Good day, and welcome to the Integra's 1st Quarter 2020 Earnings Results 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
Good morning, everyone. Earlier today, we announced the financial results for our first quarter of 2020. Before we begin, I would 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 as 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 integrys.com. On the call today are Bertrand Loy, our CEO and Greg Graves, our CFO. With that, I'll hand the call over to Bertrand.
Thank you, Pam. I will start today with what we have experienced related to COVID 19. I will then comment briefly on our first quarter performance and what we expect for our business going forward. Greg will then follow with more details on our financial results, discuss our liquidity and capital structure And finally, we'll cover our guidance for the second quarter. We will then open the line for questions.
For the past 2 months, we have been battling hard against the spread of the pandemic with 2 priorities in mind. Our first priority is to ensure the health and safety of our colleagues and their family. The second priority is to keep the business running so we can continue to serve our customers and protect the jobs of our employees and partners. So far, I am pleased to report that we have been success fall on these two fronts. Let me expand a little bit on that.
Since the early outbreak in China, we have implemented rigorous safety measures in all our sites to make our facilities amongst the safest places to be for all our employees that need to be fit present on the manufacturing floor or in a lab to perform their work. Everybody else has been instructed to work from home. We implemented temperature checks that the entry of our facilities, very early on, mendes along with proper social distancing protocols are still in place in all our sites. In addition, we are extensively and frequently disinfecting common areas and providing math for those who want them. Our facilities and health and safety teams have done a fantastic job, making sure our facilities and our coworkers are safe.
Turning to the impact of and the overall demand environment. Despite major supply chain shutdowns across many industries to date, of supply chain and manufacturing operations have only been modestly impacted by COVID-nineteen as a direct result of the extraordinary effort of our Integris teams and extended supply chain partners around the world. In particular, our supply chain team has been proactively managing the pandemic since the early days of the spread in China. The team has moved maintained, assessing the areas of risk with all suppliers every day. Taking appropriate and most importantly, presences steps to ensure our critical supply lines remain open.
To that end, we began to build additional safety stocks in February in anticipation of potential constraints as well in the world. This obviously served us well as the pandemic continued to spread in Europe and to the U. S. While our supply chain was largely not impacted, a few of our factories did experience brief interruptions. While they work through new government mandates.
The two sites where we saw the most significant disruptions were in San Luis Obispo, California and also in one of our largest manufacturing facilities in Poland, Malaysia. Both sites are now back up and running. And while there has been significant reduction in global freight capacity across industries, our logistics teams has worked hard and creatively to identify alternative routes and to deliver products with very minimal interaction to our customers. From a demand point of view, we have not experienced any visible deterioration in demand since the start of the pandemic. On the contrary.
Even today, our order book is at a record level, and as Greg will cover, This indicates a strong Q2. Having said that, we believe the strength in bookings is likely the result of customers ensuring they have adequate safety stock levels to protect against the risk of fuel supply chain disruption and the lag between supply and demand due to the long cycle turns typical in semiconductor Manufacturing. Let me now turn to the first quarter performance.
And I will start by saying that in light of
the significant challenges from COVID-nineteen, I am pleased with our results. In the first quarter, sales grew 5% year on year and were not materially affected. By the impact of the coronavirus. Leading the growth was our SCM division and its advanced solutions in new nodes in both logic and memory as well as the positive impact of acquisitions. And despite sales slightly below our expectations because of solid expense management, profitability remained strong in the quarter with EBITDA of 29%, up year on year and flat sequentially.
Finally, EPS was at the high end of our guidance range and up significantly year on year. Moving on to our outlook. While our order book remained healthy and we remain optimistic about the long term shelter and place ordinances in various countries, we believe economic realities will catch up to semiconductor demand at some point this year. It's a fluid situation, and it is hard to predict exactly when this will happen but with that in mind, forecasting beyond Q2 is challenging. Consequently, due to the evolving and uncertain impact of COVID-nineteen will have on the semiconductor industry, we are withdrawing the 2020 sales and EPS annual guidance we gave in February.
While it's unclear how the market will perform for all of 2020. The 2 other positive growth drivers totaling 400 to 600 basis points of growth are still in place for us in 2020. The first one As you remember, it's the key technology node transition to logic and memory we expected for 2020. And these are still on track, which means we continue to expect to outperform the market by approximately 200 to 300 basis points in 2020, driven by an increase in our served market and market shares as a result of a number of large customers transitioning to new technology nodes, both in logic and memory. The second is that we continue to expect but that the acquisition we have already made will add approximately 2 to 300 basis points to our growth in 2020.
Clearly, we are in unprecedented times, and we will be facing a high level of uncertainty for the balance of the year. But we feel very optimistic about the long term fundamentals of the industry, and we feel confident in the things we can control, including our competitive and financial position. First, we believe that the secular connector demand will continue to be very attractive. Our society will continue to need more embedded chips And in a strange way, COVID nineteen could lead to an acceleration of the digitalization and automation of the economy which would be favorable for the
and to
further secure disposition, we will maintain significant R and D and capital investment levels in 2020. Despite the prevailing short term uncertainty. These investments are essential to a number of critical joint development initiatives with several key customers. As you know, greater materials intensity and greater materials purity will be the primary defining factors of the next generation of semiconductor performance, and we want to be in a position to capitalize on the many new opportunities in front of us. Finally, we feel very confident that our experience Disciplined execution and strong balance sheet will allow us to navigate this period of uncertainty while continuing to invest in the future.
Our team has very effectively managed challenging times in the past and we will Before turning over to Greg, I won't take a minute to thank the Entegris teams and our partners around the world. For their dedication and their relentless efforts during this challenging period. And I also want to thank our customers for the trust they placed in Integra. Now let me turn the call to Greg. Greg?
Thank you, Bertrand. In my section today, I'm going to cover our first quarter financial performance and our second quarter guidance. I'm also going to discuss how our liquidity and balance sheet strength provides a significant flexibility. As Bertrand said, in spite of all the challenge brought on by the COVID 19 crisis, the first quarter was solid for Entegris. Q1 sales of $412,000,000 were slightly below the low end of our As Bertrand said, the negative impact of the coronavirus to our supply chain is not material.
Q1 GAAP diluted EPS was $0.45 per share, up 88% year over year and up 7% sequentially. And non GAAP EPS of $0.55 was at the high end of our guidance range, up 10% year over year and flat sequentially. Moving on to gross margin. GAAP and non GAAP gross margin was approximately 45% in Q1. Gross margin was a bit below our original expectations, driven primarily by the modest manufacturing interruptions related to COVID-nineteen and lower than expected volume.
We expect gross margin to be approximately 44% both on a GAAP as a result of the prevailing supply chain GAAP operating expenses were approximately $105,000,000 in Q1 and included a total of approximately $19,000,000 of non GAAP items from amortization of intangible assets, restructuring, deal and transaction costs. Non GAAP operating expenses in Q1 were 86,000,000, down from 93,000,000 in Q4 and well below our guidance. The biggest reason for this is lower compensation costs and reductions in other discretionary spending. We expect GAAP operating expenses to be $102,000,000 to $104,000,000
and non GAAP operating expenses to be $88,000,000 to $90,000,000, 2nd quarter.
Q1 GAAP operating income was $81,000,000 or 19.6 percent of revenue, and non GAAP operating income was $100,000,000 or 24.2 percent of revenue. Adjusted EBITDA was approximately $120,000,000 in the quarter or 29.2 percent of revenue. Our GAAP tax rate was approximately 12% and our non GAAP tax rate was 15% for the quarter. As a reminder, the first quarter typically has the lowest tax rate of the year. For 2020, we continue to expect both our GAAP and non GAAP tax rate to be 19% to 20%, which implies a quarterly rate of 20% to 21% for the balance of the year.
Before I get to the performance by division, I would like to note that the impact of the coronavirus affected all three divisions. However, I will not call that out or quantify that in my commentary. In the aggregate, the impact of the virus is not material to our financial results. Q1 sales of $144,000,000 for SDEM were up 16% year over year, primarily driven by advanced deposition materials, leading chemistries and the positive impact of the DSC MPD and Sinmat acquisition. The sequential sales decline was primarily driven by Specialty Materials.
Adjusted operating margin for SCEM of 23 percent was up sequentially and up almost 300 basis points year over year. The year over year increase in operating margin was driven primarily Q1 sales of $159,000,000 for MC were up 1% from last year and down 6% sequentially. On a year over year basis, growth in liquid filtration, gas filtration and the impact of the A Now acquisition more than offset declines in gas purification. The sequential decline in MC sales is driven by gas purification which was impacted by the temporary supply chain issues at our California facility with Bertrand Restaurants. Adjusted operating margin for MC was 31.7%.
The sequential margin decline was driven primarily by the lower volume and manufacturing inefficient. Q1 sales for MH of $116,000,000 were flat versus last year and down slightly sequentially. The sequential sales decline was primarily driven by wafer reticle handling and sensing product. Adjusted operating margin for AMH was 17.9%, marking the 3rd quarter in a row of sequential margin increase, driven by solid cost management. Cash flow from operations through the quarter was $11,000,000.
Free cash flow was a negative $11,000,000. As a reminder, Q1 typically has the lowest cash flow of the year, primarily due to the variable compensation We continue to expect to spend approximately $120,000,000 in CapEx in 2020 related to ongoing investments in support of our new product introduction as well as capacity expansion. Given the uncertain environment, we will continue to evaluate this setting levels. During Q1, we used approximately $11,000,000 for our quarterly dividend. And just to be clear, we remain committed to our dividend.
We also repurchased approximately 600,000 shares for $30,000,000 in Q1 for an average price of $49 per share. We suspended our share repurchases in March. We have put those on hold until we get a better sense of the economic environment. Before I cover our guidance for the second quarter, I'd like to discuss our liquidity and capital structure. We've also put a supporting slide covering this in our earnings slides for your reference.
To start with, We have substantial cash reserves, the $335,000,000 total cash at the end of Q1 $134,000,000 of that in the U. S. We have approximately $950,000,000 of long term debt in the form of a term loan and a note. The first significant maturity is not until 2025 and none of this debt is the subject of any maintenance covenant. We also have a $300,000,000 revolving credit facility.
We have drawn down approximately $140,000,000 of the revolver with no repayment requirement until November of 2023. Like many other companies, we see drawing the revolver as a relatively inexpensive way to ensure access to liquidity in this uncertain time. The revolver does have a 3.25 times secured net debt to EBITDA covenant. At quarter end, this ratio was less than one time, well below the covenant. Bottom line our liquidity position and capital structure is extremely solid and provides a significant amount of flexibility to weather a very severe economic downturn scenario.
Turning to our outlook for Q2. We expect sales to range from $4.10 to $430,000,000. We expect GAAP EPS to $0.37 to $0.43 per share and non GAAP EPS to $0.41 per share. In summary, we were pleased with But more importantly, we feel strongly that the secular growth prospects for the semiconductor industry remain intact, Our competitive position has experienced in managing during uncertain time and our balance sheet and liquidity are strong. Operator, Before we move to questions, I just want to say we appreciate your flexibility around the timing of our earnings announcement.
We've been monitoring recent activity in the debt markets with our financial advisors and the opportunity arises to refinance some of our existing debt with other non convertible debt on attractive terms, we would hope to take advantage of it Getting our earnings out a few days earlier gives us additional flexibility from a timing perspective. Operator, we'll now take
you. We can now It comes from Toshi Hari of Goldman Sachs. Your line is open. Please go
Hello. Can you hear me?
Yes.
Hi, good morning guys. For taking the question and glad to hear that you're all safe and healthy. Bertrand, you mentioned in your prepared remarks that so far you really had an seen, any change in customer demand. But I was hoping if you could speak to any sort of discrepancy or differences you're seeing between your CapEx business versus your wafer start business. And if you could also kind of speak to, any discrepancies between logic and foundry memory and your lagging edge business that would be helpful as well?
Then I have a quick follow-up. Thanks.
Sure. Thank you for the question, Toshiya. We actually have seen strength on both sides of the business. Our CapEx business remained very strong in Q1, and we expect that to continue to be the case in Q2. That was particularly true for our fluid handling solutions, as well as our shown in revenue on the CapEx front was in the gas purification systems, but really it had to do with the elimibility for a couple of customers to perform final inspection on our systems, before we were able to ship them out of California.
This is an issue that is about to be solved this week and we expect those systems to be shipped before the end of the month. And we don't anticipate any similar types of issues as we get into Q2. The consumable business, behaved pretty much in line with what we had expected going into Q1. You remember that Q1 is a seasonally slow quarter, and we saw that, especially across some of our trailing edge customers, But the level of activity on the leading edge logic and leading edge memory was very, very strong. And that's something that we would expect to continue to see in Q2 as well.
So that's the color around some of the momentum that we saw in the various segments of the business.
That's very helpful. Thank you. And then as a quick follow-up, again Bertrand, I wanted to ask you on the competitive landscape, cyclical downturns or recessions in general, obviously, painful for everyone, but I think history would suggest that strong companies typically come out of downturn stronger. I realize it's early in the downturn or this correction phase, but have you seen anything, on the competitive front that would potentially drive, market share higher for your business either in the near term or the long term?
This is a very important point that you're making. And I absolutely share your view. I would say that in the short term, we it's too early and we have not seen any one of our competitors being in a difficult situation. But as you mentioned, I think we have an opportunity to put some distance between us and our nearest competitor if we manage what's ahead of us in an appropriate fashion. And this is one of the reasons why we want to be very, very focused on maintaining timely development, the all of the critical solutions that our leading edge customers expect from us.
And we want to be sure obviously that we continue to be extremely focused on maintaining the proper stability in our supply lines, we know that it's something that is always difficult to do even under normal circumstances, but certainly it's a whole different challenge. In the current environment that we operate. But as you all know, we have a fantastic team a very dedicated team, very generous. And not only do we have confidence that we can get out of this, But I really do believe that we're going to come out of this, pandemic, a much stronger company and a much stronger brand.
Thank you.
Thank you. We can now move along to our next question. Skailati of Citi. Your line is open. Please.
Hi, good morning. Just a question first on sort of any quarter that you've been seeing in the space. I know you commented that you started building up stock in February. Are you seeing any of that coming from your customers? Any increase in demand that seems somewhat unusual that would be due to the best reporting happening?
Or was this sort of very strong demand on the leading edge sort of in line with what expectations were headed into the quarter?
Yes, Mandeep, this is a fair question. It's a question that is a little bit hard to answer. We know that there was a little bit of buying ahead by some of our customers. It's really hard to fully quantify the magnitude of that. We don't think that it was much of a factor in Q1.
We believe it could be a little bit more of a factor in Q2 and we will be very, very focused on that obviously. I mean, we want to try to the greatest expense possible. We want to try to, level load our factory and smooth shipments across Q2 and Q3. So it will be, a balancing act for all of us over the next few months.
Okay. And then can you remind us, what your split is that your exposure is to leading edge versus lagging edge And it could just be general if it doesn't have to be broken out by memory or logic and foundry. But if you have a general number that you can share.
I know the way
we have approached that question in the past was to say that about 30% roughly of our top line comes from products that were introduced in the past 5 years. And typically, I think that's a good approximation for the level of exposure we have to leading edge.
Perfect. Thank you so much.
We can now move along to our next question. It comes from Patrick Ho of Stifel. Your line is open. Please go ahead.
Thank you very much and good to hear that everyone's well. Bertrand, maybe I know this has been a very, disruptive and chaotic period, particularly in the March quarter. And obviously things keep changing and they're very fluid at this time. But given some of the issues, particularly in the supply chain and logistics that have occurred, Are there already things that you've learned that you can apply for Entegris on a going forward basis? And kind of what I'm getting at there is just different ways of, I guess, building inventory, keeping some for yourself in potential situations like that because obviously the entire, technology ecosystem has gotten to a more real time.
And just in time type of manner. Are you already making changes longer term for the company to adjust for any future disruption?
The way I would answer your question, Patrick, is, you have a management team that has managed several downturns already. And one of the biggest lessons from that is that you prepare for the next downturn in good times. And I think that at Entegris, we have done just that over the past 10 years. We have built a lot of variability in our cost structure. We have constantly looked at optimizing the cost structure of Entegris.
And we have also made significant investments in our supply chain management teams I think we may have mentioned that about 2 or 3 years ago when we essentially created a 15 to 20 person's strong team to just help us be smarter about and more proactive about managing occupied chains, building alternative supply options, And just again, managing the risk in a more dynamic way. And I'm pleased to tell you that this investment really paid off over the last past month. I mean, we were quick to assess the risk when we were battling COVID-nineteen on the Chinese fund. We were quick to make, inventory buying decisions as early as February to build against potential future risks supply interruptions, not just in China but in Europe and in the U. S.
And obviously, as I was saying in my prepared remarks, all of that served us really, really well. So that is not to say that we didn't have some pain points because we did. But I would say that, in the scheme of things, I am extremely pleased with the way we were able to manage the risk and with the way we were able to maintain stability in our supply chains and supply lines to our customers.
Great. That's helpful. And maybe as my follow-up question for Greg, you gave a great update on the liquidity and balance sheet situation for the company. Is it fair to assume that at least over the next couple of quarters, the focus is building cash, especially since it looks like it'd be cash flow positive at least on the June quarter given your revenue outlook. Is that the way you should be looking at, I guess, cash management over at least the next few quarters?
No, I think you're right, Patrick. I mean, at this point, I mean, we're definitely we're focused on maintaining as much liquidity as we possibly can. We suspended the buyback as we mentioned. We're fully committed to the dividend, but in general, focus on maintaining liquidity.
Great. Thank you.
Well, we feel very good about the position we're in.
Thank you. Can we move along to the next question? Thank you. We can now take our next question. Please go ahead.
Great. Thanks for taking my question. My first question is, can you talk about where your customer's factory utilization is at maybe on average? And maybe what do you think that is heading over the next few quarters? Maybe by segment, memory logical, by technology, leading edge versus, like, Ganesh, And are there areas that you are more concerned with?
So Patrick, I will limit my comment to what we saw in Q1 and what we expect to see in Q2 as we said in the prepared remarks that it's just too many moving pieces for the back end of the year. So I would not, risk any projections there since we don't really have any unique insight. But when it comes to Q1 and Q2, advanced logic was and is expected to remain very strong. With utilization rates, most likely between 90% 100% depending on the customer. Training edge paths on the logic front, was at probably 80 to 90.
We expect that to subside a little bit in Q2. Gram was very, very strong in Q1, probably close to 100% at most of the leading edge makers. And I'm putting Shanghai's side for that particular comment. We expect that to come down a little bit in Q2, probably in the 90% range. But again, a lot of the DRAM capacity is currently being shifted away from handset devices and really very focused on high performance servers, and we believe that the demand for high performance servers will continue to be strong in Q2 as well.
So that should be good for the Iran. And then for NAND, close to 90% and probably going to 80% in in Q2. So still very healthy levels of utilization in Q2 a little bit below Q1, but nonetheless, very healthy. And remember that we have introduced a number of new products and new technologies that are very critical to all of the new nodes that we expect to see in logic and in memory in the back end of the year. So everything else being equal, I would expect the curve wafer integrates opportunity to continue to grow through the balance of the year.
And that's one of the reasons why we expect to outperform the industry pre significantly in the first half of the year, and why we expect on balance to be able to do that on a full year basis as well.
That's great. That's very helpful. My follow-up question is if you can look back and make your past experience, how have things unfolded in past cycles, particularly as it relates to what they're trying to talk about the lag in demand, And whether you think this cycle could look differently? Obviously, the circumstances are different, but just curious how you think about the bad lag that you talked about?
Well, I think for any one of us who have been in the industry long enough, we know that The demand at some point will drop. And we won't know until it's just right in front of us and most likely, for us, it would be sometime during the summer. So there would be a contraction in fab utilization. There would be a contraction obviously to our business. The magnitude of that contraction is unknown.
The duration of that contraction is unknown. But we know that at some point, it's gonna snapback really strongly and you want to be sure that you are ready to reaccelerate out of the larger really effectively. And if you fast forward, we continue to be absolutely confident in the long term growth prospects of the semiconductor industry. Very twisted way, I think that the post COVID-nineteen era will be very favorable to the semiconductor industry. I would fully expect an acceleration of the digitalization of the economy, digitalization of human interactions further automation of the economies.
So all of that will drive significant shift demand. Again, I think that we have certainly a few months ahead of this of softness that we're going to deal with. But as I said, we have a team that has done that many times before. We know how to do it. We have ample liquidity as Greg was, suggesting And we will make sure that we tap the brakes effectively, but we keep a foot on the accelerate it so that we can reactcelerate really, really strongly, when the time is back.
Great. Thank you very much.
Thank you. We can now move along to our next question ish comes from Chris Kappish of Loop Capital Markets. Your line is open, sir.
Yes, good morning. Kudos on impressive execution considering all the challenges. I had a quick follow-up on that. Question about lag demand. The one end market where it looks pretty clear that there's going to be softness is automotive.
And I'm just wondering if you could characterize your exposure to that market and what's the, what might be the the lag cycle in terms of your materials that ultimately find their way into a automobile application?
Well, Chris, the automotive industry is driving about 10% of semiconductor demand globally. So We have indirectly effectively that level of exposure, I would say, to the automotive industry. We saw a little bit of weakening in the at the end of Q1, especially in Europe, but some of the fabs serving the automotive industry We expect to see it a bit more weakening in Q2, and that is baked into our guidance for Q2. And as I said, We would not risk any additional speculations on the back end of the year.
Fair enough. Thanks. And then the in the first quarter expense reduction was part of the story in terms of at least the earnings upside. And I was wondering if there's a way to elaborate or characterize the benefit on your cost containment efforts, more specifically are are the, some of the cost reductions, are they temporary discretionary nature or more structural in nature? So any examples of, how those flows through would be appreciated?
Chris, this is Greg. I would say most of them at this point are, around discretionary spending. Obviously, we had a lot lower T and E, we had lower employee benefits costs, in this environment, it's slower to fill open positions. What I would say is, as we work through this, I mean, we're focused on maintaining our levels of investment in E R And D, obviously, because that's our lifeblood and that'll be important as we come out of this. But I mean, you know, all the discretionary things, whether it's like the T and E, consulting costs, those kinds of things, we're watching very, very closely.
Okay. And then just finally, normally in the slide deck, there's a slide on sales performance by geography. Can you just provide any color you sort of did it by, logicfoundry memory? Just wondering if you could have any color geographically how the business trended across the globe? Thanks.
Yes, I'm happy to do that. If you look at China RBC, sequentially down, meaningfully, close to 30% reduction as you would expect, given the timing of COVID-nineteen in Q1. Sequentially in Europe, I would say good performance up 4%. We saw strength in advanced logic, but as I was mentioning, we also started to experience a little bit of a slowdown in the automotive related activity. Japan was down sequentially 3%.
So it's normal seasonality in Japan. But in Japan, I would like to note that it was up 16% year over year. And that's really more of a function of a number of very significant PoR wins in advanced memory in Japan. And it's really advanced the position materials and new cleaning chemistries that should actually lift our business in Japan on a more permanent basis. So really good performance in Japan.
Korea. We still increased usage of advanced filters and new materials in advanced memory applications. So it was, it was, up mostly. And then, North America year on year was up 10%. A function of some new wins in advanced logic as well as really the impact of a number of acquisitions that we completed late last year and early this year.
And then Taiwan was very strong, 6% sequentially, 13% year on year, and I think you understand what's what is driving that? It's really the high level of activity at the leading edge. And all of the preparation work going on in Taiwan for new node transitions. And that we expect will be a very rich environment for us for our 3 divisions for the balance of the year.
Very helpful. Thank you.
Thank you. We can now move along to our next question it comes from Paretosh Misra of Berenberg. Your line is open. Please.
Great. Thank you. Good morning. As customer spending declines, how do you expect that to impact different parts of your business? And I was, which parts of the business are the first to be affected in which products or material are the most lagging indicator underlying demand?
So I think typically our consumable business tend to be less volatile, but in the environment we're in, it's we would see exactly what type of a contraction we see in, in the back end of the year. So I'm not sure that they are a lot of perfect leading indicators for us. I think we're going to continue to be vigilant across all product lines. We have some level of flexibility in our cost structure. We try to maintain 20% of our manufacturing workforce in the form of temporary workers.
So we have a way to throttle down a little bit the level of spending. And as Greg was mentioning, we will continue to tap the brakes, if, need be. But there are a few things that we want to be sure we protect. E R and D is one of those areas. It's, as I was mentioning earlier, I mean, you win rates in the way you manage the turns.
And we're going to try really, really hard to carry our speed in the turn so that we can accelerate as quickly as we can. So Again, there's no perfect way of managing what is ahead of us. The key is to have enough variability in your cost structure, which we have The key is really to have modeled different scenarios and have clear actionable plans, detailed plans so that you are ready to act quickly and decisively, and we have to have. And then you need to have the confidence that you have enough liquidity to afford maintaining adequate levels of spending in what matters. And that's the case for the R and D and more generally speaking.
As Greg mentioned, we have a strong balance sheet. So we don't know what is ahead, but we will be ready in any event.
Got it. And is there any impact are any kind of a material impact on you because of the lower oil price and whatever it's going to do with pricing you've got many of chemicals
Most, I would say generally not. I mean, typically when oil prices rise, we don't see a lot of it. And when they decline, we don't see a lot of them. We have a few of our inputs that are sensitive to it. But in general, we're using highly engineered polymers, many of which are formulated specifically for us.
And so they don't tend to move in a meaningful way with commodity prices.
Thank you. We can now move along to our next question. Comes from Mike Harrison of Seaport Global Securities. Your line is open. Please go ahead.
Bertrand, I was wondering if you can talk a little bit about your confidence level in Q2 guidance, there are a number of companies out there that are just saying, Hey, we're not going to provide guidance even for the next quarter. What does your visibility look like relative to normal And I guess just what kind of updates have you gotten from ship producers? I think we've seen a couple publicly but are you getting some private or anecdotal evidence that that gives you confidence in the outlook?
Yes, it's a good question. We, to tell you the truth, we discussed that sensitively as the management team. We would have been easy to just hold the tower as many companies did. Then we were Looking at, our bookings, which are very, very strong. And I'm not here to tell you that we have perfect visibility, we don't.
But we have a visibility level that is not very bit similar to what we would have in a normal quarter. And the order book is very strong. And as of right now, we have not seen any signs of cancellations or push outs. So given the fact blog that we have given the order momentum that we are currently seeing, we felt that it could be useful to all of you to give you, a Q2 guidance. And we open up the range a little bit.
I mean, typically our guidance range is about $15,000,000. It's $20,000,000 in Q2 just because we wanted to create a little bit more buffer. And, so let's see how that plays out. But again, I think there are a number of reasons for us to be, still look to mistake for our Q2 top line. All right.
And then you mentioned
a little bit some of the sounds like logistical issues that were impacting your facility in California. Is that resolved at this link and can you maybe comment on any other supply chain or logistical issues that could come up as a result of the COVID situation, in, in that or in other businesses?
Well, there are too many limited stories that, we could bring forward, but it's 2 major stories, one was the situation in San Luis Obispo. So there was a shorter, the shelter in place order in California and the inability of a couple of customers to come in to complete their inspection. But that's behind us, as I mentioned. The other big story that we referred to was, the situation in Malaysia, the Malaysian government, it was a multi week saga, and it started with a hard lockdown, late March with no exemption really given. And that has evolved to providing essential businesses with the ability to bring on-site about 30% of the workforce.
And that number has now increased to about 50% of the workforce. Which in practical terms, given the fact that all of the office workers are working from home means that when it comes to the manufacturing floor, we can bring about 70% of the workers. And given the degree of automation, that we have in the plant, we are currently running at 80% to 90% capacity, which is sufficient given the projections that we have. So long answer to your question, but those were the 2 major pain points when it comes to supply chain and manufacturing, and both of them are essentially beyond us.
Alright. Thanks very much.
Thank you. We can now take our last question. It comes from Chris Shankar of Cowen And Company.
Yes. Hi, thanks for taking my question. And Bertrand, thanks for those candid commentary on downstream demand. Just wondering from your vantage point, when the demand slowdown does happen, like in a typical recessionary environment, Which of your 3 division ceases sees it first? Is this Advanced Materials?
First, or who sees it first? And what is the typical cadence of the slowdown between the three divisions of yours?
And then I have a follow-up. Well, let's say that the other fact I made but the very nature of some of the specialty chemical products, it is very difficult for our customers to carry a lot of inventory, right, especially true for some of the altering and foreseen gases and some of the other highly, half of this materials that we sell. So I guess we probably would have, that could be the best leading indicators for us and we're going to keep an eye on that.
Got it. That's helpful. And then as a follow-up, I think Bertrand kind of gave some color into utilization rate trends. I was kind of curious, you said that both DRAM and NAND would decline in utilization rate in Q2 relative to Q1. From your prior experience, is that typically a precursor to CapEx cuts by the many companies or do you need to see a more prolonged period of lower utilization rates?
Krish, I don't know. I think I will leave that to you. I think you have as much experience in this industry as I do. And, I think I did this downturn is somewhat different from what we've done. So I will let you run your own finance this and figure out what is the most likely outcome.
Alright, Bertrand. I know I'll definitely be wrong on that front part. And just a final question, if I can squeeze it in. You give any color into the geographic breakdown in Q2? How do you think it's going to be?
Is it going to be more stronger in China, etcetera?
Yes. So we are seeing company a nice recovery in China already. So I would expect China to rebound. I would expect Korea and Taiwan tools have been very strong for us in, in Q2, and I would expect, and it's probably doesn't come as a surprise. I would expect a little bit of weakness in Europe and some weakness in Japan, given the end customers that many of the fabs in those 2 geography are serving.
All right, operator. That was the last call. Thank you very much everyone.
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may