Good day, ladies and gentlemen, and welcome to the Entegris second quarter 2018 earnings call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Steven Cantor, Vice President of Corporate Relations. Please go ahead, sir.
Good morning. Thank you all for joining our call. Earlier today, we announced the financial results for our second quarter ended June 30, 2018. You can access a copy of our press release on our website, entegris.com. 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. On this call, we will also refer to non-GAAP financial measures as defined by the SEC in Regulation 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, President and CEO, and Greg Graves, CFO. Bertrand will now begin the call. Bertrand?
Thank you, Steve. I will make some comments on our second quarter performance and on our outlook for the second half of 2018. Greg will follow with more details on our financial results. He will provide guidance for the third quarter. We'll then open the line for questions. We achieved another record top-line and bottom-line performance. During our second quarter, we grew our sales 16% year-over-year, achieving strong growth across all three divisions and outpacing our markets. We grew our profits faster than sales, growing non-GAAP EPS by 44% and adjusted EBITDA by 24%. We also completed the acquisition of SAES Pure Gas on June 25th, adding the leading provider of bulk gas purification systems to our Microcontamination Control platform. Overall, we are on track to deliver a very strong 2018, well in excess of our original targets.
The industry environment in Q2 reflected robust levels of semiconductor production as the industry's end market demand continues to broaden beyond PC and mobile devices. While these industry trends were mostly favorable, they were not uniformly positive. Growth in industrial and automotive applications did offset softer production at leading logic and foundry makers. Despite spending pushouts by some memory makers and uncertainty stemming from U.S.-China trade relations, there continues to be steady investments in new fab projects. Against these crosscurrents of demand, we continue to achieve our goal of outpacing the industry. In the second quarter, we did this by a substantial margin. Our ability to achieve this goal with consistency stems from our unique value proposition, the broad diversity of our customer base, and the breadth of our technology.
This comprehensive and unmatched set of solutions is enabling Entegris to help solve increasingly complex semiconductor manufacturing process challenges around engineered materials, as well as the purity and the handling of those chemistries and process materials. The increasing value of the Entegris platform is enabling us to expand our served available markets and grow our share across our three divisions. We saw the benefit of our unique model in the second quarter. While our leading-edge logic and foundry revenue was somewhat muted, we recorded strong demand for our filtration products, specialty gas, and specialty materials at memory and mainstream semiconductor manufacturers. Our sales to OEM customers grew sharply, reflecting demand for fluid handling and gas purification solutions related to ongoing fab build-out projects and new fab activity.
Our sales to materials company, which include chemical makers as well as wafer growers, grew double digits, reflecting strong sales for wafer shippers, high-purity containers, and filtration solutions. By geography, sales in North America grew 18%, reflecting strong demand from OEMs. Growth in Korea and Japan was 24% and 34% respectively, and was driven by memory and OEM customers. We continued to experience lower sales in Taiwan, reflecting weakness at foundry manufacturers in Q2, but increased production at mainstream fabs boosted our sales in Europe and Southeast Asia. While we were pleased with our sales performance in Q2, we are even more excited about the additional design wins and process of record nominations we continue to achieve across our portfolio.
We continue to gain market acceptance for next-generation filtration solutions, advanced deposition materials, and specialty gas solutions for N7 and N5 nodes, as well as for 9X vertical NAND applications and for EUV. In terms of the quality of our execution, we generated record cash flow and continued to grow our operating earnings faster than our revenue. Through the first half, we generated $215 million of adjusted EBITDA Or 28.7% of sales. Achieving this is enabling us to execute on our capital allocation strategy, balancing internal investments, returning cash to shareholders, and most significantly, act on highly strategic and accretive acquisitions that leverage the strength of our global platform, broad customer base, and diversified solution set.
To that end, we were very pleased to complete the acquisition of SAES Pure Gas, or SPG, at the end of June for $355 million in cash, or approximately nine times fully synergized 2017 EBITDA. SPG complements our offering of gas purification solutions and gives us the unique capability to provide complete end-to-end solutions from the point when gas enters the fab to the point where it is used in the process chamber. The need in the semiconductor industry to handle higher volumes of process gases at ever-greater purity level has been a key secular driver for SPG and has enabled it to significantly outpace the industry CapEx spending. For many years now, we've been very clear about our preference to create long-term shareholder value with the right acquisitions.
We've also been very consistent in defining our acquisition framework, including the characteristics and the price of the businesses we want to add to our platform. SPG fits this framework, as do the acquisitions of Particle Sizing Systems, or PSS, and Flex Concepts, which we completed this year. PSS adds innovative fluid sensing technologies for CMP applications, and Flex Concepts augments our emerging life sciences business with new capabilities for single-use bioprocessing bags. The addition of these businesses will not only add to our capabilities and value proposition, but we believe they will contribute to our top-line growth and will significantly add to our earnings powers this year and beyond. With our financial discipline, strong balance sheet, and focused capital deployment, we see the potential for additional high-quality acquisitions to achieve earnings per share in excess of $3 in three years.
In summary, our results in the first half put us on pace for another strong year for Entegris. Given current industry trends and demand for our solutions, we are positioned to grow approximately 16% in 2018, including the addition of the three acquisitions completed in the first half of this year. I will now turn the call to Greg for the financial detail. Greg?
Thank you, Bertrand. We're very pleased with our results for the first half of 2018. First half sales of $750 million were up 16% over the prior year, and we achieved GAAP EPS of $0.78 per share. On a non-GAAP basis, first half EPS of $0.96 increased 52% from the same period in 2017. For the second quarter, sales of $383 million grew 16% from a year ago and were up 4% from Q1. Q2 GAAP diluted earnings per share was $0.38. On a non-GAAP basis, we achieved earnings per share of $0.49, up 44% from Q2 of last year and up 4% sequentially. Our operating performance in the second quarter reflected non-GAAP gross margins of 47.7%, which compared to 47.9% in the first quarter.
The gross margin was impacted positively from higher sales volume and a one-time benefit from a $2.9 million insurance claim related to production downtime caused by a fire at our graphite facility in 2016. These tailwinds were offset by the less favorable effects from FX and sales mix than we experienced in Q1. We expect gross margin on a non-GAAP basis in Q3 to be 46%-47%, in line with normalized levels and consistent with our model inclusive of SPG. GAAP operating expenses included $5.1 million of costs related to the SPG acquisition and $1.2 million of integration expense. Including what we incurred in Q2, we expect total integration expenses from the SPG transaction to be approximately $5 million-$6 million.
With regard to SPG, we expect to realize approximately $5 million of total cost synergies, of which 60% will be in place by the end of Q1 of 2019, and the balance in place by the end of next year. Non-GAAP operating expenses in Q2 of $89.1 million were at the low end of our expectations. Excluding amortization expense of $18 million and integration-related expenses, we expect non-GAAP operating expenses to be $90 million-$92 million in the third quarter. The higher operating expenses include the addition of SPG. Non-GAAP operating margin of 24.4% increased 200 basis points from Q2 a year ago. Our GAAP tax rate of 17% was slightly better than expected and reflects a discrete tax benefit related to tax reform and an improvement in our foreign tax credit positions.
These factors also led to a better than expected Q2 non-GAAP tax rate of 16%, and our expectation for a full year non-GAAP tax rate of 19%. This suggests a tax rate of approximately 20% in Q3 and Q4. Adjusted EBITDA for the quarter was a record $109 million or 28.5% of revenue. Turning to our performance by division, Q2 sales of $134 million for Specialty Chemicals and Engineered Materials, or SCEM, grew 11% from a year ago and were up 3% from Q1. The quarterly growth was driven by strong performance in graphite coatings and formulated cleans. Adjusted operating margin for SCEM was 27.8%, up from the same period last year and up from Q1, reflecting the one-time benefit from the insurance claim I mentioned earlier. Excluding the $2.9 million benefit from the insurance claim, the SCEM adjusted operating margin would have been 25.7%, still above our targeted range.
Q2 sales of $125 million for Microcontamination Control, or MC, were up 19% from Q2 of last year and were up 5% from Q1. The growth in the quarter reflected strength in liquid filters and new purifier solutions for wet etch and clean and bulk photo applications. Adjusted operating margin for MC of 31.5% declined from last year and from Q1. The decline from Q1 was due to the negative impact of FX and higher R&D spending. We expect the MC operating margin to improve in Q3 and to be in line with our long-term target of 34%-36% by the first quarter of 2019. Q2 sales for Advanced Materials Handling, or AMH, of $124 million were up 20% from Q2 of last year and grew 5% sequentially.
The sequential sales performance primarily reflected strength in fluid handling components for new fab infrastructure projects, as well as the impact of the PSS acquisition. Adjusted operating margin for AMH of 18.6% improved from last year and declined slightly from Q1. The decrease from Q1 reflected less favorable FX trends and higher R&D spending, offset in part by more favorable product mix. The Q2 AMH operating margins are within its long-term targeted range of 18%-20%. Cash flow from operations for the quarter of $98 million grew 15% from Q2 a year ago. Free cash flow was $72 million or 19% of revenue. Our cash balance as of June 30th was $257 million, and total long-term debt was $650 million. We have no mandatory debt repayments until 2021, and we have suspended our voluntary debt repayments until we rebuild our domestic liquidity.
Uses of cash during the quarter included $355 million for the purchase of SPG and $26 million of total CapEx. The CapEx spend in Q2 is consistent with our expectations for full-year CapEx of approximately $100 million-$120 million. Consistent with our capital allocation strategy, in Q2, we used $10 million for our quarterly dividend and $10 million for stock repurchases. Turning to our outlook for Q3, we expect sales to range from $395 million-$410 million, which includes a full quarter of SPG. At these revenue levels, we expect non-GAAP EPS to be $0.46-$0.51 per share, consistent with our target model. In summary, we are pleased with our execution. We are excited about the addition of SPG. We continue to be disciplined with our capital allocation. Finally, we are excited about our prospects for the balance of 2018 and beyond. Operator, we'll now take questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press the star or asterisk key followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Once again, please press star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. Our first question today comes from Toshiya Hari of Goldman Sachs. Please go ahead.
Hi, good morning, thanks very much for taking my question. Bertrand, I guess the first one's more of a housekeeping question. SPG, what level of revenue and OpEx is embedded in your Q3 guide? Your view on accretion into 2019. I realize you literally just announced this deal, has that changed at all given some of the industry dynamics we've seen over the past couple of months?
Toshi, I can take the first part of the question, will turn to Greg for the second part of the question. As we mentioned, during our recent mini analyst day during SEMICON West, we have embedded about $50 million-$55 million of revenue coming from SPG for the second half of the year.
The OpEx related to SPG in the model is between $3 million and $4 million. With regard to your accretion question, no change to our views on that. I think we talked about $0.08-$0.10 in the current calendar year and then something, $0.16-$0.20 next year.
Okay, got it. As my follow-up, Bertrand, in your prepared remarks, you talked about some of the pushes and pulls that you saw in the quarter and probably continue to see into Q3. On the negative side, you talked about weakness in leading edge foundry and logic and some of the fab pushouts. If you can kind of elaborate on those two points, how big was the impact in Q2, and when do you see those reverting and kind of contributing positively to your financials? Is it Q4? Is it more 2019? Any additional color there would be helpful. Thank you.
Right. If you think about the industry environment that we experienced in Q2, it was very much consistent with the expectations that we had going into the quarter. What we saw was very strong level of activity in mainstream fabs and across the memory sector. We experienced continued robust CapEx in the industry, and that was offset somewhat by a more muted logic sector. We expect the trends to improve with regard to the logic segment in the back end of the year, and we certainly hope that there will be some more meaningful node transitions going into 2019 that will be providing some type of tailwind for a number of our product lines, more specifically advanced filtration and advanced materials. That's how you should think about the overall industry environment in the quarter and what we expect going forward.
The fab pushouts?
Again, I think that as it comes to what we have in mind for the full year, we expect the industry CapEx to be about 8%. Certainly a slowdown in the back end of the year. That will have some bearing on our CapEx business. That will be offset by strength in our unit-driven business, and that's really what we're trying to reflect on the overall guidance that we're providing for Q3 and the balance of the year.
Very helpful. Thank you so much.
Thank you. We now move to Patrick Ho of Stifel. Please go ahead.
Thank you very much. First off for Greg, in terms of the gross margin profile with the addition of Pure Gas, how much do you see from a gross margin perspective as that being additive on a going-forward basis?
When you talk about the margin structure of SPG, operating margins for that business are in line with our corporate average, or maybe slightly above, really in line with the kinds of operating numbers you will see in our MC business. Gross margins are slightly below the corporate average, so if you were to look at this quarter and our guidance, having SPG has approximately 30 basis point negative impact on our gross margin going forward. Like I said, positive to operating margin and slightly dilutive to gross margin.
Great. That's helpful. Maybe as a follow-up for Bertrand, in terms of the market environment, obviously there's a lot of moving pieces going on right now. A key driver for your Specialty Chemicals and Engineered Materials business is the adoption on the memory front. How do you see memory trending in the second half of the year and into 2019, given some of the pulls and pushes we're seeing both in DRAM and NAND today?
Yes, Patrick. For Entegris, both advanced DRAM and NAND continue to be a very fertile ground for served market expansion, and it has benefited all three divisions. If you think about the first half of the year, memory contributed about 40% of our revenue. That has to be compared to a contribution of just about a third of our revenue a year ago, very significant growth momentum in the memory segment of our business. We frankly expect that momentum to carry through the balance of the year, and into 2019. I also want you to remember that a lot of the new opportunities for advanced material in particular, and advanced filtration are still ahead of us. I think that there are a lot of reasons to be very, very optimistic as it comes to the memory segment for Entegris.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from Edwin Mok from Needham & Company. Please go ahead.
Hi, good morning, guys. Sorry, my line got cut off, so if someone asked this question, I apologize. Did you guys talk about how much of your revenue you expect to come from your acquisition in the second half of the year? And also, I think when you acquire SPG, you said that you expect the earnings accretion $0.08-$0.10 this year, $0.17-$0.20 next year. Are those still the targets?
I'll take the first half, Edwin, and then I will turn to Greg for the question on EPS. Maybe I can take your question in the context of the annual guidance for Entegris. We expect the annual growth rate for us to be about 16% in 2018, and there are four components behind that. The first one is the industry baseline, and we expect both MSI and CapEx to grow at about 8% this year in 2018. That's the first component. The second component is our commitment to outpace the industry by about 200 basis points. The third component is we expect to pick up some positive foreign exchange of a little bit less than a point. And then approximately 500 basis points will come from the addition of SAES and PSS this year.
That's how you should think about the impact of those two acquisitions in 2018 and how you should think about the overall annual guidance.
Great. Actually, that's extremely helpful to kind of break it down like that. Greg, any thoughts on the earnings accretion side?
Yeah, no. On the earnings accretion side, we said in 2018, $0.08-$0.10. That's embedded in our guidance. I think you said you'd gotten cut off, but we had talked on the previous question, essentially PSS, slightly dilutive to gross margin, maybe 30 basis points. Accretive to operating margin, however, higher than corporate average operating margins.
Yeah, maybe if your line was cut off, Edwin, maybe I should also add that on the top line, there's really no change to our expectations with respect to the revenue coming from SPG in the back end of the year. The expectation is about $50 million-$55 million of revenue in the back end of the year.
That's extremely helpful. I have a longer-term, high-level question on contamination. We've heard from some people saying that even in the trailing edge, we start to see increased demand for contaminations. Contamination controls, and obviously, that could be a positive trend for you guys. I guess really what I'm trying to understand is what is driving that? Historically, the leading edge customer tends to have the process qualified, and they try not to change that. Maybe they focus more on cost than actually adding more pure filtration that might drive costs up. Can you kindly talk a little bit about why the trailing edge guys actually have increased demand for contamination control?
Right. We could spend a lot of time on the topic, Edwin. I'll try to just give you a very simple answer. The first thing to remember is that purity is increasingly important to not only the yield, but really to the device performance and the device reliability. As a result, I think there is a much greater focus across the various segments of the industry, logic, memory, and even trailing edge fabs now to achieve greater levels of purity. That's the first thing that you need to keep in mind. The other thing that you need to keep in mind is to achieve those very high levels of purity, the ecosystem needs to start thinking about reaching higher levels of purity much earlier in the supply chain.
That's providing us with the opportunity to add a number of new filtration points, not just in the fab or sub-fab, but increasingly, with the bulk chemical manufacturers and even with their sub-suppliers. Think about proliferation of filtration points, and the ecosystem now being asked to use much more advanced filtration solutions than in the past. Which drives the adoption of better filters, but also increases the frequency of replacement of those filters. When you think about the growth that we've seen in micro-contamination, last year was growing at about 20%. This year, still growing at about the same pace. That's really a function of all of those trends. It's the importance of purity, and it's really the complexity to reach those very high levels of purity. Does that answer your question?
Yeah, I think that's extremely helpful. One last question, if I may, Greg. MC margin declined this quarter. I think on the prior margin slide you said that you expect it to recover in the coming quarters. Are you guys taking any specific steps around that, what drove the decline, and what objectives to-
No. I would say nothing specific in terms of any kind of restructuring actions or anything. If you think about that business, they were the largest beneficiary of the currency tailwind in Q1. That obviously didn't repeat in Q2. It's our fastest-growing business, we are investing significantly in R&D, and we saw a spike up in some project-related R&D costs in Q2 that we don't expect to repeat in Q3. As we move into Q3, like I said, we'd expect to see it improve closer to that 34-36 target and a little bit incremental improvement in Q4, and then by Q1, we should be back in that target range.
Okay, great. That's all I have. Thank you.
Thank you. We now take a question from Sidney Ho of Deutsche Bank. Please go ahead.
Thanks for taking my questions, congrats on good results in a very busy quarter and first half on the M&A front. The first question I have is on the AMH side. In Q2, it was up 5% quarter-over-quarter. That's a little better than I expected. What is driving that upside? With CapEx slowing down quite a bit, at least in the third quarter, I understand your definition of CapEx may be different than the industry standard, but how should we think about the growth in AMH in the third quarter or the second half, knowing that the first half was really strong?
Yes. Sidney, yes, indeed, 2018 is proving to be another really strong year for AMH. We are seeing a lot of action around the new fabs that are being built in many parts of the world. Lots of opportunities for our FOUP platform. That really has become the industry standard for all of the advanced fabs, and that's really what is driving the performance year to date. As we have said many times, this is a business that is tied to the industry CapEx, we would expect that business to come down a little bit in the back end of the year as a result of the expected contraction in the industry CapEx on a sequential basis. We expect overall, this division to have a record year this year.
Again, very pleased with the market share gains that we've been able to generate across a number of product lines in this division.
That's great.
The other thing I'd point out there, Sidney, is the AMH business, they are a beneficiary of-- Well, PSS is part of that business as well, and so not a huge driver because it was a relatively small acquisition, but it is a tailwind for their revenues on a year-over-year basis.
Got it. Great, thanks. My follow-up question is on the OpEx side. I'm actually quite impressed that your OpEx is up only very slightly in Q3, even though with a full quarter of SBG. I think, Greg, you mentioned $3 or $4 million, is it per quarter or second half of the year? Maybe clarify that. Is there any offset in Q3 from the organic business that drives that only marginal increase? Longer term, how should we think about OpEx beyond the Q3 level? Is it better to think about it as a percentage of revenue or a percentage of revenue growth?
Well, first of all, we're always intently focused on the SG&A spend and clearly growing that at a slower rate than sales. That's where we expect to get a portion of our operating leverage as we move forward. As you think about the balance of the year, that number that we talked about, 90 to 92 in Q3, that type of number is probably a safe number for Q4 as well. In general, like I said, we, over a long period of time, control that SG&A pretty tightly. As it relates to overall OpEx, our goal, we clearly would like to grow R&D closer to the rate of sales. We've talked about sort of an 8%-9% target on R&D spend, and we're running just under, in the most recent quarter, we were just under 8%.
Okay. Maybe if I can squeeze in one last question, this is on China. I know I asked this question only two weeks ago. Given the rising global trade tensions, and China is a rapidly growing geography for you, I was hoping you can give us a little more color as to how to assess the risk there. Say, how much revenue is coming from local Chinese manufacturers versus multinationals, how much of business sold through partnerships in China, and what portion of your sales are considered leading edge versus lagging edge there?
Sidney, I don't really have that level of detail available for this call. What I would tell you is China overall is indeed a very important market. It represents about 12% of our revenue. This is also a region where we've seen very significant growth. We are growing at about 36% year-to-date, that's coming from a couple of very strong growth years in 2016 and in 2017. We have been doing really well leveraging the strong level of investment, certainly in new fabs and new capacity, but also the very strong fab activity. We are, again, the trade tensions that you're describing are an evolving matter. We're going to stay very close to that. As of right now, we are not overly concerned.
Again, if we see risk to our business, we would be ready to take appropriate steps to try to isolate some of those risks. Again, not very concerned today. Very pleased with the momentum that we're seeing in China and frankly, the momentum that we are seeing across a number of other geographies. I think that maybe the way I would want to conclude my answer is to say that we have a really resilient business model in Entegris. I actually am very pleased with the much greater level of exposure that we've been able to gain across a number of different customer segments, but also regional markets. I think that's probably what makes Entegris very unique in this industry. We're not dependent on any given customer, we're not dependent on any given market, we're not dependent on any given customer segment.
That's great. Thank you very much.
Thank you. Ladies and gentlemen, as a reminder, to ask a question, please press star one. We now take a question from Chris [Parkinson] of Loupe Capital Markets. Please go ahead. Mr. Parkinson, your line is open.
My question focuses around the comments on the Specialty Chemicals business, I think you called out the growth there being muted a little bit, at least relative to expectations, and sounds like that had to do with softness in foundry demand in Taiwan. If you look at both, I guess, logic and foundry, key logic and foundry customers and the ramp in Taiwan and with Intel, the 7 and 10 nanometer nodes specifically, and given that it seems like you have sort of disproportionate processor record wins with those key customers, just wondering what visibility you have into those node transitions driving maybe a recovery in the magnitude of the growth for that segment. What's the timing of that? Is it something you expect in the second half, or is it, as you referred to, Bertrand, more of a 2019 phenomenon?
Chris, let me first say that I am actually very pleased with the SCEM performance so far this year. If any of my previous comment suggested something different, I apologize. That was certainly not intended. If you look at SCEM, year to date, they've been growing at about 12.5%. If you think about what we estimate wafer start growth to be year to date, it's probably in the 7%-8% range. Significantly growing faster than the market. Very pleased with the performance. Having said that, there is, I think, an upside case for SCEM, and that's really what I think we will be experiencing when a number of those large node transitions really materialize, which I would expect to be the case in 2019.
Similarly, I think the other big driver for the SCEM business will be greater levels of production at 6X and 9X vertical NAND, which I would expect to see in 2019 and 2020 and beyond. I think that the SCEM performance so far is very good, and I think it will become much stronger as we see more wafers being produced at those new nodes in Logic and those more complex architectures in memory.
That's helpful. I appreciate it. Just one follow-up to that. In terms of the transition to the vertical NAND architectures with greater number of layers, 6X, 9X you referred to, per capita, do you have greater content as those stacks get deeper? I know that just by nature of their more processing steps, all consumable players will benefit, but is there something also about that architecture that you'll get sort of an outsized benefit in terms of demand and processor record for those more complex architectures? Thanks.
You're correct in the way you're framing your question, Chris. There will be two benefits, and we refer to that as the material intensity. The first comes from just the mere addition of more process steps and more layers. More importantly for us, the opportunity is really around the introduction of a number of new materials, because those very high aspect ratio structures are calling for different thin film materials, different ways to etch those very deep and narrow structures. That, as I said, is a very fertile ground for Entegris. We are very well positioned on the technology roadmap of all of the NAND players in the world, and those opportunities will materialize in 2019 and beyond. Again, memory is a very important segment for us today, and I would expect that to continue to grow in importance tomorrow.
I limited my comments to the impact to SCEM because that was the question. I know that I don't need to go in a long narrative around similar types of opportunities as it relates to our Microcontamination Control product lines in advanced memory fabs. I think you understand that opportunity as well. Again, memory across the board and across divisions will be a very important segment for us going forward.
Thanks for the additional color.
Thank you. We now move to Amanda Scarnati of Citi. Please go ahead.
Hi, thanks for taking the question. Just jumping over to the logic side. On the 7 nanometer node transition, can you just talk about the impact to Entegris with the addition of EUV and the addition of new materials like cobalt, how that would impact your growth potential? Then on the other side of that, how, if 7 nanometer ends up being a more all-encompassing node than 10 nanometer, what the potential there is as well.
Yes, Amanda, thank you for asking. We are very well positioned on all of those advanced nodes, it's really more a question of when they will reach very high volumes. As it relates to EUV specifically, I would just say we are ready. Not only are we ready, but we are really looking forward to supporting the EUV insertions. We have developed a number of new solutions to that end. I think that over the years, we've described a few of them. If I was to name only but a few, I would say that we have been continuously improving our bulk and point of use filtration solutions for EUV resist. We have also developed a reticle pod that hopefully will become the industry standard.
I would also say that the timing of the acquisition of SAES is perfect, because there will be a lot of very large quantities of gases used around the scanner. In other words, all of those applications will create many opportunities for Entegris to increase our SAM and increase our shares.
Can you just remind us, I know you touched on this a little bit earlier, but the JVs that you have in China, can you just remind us how they're tracking towards your expectations, and if there's any surprises that you've seen with the JVs?
Yeah. Amanda, we actually have, they're really not JVs, they're more sort of contract manufacturing arrangements. We have one with regard to specialty gas. We've got a partner there who is helping us with refilling the cylinders and distributing those in China. Then we've got a partner that is manufacturing TEOS for us. Those are both part of the SCEM business. They're really supply chain plays, and they are both tracking sort of in line with our expectations.
No surprises there with IP concerns or any of the trade war concerns as well?
No. In both cases, we're not transferring any meaningful IP into China.
That's all I had. Thank you.
Thank you. We now go to Toshiya Hari of Goldman Sachs for a follow-up question.
Thanks so much for taking the follow-up. Bertrand, if I take the midpoint of your full year revenue guidance, I think the implied second half revenue is up 8%-9% when you exclude the acquisition of SPG. When you think about your CapEx-driven business and your wafer start-driven business, is it fair to say that you embed the CapEx side down year-over-year in the second half, and the wafer start-driven business is up kind of in the 10% range? Is that sort of a fair description of what you're embedding in your second half numbers?
That's exactly the way to think about it, Toshiya. When you think about the second half versus the first half, we expect CapEx to contract in a mid to high single-digit range, and we expect wafer starts to be flat to up modestly. As you said, if you look at Q3 specifically-
We expect MSI and CapEx to be in the 7%-8% range up versus last year. Our pro forma business is expected to grow at 8%-9%. Again, very much in line with that 1 to 200 basis point performance in excess of the industry.
Okay, great. Then this one is for Greg. Your tax rate's been coming in below your guidance, yet you're still kind of sticking to your 20% near term and long term tax rate guide. Is that still the right place to be, or do you think the tax rate could be coming in lower going forward? Thank you.
I took the full year rate from 2020 to 2019, much of that benefit was discrete items in Q2. If we talked about as we came out of Q1, we talked about a full year of 2020, and we're now talking about a full year of 2019. I'll be candid. With the change in the tax law and some of the variation around some of the assets and liabilities every quarter based on currency. It's becoming more and more difficult to predict the tax rate. I would say, in general, we should think about the core rate in that 19%-20% range.
Got it. Thank you.
Thank you. We'd now like to turn the call back over to Mr. Steven Cantor for any additional or closing remarks.
Before concluding, I do want to note that in August, management will be presenting at the Needham Industrial Tech Conference, the KeyBanc Growth Conference, and the Jefferies Semi conferences. If you'd like more information on those, you can email me. With that, I'd like to thank you again for joining the call, have a great day.
Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.