Good day, everyone, and welcome to the Entegris Investors Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Steve Kintour, Vice President of Corporate Relations. Please go ahead, sir.
Thank you. Good morning, everyone, and thank you all for joining our call today. Yesterday, we announced an agreement to acquire SAES, Pure Gas, You can access a copy of the press release on our website. 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. And you can find a reconciliation table in today's press release, as well as on our website. On the call today are Bertrand La President and CEO and Greg Graves, Chief Financial Officer. Bertrand will now begin the call. Bertrand?
Thank you, Steve.
This is a very exciting day for both Integrys and SAES Pure Gas. Together, we are creating the most compelling platform of high 1st, it addresses the rapidly growing market need for ever greater purity in the Semiconductor Industry. 2nd, it expands our microcontamination controlled business and complements our current offering to enable us to provide end to end gas purification solutions. 3rd, it is an accretive acquisition of an established profitable business with a strong cash flow business model that will leverage Integrys's operating platform and sales channels. Finally, it creates significant shareholder value through the effective deployment of cash on the balance sheet consistent with our stated capital allocation framework.
Under the agreement, Entegris will acquire SAES Pure Gas in an all cash transaction funded by cash on our balance sheet for a total value of approximately $355,000,000. We expect the transaction will close late in second quarter of 2018, subject to customary closing conditions including the completion of internal reorganization of the SAES Gathers U. S. Legal entities. The HSR waiting period has expired.
SAES Pure Gas is currently owned by an Italian parent company and has a 25 year track record of leadership in providing mission critical, high purity, high flow rate gas purification solutions. Approximately 75% of their sales are used in semiconductor applications with the balance used in closed adjacencies such as LED and flat panel display. We are excited with the fit Says Pure Gas has with our value proposition and the breadth of our portfolio, which encompasses materials the ability to purify them and the means to keep them pure throughout the supply chain. Integris is ideally positioned at the intersection of the need for new material and increasing purity requirements. The breadth of our expertise, combined with the strength of our customer relationships and the focus on operational excellence, expanding our sand and are creating the integrase specific opportunities that are driving our ability to outperform our markets.
Jurification capabilities play an increasingly critical role in semiconductor Manufacturing. For advanced memory and advanced logic devices, purity requirements are becoming more stringent, and fabs are requiring greater control of molecular level contamination to achieve their targeted yields. These needs are also coinciding with more device layers and more process steps, which are leading to greater consumption of critical process gases. This challenge of gas purity requires a suite of solutions deployed at different points in the gas supply chain and extends across a number of critical process gases such as nitrogen, argon, oxygen, and helium. Sales Pure Gas, which will now report into the microcontamination control division, adds a portfolio of large bulk gas purification systems, which are complementary to our existing set of filtration and purification products.
Combined, Entegris will be able to provide end to end gas purity from the bulk gas container outside the fab for dry processes as the value proposition Finally, we are very excited to add The share of passion for solving very complex process challenges and for exceeding customers' expectations. Together, we will create unparalleled value for our customers as we solve emerging gas purification challenges in the industry. In closing, before turning to Greg, I will add that this transaction will create significant shareholder value and exemplifies the disciplined execution of our balanced capital allocation strategy. As we have discussed before, the use of our balance sheet to fund acquisitions of quality businesses can significantly add to our future cash flow and deliver meaningful expansion of our earnings power. I will now turn the call over to Greg Graves.
Thank you, Bertrand. This transaction provides multiple value creation opportunities financially teachically. We have a team with considerable experience in successfully integrating businesses to guide us through the process which gives us confidence in our ability to realize SACE Pure Gas reported revenue of $91,000,000 and an EBITDA margin of 36% in 2017, and is on track to achieve a record adding $0.08 to $0.10 in the second half of twenty eighteen and $0.17 to $0.20 in 2019 and beyond. We expect to realize approximately 5,000,000 to eliminating redundant high level management and some back end functions and $4,000,000 relates to facilities and supply chain rationalization. We would expect to have the synergies in place by the end of 2019.
The transaction was completed on a negotiated basis. The $355,000,000 purchase price represents a 9 times multiple of 2017 EBITDA on a fully synergized basis. We expect to record charges relating to the integration expense primarily related to IT and severance costs. Following the completion of this transaction expect to have approximately $200,000,000 of cash on the balance sheet, of which approximately $30,000,000 will be in the Given our ability to repatriate additional we are very comfortable with our cash position to run the business. Since this is being funded by cash on hand, our total outstanding debt of $650,000,000 will While our $25,000,000 of long term debt in order to rebuild US liquidity.
We affirm our annual 2018 guidance for organic growth in excess of 10%. Including anticipated revenues for SAES Pure Gas of approximately 50 to $55,000,000 for the second half of twenty eighteen, we would expect total Entegris reported revenues this year to be in excess of $1,525,000,000 or up in excess of 13.5 percent on an as reported basis. Given the earnings and cash flow potential, this is an investment that is clearly attractive from a shareholder perspective. With that, operator
And we'll take our first question from Toshiya Toshiya Hari from Goldman Sachs.
Hi, good morning and, congrats on the deal, guys. Bertrand, how big is the SAM that says, addresses in this business And more importantly, can you talk a little bit about the growth profile of the business? Is it more tied to what you guys would describe as CapEx driven or is it more wafer start driven and sort of related to that, what percentage of the business would you consider to be recurring in nature?
Hi, Toshiya. Thank you for the comments. So think about the Sam as probably a quarter of a $1,000,000,000. Roughly for the ton for products that says pure gas has been developing and selling This is actually a very, attractive business, a business that has grown significantly in excess of the underlying industry for the last 4 years. To put that in perspective, the industry CapEx the last 4 years has grown at about 12%.
For reference, our own integrates gas microcontamination grew 14%. So essentially 200 basis points over the industry over that same period. And, over that 4 year period, the SAES Pure Gas business grew in excess of 20%. So why is that? Well, as you would expect, this business benefits from the increased capital intensity benefits from the need for greater purity for bulk gases And of course, also benefits from the introduction of more process steps, which drives increased consumption in process gases.
And of course, we expect all of those positive trends to remain intact for the years to come. So that's another way to say that we expect Says Pure Gas platform to continue to outperform the industry for the years to come. In terms of the last part of your question, how much is recurring, how much is CapEx? I mean, it's really primarily CapEx driven. I mean, a lot of those systems are installed at the time new fabs are being built.
And those systems are used in both semiconductor, but also LED and display types of facilities.
Great. And as a quick follow-up, I was hoping you could comment a little bit on the competitive landscape. What sort of market share do they have today And, how are they and more importantly, how are they different? What's sort of the differentiating factor vis a vis their competition? Thank you.
So Toshiya, typically, if you think about where integrys has been playing, we've been really focusing our efforts to tool based applications or closer to the process chamber, while SACE has been really focusing their attention to facility based solutions or larger flow rates, larger volumes, larger equipments, together, combined we should be having between 50% 60% market share across all of those applications.
Thank you.
And we'll take our next question from Stifel.
Thank you very much and congrats on the deal. Bertrand, can you just give a little more color in terms of how your gases products complement yours. I know they're on the bulk gas side of things. And I think based on the presentation on the facility fab level, I guess what's the increase in capital intensity needs on that front, given that you do a lot of the purification on the process side of things and on the up fab level?
So the way to think about the complementarity of the platform is twofold. One is we are, in fact, gaining access to a high flow rate platform. And again, to put that in context, think about, sales pure gas being able to handle flow rates that can be anywhere. 3 to 10 times higher than what Entegris has been traditionally able to do. And again, it's simply because we have been focusing on tool based solutions as opposed to their focus being facility facilities overall.
The other level of complementarity would be, expanding the array of gases that we would be able to purify. They, with the nature of their product and the nature of their technology, the fact that they have some, getter technology included into the system, they've been able to provide solutions for Oregon, Elium and some other gases that, Entegris was not able to purify in the past. So again, a very, very nice natural extension of our product lines.
And we'll take our next question from Sidney Ho from Deutsche Bank.
Thanks for taking my question and congrats on the deal. How should we think about the revenue synergies going forward? I can see that their exposure to China, it's a lot higher than yours. And I'm guessing the customer said it may be quite different. How much revenue synergies are you assuming in your EPS accretion guidance?
So the assumptions for revenue synergies are relatively modest in the short term. Midterm, I think that there will be opportunities for us to cross sell. Most specifically, we should be in a position to leverage the relationships and the platform of sales with facility management to be in a position to better penetrate the high flow gas filters, opportunities around the sub fab gas lines. But that's I would say a 2 to 3 year horizon.
Okay. Maybe just I think your EPS accretion guidance it would imply that the operating margin. So that is about 25% to 30% in the second half of this year. And that will be a little bit lower than the operating margin target for your organic MC business. Am I missing something in that math?
Maybe I should be assume a lower revenue run rate than the first quarter. And if true, how should we think about your target operating margin for the MC business as a whole going forward?
So I'll take those in reverse order. First of all, When we think about our MC business overall, by the time we achieve full synergies in this business, we would expect the operating margins to be consistent with the current targets that we've set out for the MC business. As it relates to, the accretion numbers, if you were to think about it mathematically. If you look at kind of the 1st quarter run rate for the business and were to take for EBITDA and were to take some depreciation off that, you would come up with kind of a $0.21 accretion run rate, which is sort of the high end of the range that we provided for 2019. So you're correct in that we're not looking for additional acceleration in the business as we move forward.
And then the lower end of that accretion guidance that was laid out for 2019. We don't anticipate weakness in the capital environment, but in the event the bears were correct and there was some softness in the capital environment. That's reflected in the lower end of our guidance for next year.
Okay, very helpful. Congrats again. Thanks.
And we'll take our next question from Edwin Mokes from Needham And Company.
Great. Thanks for taking my question. First, on the deal itself, why you say you decided to sell off 40 percent of this business, the company? And was it a competitive process in terms of bidding for
this business?
It was a negotiated transaction, Edwin.
I see. So you guys, I think Okay.
It was not a competitive process. This is a transaction that you could argue we've been working on for 10 years.
Right? And this is a business that we've known for decades and, we've had always had a tremendous respect for the quality of the business, the quality of the technology, the quality of the management team. Think of it as really a beachfront property, the type of property that you have always dreamt of owning, they don't come the market very often when they do, you really want to be quick and deliberate. The flexibility that we have on the balance sheet did put us in a position to be, just that quick and deliberate. And we are very, very excited to have sales in our portfolio.
Great. That's helpful. And then, Greg, if I do the math correctly, in the first quarter, the EBITDA margins sort of 30% rather than 36%. Has something changed there or is it just Epic or you can kind of walk through wide test case?
Yes. I mean, essentially the margin in Q1 was lower than last year as a function of product mix. The margins on point of use, purification are modestly higher than the margins are on bulk purification.
I see. Okay, great. That's helpful color. And then lastly, just on the competitive position, they're trying to if you said the market is around a quarter of a $1,000,000,000 and say just close to $100,000,000, is it fair to describe them as the market leader in this space in as they as you fold this business within your portfolio, do you see room to gain further share in this space given your broad reach in the marketplace?
So you're correct that they are the market leader in terms of high flow rate gas purification systems. We believe that there will be a lot of, technology synergies available to us as we bring together those platforms And as a result, I would expect us to be in a position to continue to gain share collectively as we leverage that broader set of capabilities.
Great. That's all I have. Thank you.
We'll take our next question from Chris Kopech from Loop Capital Markets.
Good morning and congrats on the transaction. Had a question about the notion that the industry's increasing purification needs or driving growth for the solutions for this company. Is that a phenomenon that's happening just at the leading edge technology nodes? Or are you seeing similar to what you're seeing in some of your existing businesses that there's increased demand for these requirements at some of the legacy nodes as well?
It's a great question, Chris, and we are seeing actually both. The thesis that we've been developing for our, wet solutions that thesis is very similar for dry processes as well. And that's one of the reasons why we felt we needed to move into bulk purification business because increasingly the bulk gases are subject to those more stringent requirements in terms of purity. And we were not equipped internally to do that.
Got it. And then just curious also about the visibility you have with the with their order backlog. How, how much visibility you have looking forward? And can you extrapolate what the business might do say in 2019 based on that order backlog relative to what say WFE index might look like?
I won't go there, Chris. I would only leave you with the thought that we think that this is a very exciting business, very healthy business. With a very solid pipeline of opportunities. Okay. And then if I
could just follow-up on the top line synergy question that came up. I understand leveraging each other's sales channels to cross sell. That makes sense. Just wondering if there's also and I understand this wouldn't be something that happens overnight, but opportunities from a systems solution approach where you can, adopt, you can migrate your technology into their systems or vice versa, I guess, Are there I don't want to say bundled solutions, but top line synergies from that holistic solutions standpoint as well?
I'll take the first part of that, Chris, and then I'll let's ask Bertrand to take the second part. Just as we the revenue synergy question that was previously asked, I want to clarify, we do not have any meaningful revenue synergies. In fact, we don't have any revenue synergies in our model when we talk about accretion and where this business might go. I think Bertrand gave an example of where we may have some, and then I'll let him talk about the broader second half of your question. But to say that, I mean,
if you look at, the time it has taken us to core optimized solutions between the former ATMI platform and the Integris platform and how long it has taken our customers to evaluate to qualify and ultimately to adopt those system solutions, those co optimized solutions. I mean, it's taken essentially 4 years. So in that context, we really don't want to be talking about any specific positive synergies on the top line, but needless to say, our teams of technologies will be working very, very closely to really create the most value possible for our customers And I would really expect frankly to see some of those positive synergies emerge and be realized at some of the future nodes, let's say, 300 meter, for instance, I think that would be a realistic time frame for us to get the full benefit of,
Fair enough. And thanks and congrats again.
Thank you.
And we'll take our next question from Mike Harrison from Seaport Global Securities.
Hi, good morning.
I wanted to go back to the question about the recurring revenue component of this business. Can you just talk a little bit about the business model I know you mentioned in the slide deck there that there are 4000 bulk purifiers installed worldwide. So So is it a situation where you essentially sell the bulk purifier? And maybe there's some service ongoing? Or are there sort of filters that need to be changed out and there is some recurring component?
So for the point of use purifiers, those purifiers needs to be regenerated. So there is a service component and service opportunity there. This is something that we will be keenly assessing going forward and see if there is an opportunity to do more there. And once we have a little bit more specifics around that, we'll talk about it. But as of right now, that was the answer to the previous question, the service component is a very small portion of the revenue for
I think you noted in the slide deck or in the 1 pie chart that industrial gas manufacturers are among your customers. Can you just talk about how the safe capabilities, compared to what some of those gas suppliers can do internally in terms of their own purification capabilities?
Yes, good question. Actually, the gas suppliers would be turning to companies like SAES Pure Gas to purify their bulk gases. They don't have to the best of my knowledge. They don't have internal capabilities to do that. So typically, those gas, large gas purification systems are built into the new fabs.
And that's really the effort collaboration, close collaboration between, the fab facility teams, the equipment makers and the bulk gas providers. So very, very similar to the business model that we have an integrase across a number of chemistries. It's about collaborating throughout the ecosystem.
So you do have agreements or relationships in place with the major industrial gas suppliers then?
Space Pure Gas has those relations, yes.
And we'll take our next question from Weston Twigg from KeyBanc.
Hi, thanks for taking my question. I just wanted to clarify first on 2019 earnings accretion, the $0.17 to $0.20. I think that includes the cost synergies, but you said the synergies wouldn't necessarily be in place until the end of 2019. So just wonder if you could clarify if that's a full year number with synergies or if that phases in throughout the year or how that works?
That includes some portion of synergies, but they do phase in throughout the year was, yes.
Okay. And then the other question I had is just on the competitive differentiation. Both purification doesn't on the surface sound that challenging. So I didn't know if you could help us understand what the, I don't know, competitive differentiation of, say, pure gases or how potentially competitive the market can be, what the various entry are, something like that?
I think the retention, capabilities, the flow rate, the ability to customize the systems to the individual facility needs. I think are all very real competitive advantages and as well as the relationships with the pulp gas manufacturers.
Okay. So part of the differentiation is just the fact that they've been in business. They know how to build and create and manage these projects and have a reputation for
Correct.
And we'll take our next question from Toshiya Hari from Goldman Sachs.
For taking my follow-up. I had a 2 part question on M and A going forward. I know you guys just literally announced this deal and it's probably a little bit early to talk about future M and A, but Bertrand, this is a fairly sizable deal for Entegris. So curious should we expect you to sort of stay put and remain on the sidelines in terms of M and A for a little while? Or is the appetite still there?
And secondly, this is probably a little bit more for Greg. On a net leverage basis, obviously, your balance sheet leverage goes up a little bit with this deal. Can you remind us what sort of leverage you're willing to take on, to the extent you guys are still active on the M and A front? Thank you.
I'll take the first part and then turn to Greg for the second part. But we have very clearly stated, that M and A will be a very important component of our capital allocation strategy. This is an initiative and an effort that we are very focused on internally. And this transaction is a great example of the types of acquisitions you should expect us to do. So high quality businesses, very complimentary, very synergistic with what we do.
And acquisitions that will create tremendous value both for our customers as well as for our investors. So no absolutely, very focused going forward on acquisition.
And the follow-up on the leverage question, you're exactly right. I'm going to just take doesn't do anything to our gross leverage, which is still kind of in that 1.5 range. It takes our net leverage up to something in one area. As we think about it, for if we were to do large scale M and A, think about a max leverage in that sort of 3.75 gross basis.
For the framework that we presented and reduced during our recent Analyst Day is what you should be using for reference.
Great. Thank you so much.
And there are no further questions I'd like to turn the call over back to Bertran Loy.
Thank you again for joining the call. As I stated, several times, we are very excited about our announcement today and what this means for our customers, our employees and our investors. We look forward to working with the SAES Pure Gas team to complete this transaction. And with that, I want to thank you, and have a great day.
That concludes today's conference.