps was 27, 9% for the quarter.
Linda Linda: The modest sequential increase in margin was primarily driven by volume leverage.
Linda Linda: Moving on to cash flow cash.
Linda Linda: Capex for the year was $316 million in line with our expectations and was approximately 10% of sales weeks.
Linda Linda: We expect to spend approximately $325 million in total capex in 2025 in line with our ongoing target of approximately 10% of sales.
Linda Linda: Full year free cash flow was also $316 million and.
Linda Linda: And free cash flow margin was almost 10% in 2024.
Linda Linda: This is a significant improvement relative to the last few years, which were negatively impacted by the industry downturn and higher capex spending from our KSP in Colorado investments.
Linda Linda: We are committed to improving our free cash flow margin, we've actually made free cash flow a compensable goal for the management team and the rest of the organization starting this year.
Linda Linda: We expect our free cash flow margin to return to the mid to high teens percent in the next few years similar to our pre pandemic levels.
Linda Linda: This will be driven by EBITDA leverage in line with our target model and working capital optimization.
Linda Linda: Looking at our capital structure during the fourth quarter, we paid down 150 million of the term loan from cash on hand, which means to date, we have paid down $2 billion of our total debt since the close of the CMC acquisition in July 2022.
Linda Linda: At the end of the year, our gross debt was approximately $4 billion and our net debt was approximately $3 $7 billion.
Linda Linda: Leverage was four three times and net leverage was four times.
Linda Linda: The blended interest rate on our debt portfolio is approximately four 9%.
Linda Linda: And since the term loan is fully hedged currently 100% of our debt is fixed.
We will continue to use our free cash flow to pay down debt and we remain committed to reducing our leverage.
Linda Linda: Based on the timing of our cash flows, including Capex or debt repayment will be weighted to the second half of 2025.
Linda Linda: We expect to meet our gross leverage commitment of below four times before the end of the year.
Moving on to our Q1 outlook, we expect sales to range from $775 million to $805 million.
Linda Linda: This equates to year on year revenue growth of approximately 7% to the midpoint excluding divestitures.
Linda Linda: Gross margin of 45.5 to 46, 5% both on a GAAP and non-GAAP basis.
Linda Linda: GAAP operating expenses of $236 million to $240 million and non-GAAP operating expenses of $188 million to $192 million up slightly at the midpoint compared to Q4 2024.
Linda Linda: We expect the EBITDA margin to range from 28% to 29%.
Linda Linda: Net interest expense of approximately $50 million.
Linda Linda: non-GAAP tax rate of approximately 15%.
Linda Linda: GAAP EPS to be 38 to 45 per share and non-GAAP EPS to be 64 to 71 cents per share.
Linda Linda: We also expect depreciation to be approximately $53 million in Q1.
Speaker Change: And in addition to the annual outlook Bertrand shared I'd like to provide a few additional modeling items for the full year 2025.
Speaker Change: We expect net interest expense will be approximately $200 million for the full year down modestly compared to 2024 and.
Speaker Change: And we also expect the non-GAAP tax rate to be approximately 15% for 2025.
Bertrand Loy: I'll now hand, it back over to Bertrand for some closing remarks.
Bertrand Loy: Thank you Linda and closing in this dynamic industry environment I am very proud of our team's resilience steady execution and a strong quarter. We ended the year on <unk>.
Bertrand Loy: As we enter 2025 I believe we have taken an appropriately prudent view of the industry. Given the continued lack of visibility outside of advanced logic and AI applications.
Bertrand Loy: We remain focused on delivering strong market outperformance and profitability, improving free cash flow and paying down our debt.
Bertrand Loy: While funding critical investments that improve our long term competitiveness and position us for the upturn.
Bertrand Loy: Looking further out we continue to have high confidence in the strong long term growth outlook of the semiconductor industry.
Bertrand Loy: In addition, the industry's technology roadmaps continue to be opportunity rich for Integra.
Bertrand Loy: Customers drive for more complex device architectures and further miniaturization.
Bertrand Loy: The resulting process complexity is making our expertise in materials science and materials purity increasingly valuable in the R&D investments, we are making are positioning us very well for the upcoming technology node transition.
Bertrand Loy: All of which are expected to generate incremental content per wafer opportunities and fuel our market outperformance in the years to come.
Bertrand Loy: Before we open the line for questions I would like to announce that Bill Seymour VP of IR and communications recently announced his decision to leave and Tegra is to pursue a new opportunity end of Q1.
Bertrand Loy: I would like to take a moment to recognize bill for the quantity of his work and his invaluable advice over the past six years, Linda and I will miss him greatly.
Bertrand Loy: With that operator, let's open the line for questions.
Bertrand Loy: The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your telephone keypad.
Bertrand Loy: If at any point. Your question is answered you may remove yourself from the queue by pressing star two.
Bertrand Loy: We ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you.
Speaker Change: Our first question is coming from Toshi Hari with Goldman Sachs. Your line is open.
Speaker Change: Hi, good morning, and thank you so much for taking the question and thank you Bill for all the help over the past several years.
Speaker Change: My first question is on the market outlook and your outperformance bertran, so the market growing 1% to 3%.
Speaker Change: I was hoping you could delineate between the wafer start.
Speaker Change: Side of side of the house and the Capex side of the house, what what you were thinking again.
Speaker Change: If you can sort of provide a little bit of color by application that would be really helpful. And then the outperformance of 4% to five percentage points in the past I think.
Speaker Change: You've talked extensively about end to end and molybdenum I'm curious what the key drivers are for you guys in 'twenty five.
Speaker Change: Sure.
Speaker Change:
Speaker Change: So when you when it comes to.
Speaker Change: The market assumptions for 2025, as we said indeed.
Speaker Change: Comments visibility continues to be fairly limited outside of advance logic and AI related application. So.
Speaker Change: As we started the year and without any concrete evidence of a rebound across the industry. We think it's prudent.
Speaker Change: To assume a wafer start being up into the low single digit.
Speaker Change: And the industry capex to be essentially flat right. So if I wanted to double click on those two components.
Speaker Change: Wafer start low single digit we expect obviously very strong wafer starts in advanced logic.
Speaker Change: And everything that is AI related but as of right now as I mentioned I think there's very limited visibility in midstream and traditional memory. So thats way up behind that's what's behind the wafer start assumption when it comes to Capex.
Speaker Change: Probably no surprise to you, we expect elevated Wi Fi and advanced foundry and advanced packaging.
Speaker Change: We expect increased spending ahead of some expected technology transitions, but that's going to be offset by.
Speaker Change: Slow W. If he pretty much everywhere else and then slower new fab construction projects in.
Speaker Change: In 2025.
Speaker Change: So when it comes to the to the outperformance as you know one to share.
Speaker Change: The performance the outperformance of <unk>.
Speaker Change: <unk> is really driven by.
Speaker Change: How many nodes are taking place in any given year and of course, the more the better.
Speaker Change: And the other big driver is the timing of dose no transition. So in other words when those notes are already put in high volume manufacturing and enforced the sooner the better right. So when you look at.
Speaker Change: 2025, the good news is that we expect a lot of important node transitions.
Speaker Change: In logic, we are going to be obviously watching carefully in two <unk>.
Speaker Change: And then in Sweden, and we are we expect.
Speaker Change: To see the adoption of Mali, <unk> placement tungsten.
Speaker Change: In.
Speaker Change: 300, plus layer devices.
Speaker Change: Now so that's those are the important node transitions that we will be watching.
Speaker Change: And then if you think about that from a timing point of view all of those transitions. So really expected in the second half of the year. So it's good but.
Speaker Change: Not as good as if they were happening in the first half of the year. Obviously in other words, we're not getting the full benefit of those conditions in 2025.
Speaker Change: The other final point, maybe on the outperformance is as I mentioned in my comments.
Speaker Change: Remember that one point of top line growth is expected to be taken away by the recent China restrictions. So so that's the context for the overall top line outperformance in 2025 of.
Speaker Change: Four to five points and.
Speaker Change: No just just to be clear our long term outperforming gold remains three to six as we have mentioned many times before.
Speaker Change: Great.
Speaker Change: It's really clear and really helpful. Thank you and my follow up maybe one for Linda.
Speaker Change: Interesting comments around working capital optimization and sort of your aspirational goal to improve free cash flow margins to sort of the mid to high teens I.
Speaker Change: I was hoping you could sort of expand on what the what the key initiatives are internally.
Speaker Change: You you gave guidance for Capex for calendar 'twenty, five, but how we should be thinking about capex, perhaps in 2006 and beyond then again is it is it primarily inventory when you speak to working capital improvements or is there something else going on thank you.
Speaker Change: Absolutely. Thanks for that question to see a.
Speaker Change: Very excited and free cash flow is going to be a very high priority as I discussed during the call and as I mentioned it will be a compensable goal for the team.
Speaker Change: We really made a lot of progress in 2024 with the 10% outcome for free cash flow margin and think about it. It's a very significant improvement over 2023 being about 5% in 2020 to be negative.
Speaker Change: So to address your points.
Speaker Change: Capex, we still over time think of it as about 10% so that would be somewhat stable.
Speaker Change: Therefore, the drivers are going to be that EBITDA leverage as we get that growth in the market recovers and then working cap so.
Speaker Change: Clearly inventory can have the biggest impact the team did a good job again this year with some improvement in our days on hand, and we're going to continue to drive that.
Speaker Change: We also made some improvement on it on the other metrics like payables. So.
Speaker Change: So overall, we're going to just keep malte optimizing our working cap overall and could continue to drive more cash flow from the working cap.
Speaker Change: And as we said we expect this to return to the mid to high teens, which is our pre pandemic levels over the next several years.
Speaker Change: Thank you.
Speaker Change: Thank you we'll take our next question from Melissa Weathers with Deutsche Bank. Your line is open.
Speaker Change: And thank you for letting me ask a question Bill best of luck on your new endeavors.
Melissa Weathers: And I guess for my first question can we dig a little bit deeper into the March quarter guidance.
Speaker Change: We have two segments, but are there any moving pieces that we should be contemplating it seems like it's a little bit below what.
Speaker Change: What you've seen historically in that quarter, so any moving pieces within the segments through March would be helpful.
Speaker Change: So I can I can certainly start and then describe a little bit about.
Speaker Change: The drivers behind the top line I think.
Speaker Change: We think we view our guidance at the midpoint.
Speaker Change: To be pretty much in line with normal.
Speaker Change: No more.
Speaker Change: Seasonal market decline.
Speaker Change: I mean, we expect.
Speaker Change: Sequential decline in wafer starts frankly across all customer segments in Q1, and we also expect a fairly slow start to.
Speaker Change: Capex in the first quarter of to use so.
Speaker Change: And we expect that too to Frankie impact most of our product lines in two divisions.
Speaker Change: So I think we think that our guidance is pretty much in line with.
Speaker Change: Normal seasonality and if you look at it against Q1 of last year, it's actually up 7%. So it's in line with the overall growth target that we have for the year.
Speaker Change: Got it.
Speaker Change: For that and then I wanted to call. It one thing that you mentioned in your slides and in your prepared remarks.
Speaker Change: Jim in the advanced packaging side of things.
Speaker Change: Haven't spent too much time, focusing on this part of the business and I know, it's a strong grower for the industry right now so.
Speaker Change: Could you give us a little bit of color on how you're supporting that industry, what trends youre seeing and maybe how much could grow this year.
Melissa Weathers: Well, thanks for asking that flowing question, Melissa I was hoping that somebody would.
Melissa Weathers: And certainly as we've been mentioning over the last two years.
Melissa Weathers: Advanced packaging has been historically, a very very small part of our portfolio, but as we've said we've been working very closely now for two years with customers too.
Melissa Weathers: To better understand their technology, roadmaps and to develop solutions for emerging.
Melissa Weathers: Process challenges that they're facing I mean, theyre all trying to drive additional automation greater process precision in events packaging and we have solutions to help them do that so.
Melissa Weathers: Today in 2020 for advanced packaging.
Melissa Weathers: Related revenues are approaching about $100 million. So it's not so small anymore.
Melissa Weathers: And by the way, we expect that part of our business to grow significantly in 2025 as more investments continued to pour into.
Melissa Weathers: Advanced packaging capacity.
Melissa Weathers: So today.
Melissa Weathers: From a product standpoint.
Melissa Weathers: Most of the opportunities are within <unk>.
Melissa Weathers: Advanced purity solutions, so think about.
Melissa Weathers: Carriers for thin and sic wafers.
Melissa Weathers: And the other side of the opportunity would be around fluid management solutions in particular, how you skirted to dispense pumps.
Melissa Weathers: But we still have opportunities in material solutions as well and we have actually very successfully introduced some dielectric series in these processes, it's still small as I said.
Melissa Weathers: Mid single digits of millions of dollars of revenue in 2025, but we expect that to grow rapidly actually for that particular platform, we expect that to grow but you've talked to a three X in 2025. So.
Melissa Weathers: As we've said many times before I mean, it's it's been historically.
The small part of our business, we've been focusing on it we are uncovering a lot of new opportunities and it looks very very promising going forward.
Melissa Weathers: Thank you.
Melissa Weathers: Thank you.
Melissa Weathers: Thank you.
Speaker Change: We'll take our next question from Budd <unk> with BMO capital markets. Your line is open.
Speaker Change: Hi, Good morning, Baton and let me like to extend thanks to Bill and best wishes going forward. Thanks.
Speaker Change: You mentioned, some very strong numbers for CMP pads and studies with anybody thought could you add some more detail around what sort of factors drove that was it was it really the new fabs.
Speaker Change: And the drivers and then do you see this as a leading indicator for some of the other platforms for this year.
Speaker Change: Yeah.
Speaker Change: Yes, so I think again I mean overall very very pleased with the way our.
Speaker Change: Materials solutions platform has been performing and in particular, we're very pleased with that.
Speaker Change: TMP suite of product I think it's actually a great success story and a story that really validates all of the expectations that we had when we chose to combine with <unk>.
Speaker Change: CMC materials right, if you think about.
Speaker Change: The types of revenue.
Revenue synergies, we were expecting to generate it came down to cross selling opportunities.
Speaker Change: Engaging with the customer differently and creating.
Speaker Change:
Speaker Change: The pipeline of innovation driven opportunities and then more broadly trying to really drive it.
Speaker Change: Our solution selling strategy across the materials platform and in 'twenty 'twenty four we started to see evidence of success.
Speaker Change: So as I mentioned Syrian pads grew very significantly but.
Speaker Change: Post CMP clean did as well and so did CMP filters actually all of those CMP products that suite of CMP products grew in the high teens. So higher in 2024, so again the cross selling strategy is absolutely working.
Speaker Change: And we expect to see more momentum going into 2025.
Speaker Change: As I said, we also engaging differently and better with our strategic customers.
Speaker Change: With a great focus on innovation, we mentioned.
Speaker Change: The progress enjoy content advanced foundry and I was just mentioning in the previous question. What we have accomplished in terms of uncovering new opportunities in advanced packaging.
Speaker Change: And then finally when it comes to solution selling we believe that the proof points will be with us.
Speaker Change: The success that we expect to see in Mali the position.
Speaker Change: <unk> edge.
Speaker Change: In <unk> NAND applications and at some point in time as Marty you gets adopted in logic, we expect to see also the introduction of multi polishing.
Speaker Change: Solutions, and that's going to create new opportunities for for integrity. So.
Speaker Change: I feel very good about about.
Speaker Change: Due to the progress that we're making I think it's.
Speaker Change: Validating.
Speaker Change: Yeah.
The value of <unk>.
Speaker Change: This combination and I'm very pleased with the way the team has been coming together in executing in 2025 four.
Speaker Change: Got it and as a follow up column he hasn't moved meaningfully in the wrong direction.
Speaker Change: Do you hedge some of that and if possible could you quantify the yodlee are impactful with Duane twenty-five audience based on where things stand. Thank you.
Speaker Change: Can you repeat that question sorry, it was blurred.
Speaker Change: Yes, just the impact of how FX has changed over.
Speaker Change: Over the past few months, it's gone in the wrong direction for some on the East coast.
Speaker Change: Yeah, if you're able to quantify that yet.
Speaker Change: So the good news is as we the way we have our facilities set up in our manufacturing a lot of the costs are hedged by location.
Speaker Change: So really when we quantify the FX as we do we mentioned the FX impact.
Speaker Change: On a revenue line, but as you go down to gross margin and there can be a slight delay, but overall a minimal impact on the gross margin line. So that's why you don't hear us talk about it at gross margin as much from a cost perspective.
Thank you.
Speaker Change: Thank you.
Speaker Change: And we will take our next question from Timothy Arcuri with UBS. Your line is open.
Timothy Arcuri: Hi, Bertrand so I wanted to go back to what the Tam is growing this year. So I heard your assumption on the Capex I think you said flat.
Speaker Change: I mean, all the equipment companies are guiding up at least 5% W. E. So I know that you use capex that'd be FTE, but.
Speaker Change: It seems like certainly that'd be if he is going to grow this year like maybe even higher than mid single digits.
Speaker Change: I guess, where does the assumption that capex is only flat coming from is there going to be a big mix shift is sort of underlying your assumptions a big mix shift from.
Speaker Change: Capex toward equipment. This appears that whats actually happening.
Speaker Change: Yeah. So so Tim did the assumption we are using right now is the W. A fee would be we'd be up in the low single digits.
Speaker Change: And then construction would be essentially.
Down in the low single digits. So that's the net effect of that is is that flat assumption.
Speaker Change: For for Capex.
Speaker Change: As we said.
Speaker Change: The.
Speaker Change: There are different views of how the market could evolve this year when we talked to all of our customers and that includes all of the large equipment makers I think there is really not perfect visibility into second half of the year.
Speaker Change: And we're choosing maybe to be a little bit more prudent than than some but I think based on what we went through in 2024, we think it's a prudent.
Speaker Change: Way to approach 2025.
Speaker Change: So I think for you I think the key the key takeaway I mean remember that we are breaking down.
Speaker Change: Our guidance in two components, one is the industry component and we understand that different people have different opinions around that.
Speaker Change: And then the other component is the outperformance the one piece, we really control is the outperformance and that's really our commitment to outpace the industry by four to five points I'm sure that our views of the industry would evolve.
Speaker Change: As we gain more visibility as we progress through the year end.
Speaker Change: And hopefully there would be a basis to be a little bit more.
Speaker Change: Constructive or to be more optimistic over the industry assumptions as we proceed into your butt.
Speaker Change: Honestly, there's not enough visibility as of right now.
Speaker Change: Yeah, I guess just the degree that you outperformed depends on what your assumption is for the underlying market Yi. That's why I was asking but so so I had a question Linda on gross margin for December so.
Speaker Change: You came in above the high end on revenue, but gross margin was at the low end.
Speaker Change: I know that the gross margin is being guided up a little bit for March but was there something specific that happened in December that that caused that because you'd think that gross margin.
Speaker Change: Could have been a touch better thanks.
Speaker Change: Yeah overall.
Speaker Change: Firstly, it's a good opportunity to just talk about gross margin overall and I will answer your question around the December.
Speaker Change: Just broadly speaking with our gross margin you know think of that as part of our cost structure part of our annualized cost cost structure and in the context of our analyst day target model, which delivers a 40% flow through.
Speaker Change: So when you think about December it was primarily product mix, so but over time.
Speaker Change: Wanted to take a step back and talk about the overall 2020 for gross margin.
Speaker Change: A 2024 gross margin of 46% for the year up 70 basis points year over year ex divestitures, and we achieved a gross margin expansion, while running our plants at the appropriate levels. So it was a really great performance by the team.
Speaker Change: I'm going to give you some color as we look into 2025, we expect gross margin to be up about 25 to 50 basis points and there's puts and takes in that we've talked about the puts and takes as it relates to 'twenty four and there are similar in 'twenty five yeah volume leverage we're going to continue to focus on productivity.
Speaker Change: And we will have some of the inefficiencies related to Taiwan in Colorado, but again think about the gross margins in the puts and takes as we look into 'twenty five similar to 24 that this is all in the context of our analyst day target model and we're going to.
Speaker Change: Make sure our cost structure works with our analyst day target model, which is in line with when you look at 25, our full year guidance for 25, and the 40% EBITDA flow through.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you we'll take our next question from Christopher Parkinson with Wolfe Research. Your line is open.
Speaker Change: And Mr. Parkinson. Your line is open please Amit yourself on your end.
Speaker Change: Sorry about that those higher sign on for Chris.
Speaker Change: I know, you said $30 million to $40 million of impacts in the new China restrictions, maybe if you could just give a little bit more color on where exactly that's affecting you that'd be helpful.
Speaker Change: Yes, so I mean I think.
Speaker Change: It's going to impact both divisions.
Speaker Change: Not going to specifically.
Speaker Change: Assign that declined to two two.
Speaker Change: Two more.
Speaker Change: Higher degree of specificity, but I think you know do restrictions so essentially.
Speaker Change:
Speaker Change: Adding 30 of our domestic customers to the entity list.
Speaker Change: And the result of that is that it's going to limit our exports of U S made products to those customers. So.
Speaker Change: Complying with the new rules as the impact of $30 million to $40 million of.
Speaker Change: Annual revenue loss.
Speaker Change: Which is about one point of growth and as I mentioned earlier again.
Speaker Change: Outperformance target of four to five points is inclusive of the impact of the China restrictions.
Speaker Change: Got it that's helpful and.
Speaker Change: And then.
Speaker Change: Regarding the ramp of the Taiwan facility.
Speaker Change: The early impacts of Colorado.
In the past.
Speaker Change: You quantified what sort of gross margin drag you expect just from under utilization of the asset ramps.
Speaker Change: Maybe how long do you think it'll take to get to what you would consider a normal operating rate in Taiwan and.
Speaker Change: Any early thoughts about the impact on Colorado for 2025 gross margin.
Speaker Change: Would be helpful.
Speaker Change: Yeah. Thanks for the question.
Again, I would think about gross margin for 2025 in the context of our overall guidance and the target model as I mentioned earlier there'll be puts and takes but we did include any inefficiencies relative to ramping in Colorado and KSP in our guidance.
Speaker Change: Even with these headwinds.
Speaker Change: We do expect that gross margin and 25 to expand a bit 20 to 50 basis points.
Speaker Change: But as we look forward with K S T in Colorado and the ramp inefficiencies. We do expect this to be mostly behind us by the second half of 'twenty six but again circle back to the target model and think of the inefficiencies is encompassed in that target model in our guidance.
Speaker Change: Thank you.
Speaker Change: And we'll take our next question from <unk> Malik with Citi. Your line is open.
Speaker Change: Thank you for taking my question and Bill you will definitely be missed.
Speaker Change: I have two questions, but during the last earnings call you guys had talked about some supply constraints that impacted your September and December quarter.
Speaker Change: Those supply compete completely behind you or.
Speaker Change: A lingering effect on the March quarter.
Speaker Change: Thanks for following up on that much appreciated so good news the supplier issues. We discussed last quarter are essentially behind us. So on the contaminated batch of Hcl impacting the liquid filtration products. This was resolved in Q4 as we expected and then on the valve constraints impacting the gas.
Speaker Change: Purification platform this is improving and expected to be resolved in Q1 as planned.
Speaker Change: Most importantly, we continually look to reduce our supply chain risk and minimize single source suppliers and also work very hard to have our suppliers close to our manufacturing facilities, where possible and the team has made great progress on this over the last two years and we will continue to work to optimize our supply chain.
Speaker Change: Thanks, Linda and then a follow up for you on tariffs I know you guys are mostly U S manufacturing, but should they be.
Speaker Change: Any impact from the tariff situation, particularly in China from any of your supply chain sources.
Speaker Change: So we're closely monitoring any impact on tariffs from the America first trade policy directives.
Speaker Change: <unk>, Canada, Mexico, China, we've completed our assessment on the newly announced tariffs and there'll be an material impact our raw material costs.
Speaker Change: Over the last several years as I just mentioned, we've been bolstering that resiliency of the supply chain and establishing local supply chains to better serve our regional customers and yeah. With this strategy is helping us mitigate some of the impact of the tariffs, but we'll continue to evaluate the impact as new information comes out.
Speaker Change: Evaluate that impact on our business.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: We'll take our next question from Charles <unk> with Needham Your line is open.
Speaker Change: Hi, good morning.
Speaker Change: I have a question a little bit high level on the wafer stocks side, so plenty plenty for looks like.
Speaker Change: The MSI something reported by the third party is going to be a down year, but.
Speaker Change: Yeah.
Speaker Change: You did expect.
Speaker Change: Wafer starts to be up for you. This year, if theyre probably seems to be forecasting.
Speaker Change: Pretty much close to 10% MSI growth.
Speaker Change: We are seeing a little bit lower wafer starts growth.
Speaker Change: Maybe if you walk us through where the disconnect between what you see and what that third party.
Speaker Change: Great quarter.
Speaker Change: Brian I, suppose really think about sex that'd be young Glenn I mean.
Speaker Change: The first thing.
Speaker Change: And I look at it.
Speaker Change: Coffee forecast flow MSR going forward.
Speaker Change: Sure I think we had the beginning of the discussion.
Speaker Change: Previous call but.
Speaker Change: What third party reports track or really to.
Speaker Change: The shipments of bare wafers from the wafer growers to defense and that's what that MSI.
Speaker Change: Next tracks and typically there is a quite.
Speaker Change: Really a good correlation between wafer starts.
Speaker Change: MSI, except when you have very high levels of wafer inventories sitting into fab.
Speaker Change: That was the case in 'twenty, four and Thats why.
Speaker Change: MSI was.
Speaker Change: Sensually reported as being.
Speaker Change: Down there was a and you can track that with or you can correlate that with the.
Speaker Change: Reports from the wafer growers.
Speaker Change: But the flip side of that is that you're going to see we expect to see the.
Speaker Change: The reverse of that.
Speaker Change: Pay out in.
Speaker Change: 2025 stores inventories have been consumed in safety.
Speaker Change: Safety stocks get rebuilt we expect shipments of bare wafers.
Speaker Change: Exceed the actual wafer start activity into fabs, so to put that in context as I said I think a wafer start number for 'twenty 'twenty four is.
Speaker Change: Low single digit 1% to 2% essentially 424.
Speaker Change: Compare to an MSI.
Speaker Change: Or that it's negative mid to high single digits, and we expect to see the flip side of that in 2025 with MSI number to your point probably in the high single digit maybe even in the low teens.
Speaker Change: The actual wafer start is expected to be a little bit less than that.
Speaker Change: Thanks.
Speaker Change: The other question right.
Speaker Change: Annual guidance, you've provided plus our Q1 guidance.
Speaker Change: It seems to imply.
Speaker Change: 25 going to be another second half weighted year.
Speaker Change: U S.
Speaker Change: As last year with second half weighted I would say, it's probably a $2 52 split between first half and second half of 'twenty four.
Speaker Change: Based on the current visibility do you expect something similar in that range or less second half, where you get a little more second half weighted.
Speaker Change: Well.
Speaker Change: Okay.
Speaker Change: Yeah. It's a good question I think.
Speaker Change: We expect certainly steady quarterly sequential growth through the year.
Speaker Change: And we expect the level of outperformance to increase in the second half of the year as we benefit from some of the node transitions I was mentioning in advanced logic and <unk> not.
Speaker Change: So our second half certainly you would be would be stronger than the first half.
Speaker Change: Thank you.
Speaker Change: Thank you we'll take our next question from Aleksey <unk> with Keybanc. Your line is open.
Speaker Change: Our trauma and I'll, maybe ask you a longer term question any views on the level of outperformance in 2026 do you think you'll stay at about this level, a little higher or lower versus what you've seen in 25.
Speaker Change: So, let's see I think.
Speaker Change: Let's let's let's go through 2025 first and then I will comment on 2026, but is.
Speaker Change: As a backdrop I would say that I'm very very pleased with.
Speaker Change: The progress that we've been making developing a suite of solutions I was mentioning in it.
Speaker Change: <unk> in particular and as those device architectures become.
Speaker Change: More challenging I would expect the magnitude of the moly dep deposition opportunity to muddy.
Speaker Change: <unk>.
Speaker Change: Opportunity to continue.
Speaker Change: To grow.
Speaker Change: So, but let's first see a few.
Speaker Change: The large memory makers transition away from tungsten into money for the word line.
Speaker Change: Then, let's see how the industry is also starting to adopt.
Speaker Change: Money etch.
Speaker Change: Wet chemistry, and moving away from the Tri edge process that they're currently using I think we'd have a lot more data points.
Speaker Change: Later in 2025, and I think it would be in a much better position to answer your question.
Speaker Change: Thanks, Brooks draw and I also wanted to wish you best of luck to Dallas.
Speaker Change: For all the help and so my second question I wanted to ask you about China I think now about 20% of sales and I believe in the past you were talking about China being 20% to 25%. So perhaps you were looking at some growth in China with these latest restrictions.
Speaker Change: How do you think this evolving do you think China similar gross margins, you'll be around that 20% Mark.
Speaker Change: Yeah.
Speaker Change: So the way we think about it is that first of all Youre right. I mean today in 2020 for China represents about 21% of our revenue it's up from 16% in 2023. So we've seen the growth we were expecting to see in China.
Speaker Change: Clearly we are facing some new headwinds from those regulations, so we'd expect that to be.
Speaker Change: A deterrent to additional growth in 2025.
Speaker Change: But I would expect China to continue to be a growth area for us we have.
Speaker Change: A large number of mainstream fabs there are.
Speaker Change: Starting operation and I would expect them to continue to process more and more wafers overtime and we have done actually a really good job at staying competitive in China, we continue to create significant value for customers.
Speaker Change: Ping them improve their device performance, helping them improve their yields and I expect China to continue to be a growth market for us is more <unk>.
Speaker Change: Midstream fab increased their productions domestically.
Speaker Change: Thanks, a lot.
Speaker Change: Thank you we'll take our next question from John Roberts with Mizuho. Your line is open.
Speaker Change: Thank you and best wishes as well Bill.
Speaker Change: If you split your business Theyre trying to advanced logic and AI versus mainstream how would you characterize means to them is it stable is it <unk>.
Speaker Change: Declining scale single decline single digit double digit.
Speaker Change: Yes, I mean, just space clearly advanced logic for us has been.
Speaker Change: Korea of significant growth.
Speaker Change: Last year in mainstream was an area of weakness I think you can see.
Speaker Change: You will see when we file our 10-K evidence of that as we report.
Speaker Change: Our revenue with our largest customer.
Speaker Change: So so and I frankly, I expect that to.
Speaker Change: To continue that trend to continue in 2025, we expect advance logic to remain very strong driven by AI application.
Speaker Change: And I expect that to use the beginning of the year to be a relatively muted for mainstream logic. So that that ratio will continue to tilt toward.
Speaker Change: The advanced logic, which is positive for us because we have actually a much larger.
Speaker Change: Content per wafer opportunity in advanced logic as compared to two mainstream logic.
Speaker Change: Thank you.
Speaker Change: Thank you we'll take our next question from Mike Harrison with Seaport Research Partners. Your line is open.
Mike Harrison: Hi, good morning.
Sure.
Speaker Change: Bill.
Bill Seymour: I wanted to see if we could discuss the margin cadence.
Speaker Change: For the year.
Speaker Change: Our margin for Q1, it looks like maybe a little bit of a seasonal dip.
Speaker Change: And I believe that typically you guys have some incentive comp payouts or equity payouts during Q2 that wouldnt lead.
Speaker Change: Q2, EBITDA margin to be relatively weaker as well.
Speaker Change: Maybe just.
Speaker Change: To discuss what our expectations should be in terms of the cadence and some of the key margin drivers for the second half of the year.
Speaker Change: Mike. Thank you for that question and you know very good memory back to last year.
Speaker Change: So you are right.
Speaker Change: The timing of our equity awards are in the second quarter.
Speaker Change: So I the way I'd recommend and thinking about it is is look at that that cadence in 2024 of how margins played out and expect a very similar pattern in 2025.
Speaker Change: Alright. Thank you and then was hoping we talked a little bit about the <unk>.
Speaker Change: <unk> consumables and it's great to hear that you are seeing good momentum there I was hoping we could talk about silicon carbide opportunities within CMP.
Speaker Change: I think last year, you had expected a really nice pickup.
Speaker Change: Silicon carbide, maybe it wasn't as good as you anticipated, but still a growth year in that part of the business where did we end the year in terms of revenue.
Speaker Change: I guess relative to your expectations.
Speaker Change: And what should we be thinking for growth in silicon carbide CMP consumables for 2025.
Speaker Change: Okay.
Speaker Change: Yes, so a.
Speaker Change: Youre right I mean, silicon carbide was very significant.
Speaker Change: Efficient growth.
Speaker Change: Factor in 2023 compared to 2022 we were hoping to see <unk>.
Speaker Change: Significant incremental growth in 2024.
Speaker Change: Just didn't happen.
Speaker Change: And I think you've followed this industry closely and you understand it.
Speaker Change: Most.
Speaker Change: Players in the industry.
Speaker Change: Didn't really grow very much in in 'twenty, 'twenty, four and that did it.
Speaker Change: In fact, our opportunity there so essentially a revenue for silicon carbide applications, where.
Speaker Change: We're flat year on year.
Speaker Change: You said that that remains a very promising area because we.
Speaker Change: We are enjoying a very significant share for salaries and pads and planes.
Speaker Change: And this is another example of where this solution selling approach has been.
Speaker Change: Working really well I mean as you know our customers are really trying to move from six inch to eight inch.
Speaker Change: Silicon carbide substrates.
Speaker Change: Key to that transition would be to have the right total cost of ownership.
Speaker Change: And our solutions are uniquely enabling that I mean, we have.
Speaker Change: Yes.
Speaker Change: Slurry is offering much better removal rate think about you know something 40% to 50% better than competitors, we have seen.
Speaker Change: CMP pads that have superior lifetime.
Speaker Change: Really lasting about 30%.
Speaker Change: Good and then do you turn it to us and all of that translates into a significant improvement in cost of ownership.
Speaker Change: In a range of up to 50% to 60%. So I think we're very well positioned we just hoped.
Speaker Change: This industry actually recovers quickly and then if and when it does.
Speaker Change: You're going to start hearing us talk more about those as I see opportunities because we're very well positioned there.
Speaker Change: Alright, thanks very much.
Speaker Change: Thank you.
Speaker Change: <unk> and answer session has concluded I will now turn the program back over to Bill Seymour for closing remarks.
Bill Seymour: Thank you for joining our call today. Please reach out to me directly if you have any follow ups have a good day and you can now disconnect.
Speaker Change: Okay.
Speaker Change: Thank you. This concludes today's <unk> fourth quarter and full year 2024 earnings Conference call. Please disconnect. Your line at this time and have a wonderful day.
Speaker Change: [music].
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Speaker Change: Hmm.
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Speaker Change: Hum.
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