Good day, everyone, and welcome to the Entegris First Quarter 2017 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. Steve Kanter, Vice President of Corporate Relations. Please go ahead, sir.
Great, thank you, everyone, and good morning, and thank you for joining our call today. Earlier, we announced the financial results our first quarter ended April 1, 2017. You can access a copy of our 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. And you can find a reconciliation table in today's press release as well as on our website. On the call today are Bertrand Law, President and CEO and Greg Graves, CFO. Bertrand will now begin the call.
Thank you, Steve. I will make some comments on our first quarter performance. Greg will follow with more details on our Q1 financial results and provide guidance for our second quarter of 2017. We will then open We delivered record sales, growing 19% from a year ago and 3% sequentially. We achieved quarterly non GAAP EPS of $0.28.
We generated record adjusted EBITDA of $76,000,000 or 23.9 percent of revenue. We continued to pay down our debt and this week, we completed the acquisition of a new filtration product line. While semiconductor production levels were in line with seasonal softness, We performed well due in part to the continued strong performance of a number of new products.
The market acceptance
of these solutions is a testament to the increasing importance of our value proposition from the strong industry CapEx environment, particularly as new 3 d NAND capacity is being added. At our March analyst meeting, we described how materials will emerge as the primary driver for the next generation chip performance. Yet the industry is finding that the integration schemes for these materials are becoming increasingly challenging, making it harder for our fab customers to reach acceptable yields. Solving these process challenges requires new advanced materials delivered onto the wafer at ultra high level of purity in a safe and stable way. Our broad array of engineered materials Filtration And Materials Handling Solutions makes Entegris uniquely positioned to help the industry ecosystem deal with these emerging process challenges.
We believe that the strength of our performance and the strong start of this year are validating the increasing value of our solutions to our customers. Looking at our first quarter performance in more detail, our specialty chemicals and engineered materials division grew 13% from a year ago. We saw strong performance for our specialty gas products, and for Advanced Deposition Materials. Advanced Deposition has been one of our fastest growth areas, and is an area where we have been able to fully capitalize on the broad range of capabilities across the Integra's technology portfolio. Our microcontamination control division grew sales 29 percent from last year on the strong demand for our advanced filters used in both dry and wet processes.
These filtration solutions are becoming increasingly pervasive across the electronic supply chain, enabling new levels of purity for process chemicals from the bulk manufacturing stage all the way to the final point of dispense onto the wafer. The Advanced Materials Handling division benefited from the strong CapEx environment, and grew 17% from last year. We are very pleased which can sometimes be prone to quarter to quarter volatility. Our strategy to grow shareholder value is built upon a consistent capital allocation framework that balances strategic M and A and debt repayment. During our first quarter, we deployed our excess cash in line with our stated strategy We continued our cadence of regular line from Gore for $20,000,000.
This acquisition illustrates very well the type of M and A opportunities we are targeting. Unit driven, profitable and synergistic businesses or product lines that leverage our existing platform and expand our served markets. The acquired filtration products are focused on high purity water and chemical applications in Semiconductor, OLED and flat panel display manufacturing that complement our existing filtration offering and leverage our deep customer relationships. We expect this addition to We are very excited about our growth opportunities, both organic and inorganic. Given the tremendous success of our new products, and the unrealized potential of new growth initiatives, we are ideally positioned to continue to Before turning the call to Greg for the financial detail, I want to thank the Integrys teams around the world.
For their unwavering dedication to making Entegris 1 of the most critical and dependable suppliers in the ecosystem. Greg?
$18,000,000 grew 19% from a year ago and 3% from Q4. The strong sales were driven by strength across the business. Our operating performance
reflected
Q4. We expect gross margin to improve further to approximately 45% in Q2. Non GAAP operating expenses in Q1 were 70 expenses to be $79,000,000 to $81,000,000 in the 2nd quarter. Up from 18.1 percent in Q4. Net interest expense was $8,400,000 in Q1 or $600,000 lower than Q4, reflecting slightly lower levels of debt and lower interest rates as a result of the recent repricing of our term loan.
Our GAAP tax rate for the quarter was 22%. Our non GAAP tax rate was also 22%. Reflecting a slightly more favorable geographic income mix. For 2017, we are expecting our non GAAP tax rate to be approximately 24%. Our non GAAP earnings per share was $0.28, which was above the high end of our guidance.
I am pleased to report that we achieved that milestone and have earned $1.05 of non GAAP EPS for the trailing four quarters. Adjusted EBITDA for the quarter I'll now summarize the results recorded sales of $114,000,000, which were up 13% from Q1 of last year
and up
3% from Q4. The quarterly growth was driven by healthy demand for specialty gas solutions and record sales for our advanced deposition materials related to 3 d NAND process technology. SCEM segment non GAAP adjusted operating margin was 24.6%, up from 23.4% in Q4. Q1 sales for microcontamination control or MC of $100,000,000 grew 29% from the prior year and were up 1% from Q4. The strong sales reflected strength in liquid filters for wetterton clean applications and strength in gas filtration products driven by strong industry tool shipments.
MC's non GAAP adjusted operating margin was 36% up from 32% in Q4. 1st quarter sales for Advanced Materials Handling or AMH of $103,000,000 grew 17% from a year ago and were up 4% sequentially. The strong year over year sales reflected strength in fluid handling products and in Foods, both of which benefited from the favorable capital spending trends across the industry. AMH's segment non GAAP adjusted operating margin of approximately 18% improved 100 basis points from Q4. We believe this improvement reflected the early stages of our ongoing margin improvement initiative for this division.
Cash flow from operations for the quarter was $33,000,000 and free cash flow was 11,000,000 Recall that Q1 is typically a seasonally lower quarter for cash flow as we pay out variable compensation related to the prior year. Accounts receivable and inventory increased from Q4, reflecting higher sales and a modest increase in DSOs to 51 days. Inventory turns of 3.8 were flat with Q4. 1st quarter CapEx was $22,000,000. For fiscal 2017, we expect full year CapEx to be $90,000,000 to $100,000,000 or $10,000,000 higher than previously discussed.
The greater level of CapEx reflects our increased confidence in our growth initiatives, and includes increases in capacity for graphite production, additions to our fleet of chemical containers, and enhanced metrology capabilities. Our cash balance was $391,000,000, of which During the quarter, we reduced including current maturities was $560,000,000 and our net leverage ratio was 0.6 times. We also repurchased 4 As Bertrand said, we are continuing to execute our capital allocation strategy, which balances debt repayment, building liquidity for potential M and A and modest share repurchases to neutralize the impact of share based compensation dilution. The acquisition of Gore's microelectronics filtration product line this week fits well with that strategy. Turning to our outlook for Q2, we expect sales to range from $315,000,000 reflecting good industry momentum and continued strong demand We expect non GAAP EPS to In summary, we are very pleased with our Q1 performance.
We continue to invest strategically in our key growth initiatives We are executing on our capital allocation strategy and are excited about Finally, our outlook remains positive. We expect of revenue growth
Thank you. We'll go first to Toshiya Hari with Goldman Sachs. Please go ahead.
Great. Good morning guys and congrats on a very strong quarter. I guess my first question is on gross margins. Of the drop through on a sequential basis from Q4 to Q1 was very impressive. Can you talk a little bit about some of the drivers, that were behind that.
And if there was anything one time in nature in Q1 and sustainability into Q2 and beyond, please. Thank you.
Sure. Hi, Toshiya, it's Greg. Or I would say the margin, it's really more about the fact that the Q4 margins were so weak. Recall that we had pretty significant negative impact in the quarter related to the rapid strengthening of the dollar versus the yen in Q4. As we moved into Q1, the yen moved back and the volatility in the currency was really mitigated.
So we did have some benefit from currency from the quarter. But I would also say we just operated very well at the manufacturing level. We had lower scrap levels. We had E and O that was for excess and obsolete inventory that was at reasonable levels. So general solid execution.
As we move into Q2, we're coming into the quarter. Relatively low priced inventory because of the good operating performance in Q1. So we feel good about the margin trend as we come into Q2 and for the balance of the year.
Okay, great. And then I had a follow-up on 3 d NAND. Bertrand, I apologize if you went through this at your Analyst Day, but to can you remind us what percentage roughly speaking of your businesses tied to the NAND business 3 d NAND in particular?
Yes. So Toshiya, this is actually an information that we don't really share publicly. And the only reason is that we have a number of customers that run different types of processes across their fabs. So our ship to information is not necessarily
totally crisp.
So we have data, that we use internally that are directionally interesting, but on that, I would say accurate enough for us to share in very specific ways externally. Having said that, if I look at it on a customer basis, all of our shipments to customers involved in 3d NAND production,
posted record levels of revenue.
We saw benefits coming from obviously the new investments, in new three d NAND fabs. And that benefited our food business, benefited our fluid handling business And then for the 3 d NAND fabs that are in operation, we are starting to see the positive benefit of the adoption of a number of new materials that we've been developing jointly with those technology leaders. And we are also seeing a much broader adoption of advanced filtration solutions. In those advanced three d NAND. So a very important market segment for us and one in which, we are intensifying our degree of focus.
And Bertrand, I appreciate the fact that, you're not willing to give out that information. But, based on some of the commentary from your customers and some of the equipment companies, I think installed 3 d NAND capacity should be increasing from around 350,000 or 400,000 at the end of 2016 to somewhere around 700,000 exiting 2017 and obviously more growth beyond that. Should we expect an acceleration in the wafer start driven, business within your NAND component, if that makes sense?
That's correct. And I think that you should expect greater levels of wafer starts in those fabs, which will impact positively all of our consumable products from, again, our advanced filters as well as, the the advanced deposition materials being, the metal layers and other dielectric materials that we're supplying for those advanced labs.
Okay, great. Thank you so much and congrats again.
Thank you.
We'll go next to Edwin Moc with Needham And Company. Please go ahead.
Great. Thanks for taking my question. Congrats. Well, great quarter and guidance. So first, I guess, just on the core acquisition, if you can give us some baseline information there, if you share like revenue or OpEx and margin profile for the business?
And what's that reflecting in your guidance?
Sure. So Edwin, so first of all, as you noted, this is a very important acquisition for us. It demonstrates the commitment that integrates us to filtration and a commitment to the strategy that we described during our Analyst Day around expanding into adjacent applications, both through internal development, but also by acquisition. So This acquisition is small. It is less than $10,000,000 in revenue today, but we believe that it has a lot of room to grow well past the $10,000,000 mark in the years to come.
So We expect the acquisition to be modestly accretive this year and then to add about about 1 to 2 pennies of accretion in the years to come. So the team right now is very actively engaged in transferring the manufacturing equipment to our Bellerica facility. So we expect to see a little bit of drag on our P and L as we complete this manufacturing transfer, but we expect to be done with the manufacturing transfer before the end of the year.
Okay. That's helpful. So once you can't complete that, is it a type of business that generated similar type of operating margin you expect your microcontamination line or is it just corporate average? And it was reflecting your guidance, I assume, right?
Edwin, it'd be pretty much in line with the corporate average. The operating margins might be slightly higher, but the gross margins are relatively systems corporate average.
Okay, great. That's helpful. And then, I guess, I want to ask you a question about a AMX ex group, I think, Greg, you mentioned on your prepared remarks that you guys have some programs that you have put in place to drive margin improvement for that group. Where can you go and any kind of color you can provide and what is the timeframe of those programs?
So we talked about, in the Analyst Day, the margins in that business moving up into something closer to the mid 20s from where they are today. That's not something that's going to happen overnight. But what I would say is, I mean, that's a business where we continue to look at a number of the business lines that we're operating in continue to look at we've talked about we had made an investment in 450. We continue to look at that investment. So there are a number of opportunities where you could see us make changes around the footprint in that business.
And that mid-20s kind of operating margin is, are we talking about in the next few quarters or is it just still it takes a little longer than that?
No, I would say this is, I mean, this is an ongoing process. I mean, I think you can expect slow incremental improvement.
I see. So it's a medium term target. Okay, that's helpful. And then lastly, just on your guidance, I mean, I'll be frank, right. Just looking at your numbers, what you did this quarter, which is very impressive.
And given the strong CapEx commentary from your from the semi cap guys, implying that your CapEx part of this should be to continue to grow. And it looks like the material side of the business or consumer with how business also growing. It a guidance somewhat conservative? I mean, if I look at the midpoint, it's only up kind of low, very, very low single digit. Is there any kind of areas that has talked keeping you guys on providing even more aggressive guidance than that?
Well, if you look at our guidance for Q2, it's flat to up 4% sequentially. And so if you think about the market assumptions behind that, going into Q2, We expect the seasonality for wafer starts in Q2 to be more muted than what we have experienced in the prior years. And then when you think about our CapEx business, we expect that to be flat to only modestly up sequentially. And that is consistent with, the expected softening in the industry CapEx environment in second half of the year. I mean, remember that many of our components are sold to the OEM customers, our OEM customers a few months prior to the shipments of their tool.
So We're trying to factor that in. And then of course, we continue to have high expectations, in the performance of our new products. They've done really well. Q1, they've done really well last year, and we have no reasons to believe, anything different, going into Q2 and the balance of the year. So So if you look at the guidance in a slightly different context and you take the midpoint of our Q2 guidance that would actually put our first half performance at about 12% up versus the first half of last year.
So put that in the context
of the objective I shared with you during the Analyst Day of growth of 4% to 6%. We're feeling good about our momentum. And clearly, we grew well in excess of that objective in 2016. And I would share with you that given the current business momentum, it's certainly suggesting that 2017 will be another great year for Entegris.
We'll go next to Chris Katz with Aegis Capital Corporation. Please go ahead.
Had a question about just the broad based revenue strength across your different segments and Bertrand, you may have sort of answered this in your earlier comments about 3 d NAND, but just curious about the upside relative to your own prior, guidance expectations in terms of top line was the source of the upside mostly concentrated in demand associated with 3 d NAND production or was it more broad based by that? If there's any way you could characterize the upside on the top line based on, either memory versus logic versus foundry related semi demand or even across nodes. So just trying to get a feel for if it was broad based upside strength or really concentrated on this, this, ramp in 3 d NAND production?
Chris, I'm going to try to give, some color in my end. So it's going to be probably hard to address every single one of the points that you're raising. But as you mentioned, it was really broad based, the industry environment remained very strong in the first quarter. And if you put aside a few note exceptions. Most of the fab our fab customers run their fabs at levels similar to what we experienced in for, which was a little better than what we expected going into the quarter.
And then, of course, we continue to benefit from the strong industry CapEx across the board. So, on top of those favorable industry trends, our new products continue performed very, very well, as did, some of our more mature product lines. So we saw, as I mentioned in my prepared remarks. We saw record demand for advanced filters and new deposition materials, but frankly, we're expecting that. But we also saw some really strong performance for product lines such as wafer carriers, fluid handling solutions, and even wafer shippers that benefit from steady levels of activities in the trading edge fab.
So again, very broad based across our semi markets. And then if you think about the non semi part of our portfolio, The non semi business performed very well as well during the first quarter. It represented about 13% of our revenue, And on a sequential basis, it actually outgrew the semi business. We grew our non semi business 5%. Sequentially and over year, we grew that business 13%.
So it was great to see strength in our glass forming applications, life sciences, and across a number of industrial markets. So I continue to expect that, this part of our portfolio will be another meaningful contributor to our growth performance in 2017.
That's very helpful. Thanks. And then in your comment your forward looking comments, I think you had just mentioned that you expect the seasonality of wafer start growth to be more muted than then I guess typical seasonality. So I'm just wondering, is that based on some industry pundit or is that based on something that you're seeing with, with based on feedback and insights with your specific customers. Any more color there would be helpful.
So, Chris, it really has to do with input we're getting from our customers. So, traditionally, the sequential growth away from starts from Q1 to Q2 would be in the 10% to 15% range. I think we should be counting on something closer to the low single digit growth rate sequentially. But the corollary to that is that we expect MSI to be or wafer starts to be more evenly distributed than normal throughout the year. In other words, we expect the back end of the year in terms of wafer starts to be a little stronger than normal.
And that really comes from the fact that there are a number of several important new devices that are expected to come to the market and there are a couple of important customers that will be gearing up to ramping up their 10 nanometer node. And all of that should actually play to our strengths. So on an annual basis, we continue to expect wafer starts to grow at about 5% year over year. Which in that context should lead you to expect integrase to grow at about 7% to 8% this year and we certainly expect to do better than that.
Okay, that's helpful. And then just one follow-up on the WL Gore acquisition. Vaguely familiar with that company is kind of, having very good expertise in membrane. So Is the product line that you're acquiring? Is it just a membrane or are there also, filtration devices that they've designed and manufactured for, the end markets which you target.
And then, if it's focused on their membrane technology, just curious if that, is applicable to, you know, across to the extent that it's applied in, in semi space, is it across technology nodes or is it a solution that's really targeted at more of the advanced manufacturing? Thanks.
That's a good question, Chris. We are, in fact, acquiring the the devices. So and only the devices, we're not acquiring the membrane manufacturing capabilities of Gore. So we will be transferring the device manufacturing capabilities to be reka. And we'll continue to rely on Gore and other suppliers to supply certain types of membrane that we do not make.
Gore has been one of the many long term strategic partners for as a membrane supplier for Entegris and we continue to act in that capacity going forward.
That's helpful. Thank you.
We'll go next to Patrick Ho Stifel. Please go ahead.
Thank you very much. Just had a follow-up question on the 3 d NAND opportunity for you guys. A lot of it obviously is benefiting your specialty materials and the chemistry solutions there. On a going forward basis, is this more dependent on the number of layers that these devices will be trending towards? Or is this more of a fab opportunity to drive sales for your materials business?
So, Patrick, it will be a little bit of both. I mean, 1st of all, I would say we are just at the very beginning of the what I would think is an inflection point us in terms of new material adoption. We are currently selling a number of new materials to those into those processes. But there are a number of new molecules that are currently being evaluated by those players. And frankly, when you think about the magnitude of that opportunity for us today, it's still very small.
It's growing very fast, but it's very small. I think we will see a positive impact to our growth momentum and there would be a lot more meaningful sometime later in 2017 and certainly in 2018. So that's for the deposition materials. And then, as I mentioned, as you continue to add more layers those device architectures are becoming increasingly prone to, contamination And we are very, very focused on developing a very unique filtration and purification solutions, for those for those fabs. And there again, I think that we are at the very beginning of fully realizing, this opportunity.
So I think when we think about 3 d NAND, it is It is growing very fast for us.
It remains still
fairly small component of our overall business, but I think it's going to become a lot more meaningful going forward.
Great. Thank you very much.
And with no more questions in the queue, I'll turn the conference back over to Mr. Steve Kanter for any additional or closing remarks.
Thank you. I just want to remind listeners that in May June, we will be participating in investor conferences in San Francisco, New York and Boston and you want more information about those, you can contact me. And we look forward to updating you on our second quarter results in July. Thank you all again and have a good day.
And ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.