Good day, everyone, and welcome to Integra's 4th Quarter 2018 Earnings Call. Today's call is being recorded. This time for opening remarks and introductions, I'd like to turn the call over to Bill Seymour, Vice President of Investor Relations. Please go ahead, sir.
Good morning, everyone. Earlier today, we announced the financial results for our fourth quarter full year 2018. 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 which are outlined in detail in our reports and filings with the SEC. Please refer to the information on the disclaimer slide of this presentation On this call, we will also refer to non GAAP financial measures as defined by the SEC and Reg G You can find a reconciliation table in today's press release as well as on our website.
On the call today are Bertrand Loy, our CEO and Greg Graves, our CFO. I'll hand it over to Bertrand.
Thank you, Ben. I will make some comments on our fourth quarter and full year performance, and then Greg will follow with more details on our financial results. And provide guidance for Let me start by covering Q4 and the full year of 2018. Our fourth quarter capped off a record year for Entegris. During the quarter, sales were up 1% sequentially and grew 15% versus Q4 2017, above our guidance.
This performance, especially in the second half of the year, showcase the strength of our execution and the resilience of our unit driven business model. For all of 2018, we grew sales 15%. Organic sales grew approximately 10%, once again outpacing our markets and in line with our expectations. Microcontamination led the way with 12% organic growth as the increasing need for purity drove strong demand for our advanced filtration across the whole range of products. Was a meaningful contributor to growth in the second half of the year for microcontamination.
Strongly in line with our expectations. The AMH business grew 11% and SCEM grew 9% for the year. Consistent with our objective, we grew our bottom line significantly faster than the rate of our top line in 2018. Indeed, our adjusted EBITDA and non GAAP EPS grew by 22% 31%, respectively. During the year, our capital allocation decisions led to additional value creation for our shareholders.
First, we acquired 3 companies: PSS, SAES Pure Gas And Flex Concepts. PSS and SAES, which are equipment businesses, grew sales in the second half over the first half of the year, as demand for these products benefited from the need for greater process control and the need for greater purity in process gases. These two businesses also finished the year with strong backlogs, positioning them well for a strong performance in 2019. 2nd, we further strengthened our capital structure and increased our financial flexibility as we refinanced our term loan in November and established a new revolver, which is currently undrawn. Finally, during the fourth quarter and through January of this year, reflecting our confidence in our business and long term outlook we repurchased over 6,000,000 shares of our stock.
Looking back on 2018, I am proud of how our team navigated the second half industry headwinds. It really demonstrates the value and resilience of our model. Putting short term macro concerns aside, we continue to believe that secular semiconductor demand will continue to be attractive, enabled by technologies like IoT, 5G, and AI, our society will continue to need more chips. In addition to positive underlying industry growth drivers, Integris is the beneficiary of 2 key intersecting themes. The first one is increased device complexity.
Which leads to greater importance of materials and the second is increased purity requirements and the resulting need for greater and more advanced position is about helping our customers achieve higher yields and new levels of device reliability and performance. Integris is uniquely positioned to achieve this with our combination of global scale, world class technical capabilities, and operational excellence. Looking ahead to 2019, I would like to provide some perspectives on the industry environment and how we see it impacting our business. The secular demand drivers for unit driven growth remain intact As a result, we expect MSI to continue to grow in 2019. We also expect to see the impact of technology node transitions and the resulting positive impact to our business of increasing materials intensity and purity requirements.
These growth drivers are expected to more than offset short term softness in capital spending. Putting it all together, we expect for 2019 to be another record year for Entegris. And we expect our sales for the financial detail. Greg?
Thank you, Bertrand. We had many reasons to be pleased with our fourth quarter and full year performance and execution. Which reflected record levels of sales, EBITDA and free cash flow. Q4 sales of $402,000,000 grew 15% from a year ago. Sales grew 1% sequentially, driven by healthy growth in our unit driven sales.
As expected, capital driven sales were down sequentially Lee, with the notable exception of SAES Pure Gas, which was up for the quarter. Q4 GAAP diluted earnings per share was 0 point 57 dollars, On a non GAAP basis, Moving on to gross margin. Gross margin included the negative impact of 3,400,000 inventory write up associated with Safe Pure Gas acquisition. Our non GAAP gross margins of 45.7 percent was down 100 basis points from last year, The decline in gross margin was driven primarily as expected by the addition to the portfolio. We expect gross margin GAAP operating expenses of $108,400,000 included $17,000,000 of amortization of intangible assets, and $1,300,000 of integration costs associated with the purchase of SAES Pure Gas.
Non GAAP operating expenses in Q4 were to be approximately 90 or 23.3 percent of revenue. Our GAAP tax rate was 5% for the full year 2018, reflecting a one time benefit from reorganization that allowed us to harvest certain legacy tax benefit. Excluding these impacts, our non GAAP tax For 2019, we are expecting our non GAAP tax rate to be 20% to 22%. Adjusted EBITDA for 18, we generated $436,000,000 in adjusted EBITDA, which is 22% increase over the prior year. Turning to our performance by division Q4 sales of $134,000,000 for specialty chemicals and engineered materials, or SCEM, grew 7% from a year ago.
The quarterly sales growth was driven primarily 21.7 percent, down from the same period last year. In manufacturing and logistics to support growth in addition to less favorable product mix. Q4 sales of $158,000,000 for microcontamination control, or MC, were up 37% from last year. Excluding the favorable impact of SAES, MC sales were up 9% in fourth quarter. The strong organic growth was driven by strong demand for wet etch and clean and photo filtration offset in part by weakness in gas filtration.
Adjusted operating margin for MC was 32.7 percent, down 130 basis points from last year but up sequentially. The decline from last year was due primarily to We would expect that MC margins will Q4 sales of Advanced Materials Handling or AMH of $110,000,000 were flat from last year. The positive sales drivers for the quarter were growth in liquid packaging and the impact of the PSS acquisition These positive factors were offset as and the impact from the 15.7 percent decreased ninety basis points from last year. As our most capital driven business, The profitability of AMH has been the most negatively impacted by the softness in the industry environment. To address this, going into 2019, we are implementing further cost savings initiatives focused on operational efficiencies primarily in manufacturing.
Cash flow from operations for and free cash flow was $202,000,000. Our cash balance increased $187,000,000 from the 3rd quarter reflecting the impact of the Us of cash during the quarter included CapEx of $35,000,000. For the full year, we invested $110,000,000 in CapEx. We expect to spend approximately $110,000,000 in 2019 related to ongoing investments to support our new product introductions and growth in advanced deposition, filtration, wafer handling and specialty gas solutions. Consistent with our capital allocation strategy, we used $10,000,000 for our quarterly dividend in the quarter.
For the fourth quarter and through the end of January, we repurchased a total of 6,600,000 shares for approximately $179,000,000 or an average price of approximately $27. As a result of the proposed merger with Versum, we've suspended our buyback program We expect our share count to be approximately 137,000,000 and the full year 2019. Another important item to note for your modeling, with the increase in the size of our term loan, are expecting interest expense to increase in 2019 to approximately $10,000,000 per quarter assuming interest rates remain at We expect sales to be approximately at the same level as fourth quarter of 2018. We also expect non GAAP EPS to be at approximately the same 2018, our business continues to be positioned well and generate significant cash flow which gives us great flexibility going into 2019.
Last week, we announced that the integrase agreed to combine with Versum Materials in a $9,000,000,000 merger of equals. This is truly a unique transaction that will bring together 2 highly complementary and diversified portfolios to create a premier specialty materials company. We believe this combination is a natural fit that will provide significant benefits to our customers, our employees and our investors. We are pleased with We intend to submit the HSR filing as soon as this week and the S4 proxy statement by early next month. In conclusion, I am pleased with the resilience of our unit driven business model and our record results in 2018.
We are very well positioned for another record performance in 2019 Finally, before turning to the Q And A, I want to express my appreciation to the integrates teams around the world for their dedication and the quality of their work. Integra's success is a direct result of their efforts and the service they provide our customers. To all of
Thank
you.
We'll take our first question from Toshahari at Goldman Sachs.
Hi, good morning guys. Congrats on the results and congrats again on the announced merger. Return, you're guiding 2019 revenue to grow, I think you said 5% year over year. I was hoping you could provide a little bit more color, on 2019, perhaps by segment. And also if you can share some of the underlying assumptions you're making around MSI growth and CapEx, that would be helpful.
And then I guess the 3rd part of my first question, In the past, I think you've highlighted, focus areas or growth areas within your portfolio. If you can maybe run through couple of areas that you're particularly excited about in terms of contribution to growth this year? That would be helpful. Thank you.
Well, good morning, Toshiya. Thank you for the question. So let me start maybe with some general considerations around the industry environment. It's probably fair to say that we expect the industry to be fairly choppy for the next quarters. Specifically, we expect wafer starts to be up only modestly.
So in other words, below the secular growth trend line, for wafer starts. And we expect the industry CapEx to be down in the mid teens in 2019. Having said all of that, we expect more NAND chips to be produced at 64 and 96 layers in in 2019 versus last year. And obviously, we expect to benefit from that. We expect from the greater materials intensity and the need for more advanced, purification solutions, outdoors, more complex geometries.
The other thing that should play in our favor in 2019 is that we expect a number of imported node transitions in the logic and foundry segment. So those would be the primary driver. And if I look at 2019 in the context of a fairly muted industry environment, I think that our guidance points to the great resilience of our business model and, the quality of our execution. So feeling pretty good about that. Trying to understand or trying to explain maybe where the growth is going to come from, while you should expect growth to mostly come from microcontamination and SCEM.
As you know, those 2 divisions have the least exposure to CapEx number 1. But also, those are the 2 divisions where we have invested the most in the past, 3 years. And as a result of that, this is where we see probably the most excitement in terms of, upcoming growth opportunities. For 2019 and frankly and beyond.
Great. And then as a quick follow-up, you guys talked about the synergies around SAES, contributing to margins, I suppose, in the second half, You guys also talked a little bit about, potential cost reductions in your AMH business, just given the tough backdrop if you can elaborate on those 2 dynamics and how we should think about margins into late 2019 2020, that would be helpful.
Hi, Toshiya, it's Greg. So first of all, with regard to the AMH business, First of all, when we look at that business, full year over full year, 200 basis point improvement in the operating margin. We're not I'm not defending the business. I'm just saying optically, when you look at the last couple of quarters, it feels sort of worse than the full year performance was. As we think about as we moved into 2019, we've made some significant reorganizations within the manufacturing environment within the major facilities within AMH that we think will have a positive impact the operating margin of that business going forward.
With regard to SAES, the SAES synergies We'll start to see some of those synergies beginning in Q1. The first big move was we closed the facility in San Diego at the end of 2018. And then we'll see the balance of those as we move through 2019. Recall, we talked about total synergies in the $4,000,000 to $5,000,000 range. So it'll have an impact, but it's not going to be a really significant impact.
So we ended the year just short of 33 in MC. We'd expect that to trend up as we move through 2019, closer to that 34 range.
Very helpful. Thank you so much.
We'll take our next question from Sidney Ho at Deutsche Bank.
Great. Thank you very much. Following a Toshiya's question on the revenue side in 2019, how should we think about the first half versus second half of the year? I think historically, you have been more first half weighted I guess another way of asking this is if you annualize Q1 guidance, you're already up 4% year over year. So first is your guidance of up 5%.
Do you think the yield will be relatively flat throughout the year.
So, Celine, based on the information currently available, I would expect the back end of the year to be up versus the first half of the year. And it's going to be a function of 2 things. One is a little bit more favorable CapEx environment in the back end of the year, but more importantly, a bigger impact from the node transitions that I was describing both in advanced memory and advanced logic and foundry.
Okay. That's helpful. My follow-up question is on the offering expenses side. You guys have done a pretty good job in the past and you, I think you guys just talk about the say side of things, there's some synergies. How should we think about the OpEx level maybe after Q1?
This is Greg. So as we think through the balance of the year, depending on how the industry environment unfolds, I would expect them to be relatively flat maybe with a slight upward bias as we move through the year.
All right. And maybe just to follow-up to that, how should we think about gross margin as well as the year progresses?
I think about it in sort of that the 46 range as volumes increase, we should see some modest improvement through the year.
Okay, great. Thank you.
Moving on to Mike Harrison at Seaport Global Securities.
Good morning. This is Jacob on for Mike. Hi, Jacob. Digging a little deeper into safe, sort of what are the expectations for that business in 2019? And maybe if you could comment what the book to bill was in Q4 and sort of how that's shaping up?
I know you said backlog was strong, but maybe a little more detail.
Yes. So Jacob, we don't provide, specific backlog information by product lines. So I will not do that except that I'm going to try to nonetheless help you with your question. So if you think about the velocity of that business, as we exit 2019, Q4 for SAES was, I mean, we exceeded $30,000,000 of revenue So that was up from the high $20,000,000 in Q3. And if you look at 2019 on a full year basis, we expect 2019 to be up versus 2018.
And that is obviously in the context of a down industry CapEx environment. So that speaks again to the very unique value proposition, that we are able to deliver with those large gas purification systems that talks to the need for much greater purity levels for all array of processed gases going into the advanced fabs. And based on the lead time that we have for those systems, we have a pretty good visibility for what to expect going into 2019. So we feel pretty good about, the outlook for that business.
Okay. That's very helpful. And then maybe looking at CEM margins, so you guys called out the investments in Manu action and logistics and then unfavorable product mix, maybe relative to Q4, could you sort of frame how big of an impact each of those were and sort of expectations for the investments in manufacturing and logistics that going to carry over into the next couple of quarters?
So let me just comment on the investments are primarily around our specialty materials business, where we're we're investing in graphite capacity. We're investing in ramping a new facility as well. We've made meaningful investments in some of our coatings capabilities. And I would say that we're waiting on the volumes to catch up with the investment. That would be kind of the 2 primary areas, where we've made investment.
And like I said, the investment is ahead of the revenue per se.
Thank you very much.
Moving on now to a question from Duffy Fischer at Barclays.
Yes, good morning. You talked a little bit about the increased interest expense, but if we obviously go through and estimate an EBITDA number, can you walk us through the puts and takes on EBITDA down to free cash flow. You mentioned the cost save program. Does that eat cash this year? What do you think kind of working capital does and then what are the capital expenses look like?
So, capital so we'd expect obviously our EBITDA to be in line with our target model, which is at the revenue levels that we're talking about for the year are in that 2829 percent of revenue. So our commitment is always to flow at least $0.40 of every incremental dollars of revenue through the EBITDA line. From a CapEx perspective, that $110,000,000 in CapEx for 2019. Taxes, which also, you know, come into play between the EBITDA and the free cash flow line. We talked about 20 to 22.
And then working capital, one of our focuses this year, I mean, our inventory as we've come through 2018 did creep up a bit and our turns slowed a bit. That's the focus area. Move into 2019 is improving, on the inventory side of the house. Receivables, I mean, always tend to be right around 50 days. So those are the primary components of cash flow.
And does that answer your question, Duffy?
Yeah, you bet. Thanks. And then just one housecleaning of the shares you bought back, how many do you buy back in Q4 versus so far in Q1?
So we said we bought back 6,000,000 shares. I don't have the exact breakdown, but the majority of that buyback probably $4,500,000 of it roughly would have been in Q4. So when we think of when you think about the share count for Q1 as well as the balance in 2019, you should think about 138,000,000 shares.
And before we move on to our next question, just a quick reminder that That having been said, we'll move on to Chris Capes at Loop Capital Markets.
Yes, just a follow-up on that the share buyback and just capital allocation in general. I think you touched on this a bit last week, when the merger was announced, but you've suspended the buyback. Is the intent there, that that would be suspended until closing of the deal, just because given the pro form a leverage of think a little over one times. And given the free cash flow, the reliable free cash flow of both your portfolio as well as, for assumes, I'm guessing that you would be interested in resuming buybacks given your copious free cash flow for the even on a pro form a basis. So Can you just provide color on what the thinking is post merger?
So, Chris, you're correct. What you heard us say today is that we'll be suspending the buyback until closing. At which time, we'll have to re engage with our new board and discuss and review all of the available capital allocation options, buyback with being one of the many options we'll be considering, you're right in your assessment that, the combined company would be a company with a very strong balance sheet about one time leverage, but also a very profitable company. So I'm anxious to have those discussions with the new board. I'm sure it would be a very productive discussion, but it's too early for us to elaborate on the choices that we will be making after closing.
Okay, fair enough. And then you did mention that in terms of the sensitivity to a weaker CapEx environment, your businesses felt some of that, but, you did mention sales as being the exception. And I think that may be even surprised you a little bit. So I'm just wondering if you have a sense for what it is about the business and And as backlog right now, that's kind of shrugging off the softer overall macro and end market backdrop, is it Is it part of the secular story there or is it, is it demand for those products across legacy and mature nodes as well?
Yes. No, thank you for asking the question. And if you recall, we've had described in many occasions now that we have a number of what we call CapEx products that behave slightly differently than the industry CapEx. So I talked about the gas purification business, But another example would be our food business. Both of those businesses actually grew sequentially, in Q4.
And the reason for that is that the demand for all of those products is really driven by the need for cleaner process conditions. And, those requirements are not going to stop anytime soon. And as a result of that, you have actually less of a straight correlation between those I mean, the revenue for those product platforms and the industry CapEx. But I mean, the flip side of that would be some other product lines like gas filtration or off grid handling businesses did decline sequentially because those products are more tied to WFE. So there was a stronger correlation there.
So in other words, what we call CapEx in our product portfolio comes in many different shapes and forms and the demand patterns for those products, are very different.
Got it. That's helpful. Thanks. And then just one last quick one on in AMH, you mentioned, while the industry has a little bit softer near term backdrop taking out some costs. Can you just is there any order of magnitude in terms of what sort of take outs you anticipate from those self help actions?
Thank you.
What I would say is we expect, I mean, the operating margin in that business ended the full year 2018 right around 18%. And we'd expect that to to trend up through the year, probably close to 100 basis points. But we're not looking for a marked shift in that business until volumes on the CapEx side of the industry from background.
Okay. Thank you.
Taking our next question now from Amanda Scarnati at Citi.
Good morning. Just a quick question on kind of utilization rates at your customers. You've been hearing a lot that they've been coming down in the fourth quarter and into the first quarter. So can you just talk a little bit about how you expect to see this sort of stability in revenue in the 4th the first quarter in that kind of industry backdrop of decreased utilization?
Yes. So Amanda, you're correct. And that's part of the assumptions that we're using as we think about the Q1 industry conditions. We expect wafer starts and fab utilization to be down modestly versus Q4 and probably slightly more so than usual seasonal pattern. So so what will allow us to do better than that is, as I mentioned, is the secular drivers for solution sets And the need that the industry has to really to migrate to more advanced materials and more advanced filtration solutions as they start transitioning to more complex geometries.
So that's the theme that we've been developing now for a number of years. We will be the beneficiary of greater materials intensity and we'll be the beneficiary of greater need for purity. And that's going to help us increase the resilience of our business model versus many other industry participants.
Then under those assumptions, we would expect to see that the second half to be significantly stronger if the node transitions continue as expected in the second half and utilization rates pop up but you're still expecting sort of a 5% growth. Do we see sort of a big step down in the second quarter in terms of what revenue expectations would be or is it really just too early to tell what's going to happen in the full year of 2019?
I think it's just a little bit there's a lot of noise right now in the channels, Amanda. So, I think as always, we will be updating our annual guidance that every one of our earnings call and when new information and better information becomes available, we'll we'll update if need be our annual guidance.
And then can you just remind us what your current lead times are and how that's changed at all over the last year?
Lead times have been relatively constant across product lines. So that's not going to be a big factor in general. Having said that, we have added capacity in our liquid filtration product lines, we are adding capacity as well in graphite our FOUP platform and even our gas purification business. So, we believe that we would be in in better position in terms of, fully capitalizing on customer demand in 2019.
Thank you.
Thank you. We'll take our final question today from Patrick Ho at Stifel.
Thank you very much and congrats on a nice quarter. Bertron, you've talked at least in your prepared remarks and other times about the investments you're making in certain areas. I think this call you talked about graphite and how that's starting to pay off for the company today. You give a little bit of color? And if you don't want to get super specific, I understand, but can you give a little bit of color of other areas of investments where over the next few years, you'll start to see benefits particularly on the top line.
Well, I mean, I will repeat what I've said in many, many calls before. So I really flagged graphite, but we have made significant investments in a number of filtration and purification technologies, some of which have already hit the market. Some have not. And the areas that we've been targeting are wet and clean applications for both liquid filters and liquid purifiers. So that would be, I believe, a very significant growth driver going forward for us.
We've talked many times before around the investments that we've made in Advanced Deposition Materials. That's an area that we believe is poised growth in the industry. And certainly one of the reasons we've decided to combine with a person. I think that joining forces around some of those advanced process materials is very critical to enable the industry technology roadmaps. So we have made investments in the past few years, and obviously, we'll be accelerating those investments as we join forces with this question.
So what I really like about, our portfolio is the diversity and the breadth of the growth opportunities that I see. It's across the portfolio. It's across our customer segments. And frankly, it's even across industries, many of those growth opportunities are slightly on the periphery of the semiconductor application. So I feel good about the overall quality of the portfolio.
Right. As my follow-up question, in terms of the materials business, Particularly, as you mentioned, the Advanced Materials side, you've talked about process of record type of wins in the past. As we look at 2019 as a whole with some of those process of records turning into volume rips, would you say this year is a little more weighted towards logic? And that's where we'll see, I guess, some of the wins and memories based a little more on recovery and timing of that, or are we going to see some I guess, ramps on your end on the memory side as well?
If I think about the unit driven part of our business. I would say it's both. So obviously, a couple of really important node transitions in our logic and foundry customers. But what will be happening on the 3 d NAND segment is also very exciting. I mean, as you know, the greater number of layers, on 3 d NAND chips the greater the material intensity.
And the more challenging the aspect ratios, the greater the opportunity for advanced contamination control solutions. So If you think about what we expect in 2019, we expect about 60% of the the NAND wafers to be produced at 64 layers and above. That number was only 40% in 2018. So even if wafer starts are essentially flat for, NAND memory, vast, I would expect the material intensity to play in our favor. And that will be true in 2019.
And obviously, we expect that to continue be true in 2020 2021 as well. So the drivers will be both logic and memory, in other words.
Great. Thank you very much.
And with that ladies and gentlemen, we will conclude today's call. Thank you very much for joining us. Have a good day. You may now disconnect.