Good day, everyone, and welcome to Integra's Second Quarter 1020 Earnings Release Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Bill Seymour, VP of Investor Relations. Please go ahead, sir.
Good morning, everyone. Earlier today, we announced the financial results for our second quarter of 2020. Before we begin, I would like to remind listeners that our comments today will include forward looking statements. These statements involve a number of risks and uncertainties. And actual results could differ materially from those projected in the forward looking statements.
Additional information regarding these risks and uncertainties are contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on defined by the SEC And Regulation G. You can find a reconciliation table in today's press release as well as on the Investor Relations page of our website at integris.com. On the call today are Bertrand Law, our CEO and Greg Graves, our CFO. Before I turn the call over to Bertrand, in case you didn't see it, we'd reschedule our 2020 Investor and Analyst Day, which will now take place on November 17th in New York.
If we aren't able to hold the meeting in person, we'll be doing it virtually. We'll be sending out the event details and registration information in the near future. With that, I'll hand the call over to Bertrand.
Thank you, Bill, and good morning, everyone. I will start today with an update on the ongoing impact of the pandemic on our teams and operations. I will then discuss our second quarter performance, especially in the context of our expectations going into the second quarter. Will then review what we expect for the balance of the year. Greg will follow with more details on our guidance for the third quarter, and then we will open the line for questions.
Since early in the outbreak of the pandemic, we have been very focused on keeping our teams safe We have implemented rigorous safety measures in all our sites, including temperature checks, strict social distancing and contact tracing protocols mandatory mask usage and frequent disinfecting of common areas. Despite brief interruptions in a few facilities early in the quarter, our manufacturing and R and D facilities remained largely operational throughout the quarter. As we exit Q2. Our global supply chain is operating smoothly and our manufacturing sites are all fully operational. Our safety, facilities and manufacturing production teams have been truly heroic in their efforts to keep our teams safe and our business running during this challenging time.
Let me turn now to our second quarter performance. And I will start by saying that I am very pleased with our results, especially in light of the many operational risks and business uncertainty we were facing coming into the 2nd quarter. In the 2nd quarter, sales grew 18% year on year and 9% sequentially above our guidance. Growth was strong across all three divisions in our core semiconductor markets, as we benefited from several node transitions, primarily at our Logic customers. Our gross margins improved and our EBITDA was up 38% year over year.
Finally, non GAAP EPS was well above our guidance up sequentially and up over 50% year on year. Let me continue with a little bit more context on our second quarter performance. When we provided guidance for the second quarter in late April, our order book was at a record level, which gave us confidence despite all of the uncertainty in the market to guide to sequential increase in sales. Ultimately, our Q2 sales ended up significantly better than we expected. And the main drivers for this outperformance were the following: first, the accelerated demand for our leading edge solutions in advanced technology nodes, the theme you will hear more about.
2nd, the increasing need for end to end contamination control solutions up and down the supply chain, including products like a 2 nanometer torrento liquid filter and our high purity liquid containers. And on top of this, the overall industry was better than we expected. Finally, while there were some modest inventory bills at some of our fab customers, we do not believe this was a significant driver. All in all, a very good quarter considering what we expected going into to the execution of our team. Before moving on to the outlook, I would like to highlight that a few weeks ago, we acquired Global Measurement Technologies, a leader in the design and production of high precision analytical instruments for CMP slurries, and formulated clean in chemistry.
The acquisition of year supplier of yield enhancement solutions for the semiconductor market. With the combination of GMTI's cutting edge measurement systems, our particle sizing systems business, the technology we acquired in early 2018. As you remember, In our extensive portfolio of filtration and other contamination control solutions, we bring a complete suite of solutions that are lower customers to achieve process stability and optimize yields in the complex CMP environment. We expect GMTI to be slightly accretive to our non GAAP EPS this year. Looking ahead to the rest of 2020, From an end market perspective, while there continues to be uncertainty around the impact of the pandemic, we are more optimistic about the remainder of the year.
The semi market appears to be holding up better than originally feared, driven by the well documented strength in areas like data centers, 5G, laptops and gaming. In our own business, demand signals continue to be strong and our order book remains at record levels. In addition, we expect to enjoy the benefit and memory, which will help us sustain our market outperformance in the second half of the year. For the full year 2020, we now expect to achieve sales of approximately $1,750,000,000 to $1,800,000,000, up 10% to 13% compared to 2019. In terms of EPS, we expect to achieve full year 2020 non GAAP EPS in excess of $2.35 Clearly, we are still in uncertain times and as such, there are risks to our view.
Most significantly related to the ongoing impact of the pandemic to the global economic recovery. And frankly, it seems hard to believe that the semi industry would remain relatively untouched by the pandemic. But having said that, and to be clear, we have seen no real indication of a downturn in the semiconductor market for that matter in our business for the upcoming few months. Furthermore, our advanced memory and logic customers continue to be very committed strong demand for our next generation materials and Advanced Filtration solutions. Looking further ahead, we continue to be very optimistic about the fundamentals of the industry, and we expect that the semiconductor industry will come out of the pandemic more attractive than ever, with enhanced drivers like digitalization and automation of the economy, providing strong catalysts for sustained secular growth.
At Integris, we have talked a lot about the growing importance process materials and materials purity on the semiconductor performance and reliability. We expect These two themes will be at the forefront of the semiconductor roadmap, both in logic and in memory for the next 5 to 10 years. And we expect Entegris will be a clear beneficiary of these trends. In conclusion, I am very pleased with the performance and the resilience of our business, and I am optimistic about our prospects for the rest of 2020. We feel very confident while continuing to invest in our future.
I also for their extraordinary work and dedication, without which, none of this would have been possible. Now let me turn the call to Greg. Greg?
Thank you, Bertrand. In my comments today, I'm going to cover our 2nd quarter financial performance and our 3rd quarter guidance. The second quarter was an excellent quarter for Integris. Q2 sales of $448,000,000 were above our guidance and were up 18% year over year and 9% sequentially. This was driven primarily by our own market outperformance as Bertrand discussed.
Q2 GAAP diluted EPS was $0.50 per share, down 45% year over year and up 11% sequentially. As a reminder, Q2 last year includes the Versum transaction termination fee which was included in our 54% year over year and up 9% sequentially. Moving on to gross margin, GAAP and non GAAP gross margin were both 46% in Q2 versus our guidance of approximately 44%. The higher than expected gross margin was driven principally by the higher supply chain teams. In addition, the amount of higher code related logistics and freight costs was less than initially anticipated.
We expect gross margin to be approximately 46%, both on a GAAP and non GAAP basis in Q3, as higher volumes $113,000,000 in Q2 and included a total of approximately $17,000,000 of non GAAP items from amortization of intangible assets, restructuring in Q2 were $95,000,000, which was above our guidance. The primary driver of this was higher performance related compensation costs driven by the improved annual outlook. We expect GAAP operating expenses to be $109,000,000 and non GAAP operating expenses to be $95,000,000 to $97,000,000 Q2 GAAP operating income was $95,000,000 or 21.1 percent of revenue, and non GAAP operating income was $111,000,000 or 24.7 percent of revenue. Adjusted EBITDA was approximately $131,000,000 or 29.3 percent of revenue. Our GAAP tax rate was approximately 17% and our non GAAP tax rate was 18% for the quarter.
The rate was slightly lower than For the full year 2020, we now expect both our GAAP and non GAAP tax rate to be 18% to 19% which implies a quarterly rate Turning to our performance by division. Q2 sales of $146,000,000 for SCEM were up 15% year over year, primarily driven by advanced deposition materials, cleaning chemistries, and the impact of acquisitions. The growth was offset by declines in non semi related sales particularly in end markets that were most impacted by the pandemic. Adjusted operating margin for SCEM of 22 percent was up over 200 basis points year over year. The year over year increase in operating margin was driven primarily by higher volume.
The 110 phase point sequential decline in margin was driven primarily by higher compensation costs I referred to earlier. Q2 sales of $184,000,000 for MC were up 22% from last year and up 15% sequentially. On a year over year basis, liquid filtration, gas filtration, and the impact of the A Now acquisition drove the sales growth. The sequential sales increase was driven by liquid filtration and gas filtration and purification. Adjusted operating margin for MC was 34.1 percent, up over 500 basis points year over year and up 200 basis points sequentially.
Both the year over year and sequential margin increase was driven primarily by higher volumes and favorable product mix. Q2 sales for MH of $126,000,000 was up 18% versus last year and up 9% sequentially. High purity liquid containers and wafer handling products. The sequential sales increase was also primarily driven by period liquid packaging products. Adjusted operating margin for AMH
was 18.7%,
up almost 500 basis points year over year. The year over year sequential margin increase was driven by Cash flow from operations for the quarter was $130,000,000. Free cash flow was 106,000,000. CapEx for the quarter was $24,000,000. We continue to expect to spend approximately $120,000,000 in CapEx in 2020, related to ongoing investments in support of During Q2, we used approximately $11,000,000 for our quarterly dividend.
As previously indicated, We suspended our share repurchases in March and absent a major dislocation in the equity market or greater clarity in the economic outlook we would not expect to
We took
We completed a $400,000,000 senior unsecured notes offering and used the proceeds to repay the approximately $140,000,000 outstanding balance on our revolver and to repay $150,000,000 of our term loan. We would expect to repay an additional $100,000,000 With the addition of the new notes, we are expecting interest expense to be approximately 12,500,000 Turning to our outlook for Q3, we expect sales to range from $450,000,000 to $475,000,000 We expect GAAP EPS to $6.60 to $0.66 per share. In summary, we were extremely pleased with our performance year to date. During the second quarter, our revenue extremely well in a difficult environment. Demand for our Advanced Products continue to accelerate as a semiconductor industry transition to new nodes requiring greater purity and increased materials intensity.
And finally, we continue to have confidence in the strength of our platform, importance of our value proposition, the quality of our execution, and our strong balance
Thank you. We'll move into our first question from Toshiya with Goldman Sachs. Please go ahead.
Good morning and congrats on the strong execution. I was hoping, you could update us on how you're thinking about, broader market trends, both in terms of industry wafer starts as well as CapEx. I forget if you did have a number last quarter, but, how are you thinking about those two buckets for the entirety of 2020? And, what level of outperformance are you assuming in both those markets for Integra specifically. And I guess what are the key drivers of those, of the outperformance in both wafer start business as well as your CapEx business?
And then I've got a follow-up.
Good morning, Kosier. Yes, a lot of questions. I'm going to try to, remember them all and take them 1 by 1. But generally speaking, 1st of all, the market, going into Q2 did behave in a way that was very consistent with our operating assumptions. If you remember on our first quarter call, we decided that we're expecting strength in advanced projects.
We're expecting healthy levels of wafer starts in advanced memory. And then relatively limited demand in mainstream fabs. And for the mainstream fabs,
we said that it probably would be
a little bit application dependent. And frankly, the second quarter paid out pretty much in line with those operating assumptions. And I would expect those trends to continue for the balance of the year. So when you think about our full year guidance, we essentially expect the total market based on our mix of unit and CapEx driven sales to be down in the mid single digits. For 2020.
We expect the acquisitions that we have already completed, including GMTI to contributed approximately 3 points of growth in 2020. And then the balance obviously amounts to a very significant organic growth in excess of the market. And that is primary driven by the node transitions that we have experienced in Logic and that we expect to see in the back end of the year in memory. And the other thing is, again, we expect more wafers to transition to those advanced nodes. And as you know, on those advanced nodes, we have greater integrates content for wafers.
So all of those factors with compounding, And I think again, we that's one of the reasons why we are optimistic about the back end of the year.
That's great. Thank you. And then as a quick follow-up, regarding your prepared remarks, you talked about there being some signs of your OEM customers building a little bit of inventory. I guess the question on just customer purchasing patterns and what you're seeing in the market today. I suppose given COVID-nineteen and maybe to a lesser extent the U.
S. Trade U. S. And China trade tension, there is an incentive on the part of your customers to be a little bit more, I guess, prudent in procuring materials and components. But is that a concern for you at all?
Should we be worried about a correction driven by inventory dynamics into the second half or sometime in 2021? Or as you mentioned in your prepared remarks, it's pretty minimal from based on what you know and what you're seeing in the market? Thank you.
Yes. So as I said in a prepared market, It was slightly a little bit of inventory built by our customers, but nothing really material to our performance in the second quarter.
Thank you.
And we'll next go to Sidney Ho at Deutsche Bank. Please go ahead.
Great. Thanks. And congrats on the very solid results and guide. My first question is, last quarter, you predict that you'll see the demand drop off some times in the summer. And your comments today suggest that that's probably not going to happen.
Given my month, my math is right, your full year guidance would seem suggest Q4 revenue down maybe a couple of percentage points. Just want to get your view on how we should reconcile the strength of your business and be in this fee. First is maybe the macro headlines, especially on consumer spending, on maybe certain parts of the enterprise spending and to to the previous question about some of these inventory potential inventory build?
Yes. So as we are entering Q3, the realities that we're facing are very similar to where we were standing 3 months ago, we are looking at a very, very strong backlog record levels. Once again, the booking momentum continues to be very, very strong. As I was mentioning, there's no sign of deceleration in advanced logic, we, we continue to hear from all of our memory customers that we remain committed to the node migrations in the back end of the year, and we have a lot of design wins attached to those. So that's a long way of saying that we believe that industry conditions would be favorable to Integris in the back end of the year.
It doesn't mean that there is, that the uncertainty isn't entirely gone. There's still plenty of uncertainty. About the timing, the way, the pace of the economic recovery and how that could impact some segments of the semiconductor industry. So let's face it, COVID nineteen is still a reality that we would have to to live with for several quarters, whether we like it or not. But at the same time, there are many reasons for us to be optimistic.
Think that it is becoming increasingly obvious that the long term fundamentals of the semiconductor industry are very promising, as we benefit from greater automation of the economy, digitalization of our lives, And in fact, what we're seeing this year is probably some small fashion, some validation real time of this hypothesis. And I think that's your assuring. I think this is particularly driving in the short term, demand for high performance servers, gaming, 5G, which really drives leading edge cheap consumption and that's a positive for Integral Services.
Great. That's very helpful. My follow-up question is, if I look back in the last quarter, Q2, the sequential revenue growth was a lot more skewed towards the silica, the MC side of things, and especially chemicals side is up only marginally. How should we read into this difference in growth rate? I recall in the past, Bertrand, you said that some of the SCEM products tend to reflect more real time demand there's no reason for customers to buy ahead.
Just want to get your thoughts on the difference between the two segments?
I think it's always it's always dangerous to look at, trends on a quarterly basis. I always preferred to look at that on a year to date basis. And if you do that, you will see that the performance of all of our 3 divisions has been very strong and very consistent with what you would expect at CEM on a has been growing at about 15%, Michael Contamination on for the first half of the year is up, 11%. So again, a pretty strong performance across the board. And pretty much in line with our expectations.
Our next question will come from Chris Kapsch with Loop Capital Markets. Please go ahead.
Yes, good morning. Thank you for taking my questions. So one was a follow-up on the generally positive comments about the second half outlook and that, benefiting from, among other things, just the continued node transitions. I'm just wondering if you could elaborate a little bit on where you're most excited. I think in a response to another question, you indicated that in the second half, it might need more about the node transitions in memory vis a vis, say logic and foundry.
But can you just elaborate a little bit on any specifics that you anticipate will benefit your top line strength from those transitions?
Yes. So the way we think about the 2nd half is that we tend to consolidate the progress that we've made in Logic. And foundry. And we want to expand on our opportunities in Memory. And there will be two ways this will play out.
The first one is we have a lot of new DTEOR wins on the 1 to X architectures. And then the other way, memory would be a big driver for us is that there would be natural transition of more wafer starts to be advanced memory architecture. So just to put that in perspective for you, if you think about 3 d NAND and just 3 d NAND for a second. In 2019, less than 20% of the wafers were produced at 96 or higher. In 2020, we expect that more than 50% of the wafers will be produced at 96 or higher where we have higher integrates content per wafer.
So that gives you an idea of how meaningful those drivers will be for us in memory in the back end of the year and frankly going forward. So I want to add to that and provide a little bit of product context to the back end of
the year. We
expect liquid filtration, the position materials, high-tricky drums, and our optical sizing system for lines to be the major contributors to the growth in the back end of the year.
That's helpful. Thanks. And the follow-up would be maybe a little nuance around the, AMH segment, which probably doesn't get as much attention as the other 2. But you had mentioned, the strong year over year growth there was associated with high purity liquid packaging products. I'm just curious to get a little bit more color.
Are you is that to imply that the strength is more focused in, say, photoresis versus, say, deposition clean, other filtration product? And is it, is it really about systems and consumables or is there more strength in, in consumables. I'm curious because I'm just wondering if this trend where, particularly with photoresist, if chip making customers are getting are still implementing retrofitting their legacy nodes with filtration systems to get after latent defects. I'm wondering if that's still a trend that's benefiting your business in that segment specifically. Thanks.
So we expect a trend, that you're describing about retrofitting older fabs, to achieve greater reliability of the chipsets to be a factor down the road. It was not a factor. In Q2. And I don't expect that to be a factor for the balance of the year. What we saw in Q2 and what we expect to continue to see in the back end of the year is strong demand for high purity containers, that all now required a crop a broad range of chemistries photoresist being only one of them, but a lot of, you know, a lot of solvents, sulfuric acid on and do require more advanced, packaging solutions to meet most stringent transportation standards.
So that is a consumable product. And I think the success of that product line is really transforming frankly the profile of or will transform overall and over time the profile of AMH. We also saw some good performance and we expect that to continue from TSF the business we acquired in Q1 of twenty eighteen. And all of that was offset by weakness in data storage, and frankly, some weakness in Q2 of our FOUP business as well, which is a lumpy business that was just coming off 3 record quarters in Q3, Q4 last year and Q1 of this year as many of our customers, were gearing up for no So overall, to your point, I think JH had a very, very strong first half of the year, I think they're on track to deliver a fantastic performance this year.
That's helpful color. Thank you and congrats on kudos on the execution and strong performance.
Thank you. We'll next go to Patrick Ho with Stifel. Please go ahead.
Thank you very much and congrats on a really nice quarter Bertrand, maybe first off, maybe on a qualitative business, you talked about no transitions and the shift, particularly in tweaking in as you go to 90 plus layers and the industry continues to move to 120 plus layers. Can you qualitatively talk about not only the increase in wafer starts that are driving the business there, but the types of new materials, some of the process wins, how much more, I guess, new product concentration of capital intensity are you seeing as you migrate to those higher layer counts?
So, so, Patrick, we are seeing significant increase in materials intensity at those more advanced notes in 3dnan in particular. We have mentioned in the past, acquisition materials, selective etching chemistries, new doping processes, and those would be opportunities at the fab level. We have also rolled out new coding solutions for chamber components in Edge Tools, So there's a broad array of opportunities on the materials side for us, both at a sublevel but also at the OEM level. And as you know, as, the leaders in memory continue to add late accounts those architectures are increasingly prone to contamination and that opens up the door to many opportunities on our filtration platforms as well. So memory historically was not a big area of focus for Integrity.
But this is changing rapidly. And I think memory is clearly providing many, many opportunities for us to contribute value on the wafer.
Great. That's helpful. And maybe as my follow-up question, I know, Bertrand, you've mentioned in the past, particularly for your microcontamination control business. That you want to provide end to end solution from, chemical suppliers all the way through the fab. Can you describe the business opportunities on the chemical supplier side and how that's contributing to the growth given the purity requirements that they also have and how you can enhance the overall yield process for the full year semiconductor customers.
Right. So this is a thing that, as served us really, really well. Obviously, with the most stringent purity requirements in the event that it is virtually impossible to expect to intercept all of the contaminants of concern in the fab environment. Increasingly, the events that are placing new purity requirements on there, both chemical suppliers, which in turn are also placing new sugarcane requirements on their supply So the whole ecosystem now has to content with most stringent purity requirements. And what it means is that we are seeing the, the adoption of more filtration points up to supply lines.
Those filters continue to be more and more advanced. At every node transitions and the frequency of replacement of those filters continue to increase as well. So So that is what has been driving the fast growth in our served market for events, liquid fintas. And as I was mentioning in a previous comment, fintas are not the only beneficiary of that. We have, some of the best high purity containers for different types of chemistries.
And of course, we have leadership position in fluid handling solutions in terms of all of the tubing and typing that be involved in the bulk chemical manufacturing route. Thank you.
Thank you. And we'll next move to Amanda Scarnati with Citi. Please go ahead. Your line is open.
Hi, good morning. This first question is for Greg. Greg, you mentioned that CapEx is still a expected to be around $120,000,000 this year, which implies a little bit of a step up in the second half. Can you talk about sort of what you're seeing there and if any of this is sort of driven by capacity constraints to meet customer demand, or if this is sort of expected CapEx plans that you had?
In general, I would say it's expected CapEx lens that we have. I mean, some of the spending we're doing is capacity related. You've a lot about our high purity drum business for our high purity liquid packaging business and we've got significant capital expenditure going on in Korea for instance to expand our liquid packaging. Capacity. But I would say the balance of it is that's probably the largest project we've got.
We've got a project. We talked a lot about deposition material we've got a project in the queue to expand our capacity and deposition materials at our facility here in the U. S. So it's a combination, but it's not there really haven't been any significant shifts from when we started the year in terms of where we expect to spend capital.
Okay. And then Bertrand, this is a little bit more strategy focused on M And A. You just talk a little bit first about the Local Measurement acquisition and if that's more sort of memory focused or logic focused And then as you look at M and A going forward, it seems that you're kind of focused a little bit more on smaller acquisitions, maybe to fill out the portfolio that you have gotten would presume Is that the right way to look at M And A going forward to the smaller acquisitions to fill out the portfolio, or is there any sort of desire for something a little bit larger at this point?
Right. So, Amanda, let me start with, brief description of GMTI, but think about GMTI as between rather for PSS, the company that we acquired in, 2018. It's similar size, very complementary value propositions, the same applications. And as you know, PSS was a great success and we intend to apply the same approach as we integrate the MTI, leveraging our global distribution platforms, introducing more advanced quality systems, think the recipe would work equally well with the NTI. So with the NTI now, we have really extended offering, to be in a position to provide those end to end solutions that we were talking about in the previous question.
Our offering now includes, floor control, optical sizing, monitoring, advanced situation, and now with GMTI more precision concentration monitoring capabilities as well. And that really puts Integra's in, leading position as the supply of yield enhancing solution for CMP and Welch
and Clean
delivery processes. So again, just expanding on the set of capabilities that we can offer in those very complex processes. So very excited by the entire. More broadly, yes, it is an example of the types of small deals that you can expect us to make high quality company complimentary with what we do. We continue to expect to find deals that can be larger than this, but as you know, we don't control actionability of those, some of those mid sized transactions.
But, so we have a rich pipeline and hopefully, we can continue to be active on the M and A front, which is part of our growth strategy.
Great. Thank you.
Thank you. And we'll next go to Weston Twigg with KeyBanc Capital Markets. Please go ahead. Your line is
Hi, thanks for taking my question. I wanted to ask about R and D and I'm wondering if you still expect your R and D profile to expand through the end of the year? And then sort of been a related question, I guess. How is that driving your product portfolio versus what your competitors are doing? And I'm just wondering how your positioning may change through this pandemic versus what you see your competition during this period?
No, I mean, as we continue, to committed doing our investment in
the R and D. In fact, if you look at our R and D spend line, it was an absolute it was record level, 7.3 percent of revenue, but we spent almost $33,000,000, which was up from $30,000,000 in Q1 and up about 10% from where it was in Q2 last year well. So we titian through this period of time because we do believe that our competitors that are part of large specialty chem or large industrial companies going to be pressed on the R and D side as those companies look to reduce costs across the board. So and we continue to have a rich opportunity pipeline in some of the things that we've continued to talk about advanced deposition, advanced filtration. So we are completely committed to the R and D spend.
Okay, thanks. And then just a quick follow-up question.
Global measurements, did you mention the revenue contribution through the back half
of the year from global measurements?
It'll be very positive.
Go ahead, Bertrand.
No, go ahead, go ahead.
The revenue contribution will be very modest and by that less than $10,000,000.
Okay. Thank you.
Thank you. We'll next go to Mike Harrison with Seaport Capital Seaport Global Securities. Please go ahead.
Hi, good morning. Just kind of following up on the competitive environment. In the filtration business, you have a competitor that had a broader range of markets that they serve. Some of those markets might be under more pressure than what you're seeing in semiconductors. So have you seen them change their focus at all to increase, the amount of business that they're trying to do or the offerings that they have for the semiconductor industry from that key competitor?
Look, I'm not going to go into those detailed, the fluctuation of specific competitors, what I would tell you is that we obviously monitor, our competitors and the evolution of their strategy very closely, and I think that we have demonstrated over time that we are pretty good at adjusting and adapting to maintain the leadership positions that we have in most of the segments that we serve
All right. And
then in terms of the the microcontamination control margin, pretty strong performance this quarter. I'm just wondering if you could comment on whether that strength is sustainable or do you feel like there was something unusual about the mix or other dynamics going on this quarter?
Yeah, I mean, they really benefited from 2 things. Obviously, the higher volumes go a long way.
I mean, to leverage the fixed cost structure of the biz
They did benefit, from favorable mix. And the
fastest growing parts of that business also happened to be the highest margin parts of that business.
All right. And if I can sneak one more in, curious about the higher compensation costs that you saw in the SCEM business, is that kind of one time or is that something that lingers for the rest of the year? Thank you.
So that It's compensation costs will be higher through the balance of the year. But I mean, in short, what happened is, as we came out of Q1 and we accrued our variable compensation in very low levels, because we had no idea what was gonna And with the much stronger performance in Q2, it's an annual plan. We raised that compensation
cost we had to catch up for Q1 as well. So it'll be
at a more normalized level, the balance of the year.
So it should come down a little bit.
Thank you. And we'll next move to Paretosh Misra with Berenberg. Please go ahead.
Can you talk about the FDM segment? And I mean, within that, you have several different product types. So categories, specialty gas, deposition materials. So I was just hoping if you could give some color as to how are these product categories are growing and which one are you most excited about given the, no changes ahead in the second half and next year? And maybe if you could maybe talk a little bit about the mix also within that segment.
Yes. So, SCM had actually probably the most complexity built in. I mean, we saw a lot of strength in Q2 in disposition materials in in our formulity clean business. And of course, we saw some of the benefits of the recent acquisitions in that business. So all of that was on the plus side.
SG's or specialty gases and the more mature product lines actually behave direct the steadily. But then, unfortunately, there was a very sharp decline in our classified materials sales. These materials are have allowed exposure to non semi applications. In markets like, electric discharge, machining, aerospace, transforming applications, for instance. And those markets were severely depressed in Q2.
And we don't expect not to see any meaningful recovery in the back end of the year. Just to quantify that for you, I mean, those segments were essentially down 50% versus the peak of last year. So what we're most excited about for the back end of the year for that division will be the new deposition materials tied to the new nodes in logic and memory, as well as some of the new cleaning chemistries that we intend to roll out to the mark since the back end of the year.
Got it. That's very useful. And maybe as a quick follow-up, can you remind me your current exposure to the C and P process, is it primarily on the silicon carbide side or do you have other product also?
On an early piece, which I think is the question is it's really on the hot materials. So it's a combined gallium nitride.
Thank you. Our next question comes from David Silver with CL King. Please go ahead.
Have kind of a big picture question for Trond. I'm hoping you can comment on. So your record results, you mentioned they benefited from a meaningful node transitions on the logic side. And, it wasn't too long ago where the industry your major customers seem to be stumbling, a bit on implementing kind of that, that next node transition in logic. And, I would just say my impression of industry discussions is greater confidence in not just the current node transition, but the next one and the one after that.
So I was just wondering, I mean, is it EUV or is there another kind of trading technology that you would say has made the difference in the decision making and the investment. Decisions of your major customers? Or, you know, is this a kind of a phase where the industry roadmaps that I don't know, I or maybe some other people considered more aspirational than realistic. I mean, are those timetables becoming more realistic? And if so, what would you say again is kind of behind that growing confidence or willingness to invest on a more compressed timetable?
So what I would say is that the roadmaps are becoming increasingly ambitious both in logic and in memory. Memory is a question of stacking up more layers. Logic. It's about further miniaturization and migration from feed fed structure to get all around structures. And all of that is very complex.
But I think that as an industry, as an ecosystem, we have become a lot better at collaborating. I think that there's been a greater commitment to R&D by all of the major players. And as a result of that, I think there's probably greater confidence that we can do it. And that's great news for us because everywhere you want to look at in logic or in memory, all of those architectures we'll be increasingly relying on new materials with better structural and better electrical properties and more of those new architecture are increasingly susceptible to contaminants. So if you sum it up, the value proposition of Entegris is continuing to grow in importance, and we will continue to have opportunities to increase the content per wafer for many years to come.
So that's really the reason we are optimistic. And that's the confidence that we have behind the our goal to outpace the market for many years to come.
Okay. Thank you. And I apologize for not. I should have reworded my questions today facilitating technologies in addition to the ones that you provide. I had a question maybe now.
We haven't discussed this, but maybe on the lagging edge of the industry. So I recall between 2016 2018, your company actually was able to double earnings per share. And there were certainly a number of demand drivers, but to me, I did, I do believe part of the part of the equation there was rising demand for current generation or even trailing edge chips. To satisfy maybe internet of things, related demand. So 1st generation electronics and autos and industrial settings where there hadn't really been that level of electronic intensely before.
And I'm wondering if you have any thoughts, about the what the shape of the post pandemic business environment is going to be. So, will the work at home economy will the need for greater separation or automation in industrial settings. Is that a recipe for longer production runs and extended product life cycles for current generation chips, which in turn could probably translate into incremental very high margin sales from your existing portfolio of products and services? Thank you.
Yes, so I mean, the way are we probably sort of the short answer is yes. I think what you're describing was kind of the secular trends that we're excited about. The way I would maybe reframe what you said is that semiconductor demand will be accelerating. Technically, roadmaps are becoming more challenging that will drive requirements lumpeterias, more stringent purity, which means that we would have an opportunity to increase our content by wafer. And as you said, over time, a lot of the order process notes will transition to more advanced notes where we have greater content of wafer.
So And I would expect that to be the case in the years to come. So that's why I believe our growth prospects are actually pretty exciting.
Thank you. And ladies and gentlemen we'll take our final question from Toshiya Hari with Goldman Sachs.
Thank you for squeezing in my follow-up. Bertrand, I had a question that's not very related to earnings. One of your large OEM customers talked a lot about environmental sustainability. At their keynote at semiconlast, the virtual show. And the company talked about getting the overall supply chain involved in driving, I suppose environmental sustainability over the long run.
Is this something that, I'm sure you guys are focused on it as well. But did you sense your customer base, your IDMs and foundry customers are increasingly focused
on this? And to the extent
they are, do you feel like, efforts here could drive, it could be a source of differentiation for our company looking Tigris going forward? Thank you.
Yes. That's actually a great question and timely question. We have done a lot in Segments. I don't think we have been very effective at communicating broadly what we have done, but we have an ongoing effort to correct that. So you should actually see a lot more be a lot more visibility to our, CSR program.
And there will be 4 pillars to that. One is innovation. The other one is safety. The third one would be inclusion and personal growth. And the last one would be, sustainability programs.
But, and I think we will actually, as part of that program, make it more visible to the investment community and our customers, how we are contributing to the safety of their processes, but also the safety of many of the future applications that the new generation of chips will be enabling. So more to come on that.
Thank you. Thank you, sir. And ladies and gentlemen, that will conclude today's call. We do thank you for your participation. You may now disconnect.