Good day, everyone, and welcome to the Entegris Second Quarter 2024 Earnings Conference Call. I would now like to turn the call over to Bill Seymour, Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone. Earlier today, we announced the financial results for our second quarter of 2024. Before we begin, I would like to remind listeners that our comments today include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in today's news release as well as on our IR page of our website at entegris.com. And finally, as a reminder, we have included in the earnings slide presentation for your reference, consolidated and divisional P&Ls that exclude divestitures for Q1 and Q2 of 2024 and all 4 quarters of 2023. On the call today are Bertrand Loy, our CEO; and Linda LaGorga, our CFO. With that, I'll hand the call over to Bertrand.

Thank you, Bill, and good morning. I am pleased with another strong performance in the second quarter. With the semiconductor industry continuing to be in transition, the Entegris team delivered results that were in line with or better than our guidance. Sales of $813 million were above our expectations and, excluding divestitures, were up sequentially in all 3 divisions. Gross margin increased sequentially and was up over 300 basis points year-on-year, in line with expectations, reflecting strong execution and the benefit of our recent divestitures. EBITDA and non-GAAP EPS were within our guidance range. Looking more closely at our sales performance, second quarter sales increased 10% sequentially and 6% year-over-year, excluding divestitures. Sales were up across most product areas. For our unit-driven revenues, sales were particularly strong in CMP slurries and pads, liquid filtration, and etching chemistries. Our CapEx-driven revenue also rebounded sequentially in the quarter, true for both facilities-based CapEx products like gas purification and fluid handling, as well as for WFE-related CapEx products like groups and gas filtration. Let me cover a few other business highlights. Last month, we announced a preliminary award of up to $75 million under the CHIPS & Science Act to support our new manufacturing facility we are building in Colorado. We are honored to be the first material supplier awarded funding through this federal initiative, validating the importance of what we do as a key enabler of the semiconductor industry and its ecosystem. We expect to receive the funding in installments tied to the achievement of several milestones over the next 4 years. The first phase of this project will include the production of FOUPs and proprietary membranes used in our photoresist liquid filters. Initial sales from this facility are expected to generate revenue in the second half of 2025. I'm also pleased to report that our new facility in Kaohsiung, Taiwan, continues to be on track to ramp up production. We generated our first revenue from this facility in Q2, a significant milestone for our local team, and we continue to expect to generate approximately $40 million in revenue from this facility for the full year 2024. Our investments in both Taiwan and Colorado will provide manufacturing capacity to support the significant growth we expect in the coming years. On that note, we are continuing to make significant R&D investments critical to capturing the many growth opportunities ahead of us. In support of this, we expect our R&D spending to increase 15% in 2024. Our customers' technology road maps are calling for new materials innovation and ever greater process purity to achieve optimal yields and incremental device performance. The increasing complexity of these road maps is making our expertise in material science and materials purity invaluable to our customers. The investments we are making in fundamental research and new product platforms are expected to translate into key wins in the new nodes, solidifying us as a critical enabler of our customers' technology road maps and providing us with excellent growth opportunities going forward. Moving on to our outlook for the balance of the year. 2024 continues to be a transition year for the semiconductor market. Industry inventories are normalizing, and fab utilization rates are broadly improving. These recent trends validate that the industry reached the bottom of the cycle in the first quarter of this year. We expect the market to gradually recover in the second half of this year and accelerate entering 2025. For 2024, including 2 months of the PIM business, which we divested in March, we now expect our sales to be approximately $3.3 billion. This modest reduction in our 2024 sales outlook primarily reflects a slightly slower-than-expected market recovery in the back half of the year and the negative impact of foreign exchange versus our original assumptions. Excluding divestitures from both 2023 and 2024, our full-year guidance amounts to approximately 7% top line growth versus 2023 and approximately 11% growth in the second half versus the first half of this year. We continue to expect EBITDA to be approximately 29% of revenue in 2024, and we now expect non-GAAP EPS to be approximately $3.15. Let me now turn the call over to Linda.

Good morning, and thank you, Bertrand. Our sales in the second quarter were above our guidance at $813 million, up 6% year-over-year and up 10% sequentially, including the impact of divestitures from prior periods. On an as-reported basis, our sales were down 10% year-over-year and up 5% sequentially. Foreign exchange negatively impacted revenue by $10 million year-over-year and by $4 million sequentially in Q2. Gross margin on a GAAP and non-GAAP basis was 46.2% in the second quarter, within our guidance range. The higher margin compared to Q1 primarily reflects improved plant utilization, focused execution, and the PIM divestiture. Operating expenses on a GAAP basis were $246 million in Q2. Operating expenses on a non-GAAP basis in Q2 were $197 million. Adjusted EBITDA in Q2 was $226 million or 27.8% of revenue within our guidance range. Net interest expense was $53 million in Q2. The GAAP tax rate in Q2 was 9%, and the non-GAAP tax rate was approximately 14%. GAAP diluted EPS was $0.45 per share in the second quarter. Non-GAAP EPS was $0.71 per share and within our guidance range. Sales for our MS division in Q2 were $342 million, up 8% sequentially excluding the impact of divestitures. The largest contributors to the sales increase were CMP slurries and pads as we benefited from improving trends in memory, specialty coatings, and etching chemistries. On an as-reported basis, sales were down 2% sequentially. Adjusted operating margin for MS was 20.7% for the quarter, up slightly sequentially excluding divestitures. This increase was driven by higher sales volumes partially offset by increased R&D spending. Our AMH division sales in Q2 of $188 million were up 16% sequentially. The largest driver of the sequential sales increase in AMH was the rebound in our CapEx solutions, specifically FOUPs, sensing & control, and fluid handling products. Adjusted operating margin for AMH was 15.4% for the quarter, with a modest sequential increase in margin primarily driven by higher sales volumes. Our MC division had record sales in Q2 of $294 million, up 10% sequentially. Revenue was up across most product lines, including gas purification, liquid filtration, and gas filtration. Adjusted operating margin for MC was 31.9% for the quarter, with a modest sequential decline in margin primarily driven by increased investment in R&D. Moving on to cash flow, second quarter free cash flow was $52 million. CapEx for the quarter was $59 million. We continue to expect to spend approximately $350 million in total CapEx in 2024. A significant portion of the incremental spending in the second half will be related to our new facility in Colorado. During the second quarter, we paid down $55 million in debt from cash on hand, which means to date, we have paid down approximately $1.9 billion of total debt since the close of the CMC acquisition. The blended interest rate on the debt portfolio is approximately 4.9%, and since the term loan is fully hedged, currently, 100% of our debt is fixed. At the end of Q2, our gross debt was approximately $4.2 billion and our net debt was approximately $3.9 billion. Gross leverage was 4.7x and net leverage was 4.3x. We remain committed to maximizing free cash flow and debt repayment. Based on the pace of the market recovery, we now expect gross leverage to be slightly above 4x at the end of 2024. Moving on to our Q3 outlook. We expect sales to range from $820 million to $840 million. We expect the EBITDA margin to range from 28.5% to 29.5%. We also anticipate GAAP EPS to be $0.51 to $0.56 per share and non-GAAP EPS to be $0.75 to $0.80 per share. Let me provide additional modeling information for Q3. We expect gross margin of 46% to 47%, both on a GAAP and non-GAAP basis. GAAP operating expenses between $238 million to $242 million, and non-GAAP operating expenses between $191 million to $195 million. We also expect depreciation of approximately $47 million, net interest expense of approximately $53 million, and a non-GAAP tax rate of approximately 15%. I'll now hand it back over to Bertrand for some closing remarks.

Thank you, Linda. In closing, I am pleased with our strong performance and the team's execution in the first half of this year. Our performance to date and the double-digit growth we expect in the second half of the year will drive Entegris above-market growth for all of 2024. The setup for next year is looking very promising. We feel good about the improving fundamentals of the semiconductor market and expect growth to accelerate into 2025. More importantly, our investments and customer engagements are positioning us well to win in new nodes. All of this translates into significant growth opportunities for Entegris, expanding our content per wafer and ultimately driving significant market outperformance. With that, operator, let's open the line for questions.

Mr. Loy, thank you. We'll take our first question today from Toshiya Hari at Goldman Sachs.

Bertrand, maybe my first question is on the market outlook. You talked about a slower market recovery in the back half. You also talked about FX being a bit of a headwind. On your first point about the market recovering at a slower rate, I was hoping you could expand on that. Is it both CapEx and wafer starts? Or is it more wafer starts? And then by end application, based on what your customers have said and what your peers have said, it seems like leading edge is, if anything, a little bit stronger, and the commentary and the data points from the memory and storage space seem quite constructive. So I'm curious what's driving the slightly weaker outlook into the second half. Also, if you can contextualize the FX impact, that would be helpful, too.

Sure. So let's start with the industry. We have slightly lower assumptions on wafer starts. Right now, we're expecting wafer starts to be up about 3%, which is a little less than our original assumption when we started the year. On the other hand, we expect CapEx to be a little stronger in the low to mid-single digits. So that’s how we arrive at the industry growth of about 3%. What is driving that revised outlook in terms of wafer starts? A significant factor is strength in advanced logic, largely driven by AI, which translates into our growth in the advanced foundry business. Memory, on the other hand, is in a better state than last year, particularly in high-bandwidth memory, but NAND is still facing elevated inventories, therefore demand remains relatively soft across most applications. In fact, wafer starts in memory, both DRAM and NAND, have not yet returned to pre-COVID levels. We're observing a slow recovery here. Additionally, sectors like industrial and automotive are seeing a decline in demand, which is leading to reductions in production from customers. These trends shape our expectation for a 3% wafer start outlook for the year. Additionally, regarding the reduction in our annual guidance, there are three factors: the slower market recovery accounts for about $25 million of the reduction, foreign exchange impacts approximately $15 million, and specific issues related to SiC also contribute to this adjustment. While our SiC business is expected to grow 30% this year, it is less than the original expectation of 50%. So that provides the overall context for the reduction in our annual guidance.

Yes. And then as my follow-up, maybe on your rate of outperformance versus the broader market. You mentioned you'd been expecting 4 to 5 percentage points of outperformance for '24. Given your SiC comment there at the very end, perhaps that’s come in a little bit. So where do you stand in terms of your outperformance in '24? And for '25, I understand it’s early yet, but you’ve spoken about things like gate-all-around and potential adoption of moly and 3D NAND. What’s your current confidence level regarding your ability to outperform the broader market into '25?

I think you understand those numbers quite well, Toshiya. For '24, we expect to outperform by about 4 percentage points. Node transitions will be a significant driver for our outperformance, but these transitions have been somewhat limited this year. We anticipate significant changes in 2025 with promising developments in advanced logic concerning the transition to N2 architecture, along with expectations surrounding 3D NAND adoption. Historically, it is tougher for us to outperform during transition years like we are experiencing in '24, so achieving a 4% outperformance under those conditions is a positive outcome.

John Roberts at Mizuho, you have our next question.

We had some restrictions on exports to China for leading-edge applications over a year ago, and things have been relatively stable since then. Do you see further restrictions as a potential risk or possibly just tariff risk here, rather than outright restrictions? Any thoughts on that topic?

We cannot speculate on potential new rules and regulations around trade with China. We are currently complying with existing regulations and have quantified the impact to our business at about $20 million of lost revenue per quarter, totaling about $80 million annually. Despite this reduction in late 2022 and early 2023, I am pleased to report that our China business has been performing quite well. We have numerous international customers operating in China, and our business with these clients has grown steadily. Again, we won't speculate on potential new restrictions, but we are satisfied with the current performance of our business in China.

Our next question will come from Bhavesh Lodaya at BMO Capital Markets.

If I look at your third-quarter EBITDA guidance and then the full-year guidance, which was slightly reduced but not that much, you're implying a very strong fourth quarter, almost 25%-30% higher sequentially versus the third. Can you touch on what's driving that? Are you seeing that in your order books? Or, in general, what's the confidence level for the fourth-quarter ramp?

Bhavesh, it's Linda. Thanks for the question. To frame the answer, while the full-year EBITDA margin guidance of approximately 29% hasn't changed, we are balancing investments in the business with cost control. As we proceed into the fourth quarter, our expectation of overall guidance combined with continued gradual sales growth will yield both volume and operating leverage benefits. These factors combined will enhance our EBITDA margin in the fourth quarter, supporting our confidence in the approximately 29% margin for the year.

Got it. Can you talk about the factors driving the low end and the high end of your third-quarter guidance? The low end, in particular, shows not much growth sequentially. I'm trying to understand the factors as we move into the third quarter.

It's challenging to forecast currently because various industry segments are recovering at different rates and times. When we put our Q3 outlook and guidance together, we had to consider specific customer situations, making generalizations tough. Therefore, I can't provide detailed customer specifics. However, at a high level, the reduction in production from mainstream customers is a significant consideration; we see differences from customer to customer. Our customers have been managing production and inventory levels more aggressively than we originally expected. On the memory side, there's a promising recovery, but wafer starts remain below pre-COVID levels. Although there's adequate industry capacity in high-bandwidth memory, it remains limited, raising questions about how much we can see in Q3 versus Q4 and heading into 2025. We feel confident in our Q3 guidance, but it's largely shaped by these specific customer dynamics.

Our next question will come from Melissa Weathers at Deutsche Bank.

I wanted to focus on your CapEx commentary. I understand the wafer start forecast is coming down a bit, but you did mention that CapEx is expected to rise a bit. Can you talk about what's driving that? Are there any specific areas of strength that bolster your confidence in this year's growth?

We are actually seeing WFE growing in the mid- to high single digits, while fab construction will remain relatively flat this year. My comments reflect the net effect of these two influences on our CapEx outlook. It's important to remember that our business is more exposed to fab construction, which accounts for about two-thirds of our CapEx revenue, while WFE accounts for the remaining one-third.

Could you elaborate more on your FOUPs business? Last quarter, you mentioned that this business had troughed in the first quarter. How should we think about the unit-driven FOUPs business as we begin 2024 and into 2025?

The FOUP is our CapEx business, which typically sees product use for around 4-5 years. Therefore, they aren’t replaced frequently, making it a less consumable product. I'm pleased to share that the FOUP platform did quite well in Q2, with a near 30% sequential increase from Q1. Frankly, one reason guidance for Q3 is more modest is that we anticipate the FOUP business to contract a bit in Q3. This business has historically been volatile, especially in transition periods like the one we're experiencing this year. However, we're expecting it to expand quickly in Q4 and continue growing through 2025 due to industry strength.

Charles Yu Shi at Needham, you have our next question.

Bertrand, you provided a bit of detail on a product trend into Q3. Could you provide further details across the 3 divisions on how they are trending from Q2 to Q3 sequentially? Your earlier comment on FOUPs raises concern that AMH may see a decline in Q3, but could you comment on all 3 divisions more broadly?

I tend to analyze our Q3 guidance through year-on-year comparisons. In that regard, at the midpoint of the range for Q3, we anticipate a 10% increase compared to last year. We expect to see strength across all 3 divisions compared to last year. We project MC up in the mid-single digits, MS up in the mid-teens, excluding divestitures, and AMH up in the mid-single digits. As for KSP, the full capacity will reach around $500 million at maturity. This year, we are concentrating on product qualifications, a critical focus area, especially with preparations for the N2 transition next year. While we generated about $2 million in Q2 from this facility, we expect approximately $40 million in full-year revenue. Overall, successful product qualifications are our key focus right now, not revenue maximization.

Our next question today comes from Tim Arcuri at UBS.

I apologize if this has already been addressed, but I wanted to bring up recent news reports about expanding the use of FDPR to further restrict segments of the market. Given that you're in pretty close contact with the Department of Commerce, do you foresee any potential that materials and subsystems could be swept into new restrictions?

That's a valid inquiry, Tim. We've been actively engaged with the Department of Commerce and within the semiconductor consortia. However, we do not have specific information regarding potential outcomes of these deliberations. Speculating on such matters isn't something we will do.

Relative to N3, there are shipment schedules for the end of the year. TSMC seems optimistic regarding N3 progress, along with capacity forecasts which are increasing. To clarify, can you discuss what's influencing the downtick in your expectations when your largest customer appears to be increasing activity on key nodes?

Our business with our largest customer is strong this year, especially within the advanced segment, which is our fastest-growing area. We indeed see potential for success with the N2 transition in 2025, and realize that the entire ecosystem is preparing for this change. The impact from this will largely materialize in 2025, but we expect some effects as early as Q4, which is reflected in our implied guidance for Q4. The anticipated drop in Q4 guidance is partly attributable to the SiC business growing 30% year-over-year, falling short of the initial 50% growth expectation. A significant contraction in mainstream fab activity affects our projections as well, driven by declining demand in automotive and industrial sectors. Customers are focusing on reducing inventory levels, influencing their fab production schedules.

Our next question comes from Aleksey Yefremov at KeyBanc Capital Markets.

This is Ryan on for Aleksey. I wanted to drill into margins a bit sequentially from Q2 to Q3. You are guiding for an increase in margins. Can you explain segment-wise where you expect that strength to come from?

There is a general strength across the board that contributes to this. There's some revenue uptick, and as we continue to see that, we will benefit from volume leverage. Additionally, our OpEx numbers are projected to decrease slightly, allowing us to gain OpEx leverage. Thus, as recovery takes place, we should see this positively translate into our margins. Although we might experience some pressure through the year, these improvements will help us as we proceed from Q3 to Q4.

And our final question today comes from Chris Parkinson at Wolfe Research.

Can you provide additional thoughts on the ramps, not only in Taiwan in the near term but also any preliminary insights regarding Colorado?

In our industry, as we build new capacity, it involves initial investments with a focus on qualifications before revenue generation occurs. For KSP, I would estimate a gross margin headwind year-over-year of about 80 basis points. This year, the Colorado facility is still under construction, and revenue from it is not expected until 2025. Therefore, considering 2024, the majority of revenue from this facility is projected for the latter half of the year. That summarizes my thoughts on both facilities at this time.

A quick follow-up regarding the balance sheet and the deleveraging process, particularly given the free cash flow outlook for the second half and projected conversion for '25. Any update on cash usage and your thoughts regarding the balance sheet, shareholder sentiments, etc.?

I'm pleased with our ability to control what we can. We've used proceeds from divestitures and free cash flow to pay down our debt. We remain focused on this debt reduction while also investing in the business. We have effectively paid down approximately $1.9 billion of debt since the CMC acquisition. This year, we expect leverage to be slightly over 4x based on recovery timing and cash flow metrics, but we remain committed to further reducing leverage.

Regarding that, we're focused on fulfilling our commitment to minimize leverage efficiently. I'm immensely proud of the team's efforts this year amidst industry transitions. We have managed to invest strategically in CapEx and R&D, which is crucial for future success. The significant investments in technology and enhanced manufacturing capabilities will provide competitive advantages for Entegris moving forward. I’m happy that we have achieved all of this while maintaining our targets presented during the Analyst Day earlier in the year. Navigating a challenging year, the team is performing exceptionally well.

Thank you for joining our call today. Please reach out to me directly if you have any follow-ups. Have a good day. Thank you very much.

Ladies and gentlemen, this does conclude today's Entegris Q2 '24 conference call. We thank you for your participation. You may now disconnect your lines.