Good day, everyone, and welcome to Entegris Third Quarter 2015 Earnings Conference 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. Earlier today, we announced the financial results for our third quarter ended September 26, 2015. We have accelerated the timing of our press release in this conference call to comply with Reg FD requirements to address an inadvertent premature disclosure of our third quarter results. 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. You can find a reconciliation table in today's press release. 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. I will make some general comments on the business, Greg will then provide more details on our financial results. Overall, I am pleased with our Q3 performance, particularly given the challenging industry environment we experienced in the quarter, reflects our operations well, adjusting our spending to the general softening in the industry. We met our target model and achieved non-GAAP EPS of $0.23. We generated solid cash flow and continued to reduce our debt with a $25 million repayment in the quarter. After strong Q2, our third quarter sales declined 4% sequentially, and were at the low end of our guidance. While we saw growth in some areas of our business, the scenario of slower production rates and lower fab project activity materialized as we moved through the quarter. This was first amplified by the negative impact of foreign exchange. Semiconductor sales were down 1% versus the second quarter, as some customers decelerated their fab utilization rates and pushed out investments to match the soft near-term demand. Sales in our adjacent markets contracted 11% sequentially, and represented approximately 22% of our revenue in Q3. We achieved modest growth in data storage and display, but sales of graphite material decline in Q3 after reaching record levels in Q2. This anticipated decline resulted from the normalization in new orders after an initial search, driven by the adoption of our graphite material in a new glass application earlier this year. Turning to our business segments, Critical Materials Handling, or CMH, declined 5% sequentially, but was about flat with the third quarter a year ago. On one hand, the decline on a sequential basis reflected lower sales of wafer handling and Specialty Materials products. Sales of wafer handling product, as you know, such as our FOUP can be lumpy, and were…

Thank you, Bertrand. While Q3 sales were at the low end of our expectations, I am pleased with our execution for the quarter. We flexed our spending and achieved an adjusted operating margin in line with our target model. Non-GAAP EPS was $0.23. The results included a $0.03 benefit from currency gains and a $0.02 benefit from a lower-than-anticipated tax rate. Results excluding these benefits were still in line with our target model. Q3 sales of $270 million were 4% lower on a sequential basis, and included a $3 million or 1% headwind from foreign exchange. Compared to a year ago, sales were down 1% and included a $13 million or 4% negative impact from foreign exchange. Gross margin of 43% declined from 45.6% in Q2. The decline in margin was due to cost resulting from supplier quality issues as well as cost related to the closure of a small manufacturing operation and to lower sales volume. In spite of our expectations for lower sales in Q4, we expect gross margin to be approximately 43.5% or essentially flat with Q3. Q3 results included amortization of $12 million and integration expense of $2.1 million. Including these costs, non-GAAP operating expenses were $71.5 million in the quarter. This result -- this was below the low end for guidance and reflects tight spending controls and lower variable compensation. We expect non-GAAP operating expenses to be $71 million to $73 million in the fourth quarter. We'll have approximately $1.5 million of integration costs in Q4 related to the merger of our legal entities. These costs are slightly higher than initially anticipated. In addition, the final steps of the integration will result in even greater ongoing benefits. Net interest expense was $9.2 million in Q3. The GAAP tax rate for the quarter was 15%. On…

[Operator Instructions] And we'll go ahead and take our first question from Todd Morgan with Jefferies.

Two quick things. First of all, Bertrand, I know you talked about sort of the medium-term story here being kind of creating synergies between the 2 companies and then being able to provide kind of next-generation products to your credit customers. Is there anything tangible you can point to at this point in terms of any kind of design wins or product developments, things like that? And I guess, secondly, just looking at the balance sheet, good to see the continued cash debt reduction. Is there a way to characterize the domestic versus international cash these days? And I don't know if you care to offer any magnitude of sort of plan to continue debt repayments that you referenced earlier.

So let me take the first question and I will let transition to Greg to answer some of the cash-related question. So as it relates to the positive synergies that we are expecting to unlock from the combination with ATMI, as we mentioned, before, we would expect some of the new solutions to be introduced when the industry transitions to 10-nanometer and then down the road to just 7-nanometer. Having said that, we have been very actively engaged with the number of technology leaders in the space. And I think we have now tangible evidence that the combination of capabilities of the 2 companies are really creating value for customers. One example of that could be some of the recent wins that we recorded in our advanced deposition materials. As you know, we provide not only precursor materials, but we also provide delivery systems to sublimate the material to phase -- to the gas phase. So in other words, think of it as really the unique ability to provide a comprehensive solution, including solid purification, packaging and delivery solution for our customers. As you know, those solid precursors are used in LED and CVD markets, which have been growing actually at an order of magnitude faster than the MSI index. So or I believe that we have actually some interesting times ahead of us as those materials are introduced into production.

Then on the cash-related questions, Todd. So slightly more than $300 million of cash on the balance sheet. Of that, approximately $70 million is held in the U.S., the balance is offshore. With regard to debt production, we don't plan to make additional payments in Q4, I would expect we'll pay -- we've classified $50 million of the debt is current and I would expect we'll pay that $50 million in the first -- some time in the first half of 2016.

And we'll go ahead and take our next question from Patrick Ho with Stifel.

Guys, the CapEx portion of your business is obviously a smaller portion. But given some of the weakness that's out there in the industry right now, from your advantage point, have you seen any significant changes in terms of fab projects, whether they're pushing out? What's your view from your vantage point on that end of the business?

Patrick. Yes, so as you mentioned, this is a minor part of our business. As you know, 20% of our business is impacted by the fab equipment activity. Having said that, as we mentioned in our prepared remarks, we saw a softening FOUP business, which typically correlates to new fab buildups, and we also saw a softening in our OEM business, in particular, softer trends for our gas filtration products that are usually solutions that we sell to our OEM customers. So certainly, we saw some slowing down in the rate of orders from OEMs, and we've seen some pushouts in terms of new fab buildups.

Right, that's helpful. And maybe, Greg, for you on the financial model. Given that you guys have maintained your run rates on the target models, given some of the volatility that we're seeing now, both for you and the wafer starts as well as in the CapEx size of things. What are some of the measures and tactics you're taking to keep your target model in line as we go forward?

Now at this point, we're really -- we really tightened up on discretionary spending, like travel and entertainment. We've reduced some of our variable, engineering and project-related cost. Like I said, this point has been general belt-tightening around some of the variable costs. We're also looking closely today at kind of the manufacturing environment and the staffing levels there.

And we'll go ahead and take our next question from Dick Ryan with Dougherty.

So, Greg, you just -- the last comment on your manufacturing staffing levels, would that suggest this pause might be more than one quarter sort of event. Do you kind of see this lingering in to 2016? How do you -- what are you hearing from customers and how would you color the rebound?

Look, yes, I'll pass that to Bertrand.

Yes, I'll take that. The industry environment right now is pretty murky, and we certainly do not have more visibility than anybody else in the ecosystem. So what I can share with you is that internally, we are planning for a soft industry environment for the next 2 to 3 quarters. And we will be taking steps to ensure that we control our spending levels and that we do that while protecting all critical investments. We've done that before. We have an experienced management team at Entegris and I'm convinced that we will be able to manage the uncertainty in the environment very effectively.

Okay. And Greg, what sort of FX impact are you kind of assuming for Q4?

Yes, Q4, we're assuming rates stay essentially where they are today. So sequentially, we wouldn't expect a lot of rate impact. In year-over-year, the impact of foreign exchange will obviously be less in Q4, because the big move in rates was in October of '14.

Okay, okay. And your buyback program, can you kind of refresh me where that is and how much is...

Yes, at this point, we actually don't have a buyback program.

Okay, that expired. Okay.

[Operator Instructions] And we'll go ahead and take our next question from Jairam Nathan with Sidoti.

I kind of dialed it was late, but Bertrand, did you guys talk about nonsemi? And you had a pretty good quarter last -- in June on the nonsemi side, and can you kind of talking about that business, was is that doing versus semi side.

Yes. So I mentioned that, our nonsemi business has grown since last year. It's representing today about 22% of our total revenue. Certainly, Q3 was a challenging quarter for our non-semi business, with the decline of 11%. But it's mostly attributable to one factor. And you know, just let me give you a little bit more details around that, but at the end of last year, we uncovered a new application for graphite material. And then for this application, the coefficient of thermal expansion of our material is actually the perfect match for the glass substrate. And as a result of the unique properties of our material, our customers has been able to generate very significant yield gains and improve their cost of ownership. So early in the year, we did benefit from a surge in order, as our customer converted all their production sites to the Entegris material. And we believe that the rate of order has receded somewhat in Q3, and we believe that the current revenue levels in Q3 are more in line with what we would consider to be normalized levels of business for this application going forward. What I want to say is that this is, in spite of the lumpiness of that business in the early stages of their business, it's certainly a very positive development for us. As you know, we do not have a lot of new opportunities and new market that would exceed $10 million on an annual basis, and this is one of them. So again, if you look at the performance of our non-semi business over time on an annual basis, we are very pleased with the progress and very pleased with the growth rate that we've been enjoying year-to-date.

And just could you also give somewhat color on the supplier issue you talked about for the gross margin? Does that continue into fourth quarter? Or is that solved?

Jairam, no, I would not expect that to continue into the fourth quarter. I mean, it was an isolated incident. The vast majority of it related to 1 specific situation.

And my last question is regarding Entegris has historically benefited when the industry kind of moves, changes notes and increases the proportion of newer next-generation notes. Is that -- you would think that, that kind of -- we saw that kind of slows down in '16. So you know, compared to the industry, should we expect -- how should we expect Entegris to perform in that light?

I think -- again, I mean, this overall -- this is -- remains absolutely true. I think that the contraction that we saw in our business in Q3 is really a reflection of significant reduction in fab capacity utilization and we saw that reduction at the trailing edge, but also at the leading edge. Some of our customers were operating the leading-edge fabs at or below 80% capacity utilization. So that's really what is behind the softening in our business. As the industry and some of the technology leaders in the industry transition to tighter nodes next year, we would expect certainly to benefit from that.

[Operator Instructions] We'll take our next question from Amanda Scarnati with Citi.

Just a question on the debt and kind of the reason, Greg, that you had mentioned that you won't be paying any debt down next quarter. Is it higher expenses? Is it bonus -- year-end bonuses or something like you got bit concerning yourself within the cash side? Or is there something else going on there that we should be aware of?

No, there's -- yes, no, I don't have any specific concerns. The primary reason is, is if I make a debt payment after January 1, it will be applied toward our -- any potential 2016 excess cash flow repayment requirement we would have. And so I'm saying I might as well take advantage of that opportunity. If you said, "could we pay some debt in Q4? " The answer is absolutely "yes." But from a -- the mechanism of the credit agreement, it just makes much more sense to make that payment in Q1 versus Q4.

And then you said about $50 million in the first half of 2016.

Yes, that's what we'd expect.

And then, Bertrand, just one more question on the demand environment. You have mentioned that you're planning for a soft environment over the next 2 to 3 quarters, and first half tends to be stronger than second half, so should we expect kind of a sub-seasonal first half. Or is there anything that you're seeing with your customers that would kind of offset that a little bit, hopefully?

Amanda, again as I stated earlier, we don't have any better crystal ball than the rest of the industry. What we are seeing right now is again, a contraction in fab utilization. And that's the result of 2 major factors: one is softening in end demand for new mobile devices and, more specifically, of slow demand for smartphone sales in China. And then a very concerted effort by many of our fab customers to reduce their inventory levels. And we believe that both of those trends we likely -- will continue in Q4, and could continue into the beginning of next year. So again, what I was saying earlier is that for internal planning purpose, we would prefer to be cautious and careful, and we're taking steps assuming that the slowdown could last up to 2 to 3 quarters. Do we know that with certainty? No we don't. But we'd rather be prepared -- again, for soft environment lasting a little longer.

And we will go ahead and take our last question from Chris Kapsch with BB&T Capital.

Chris Kapsch with BB&T Capital Markets. Bertrand, I wanted to ask about -- and apologies if you may have touched upon this. But just industry consolidation, generally speaking, it seems there is a way that's maybe accelerating downstream, and I'm just wondering what your thoughts are behind, not just the drivers of that, but what are the implications for Entegris, both threats and opportunities strategically, looking at a longer-term basis as that continues to play out?

Right. So -- I mean, I think that it certainly has been a lot of activity, a lot of consolidation in the space over the last 2 years, and I think it's probably a validation that scale matters in the semiconductor industry. When I think about our own recent acquisition of ATMI, I can tell you without hesitation that the new scale that we have created has created value to all of our stakeholders, be it customers, investors and employees. When you think about our core semi-markets, the process, challenges continued to be more complex and our customers want to rely on fewer, more capable suppliers. Suppliers that can live up to the expectations in terms of the technology they bring, the application knowledge that they have and the operational excellence that they can commit to, and all of that requires steady investment: investment in R&D, investment in CapEx, investment in talent. So I can tell you that at Entegris, with the acquisition of ATMI, we experience the benefit of scale firsthand. We were able to increase our R&D spending from 6% of revenue to 10% of revenue. We've increased our CapEx from about 6% of sales to 7% to 8% of sales. And we've been able to attract a great deal of talent in the company in the last year as a result of the bigger platform that we have created. And we've been able to do that all of that while providing superior financial return. So I think that scale matters. We have demonstrated that. And I think that's really the impetus behind some of the recent news that you've seen in the marketplace.

I'm actually going to go ahead and take one more question from Tony Venturino with Federated Investors.

Actually, a lot of my questions have been answered, but I just want to get a little more clarification on the gross margin guidance. You guys talked about 3 things, the supply issue, the plant closure and volume and it seemed, with the supply issue behind us that going forward, that the volume maybe is the bigger driver of the flat guidance, is that fair to say?

That's absolutely fair.

Okay. And I was actually going to ask about that consolidation issue, but that's already been answered. I guess, couple then, just clean-up questions. In the income statement, you had $5 million or so in other. Could you explain what that is?

Yes, the other related to gains on revaluation of some of our assets in Malaysia as the dollars appreciated versus the ringgit, and so it's currency-related and that was the $0.03 I spelled out. We made $0.23, but we have an unusual benefit $0.03 related to currency and $0.02 related to tax rate. But that $5 million is that $0.03.

Okay. And then in the working capital detail and the cash flow statement, there is an $18 million of other as well use of cash. Could you explain that?

That relates largely -- so we hedge our position in Malaysia. Had we not been hedged, that gain would have been closer to -- it would have been $15 million to $17 million. That offset in the cash flow statement. It was an $11 million offset as we closed out our hedge contract. So that was the vast majority of that amount.

And now that conclude our question-and-answer session. I will now hand it over to Bertrand for any additional or closing remarks.

Thank you. This concludes our Q3 earnings call, and I would like to thank you all for joining the call at short notice. Have a good day. Bye-bye.

And that does conclude today's program. We'd like to thank you for your participation. Have a wonderful day, and you may disconnect at any time.