Good day, everyone, and welcome to Entegris' 1st 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 Steve Cantor, Vice President of Corporate Relations. Please go ahead, sir.
Thank you. Good morning, everyone, and thank you all for joining our call. Earlier today, we announced the financial results for our first quarter ended March 31, 2018. You can access a copy of our press release and slides on our website, integris.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 on our website. On the call today are Bertrand Loa, President and CEO and Greg Graves, Chief Financial Officer. Bertrand will now begin the call. Bertrand?
Thank you, Steve. I will make some comments on our first quarter performance and our outlook for the reminder of 2018. Greg will follow with more details on our financial results and provide guidance for the second quarter. The first quarter was an excellent start to the year. We grew sales year over year 16% to $367,000,000, growing faster than our markets.
We continue to get traction in a number of key new products across our portfolio and across our major customer segments. We grew our profits matched faster than our top line generating EBITDA of $106,000,000, a non GAAP EPS of $0.47. And finally, we deployed our capital consistent with Q1 reflected healthy levels of semiconductor production and ongoing new fab construction. Once again, we outperformed our markets, demonstrating the relevance of our value propositions, the importance of our diverse customer base and the resilience of our broad product portfolio. Demand from Advanced memory customers, particularly in NAND, continue to be the primary driver for our performance in the quarter.
The successful transition to 64 layer, 3 d NAND chips by all leading memory producers spur demand for our newly introduced advanced deposition materials and our filtration and purification solutions. In addition, new fab construction helped drive sales of our fluid handling solutions and wafer carriers. Our leading edge logic and foundry business was soft this quarter, in line with our expectations as our customers experienced more muted and demand for PCs and smartphones. However, demand from our mainstream logic fab customers remains strong as IoT, industrial and automotive applications continue to drive high utilization rates. This benefited our entire suite of consumable products, including process chemistries and filtration solutions.
Growth in sales to OEM customers reflected the industry's investments in new fab capacity and process technology transitions. Particularly for new advanced memory fabs. New tool shipments continue to drive demand for gas filters and gas purification systems as well as advanced coatings and photoresist dispense systems. Sales to materials companies including chemical makers and wafer growers also demonstrated positive trends and were up strongly from the prior year. We continue to expand our market opportunities for advanced filtration and ultra pure fluid containers as the chemical industry diligently works to increase the stability and the cleanliness of their chemistries during manufacturing and through transportation.
By geography, sales strength in North America reflected robust demand from OEMs and the addition of PSF, while growth in Korea and Japan was driven by memory and OEM customers. Weaker sales in Taiwan and Southeast Asia reflected muted 1st quarter foundry and data storage trends, respectively, while increased production at mainstream fabs boosted our sales in Europe. During our Analyst Day in March, we described some key long term operational goals for Integris. First, we intend to continue our track record of organically growing faster than our markets. And second, we intend to continue And this year, our strong start puts us on a path to achieve this goal once again in 2018.
Let me provide some more color around this. 1 of the fundamental drivers of our growth is the industry's intersecting needs for new materials and increasing purity requirements. These two requirements are essential to advancing the performance costs and reliability of new semiconductor devices. We are the only company that can do both. Which makes our value proposition very unique.
Having these capabilities and the breadth of technologies under one roof, is enabling us to not only develop highly differentiated solutions but also to shorten development times. As a result, we expect Turning to the bottom line, I want to praise the integrase teams for the quality of their execution this quarter. I was very pleased with a collective focus on managing our fixed costs, yield improvement initiatives and a new focus on cost optimization in new product development process. During our Analyst Day, we extended our target operating model to reflect the incremental leverage we expect to capture as we continue to grow our top line. Our strong ongoing operational execution is also enabling us deliver on our capital allocation strategy, balancing internal investments, acquisitions, debt repayment and returning cash to shareholders.
During the first quarter we deployed more than $100,000,000 in capital, which included capital investments of $21,000,000 focused on expanding our internal capabilities and capacity to support our organic growth. Debt repayment of $25,000,000 as part of our regular quarterly cadence of voluntary repayments of our term loan share repurchases and cash dividends amounting to $20,000,000 as part of our ongoing quarterly programs and $38,000,000 related to the acquisition in January of 2018 of particle sizing systems or PSS, a provider of specialized sensing and control solutions. As we discussed in last quarter's call, we are excited to add PSS unique technology to our portfolio. The integration is proceeding well, and we are tracking favorably to the EPS accretion we expect this year and next. We are all already working on additional growth opportunities for PSS by leveraging Integrys', customer relationships, quality systems and operational excellence.
In summary, the first quarter was a great start to the year and reflects the strength and resilience of our business model the diversity of our customer base, the breadth of our solution set and the quality of our teams. Including the addition of PSS, our current target is to grow our top line in excess of 10% in 2018. I will now turn the call to Greg for the financial detail. Greg? Thank you, Bertrand.
We were very pleased with our first quarter results, which reflected record levels of sales and earnings. Q1 sales $367,000,000 1% sequentially. Q1 GAAP diluted earnings per share was 0 point 40 dollars On a non GAAP basis, we achieved earnings per share of $0.47 which was above the high end of our guidance and up 68% from Q1 last year. Our operating performance in the first quarter reflect gross margins of 47.9 percent, which was up from 46.7% in the 4th quarter, reflecting continued strong execution by our manufacturing teams and higher sales volumes as well as a favorable impact from FX. We expect our gross margin in Q2 to be approximately 47%.
Slightly lower margin expectation reflects similarly strong operational execution and product mix, but without the FX benefit we had in Q1. Non GAAP operating expenses in Q1 of eighty six million dollars were at the high end of our expectations. Excluding amortization expense of $12,000,000, we expect non GAAP operating expenses to be $89,000,000 to $92,000,000 in the second quarter. The higher operating expenses include the addition of PSS increases in R&D to support our growth initiatives as well as higher variable compensation percent increased from 19.5% in Q1 a year ago and 23.4% in the 4th quarter. Our GAAP tax a favorable discrete item related to stock based compensation offset in part by discrete charge related to tax reform.
We expect the GAAP tax rate and we expect the full year rate to be approximately 20%. Lower than expected non GAAP rate was the result of the same factors that impacted the GAAP rate. Adjusted EBITDA for the quarter was a record $106,000,000 or 29 percent of revenue. Before turning to our performance by division, I do want to remind investors that the adjusted operating margins for the divisions reflect reporting changes in which divisional numbers. Q1 sales of $131,000,000 for specialty chemicals and engineered materials or SCEM grew 14% from a year ago and were up 4% from Q4.
Quarterly growth was driven by strength in specialty gases, graphite and coatings. Adjusted operating margin for SCEM was 24.1%, up from 20.2 percent last year and up slightly from Q4, reflecting higher volumes in favorable product mix. Recall that both the Q1 and historical quarterly divisional operating margins reflect the new reporting convention. Q1 sales of $119,000,000 for microcontamination control or MC were up 19% from Q1 of last year and were up 3% from Q4. The growth reflected strength in liquid filters and new purifier solutions for wet etch in clean and bulk photo applications as well as strength in gas filter products driven by strong industry tool shipments.
Adjusted operating margin for MC was 35.4%, up from 31% last year and 34% in Q4, reflecting higher volumes, favorable mix and the favorable impact of FX on gross margins. Q1 sales for Advanced Materials Handling or AMH of 118,000,000 were up 15% Q1 of last year and grew 8% sequentially. The 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 and 16.6% in Q4, reflecting the favorable FX trends, favorable product mix, and the addition of We expect the impact of cost reduction actions taken and to see AMH operating margins to be within its targeted range of 18% to 20%. Cash flow from operations for the quarter This is consistent with typical seasonal patterns as Free cash flow of $18,000,000 or 5 percent of revenue increased from $11,000,000 a year ago.
Both DSOs and inventory turns were essentially flat with Q4. As of March 31, Our cash balance was $550,000,000 of which approximately $312,000,000 was in the U. S. As a result of the new tax law, we were able to repatriate 152,000,000 of cash in Q1 and expect to repatriate additional cash during the balance At quarter end, total long term debt was $650,000,000. Uses of cash the quarter included $38,000,000 for the purchase of PSS and $21,000,000 of total CapEx.
The CapEx spend in Q1 is consistent with our expectations for the full year of approximately 100 to 120,000,000. Turning to our outlook for Q2. At these revenue levels, we expect non GAAP In summary, we are pleased with our execution We continue to be disciplined with And finally, we are excited about our prospects for 2018 and beyond. Thank
We'll take our first question from Toshiya Hari with Goldman Sachs.
Great. Thanks very much and congrats on the strong results. Bertrand, you talked a little bit about weakness in the leading edge logic and foundry business. And I think your revenue from your the sales number from Taiwan kind of reflect that. I'm guessing you're embedding a fairly muted outlook for Q2 as well.
But I'm more curious about the second half. Your biggest customer is clearly guiding the second half above the first half given seasonality and potentially a pickup in the smartphone business. And when you think about node transitions, 10 nanometer at logic and 7 nanometer, and perhaps 7 nanometer plus at your largest foundry customer should help as well. So how are you looking at the second half for the leading geologic and foundry business today?
Yes. So, Toshi, let me try to maybe break your your long question into pieces. And you're right, if you think about Taiwan first, in the first half of the year, our the first half will be a difficult comparison for us in Taiwan because remember, to your point, that last year, in early 2017, there was a major node transition taking place in Taiwan. And remember that sales of a number of our products can be lumpy when fab customers prepare for those fab transitions. And during the 1st 6 months, following a node transition.
So this is what we experienced in Q1 and Q2 of 2017 in Taiwan with record sales of hoops and filtration products. So the back end of 2017 for us is more representative of what, the revenue potential for Entegris is when when, the timing of when these market is operating under more normal business conditions and when the process have stabilized after a major ramp. So if you think of, if you look at our performance in Taiwan on a sequential basis, down 2% versus Q4. This is in line, if not slightly better than the normal seasonal trends, our Taiwanese customers. So, so we expect Q1, we expect Q2 to be relatively soft for our foundry business.
But we certainly expect, the second half of the year to be stronger in Taiwan and across our Logic segment as many of our customers are getting ready to transition to tighter notes.
Great. And then as a follow-up, I had a question on gross margins. Greg, when I look at the incremental drop through, both on a sequential basis and a year over year basis. You guys continue to deliver numbers that are north of 70%. And I appreciate the FX impact in the quarter, but, I guess I'm trying to better understand sort of the disconnect between what you guys have been telling us in terms of gross margins, I.
E. Don't expect a significant improvement going forward versus what you've been delivering over the past couple of quarters, if not the past couple of years. When I look at Q1, for example, I think the AMH business grew the fastest on a sequential basis. And my understanding was that business carries the lowest gross margins in the business. Yet, you guys did very, very well on a sequential basis.
So I guess, how big was the FX impact And how conservative are you being when you guide us, when you guide gross margins for us longer term? Thank you.
So the growth, the gross margin impact in the quarter from FX was approximately 70 to 80
basis
And when we think about the guidance going forward, I continue to believe we'll continue we will execute better and better. But I also, at the same time, have always had a view that I think the customer is not going to let us have a margin up in the 50% range. I mean, we've always said, think of peak margins in the high 40s.
Okay. So I guess the sequential drop off from Q1 to Q2, that's basically the FX benefit going away and everything else?
It's entirely the FX mean, I would expect we'd expect mix to be similar. We'd expect we continue we don't have any reason to believe we wouldn't continue to execute very well from an operational perspective. So it's entirely related to the FX.
Okay, understood. Thank you so much.
We'll take our next question from Edwin Mach with Needham And Company.
Great. Thanks for taking my question guys. So, first question, I guess, costs sticking on the financials. Looks like there's a pretty big step up in OpEx sequentially. How much of that come from PSS?
And if you can give us some color in terms of how much revenue of PSS come through in the first quarter?
So order magnitude PSS is kind of it's low single digits. In terms of revenue. I mean, we're not going to be more specific than that. From an OpEx perspective, in the $1,000,000 or $2,000,000 per quarter. I would say the other big impact on OpEx though is our increases in variable compensation as we deliver higher and higher levels of operating margin largely tied to that margin
Just fair to say that this higher level of it is how we should think about the model going forward?
I'm sorry Edwin. I didn't catch the follow-up.
Yes. Just quick follow-up on that. So it's fair to say that given that you mentioned high variable comp and you guys have quite profitable out now. So we should assume the step up in OpEx is something to stick around for this, how we should model it going forward?
As long as we're delivering it on the current profitability levels, that's true.
Okay, great. That's helpful. And then kind of on the product side, Prashant, I noticed that you mentioned on the call that, the kind of your sales through the chemicals company is up quite strongly year over year. It seems like you're making some good progress in that end. How do you guys think about that opportunity longer term?
Do you see a lot more growth out there? Is that something that you guys already have, there? Any comment you can make around that growth opportunity for the company?
Yes, Edwin, if you recall, I mean, this has been one of the market segments that we have flagged as one of the probably largest opportunities for our bug filtration products as well as our high purity packaging solutions. As you know, increasingly, the semiconductor industry is requiring their chemical suppliers to supply ever increasing levels purity, much tighter specs and quality levels. And to achieve that, those, electronic grades, chemical manufacturers will have to improve their manufacturing processes and to a great extent, it means that they will have to increase many more points of filtration in their manufacturing processes. And then they will have to migrate to much cleaner packaging solutions in order to maintain the purity levels that they have achieved in their manufacturing process all the way through the very inefficient supply chains that are very customary in our industry. So I think that this is a huge opportunity for us.
We've mentioned the opportunity around advanced resist, but that's also true for a number of electronic waste chemistries.
Okay, great. That's helpful color. And then lastly, just on Nano Memory in general, right. You mentioned that NAND has been a big driver for at least for this past quarter. Definitely, we are seeing a lot of increase in NAND production there.
Is that where you think about how that mix of your business is shifting at least on your mix with the foundry sorry, with the fab customer is shifting? From kind of logic to memory, where was it? Where is it right now? How do you kind of see that progress thing through this year or through next year? Any kind of color on that?
So we're certainly we're a big beneficiary of the transition to 64 layers in Advanced NAND, we expect to see another step increase the industry transitions to 90 plus layers down the road. And the reason for that is that again, think about those very high aspect ratio features, and think about the difficulty that the advanced memory makers have to maintain the fundamental structure of the materials in those very complex features. So we are, developing all sorts of different deposition materials with better electrical properties for those very, very thin films. We are also developing new doping materials that could actually help increased the velocity of the electrons in those very high aspect ratio, silicon channels. We are working on selective edge materials as well because you obviously need to etch those very, very, very narrow yet very deep trenches and holds.
So all sorts of new materials opportunities for us And then of course, as we mentioned, all sorts of new opportunities around purification and filtration to, help maintain the conformality of those structures. So I think that this is something that benefited greatly our business across all divisions in the first quarter, we expect those trends to continue to be beneficial throughout the year. It doesn't mean that our opportunities in advanced project is not there. But we haven't seen any meaningful no transition in advanced logic in some time. When that happens, I think that we will be able to demonstrate our exposure to advanced logic as well.
I think the key takeaway for you is that We have a very broad portfolio of products. We have a very broad portfolio of customers And to a great extent, we are agnostic to any, single device.
Great. That's all I have. Thank you.
We'll take our next question from Duffy Fischer with Barclays.
Yes, good morning. Just wanted to go back to the incremental margin, if I could. Obviously, generally, there's 3 parts that there's just improving the profitability, the ongoing sales, the way we would calculate it from the outside gets rolled up into that mix shift gets rolled into that. And then there's kind of what we think about the academic, incremental earnings, which is just how much more leverage do you get on a new dollar sales versus your existing base. So by segment, can you walk through just what that new dollar of sales should do on an incremental margin that way and then we can back calculate the rest of it?
We actually really we look at the flow through really more on a consolidated basis and we haven't gone to the level of talking about flow through on a segment basis. But if you think about, I mean, our target model is for a $0.40 flow through to the EBITDA line for each incremental dollar of revenue. Now as one of the earlier gentlemen, questioners pointed out, if you look year over year, Q1 2018, our flow through was about 57%. Correct. And on a sequential basis, it was about 48%.
We continue to hold the view though. That 40% or slightly above that is the right number over the long term.
Okay, fair enough. And then if you did that same thing, by segment, micro came in at 70% versus the other 2 at 50%. Was there something special this quarter and a year over year in microcontamination that led to that huge jump relative to the other two segments?
Would just say that that business has and we've seen it really over the last six quarters. I mean, there's significant operating leverage in that business. Of the gross margin structure.
Fair enough. Thank you, guys.
Our next question comes from Sidney Ho with Deutsche Bank.
I think you guys raised the full year revenue guidance from 8% to 10% to now I think you said above 10%. What are the changes in your the about those 2 drivers would be great. Thanks.
Right. So, you're correct, Sydney. We have increased slightly the guidance. In other words, we have kind of reaffirmed that we think we're going to be operating towards the high end of the guidance. The assumption is that MSI would be in the 6% to 7% range for the year.
We, we also expect the industry CapEx to be slightly in excess of 10% on a full year basis. And then of course, we continue to expect to outperform the industry by about 200 basis points as we capitalize on the new surety requirements across the industry ecosystem and as we capitalize on the greater material intensity, in advanced memory in the first half of the year and in advanced logic in the back end of the year. And then the final component to the annual guidance is the, the additional 1% to account for the expected contribution of PSS on a full year basis. So if you sum up those 4 components to get an annual growth objective of about 10% for the year.
Any particular comments Q2 in terms of MSI and CapEx?
So if you think about the first half of the year, we expect CapEx continue to be very robust in the first half of the year. It will slow down in the back end of the year. And that's really the big difference between, the guidance that we have for Q2 versus what we the balance of the year. So in other words, the blended index of reference for the first half of the year is pointing at about 10%. And that's really the big difference.
I mean the rest remains the same. Continue to expect to outpace the industry by about 200 basis points. Again, that's going to come from served market expansion and share gains. As we capitalize on the trends I was mentioning around purity and material intensity and then 100 basis points from the addition of PSS And then for the first half, we have the lingering positive impact of the fore ending change that we recorded in the first quarter. We don't expect that foreign exchange benefit to continue on a full year basis, but certainly on the first half, that's going to be a factor.
Got it. Great. And then my follow-up question is, if you kind of look at your segment profitability, I guess, congratulations on having AMH just now in your target range. For,
it
seems like it's going to be at least for this quarter, but all three segments are now above the midpoint of your new target. Is there any reason why it won't go higher? In other words,
are there
any one time benefits in 1Q that you think will reverse in the future?
No, there's really not anything specific in terms of one time benefits. I would just say, I mean, we're performing and executing at a very high level and in terms of when I say high level, I mean, really the performance of the team.
Okay. That's all I have. Thank you.
We'll take our next question from Mike Harrison with Seaport Global Securities.
Good morning. This is Jacob on for Mike. My question, do you get the sense that China may be look to accelerate investments in domestic semiconductor capabilities given some of this U. S. Commentary suggesting maybe a more protective stance on IP and that sort of flow of information from China to U.
S?
I mean, we're not really thinking that the recent tension between U. S. And China, will have any imminent short term impact on our business. I think said that China overall continues to be a big area of focus for us. It represents a little over 10% of our revenue.
We've been growing in China, very fast in excess of 25% for the last couple of years. We have high growth expectations in China for this year again. And we're continuing to invest in China at be ready to capture all of the opportunities that we believe will be available to us. We added a number of sales offices last year. We just announced the investment in a new tech center in China, all of that I think will put us in a great position, to support the existing plans of our customers.
And if we have more aggressive investment plans going forward, I think we'll be ready to address that as well.
All right.
And then I wanted to get a little more detail on the amort margin. Could you maybe bridge the 300 basis points of sequential margin expansion from Q4 to Q1, maybe put it in buckets, how much of that was from PSS? How much was from the FX benefit you mentioned And then how much was mix related?
I would say, broadly, it would be relatively even among the 3.
Got it. Okay.
Question. We'll take our next question from Christopher Capps with LOPE Capital Markets.
Yeah, good morning. My question is sort of follow-up to some of the formal comments about, the calling out of mainstream fab business being sort of disproportionately strong, at least relative maybe to expectations. I'm just wondering if you could further characterize the what's driving the mainstream strength? First of all, is it, is it, I don't know if you have visibility, but any sense on which end markets is it skewed towards automotive? Is it skewed, or is it just more generally like the proliferation of devices and the internet of things phenomenon?
And then at those legacy nodes, is it, is it just a general strength in demand for those chips, or are you seeing any increase either in share or materials intensity associated with producing those chips? Thank you.
Yes. So I think again, We have benefited from just the sheer volume of demand for some of those lesser advanced devices. And then that benefited many of our long tail product lines such as specialty gases, in our formulated clean chemistries. But we have certainly seen new opportunities arising as a lot of those fabs are starting to serve new applications such as automotive and applications where reliability is becoming increasingly important. And we have seen a number of new opportunities in particular for our filtration and purification solutions.
If you look at our European business, which was up 6% versus last year. This is actually a perfect illustration of some of those trends We are seeing very, very strong filtration sales in Europe. And that is really driven by mainstream fabs focused on automotive applications that are adopting advanced filtration solutions to reduce latent defects. So that's a real trend. It's very beginning of a trend and we expect that there would be more opportunities of that nature available to us going forward.
Thanks. That's helpful. And then to follow-up on your comments to expect better demand for advanced logic I guess, a no transition in the second half of twenty eighteen. Are you talking specifically about Intel or just the industry more generally And where do you expect to see benefit from that node transition and ramp? Is it most acutely in the business or is it across all three segments?
Thanks.
I won't talk specifically about any customer, but it would only say that we are I mean, first, it's more than one customer considering, no transition in logic this year. And we are in all cases very well positioned on the technology roadmap. And I believe that as they transition to those new nodes, we will see new opportunities in, deposition materials and in advanced filtration in particular.
Thank you.
Our next question comes from Patrick Ho with Stifel.
Thank you very much. Bertrand, maybe as a follow-up to some of prepared remarks and some of the answers you've already addressed. You've talked about your new products being a key driver for 20 eighteen's above average growth as well as into the future. You talked about stuff like advanced debt position in the period. And other purification products.
Are there any other types of new products as the year progresses that you expect to be contributors in 2018?
I think that for 2018, those would be the 2 major drivers. Again, material intensity is one big trend that we want to capitalize on. Material intensity is a real it's real for advanced logic. It's real for advanced memory. As I mentioned, our ACM business is very well positioned to capitalize on that.
If you recall, during the Analyst Day, we discussed about newborn mixtures. We discussed new deposition materials, selective etch, specialty coating, all of those products will play a big role in, in 2018. And then the big theme that we developed during the Analyst Day is the team of surety. And the purity requirements are becoming more stringent in the fab environment, upstream in the supply chain as we are discussing And that's going to open up all sorts of new opportunities for fab based solutions as well as bulk, filtration solutions. So those will be the drivers in 2018.
We have a number of new products that will be introduced later in the year that I would expect will help our growth trajectory in 2019, but it's a little early to talk about those.
Great. That's helpful. And my follow-up for Greg. In terms of the capital allocation strategy, obviously this past quarter, you've shown a lot of balance in how you reallocate the cash. Given the volatilities in the market and even with some of the changes in the interest rates from the broader markets, does that potentially change how you look at the capital allocation strategy of either repaying down more debt near term or either repricing debt versus, potential share repurchases and things of that nature?
Yes. So I think as it relates to debt reduction, I think you'll see us continue on kind of our $25,000,000 a quarter cadence. We've only got about $100,000,000 of floating rate debt. The balance of our debt is the 4.58 notes that we issued last fall, which right now is proving to have been a, I'll call it a stroke of brilliance. As it relates to thinking more broadly about buybacks, dividends, M and A.
We still continue to believe that M and A is our best offer community in terms of capital allocation, but we're certainly in a position that we can think more broadly about buybacks if we were to be in an environment. Where the industry would weaken significantly.
Thank you.
We'll take our next question from David Silver with Morningstar. Please go ahead.
Yeah. Hi. Thank you. I did not hear any discussion of trade issues So I just want to, I just want to kind of cover that off, but, the Chinese market is a very large, one of your largest country markets, and you have a very global sales spread. So, I'm just wondering if there are any any of the number of trade and tariff related issues that are swirling around right now that from your perspective might impact your ability to either market your products effectively or secure any key raw materials?
Thank you.
That's a good question. And as you would expect, we have a led of pre comprehensive analysis of what could be the potential impact of those new trade tariffs. And if those higher duties were be implemented and that remains a big if. The impact would be actually very small for us. And financially, it would be less than a $1,000,000 of additional import duties on a full year basis.
And then the other part of your question is, do we expect any impediment into our ability to do business in China. And based on everything we know so far, the short answer to that question is no.
Okay. And then, I had a question about maybe the trend in your R and D spending. So, I don't know, I'm a little bit taken by the significant volume leverage that your results show, in terms of growth in sales and growth in operating margin. Only a modest portion of that incremental margin expansion is on the gross margin line. And when I look at R&D, I mean, the R and D relationship to sales has been trending lower for quite a while.
And for a lot of companies, I wouldn't necessarily consider that unusual, but I I consider your business even within the Semiconductor industry to be more R and D intensive. So from your perspective, can that trend continue or is this this the case where since your company is kind of a play on complexity that the R and D budget is going to have to match or maybe even catch up to the recent growth in sales for you to maintain your competitive position?
Yes, go ahead. Go ahead.
Yes. So our R and D, if you think about it sequentially, it was up about $1,000,000. It was 7.5 percent revenue versus 7.6 percent of revenue in Q4. So we are we would expect when we talk about those higher OpEx levels, we would expect to see incremental spending in the, I wouldn't expect you're going to see us go back to the plus 8% days, but we would like to invest more in the R and D this year. And so think about it as in that 7.5 to 8 range.
Yes. So I think I would echo that again. I don't think that we are constrained as of right now. But we certainly have a number of open head counts that need to be filled. And we've been filled later in the year.
So expect that number as a percentage of sales to trend back to about 8% of revenue.
If I could just add a quick one. Your company does not really discuss sales growth in terms of the percentage from price versus 16% top line growth, was maybe a couple of percent FX and the balance or even slightly more than the balance was due to volume or might there have been some level of price increase or notable mix shift as well?
It would be largely volume. I mean, we do talk about, we don't talk about it like a specialty chem company. Point out in terms of volume and units. But we do talk about historically, our ASP erosion has run kind of 1% to 2% across the portfolio. And those trends are sort of ongoing.
This year is no different than most years. And like I said, that 1% to 2% has been where we've run pretty consistently over the last 4 or 5 years.
Yes. So I should just assume your volume growth is pretty much sorry, your sales growth is pretty much equal to your volume volume?
Pretty much, yes.
Very good.
Okay. Just wanted to clarify. Thanks very much.
We'll take our next question from Amanda Scarnati with Citi.
Hi guys. A quick question on China. We've seen some news articles recently that one of the mainland China manufacturers just received its 1st order for 3 d NAND and that they're expecting to start volume production towards the end of 2018. Have you started seeing any sort of revenue from these Mainland these new upcoming mainland manufacturers, or is that something that you expect to see, later on in the year as they start volume production?
Yes. So, Samantha, we have actually, benefited from all of the fab constructions that took place in China, many of which were funded by Chinese capital. So that benefited our fluid handling product lines. That benefited our FOUP platform late last year, early this year. And you're correct, in your statement that we would expect to start seeing the benefit of, the production that we expect to see later in the year early next year to benefit our filtration and SCM product lines later on in the year and early next year.
Remember also that, we are in the final stages of qualifications of the 2 partnerships that we have in China. So spectrum specialty gases. The customer qualifications are about to be completed, this quarter. In Q2. So we will be in a position to bring this capacity online and then shorten our lead time.
So that's going to be actually very timely. As we start seeing those Chinese fabs ramp up their production. And the second partnership with Jingxin, we expect the qualifications to be completed later in the year in Q4 of this year. So again, perfect timing for us.
And then the last question that I have is, if there's any share shifts between TSMC and Intel, whether it's on smartphone devices, or just in terms of node shift, if there's any sort of shifting there. How would that impact the revenue, I. E. If Intel becomes larger this year than TSMC?
In terms of share shift, I mean, you should be asking the question to those two customers. What I would tell you again is remember, we have a very broad customer base we have exposure to the technology roadmaps of every player in the industry be it a fab logic fab participant, a memory fab participant, OEMs, chemical manufacturers, And that's I think what makes integration very unique. We are not dependent on any customer. We are not dependent on any market stake. Statement.
And I think that's really what, is important, I think, for the investment community to remember.
So then you'd have kind of similar exposure then at both Intel and TSMC. So for you, it wouldn't matter who's winning versus the other. Is that the way to look at it?
That would be a good simple way to summarize my statement.
Thank you.
And that concludes the question and answer portion of today's conference. I'd like to turn the call back over to Steven Kanter for any additional or closing remarks.
Thank you. Before concluding, we will be out to Barclays Electronic's Electronic Chemicals Conference in New York on May 14th. And you can contact me for more information. Thanks again for joining the call. Have a great day.
And that concludes today's presentation. Thank you for your participation. And you may now disconnect.