Good day, everyone, 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 Bill Seymour, Vice President of Corporate Relations. Please go ahead, sir.
Thank you. Good morning, everyone, 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. 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, Chief Financial Officer. Bertrand will now begin the call. Bertrand?
Thank you, Steve. This is a very exciting day for both Entegris and SAES Pure Gas. Together, we are creating the most compelling platform of high pure gas purification solutions. This combination will provide unique value for our customers and investors. First, it addresses the rapidly growing market need for ever-greater purity in the semiconductor industry. Second, it expands our microcontamination control business and complements our current offering to enable us to provide end-to-end gas purification solutions. Third, it is an accretive acquisition of an established, profitable business with a strong cash flow business model that will leverage Entegris' 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 million. We expect the transaction will close late in the second quarter of 2018, subject to customary closing conditions, including the completion of internal reorganization of the SAES Getters 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 close adjacencies such as LED and flat panel display.
We are excited with the fit SAES 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. Entegris 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, are expanding our SAM and are creating the Entegris-specific opportunities that are driving our ability to outperform our markets. Purification 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. SAES 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 all the way to the wafer. In essence, we will be providing the same value proposition for dry processes as the value proposition we have been providing for wet processes.
Finally, we are very excited to add the talented SAES Pure Gas team to our platform. They share our 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 and strategically. 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 the benefits of this transaction quickly. In 2017, SAES Pure Gas reported revenue of $91 million and an EBITDA margin of 36% in 2017 and is on track to achieve a record year in 2018. The transaction is expected to be accretive to non-GAAP EPS, adding $0.08-$0.10 in the second half of 2018, and $0.17-$0.20 in 2019 and beyond. We expect to realize approximately $5 million of total cost synergies, of which approximately $1 million relates to eliminating redundant high-level management and some back-end functions, and $4 million 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 million purchase price represents a nine times multiple of 2017 EBITDA on a fully synergized basis. We expect to record charges relating to the integration expense of $3 million over the next four to six quarters, primarily related to IT and severance costs. Following the completion of this transaction, we expect to have approximately $200 million of cash on the balance sheet, of which approximately $30 million will be in the U.S. Given our ability to repatriate additional cash from offshore, combined with our strong cash flow and unused ABL, 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 million will be unaffected by the transaction.
While our quarterly dividend and share buyback programs will be unchanged, we intend to suspend our voluntary quarterly cadence of repaying $25 million of long-term debt in order to rebuild U.S. liquidity. We affirm our annual 2018 guidance for organic growth in excess of 10%. Including anticipated revenues for SAES Pure Gas of approximately $50 million to $55 million for the second half of 2018, we would expect total Entegris-reported revenues this year to be in excess of $1. 525 billion, or up in excess of 13.5% 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, we'll now take a few questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. Make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll take our first question from Toshiya Hari from Goldman Sachs.
Hi, good morning, congrats on the deal, guys. Bertrand, how big is the SAM that SAES addresses in this business? 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? 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. Think about the SAM as probably a quarter of a billion dollars, roughly, for the type of products that SAES 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 four years. To put that in perspective, the industry CapEx over the last four years has grown at about 12%. For reference, our own Entegris gas microcontamination grew 14%, essentially 200 basis points over the industry over that same period. Over that four-year period, the SAES Pure Gas business grew in excess of 20%. 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. 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 SAES 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? It's really primarily CapEx driven. A lot of those systems are installed at the time new fabs are being built. Those systems are used in both semiconductor, but also LED and display types of facilities.
Great. 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 more importantly, how are they different? What's sort of the differentiating factor vis-a-vis their competition? Thank you.
Toshi, typically, if you think about where Entegris has been playing, we've been really focusing our efforts to tool-based applications, closer to the process chamber. While SAES has been really focusing their attention to facility-based solutions. 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.
We'll take our next question from Patrick Ho from Stifel.
Thank you very much, congrats on the deal. Bertrand, can you just give a little more color in terms of how Pure Gas's products complement yours? I know they're on the bulk gas side of things, I think based on the presentation on the facility fab level, I guess, what's the increasing capital intensity needs on that front, given that you do a lot of the purification on the process side of things, and on the sub-fab level?
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. Again, to put that in context, think about SAES Pure Gas being able to handle flow rates that can be anywhere three to 10 times higher than what Entegris has been traditionally able to do. Again, it's simply because we have been focusing on tool-based solutions as opposed to their focus being facilities overall. The other level of complementarity will be expanding the array of gases that we would be able to purify. With the nature of their product and the nature of their technology, the fact that they have some getter technology included into their system, they've been able to provide solutions for argon, helium, and some other gases that Entegris was not able to purify in the past.
Again, a very, very nice natural extension of our product lines.
Great. Thank you very much.
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 is a lot higher than yours, and I'm guessing the customer set is maybe quite different. How much revenue synergies are you assuming in your EPS accretion guidance?
The assumptions for revenue synergies are relatively modest in the short term. Midterm, there will be opportunities for us to cross-sell. More specifically, we should be in a position to leverage the relationships and the platform of SAES with facility management to be in a position to better penetrate the high flow gas filters opportunities around the sub-fab gas lines. That's, I would say, a 2 to 3-year horizon.
Okay. Maybe just if I take your EPS accretion guidance, it would imply that the operating margin for them is about 25%-30% in the second half this year, and that would 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 assume a lower revenue run rate than the first quarter. If true, how should we think about your target operating margin for the MC business as a whole going forward? Thanks.
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 just think about it mathematically, if you look at the first 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 a $0.21 accretion run rate, which is sort of the high end of the range that we provided for 2019. You're correct in that we're not looking for additional acceleration in the business as we move forward.
The lower end of that accretion guidance that we laid out for 2019, we don't anticipate weakness in the capital environment. In the event that 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.
Thank you.
We'll take our next question from Edwin Mok from Needham & Company.
Great. Thanks for taking my question. First of all, on the deal itself, why has SAES decided to sell off 40% of its business, the company, and was it a competitive process in terms of bidding for this business?
It was a negotiated transaction, Edwin.
I see. You guys I see. Okay.
It was not a competitive process. This is a transaction that you could argue we've been working on for 10 years.
Right. This is a business that we've known for decades, and we've 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, and the type of property that you've always dreamt of owning. They don't come to 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. We are very excited to have SAES in our portfolio.
Great. That's helpful. Greg, if I'm doing the math correctly, in the first quarter, the EBITDA margin is closer to 30% rather than 36%. Has something changed there, or it's just ethic? If you can walk through why that's the case.
Yeah. 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, then. Lastly, just on the competitive position, If you said their market is around a quarter of a billion dollars and SAES at close to $100 million, is it fair to describe them as the market leader in this space? 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?
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. 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 Kapsch from Loop Capital Markets.
Good morning. Congrats on the transaction. Had a question about the notion that the industry's increasing purification needs are 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. That's one of the reasons why we felt we needed to move into this bulk purification business, because increasingly, the bulk gases are subject to those more stringent requirements in terms of purity. We were not equipped internally to do that.
Got it. Then, just curious also about the visibility you have with their order backlog. How much visibility do you have looking forward, and can you extrapolate what the business might do, say, in 2019, based on that order backlog relative to what a 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. 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 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 solution standpoint as well?
I'll take the first part of that, Chris, then I'll let Bertrand take the second part. 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, then I'll let him talk about the broader second half of your question.
To say that, if you look at the time it has taken us to co-optimize solutions between the former ATMI platform and the Entegris platform, and how long it has taken our customers to evaluate, to qualify, and ultimately to adopt those system solutions, those co-optimized solutions. It's taken essentially four years. 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 technologists will be working very closely to really create the most value possible for our customers. 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, 3 nm, for instance. I think that would be a realistic timeframe for us to get the full benefit of the technology synergies that you're calling for.
Fair enough. Thanks, and congrats again.
Thank you.
As a reminder, that is star one to ask a question. We'll take our next question from Mike Harrison from Seaport Global Securities.
Hi, good morning.
Morning.
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 4,000 bulk purifiers installed worldwide. 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?
For the point of use, those purifiers needs to be regenerated. 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. Once we have a little bit more specifics around that, we'll talk about it. As of right now, that was the answer to the previous question. The service component is a very small portion of the revenue for that business.
All right. Then in terms of, I think you noted in the slide deck or in the one pie chart that industrial gas manufacturers are among your customers. Can you just talk about how the SAES capabilities compare to what some of those gas suppliers can do internally in terms of their own purification capabilities?
That's a good question. Actually, the gas suppliers will be turning to companies like SAES Pure Gas to purify their bulk gases. To the best of my knowledge, they don't have internal capabilities to do that. Typically, those large gas purification systems are built into the new fabs, that's really the effort of a close collaboration between the fab facility teams, the equipment makers, and the bulk gas providers. Very similar to the business model that we have in Entegris across a number of chemistries. It's about collaborating throughout the ecosystem.
You do have agreements or relationships in place with the major industrial gas suppliers then?
SAES Pure Gas has those relations, yes.
Okay. Thank you very much.
We'll take our next question from Weston Twigg from KeyBank.
Hi. Thanks for taking my question. I just wanted to clarify first on 2019 earnings accretion, the $0.17-$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. Just wondering 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 the synergies, but they do phase in throughout the year, Wes. Yes.
Okay. The other question I had is just on the competitive differentiation. bulk 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 SAES Pure Gas is, or how potentially competitive the market can be, what the barriers to 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. As well as the relationships with the bulk gas manufacturers.
Okay. 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 it?
Correct.
Got it. All right. Thank you.
We'll take our next question from Toshiya Hari from Goldman Sachs.
Thanks for taking my follow-up. I had a two-part question on M&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&A, but Bertrand, this is a fairly sizable deal for Entegris. Curious, should we expect you to sort of stay put and remain on the sidelines in terms of M&A for a little while, or is the appetite still there? 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&A front? Thank you.
I'll take the first part and then turn to Greg for the second part. We have very clearly stated that M&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. This transaction is a great example of the types of acquisitions you should expect us to do. High-quality businesses, very complementary, very synergistic with what we do. Acquisitions that will create tremendous value both for our customers as well as for our investors. No, absolutely, very focused and going forward on acquisition.
The follow-up on the leverage question, you're exactly right. I mean, this doesn't do anything to our gross leverage, which is still kind of in that one and a half range. It takes our net leverage up to something in the one area. As we think about it, if we were to do large-scale M&A, we think about a max leverage in that sort of three and three-quarters gross basis.
The framework that we presented and introduced during our recent analyst day is what you should be using for reference.
Great. Thank you so much.
Thank you.
There are no further questions. I'd like to turn the call over back to Bertrand 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. With that, I want to thank you and have a great day.
That concludes today's conference. Thank you for your participation. You may now disconnect.