Ladies and gentlemen, thank you for standing by. Welcome to today's conference call to discuss Entegris and Versum Materials Merger. At this time, all participants have been placed in a listen only mode. Following the presentation. Regarding today's announcement are available on the Investor Relations section of each company's website.
The archived replay can be accessed on both company's websites following the call. If you require assistance during today's call, I would now like to turn the call over to Bill Seymour, Vice President of Investor Relations for Entyress. Please go ahead.
Thank you, Maria, and good morning. I'm Bill Seymour, Vice President of Investor Relations at Entegris. Today, we'll be discussing our combination with Versum Materials, which we announced earlier this morning. Entegrisand Versum will also issued preliminary earnings releases for the fourth quarter full year 2018 and 1st quarter 2019, respectively. Those releases will be on our respective websites.
With me on the call this morning are Safi Gassami, Bertrand Loyd Guillermo Novo. Also joining us are Entegris' chairman Paul Olsen and Entegris CFO, Rick Graves. As a reminder, any forward looking statements we make during today's conference call are given in the context of today only. Actual results and events could differ materially from those discussed here. Please refer to the information on the disclaimer slide in the presentation as well as the additional information contained on the regulatory filing for both companies.
I will now turn the call over to
Thank you, Bill. Good morning, everyone, and thank you for joining us to discuss today's news. This is a truly monumental day for both companies. They are excited about this unique transaction because of the combined company's attractive growth prospects, diversified portfolio, global scale, and financial profile, none of which they could have achieved separately. Together, We will leverage our complementary portfolio of world class technology, R&D, as well as our broad scale I am honored to be chairman of the new company and look forward to working with the board, Bertron, and the management team to deliver on this tremendous value proposition.
With that, I'll hand it over to Bertron and Guillermo to take you through this exciting
This is indeed a momentous day for our 2 companies and a win for both sets of shareholders, customers, and employees. Today, you will hear Guillermo and me talk about the evolving Semiconductor Industry landscape and how combining our 2 companies, will position us to be at the forefront of that transformation. So let's start with Slide number 5. And I think you would agree with me that the numbers speak for themselves. In today's environment, Ship demand is continuing to accelerate, and new applications for Semiconductors are emerging every day.
Our customers are in a never ending race to rapidly overcome technology hurdles and solve the industry's toughest process challenges so that they can achieve unmatched competitive differentiation. The combination of our companies will provide customers with a stronger partner, better equipped to help through a larger global presence increased financial stability, a broader solutions portfolio, and unique industry expertise across the entire semiconductor manufacturing process. Combining it Agris and Versum will create a $9,000,000,000 premier specialty materials company, with nearly $3,000,000,000 in annual revenue, approximately $1,000,000,000 in EBITDA. The size and scope will be critical to achieving our next stage of growth. Importantly, we will continue to But we will also spend on R&D.
This will not be an either or choice for us. We are confident that we can position the combined organization to be the best innovator in this space and turn our significant R and D spend into tangible value for our customers and attractive growth for our shareholders. This is a merger predicating on growing the top line. Nonetheless, we expect to achieve a minimum of EUR 75,000,000 in global in annual cost synergies. More detail on that in a minute.
Finally, the combined company will be well capitalized with a strong balance sheet, and this will provide us with the flexibility to invest make acquisitions and return capital to stockholders. In other words, this transaction will drive significant shareholder value. Before I hand the call over to Guillermo, I want to thank him and his team for the extraordinary effort they have put into this transaction. We have long admired Versum, and I am excited that we will be joining forces.
Guillermo. Thank you Bertrand. Good morning. First, I want to echo Bertrand's enthusiasm for our combination. Versum and Entegris are terrific companies.
And together, we will create a new premier Specialty Materials company that reflects our shared commitment to creating value and unlocking growth potential. If you turn to Slide 5, you can see why we're so excited about this merger. Resume and Entegris have highly complementary portfolios, that together will be the most comprehensive in the industry. While there's little product overlap, we do share many customers. The combined company will provide a more diversified portfolio for these customers.
Our world class technological and R and D capabilities will ensure that we're better able to meet our customers' evolving needs for new materials, at a time when the industry is growing and becoming more complex. We will be better positioned to develop new technologies faster, which will keep both our And as Bertron highlighted, we will increase global scale and financial strength, stability and flexibility. We also know that as a larger company we'll be able to attract an even broader set of investors. We put it all together. We believe we will yield significant value to shareholders, customers, and employees.
Turning to Slide 7. What we are announcing today is a true merger of equals. We are bringing together 2 very strong companies, with key business lines and making them will be poised to drive further innovation and support investment across our world class capabilities. This will enable us to better serve our customers and provide expanded opportunities for our employees. Before I turn the call back over to Bertron, I'd like to thank the Versum employees for their hard work.
Your dedication vision for the company we are today and unwavering commitment to our customers have built a great company. And given that, It is exciting to know that the best is still yet to come. Bertrand?
Turning to Slide 8. The terms of the transaction are straightforward and consistent with what you would expect to see in merger of equals. Under the agreement, this is an old stock transaction, and it is and it was unanimously approved by the boards of both companies. Entegris Stockholders will own 52.5 percent of the combined company, and Versum stockholders, we own 47.5 percent. Upon closing of the transaction, Safety will be Chairman of the Board.
I will serve as CEO, and Greg Graves will serve as CFO. Michael Valente, Versum's General Counsel, will serve as General Counsel of the new combined company. Additional senior leadership positions will be named at the later date. The new company's Board of Directors will be composed of 5 existing integris directors and 4 existing purchasing directors, including Safie and myself. The merger is expected to close the second half of twenty nineteen, subject to the satisfaction of customary closing conditions, including receipt of regulatory approvals and approval by the shareholders of both companies.
Moving to Slide 9. As a combined company, we will be primarily focused on the semiconductor industry. Which is a great place to be. For decades, the industry was dependent on singular drivers such as PCs and smartphones, which resulted in slow growth and volatility, but the industry has changed significantly. We are now seeing the emergence of new applications, driven by the 4th industrial revolution, applications such as artificial intelligence, IoT, and cloud computing.
All these trends will drive semiconductor demand to new heights, and importantly, we'll provide greater stability for the semiconductor industry. As a result, We expect wafer starts will be growing at twice the rate of GDP for many years to come. The combined companies will be primarily unit driven, and therefore, will be ideally positioned to benefit from the industry's long term secular growth. To enable this next generation of digital transformation, the global IT infrastructure and semiconductor design will require new levels of device performance and reliability. This means new precision materials optimized for the next generation of device architectures, and importantly, new and higher levels of purity for those materials.
The combined company will be uniquely positioned to address this issue for our customers. Ultimately, this ability to deliver the speed and reliability that the digital transformation demands will allow us to expand our served addressable market and offer us new growth opportunities. Let's turn to Slide 11. As you can see, the combined company will be in a position to offer proposition for our customers. These capabilities will be based on a set of core technologies such as separation technology, polymer science, synthesis capabilities, and sensing and control.
Importantly, we will also leverage This includes our unparalleled global laboratories infrastructure, best in class metrology capabilities, expanded global manufacturing footprint and world class operational excellence. Bottom line, our new capabilities will allow us to offer our customers faster time to solution. Moving to Slide 12. We believe this unique value proposition in the will be driven by cross selling, across major customers and geographies. And soon thereafter, we will have an opportunity to develop co optimized products and solutions.
All of this will lead to clear market expansion and market share growth. This is the one area that gets me the most excited when I think about the power of this combination. In addition to these revenue synergies, we expect more than $75,000,000 in annual cost synergies to be achieved within the 1st year post close, mostly from SG And A such as facilities, optimization, administrative functions, and rationalization of public company costs. From a supply chain standpoint, we also expect to drive efficiencies in manufacturing, logistics and procurement. Finally, we expect to implement EUR 10,000,000 to EUR 15,000,000 of CapEx synergies within the 1st year pass close, primarily driven by things like improved fleet management, analytical equipment and capabilities, as well as the option of optimizing, manufacturing laboratories, expansions.
As we move to Slide 13, we have significant M and A experience and a strong track record of execution with a proven ability to integrate and exceed synergy targets. Our vast experience gives us confidence in our ability to successfully integrate our 2 companies and capture the full value inherent to this combination. For now, through close, we will have a dedicated group of people from both Integris and Versum who will assist with the integration efforts. Most importantly, we will do all we can to preserve and build on the great customer and employee centric cultures that thrive at Entegris and Versum. As we finish up on Slide 14, we believe this transaction is a true merger of equals, that is expected to unlock significant value for all constituents.
For both sets of shareholders, we believe this combination creates a company with an even more attractive growth profile, a broader diversified technology portfolio, accretive and stable margins, increased flexibility and enhance scale. For customers, they will benefit from a much broader infrastructure and capabilities and global scale. We will also have unique product breadth and depth. We will have the R and D fire power and enhanced technical capabilities to enable us to better address customers' evolving needs. And best of all, we can deliver solutions faster.
When you put all of this together, We expect to deliver significant value creation to our shareholders, our I look forward to working with our combined best in class management team to capture the expanded potential that we will have together with Versum. I know that Guillermo shares my confidence in the path ahead. Thank you again for joining us today. I will now turn it back over
you. Our first question comes from the line of Patrick Ho of Stifel.
Thank you. Good morning and congratulations, to you, Birch Ponte Guillermo, for this deal. Maybe as we look at the cost synergies that you provided on the call and in your presentation, Can you talk about the 75% coming from the OpEx and SG and A line? If there's any incremental upside, would that be coming in the cost good line on a going forward basis when you talk about, some of the manufacturing and logistics, on your supply chain front.
Good morning, Patrick, and thank you for the kind words. As mentioned in my preliminary remarks, the bulk of the $75,000,000 of synergies will be coming from SG And A. We, however, expect to find a number of opportunities to improve the cost structure as we optimize our logistics and manufacturing platforms as well. So to your point, we will not left any stone unturned Our objective is to find a minimum of $75,000,000, and you should expect those synergies to be found in many different areas on the P and L.
Great. And maybe as my follow-up question in terms of some of the development work that both companies have done, and how you expect to accelerate them as a combined company. Given a lot of the changes that continue to go on in the semiconductor industry, when we see new introductions of cold wall and other types of materials. And can you give a little bit of color how you believe you put the allowing the development of not only new material, but different uses of materials for your customers.
I think, Patrick, you you are indeed talking about what is the most exciting part of this combination. It would be the unique capability to provide solutions that nobody else will be able to develop. If you think about what this industry needs, it's about a new set of materials with higher performance, but they need those materials to be stabilized. They need those materials to be brought to much higher level of security. And as importantly, we need to be in a position to transport from the point of manufacturing to the point of use, those materials in a very safe way.
If you think about the portfolio of the combined company, we will be the only supplier in the market able to provide this comprehensive value proposition. And that is indeed the excitement around this combination.
Our next question comes from the line of Karen De Bruin of Credit Suisse.
Good morning and congratulations on the merger. Yeah. You mentioned having around 1.1 times net debt following the merger, and that gives you a lot of opportunity to pursue organic and inorganic initiatives. I know it's really preliminary, but are there any areas of you looked at this combined portfolio where you'd potentially like to expand or participate in that you're currently not in? Thank you.
So I I agree. I think that one of the very interesting attributes of this combination will be the very strong balance sheet. Low leverage ratio as of right now, certainly very profitable platform going forward the combined company will be generating approximately $1,000,000,000 of EBITDA annually so this will actually give us a lot of optionality with the balance sheet. I believe it's way too early for us to talk about you know, how we will be deploying our capital going forward. Right now, the team is very focused on integrating those 2 platforms, very focused on creating, the right benefits for our customers.
And making sure that we unlock the value for customers and for our employees.
And then You know, I you mentioned revenue synergies being the most kind of exciting opportunity going forward. And I I know this also might be preliminary, but are there any, any areas that you've already maybe looked at or seen where you might have potential cross selling opportunities or, you know, areas to have more integrated solutions going forward? Thank you.
So in the short term, we will be exploring cross selling opportunities. It is fair to say that each company has different levels of, strength in in in its customer relations. So we will be leveraging the respective strength at various different customers. And that is something that I believe we should be able to do within the first year or 2 post combination. And then after that, what is actually more exciting is the opportunity to co optimize our products and solutions and down the road to actually develop system solutions for our customers in order to enable the next generation of materials and make sure that those materials can be delivered onto the wafer at the right level of purity.
It's going to be a process. I think you could see some quick wins in the first year or 2, but I think the bigger wins, the more meaningful wins, the things that are really very excited about this platform will probably take 3 to 4 years before we would be in a position to unlock them.
Our next question comes from the line of Toshiya Hadi of Goldman Sachs.
Hi. Good morning. Thanks very much for taking the question and, congrats to to all you guys on on the deal. Bertrand, as you mentioned in your prepared remarks, you have a very strong track record of buying companies and integrating companies. What would you say are some of the similarities or differences of between a Versum and, say ATMI and says more recently?
Good to hear you, to see, the I think the the the biggest similarity is, in the business models. Both companies have very customer centrics, business models. I think that the cultures of ATMI, the cultures of Versum, the cultures integris are very similar, very compatible. And that's extremely important, as you know, when combining and when putting together teams. So I like what I see and I think that this is actually very positive.
Having said that, every integration is different. So we will be using some core principles that have worked for us in the past, which is really put the customer first, to put speed over perfection, and, and, and really to have a lot of very tangible goals for the organization so that we minimize, any disruption, any confusion that this combination could create within our teams and within our customers. Having said that, again, we will be creating an integration office, that integration office We leverage, talented people from both organizations so that we can actually design an organization and design a strategy for the combined company that could have the most impact for our customers and obviously for our shareholders.
Great. And then as a quick follow-up, can you size the overlap between the two companies? I realize must be pretty small, but, if you can size that and then what sort of, you know, regulatory response you might expect. And also from a customer perspective, I think, you know, different fields, but in semi cap equipment, you know, a couple of deals were were you know, MetLife opposition from customers, what sort of customer response would you expect for this deal? Thank you.
So there is very little overlap between the two platforms and that's why this combination is powerful and that's why this combination is exciting. It's very complimentary. And, and I believe that the result that, our customers will see the value that they will be in position to benefit and create for themselves as they collaborate and engage with the new combined company. So because of that limited overlap, we do not anticipate any significant regulatory hurdles.
Thank you and congrats again.
Our next question comes from the line of Laurence Alexander of Jefferies.
Good morning.
I guess, two questions. First, can you address overlap, not so much in terms of products overlap, but what percentage of your sales is for each company is to customers that the other company does not have as customers? So, you know, is there clear, you know, just to give us a sense for how much white space there is for cross selling? And secondly, can you give a feel for how you think about the longer term? Like, what the more diverse business lines should be to carry in terms of fair leverage ratios.
And it seems to me that's, like, one and a half to two times should be supportable for this business across the cycle. But how do you think about that?
So let me start with the second question, which is the, I mean, do we today, our leverage ratio is just around 1. As a stand alone company, Entegris had indicated in the past that we would be comfortable, levering up to about 2 times EBITDA. I will not speculate on what is the right level of debt for the new combined company. These would be topics that we will be discussing post close. As it relates to The first question, it was around your customers, cross selling opportunities.
Those companies have been serving the same customers. So they are actually so when I talk about cross selling opportunities, it is really more about leveraging relationships, leveraging existing engagements that each of the companies may have with, certain customers in Korea, in Japan. I think that the relative strength of the two companies is is not symmetrical in those geographies. And I think that there's some value to be created as we engage differently and better with, certain customers in interconnection Korea in particular.
So just to clarify, is it fair to say that any cross selling synergies. It's a very long tail as opposed to some kind of like quick surge of, you know, winning a few key accounts.
Believe I mentioned earlier that I believe the cross selling opportunities would probably be realized within a 1 to 2 year timeframe.
Okay, perfect. Thanks.
Thank you.
Our next question comes from the line of Sidney Ho of Deutsche Bank.
Thanks for taking my questions and congrats on the transaction. You talked about revenue synergies from cross selling and co optimized products and integrated solutions, are those synergies that will comply to your specialty material business, or do you think it will have, have an opportunity to cross over to your other two businesses as well?
I believe there will be opportunities across all business platforms. So clearly in specialty materials, but I would expect also a lot of opportunities in the, GSS positive person's portfolio. I would just point to the fact that we had similar expectations when we acquired ATMI 5 years ago now, we had, clearly articulated those various elements of the positive synergies we're expecting to realize. And if you look at our growth performance over the last 5 years, we've been able to outpace the market consistently by 1 to 200 basis points. The reason we've been able to outpace the market by 1 to 200 basis points is absolutely driven by the positive synergies that we were able to unlock following the ATMI acquisition.
I believe we would be in a position to do exactly the same as we combine Versum and Entegris. And that's once again, why we're excited by this combination.
Okay, great. And my follow-up is that I'm not familiar with the Versooms as the Liberty system business. So do you think there will be any dis synergies now that you will be competing with some of your customers, or do you think it's an area that you can grow more aggressively as a combined company?
This is something that we'll be very focused on. This is an industry that is the small industry. We have many, many situations where the same company can be a supplier can be a customer and can be a competitor. And we have done a great job as an industry, as an ecosystem, to find different rules of engagements depending on those various situations. I think that our customers really just want to work with the best.
And we'll actually make sure that we can collectively create the conditions where we can harmoniously collaborate and compete. So I don't I don't think I I'm not overly concerned, about those situations.
Great. Maybe I can squeeze 1 in. For students directly have spent quite a bit less on OpEx as a percentage of sales in Entegris. I'm curious if you think you will be reinvesting some of the cost synergies that you mentioned into into the business.
Well, we're reinvesting on Indeed. We, made that clear. We really want this platform to be the leading innovator in the industry We don't expect to have to reinvest meaningfully in SG And A. I believe that the reason why versus was able to have a lower SG and A structured in us was inherent to their business. And, we certainly will not be adding additional cost to support those business lines.
Our next question comes from the line of Amanda Scanati of Citi.
Good morning. Can you just talk a little bit about the overarching driver for the for the merger? Was it coming down from customers who wanted to see more product offerings from your Integra server soon? Was it the, synergies that are going to be recognized kind of drive EPS growth? Or was it something else entirely that drove the merger idea?
I think it was the simple answer is that we've we've known Versum for a long time. And, we've been tracking their performance and we've been very impressed with their performance ever seen this panel from air products. I think that, respect is mature. And we really felt that there could be significant value to be created by combining those two platforms. And that's really what has been driving yearly, days discussion.
And the more we've been discussing the possibilities behind this combination, the more we've been excited about the future prospects for the combined company. That led us very naturally to discussing the terms of a merger of equals.
And then just, you know, talk
a little bit more about cash. I know you've mentioned this a little bit already, but how do you look at, you know, cash going forward? You know, is there a continued priority to pay down debt, is it refinancing shares? Is it looking at additional acquisitions going forward or investing back into the combined business?
So between now and close, Both companies will most likely keep doing what they've been doing. For us, it means that we intend to continue to pay our dividend. For instance, In terms of the capital allocation choices that we will be making following the close, it's just too early for us to discuss that. So stay tuned. We will provide a lot more details after the close.
Our next question comes from the line of Christian Schwab of Craig Hallum Capital.
Hey, good morning guys. Congrats. Can you give us I know you said predominantly unit driven on a combined basis, but can you give us a rough percentage of the combined business that's unit driven?
Yes. So I think it would be about 30% CapEx, 70% unit driven. We're fine to use those numbers after closing.
Yeah. That's in the ballpark. Thank you, Vikram. On a combined basis,
in line with some of
the similar questions I've already been asked, but how much cash is actually needed, you know, on a combined basis, to, to, to run the company?
I would estimate that to be around $200,000,000. Okay. Perfect. It's just a very rough estimate. We'll provide a lot more clarity into time, which really means after closing.
Perfect. And I'm not familiar with Versa. What percentage of their cash is domestic?
I probably would have to get back
to you with a precise number, but about half. Yes.
All right. Perfect. And then lastly, I it wasn't clear to me which regulatory approvals are needed for this transaction?
This is obviously a topic of discussion right now with our legal advisors. But we would expect to file in all of our major markets.
No other questions. Thanks. Thank you.
Our next question comes from the line of Mike Harrison of Seaport Global Securities.
Good morning. This is Jacob on for Mike. Congratulations on the merger.
Thank you.
So my my question, looking at the percentage split, of the ownership, Entegriset 52a half, pursuing that 47a half, not not being critical of those numbers, but just sort of how how did you arrive at that split and sort of the the negotiation process maybe a a little look into that.
Right. So once we agreed on the principle of the merger of equals, then the next question was really around trying to find a fair and adequate exchange ratio. And as you know, there's a fair amount of volatility in our respective stocks. So we had to look back over different time series. And if you look at, 90 days out, you look at 180 days or so, you know, you get to that exchange ratio of 1.12.
And that's how we got collectively comfortable that it was the right exchange ratio for this transaction, consistent with the terms and the desire to have a modular fee code structure.
Alright. Alright. Fair enough. And then, just curious Guillermo. I didn't hear what, what your plans are for the combined company.
So sort of what what you and George are planning on working at?
You know, I think it's very simple. We just announced this, we're totally committed. This is the the the right deal strategically. I think you've heard all all the reasons why. We're just focusing on executing, to close.
There's a lot of exciting projects, for us. It's, you know, that we wanna make sure that we maintain momentum. This is part of what, what, the future is about. So it's about continuing doing what we're doing.
Alright. Thank you.
And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Chris Kapsch of Loop Capital Markets.
Good morning and congratulations. I had a couple of questions. One was, and I apologize. I'm at the office, so if you touched on this, but just the cash, out required for both the transactional transaction expenses as well as the cash required to get after the $75,000,000 in synergies. And the timing on the ladder?
Yeah. So, Greg, do you
wanna Chris, I would I would say we'll be better prepared to comment on that in the coming weeks. We, you know, sort through some of our retention related issues and those type of things. Okay. Fair enough. And then, you know, more broadly, the the, you know, this, this consolidation is not at all inconsistent with strategic narrative from both companies.
And, you know, clearly, what we've seen over the last several years is a a wave of consolidation amongst your customer base in the semiconductor industry. And you guys have talked about the need for you know, suppliers to also have greater scale to address the needs of those consolidating customers. So so seems like, a natural sort of fit, obviously, as you guys have described. I guess the question is, is as your customers are bigger and needing more sophisticated, more innovative and larger, more reliable quality cut suppliers like like both companies are, is there an opportunity from that standpoint to, to, gain market share with the industry leaders at the customer base
Chris, I think you
answered your own question. Absolutely.
I think that we believe that combining this platform will number 1 help us grow our SAM because of the greater maturity of intensity that, you're well aware of because of all of the opportunities around the need for greater, purity requiring more filters and and and better filters. But but again, as I said many times before, the capabilities of this platform would be absolutely unique. And as a result, I believe we will be in a great position to gain market share as well. So I, that's again, that's why we're excited about this combination.
And then just one other follow-up. I think I remember specifically from a one on one meeting that the the overlap was described as call it 15% of the combined portfolio. But I think that 15% was just more in applications where you overlap as opposed to competing. Is that a right characterization? If you could provide any color on sort of that sliver of where you do sort of overlap, if you will.
Thank you. And congrats.
Yes, Chris.
That's the right characterization. I mean, the we we they are very, very limited areas where there is direct competition between the two companies. And that's really what led me to characterize this combination as highly complementary, and it's probably one of the most complimentary combination that could be had in this space.
Okay. Thank you very much and good luck as you progress here. Thanks.
So thank you all for joining us today. I think it is clear, and we are all very enthusiastic about what our two companies can do together. And we look forward to speaking with you some more into coming weeks.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.