Good day, everyone and welcome to Entegris' Third Quarter 2019 Earnings Release Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Bill Seymour, Entegris’ Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone. Earlier today, we announced the financial results for our third quarter of 2019. 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, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties are 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 SEC in Regulation G. You can find a reconciliation table in today's press release as well as on the Investor Relations page of our website at entegris.com. On the call today are Bertrand Loy, our CEO; and Greg Graves, our CFO. I'll hand it over to Bertrand.

Thank you, Bill. I will make some comments on our third quarter performance, how we see the industry environment and discuss our expectations for the balance of the year. Greg will follow with more details on our financial results, and our guidance for the fourth quarter. We'll then open the line for questions. Our third quarter performance was solid with many positives, but also a few things that will below our expectations. On the positive side, sales in the third quarter grew sequentially both as reported and also on an organic basis. Driving that top-line growth was strong momentum with our advance solutions in new nodes, in logic and foundry as we anticipated. This growth was particularly highlighted by good performance in our Microcontamination Control and Advanced Materials Handling division. In our second quarter call we said that our CapEx driven products had improved all the patterns. And this resulted as expected in sales that were up significantly sequentially in Q3 for products such as FOUPs, gas filters and gas purifiers. Good expense control was also evidenced during the quarter driven by disciplined execution and the benefits of the recently announced reorganization. All of this translated into improved profitability, with adjusted EBITDA levels reaching 27% of sales, which represented a sequential increase of 13%. On the other hand, the performance of our SCEM division was below our expectations for the quarter. This was the result of temporary supply constraints in our specialty coatings and specialty gas businesses and the timing of shipments in our graphite business. We believe these operational issues are largely behind us and expect SCEM to end the year on a high note. Finally, gross margin was lower than expected for the third quarter. We expect gross margins to improve in Q4 and Greg will provide more…

Thank you, Bertrand. Our third quarter performance was solid. Q3 sales of $394 million were in line with our guidance. Compared to a year ago sales were down 1% on a reported basis and down approximately 3% on an organic basis. Sales were up 4% sequentially on a reported basis and were up 2% on an organic basis. Q3 GAAP diluted earnings per share were $0.30, down 12% year-over-year and down 67% sequentially as Q2 included the proceeds associated with the terminated Versum transaction. On a non-GAAP basis EPS of $0.50 was up 9% year-over-year and up 28% sequentially, more favorably expected non-GAAP tax rate related to discrete items contributed approximately $0.05 to EPS in Q3. Moving on to gross margins, GAAP gross margin was 43.2% and included the negative impact of approximately $5 million from an inventory write-up associated with the recent acquisitions and restructuring costs. Non-GAAP gross margin was 44.6% in Q3. Gross margin improved modestly sequentially, though lower than expected, primarily driven by higher manufacturing costs and unfavorable mix. We expect gross margin to approach 45% on a GAAP basis in Q4. On a non-GAAP basis, we expect gross margins to approach 46% in Q4, driven primarily by higher sales volumes. GAAP operating expenses were $118 million included a total of approximately $31 million from amortization of intangible assets, restructuring costs, integration costs and transaction fees associated with the MPD and Anow transaction. Non-GAAP operating expenses in Q3 were approximately $88 million. The favorability was driven primarily by effective expense control and the impact of the announced cost reduction initiative. We expect non-GAAP operating expenses will be $90 million to $92 million in the fourth quarter. Last quarter, we announced the strategic organizational realignment aimed at increasing our customer responsiveness. We realized the modest amount of savings…

[Operator Instructions]. We'll now take our first question from Toshiya Hari from Goldman Sachs.

I had two, one on your Q4 guide and the other on M&A broadly. In terms of the Q4 guide, Bertrand you're obviously guiding revenue up I think 7% or 8% sequentially at the midpoint, which is significantly above typical seasonality. How much of this is M&A? Just as a reminder, how much of it is organic? And then within organic, the organic component, you talked a little bit about the node transitions that contributes to growth. But is there anything kind of one-time embedded in the Q4 guide or when we think about modeling Q1 of '20 and beyond is Q4 the new baseline? And then the second part of that first question, in terms of gross margins. Greg, you talked about higher manufacturing costs and mix being an issue in Q3. Is the sequential improvement into Q4 essentially those two kind of abating or normalizing or is there more to it?

Good morning, Toshiya. Let me start with the first part of your question and then I will let Greg answer the gross margin question. So to go back to the Q4 guidance, the midpoint represents an 8.5% of sequential growth. And the way you get there, first, if you look at the industry and the assumptions that we have around the industry, it's a combination of wafer starts that we expect to see up modestly sequentially, or down -- I'm sorry, modestly sequentially. And we expect the industry CapEx to actually enjoy a pretty nice sequential rebound in the mid-teens sequentially as a result of the uptick that we expect to see in logic and memory related spending. So that's the industry backdrop, which is overall a blend of 2% up sequentially. So add to that about 1 basis points coming from Anow. So Anow is the Chinese filtration company that we acquired in Q3, and we expect them to contribute about $4 million, a bit more than $4 million in Q4. So, the rest is really organic growth and then that implies a 500 basis point organic growth in excess of the market. And the strong performance will come from liquid filtration, deposition materials, specialty coatings, graphite platforms. So most of which are really linked, as you mentioned, to node transitions in advanced logic and advanced memory. So second part of your question, well, is it the new normal? I'm not sure I would necessarily run rate that momentum. We like our momentum but as you know a lot of those new node transitions that we expect going into 2020 are still hard to forecast, both in terms of the timing of those transitions as well as the magnitude of those node transitions. So, again, let's just focus on Q4 for now. We like the momentum in Q4, I think it bodes well for the future. And I will turn the mic to Greg to answer the question on gross margin.

Yes. Okay. So with regard to gross margin, a couple things. One, we talked about Q3 being slightly short of our guidance and that was a function of mix and some manufacturing inefficiencies. As we move into Q4, the improvement is really twofold, but we don't expect much change in mix. The improvement is largely volume and improved manufacturing efficiencies.

And then my second question on M&A. Bertrand, you touched briefly on the Anow acquisition in your preferred remarks. But if you can kind of elaborate on that, perhaps the history that you guys have with the company and what was unique about Anow and the potential revenue synergies when you think about the combination over the next couple of years? And then related to that, if you can touch on the M&A pipeline going forward? Clearly M&A is becoming a bigger percentage of your long-term growth model it seems like? How comfortable are you with the sustainability of M&A as you kind of look across your businesses over the next couple of years? Thank you.

So as you mentioned, Toshiya acquisitions is certainly a major part of our growth strategy. I believe that we've been very effective acquirers in the past. And our M&A pipeline remains rich and I believe actionable in many ways. So in other words, I think we would have opportunities to add to the already long list of small to midsized deals that we have been competing in 2018 and then 2019 with DSC, MPD and Anow in Q3. When it comes to Anow, this is a company we know well. It has been a long time supplier of certain types of membrane to Entegris. And we've been in discussion with Anow for a number of years. So what we like about this acquisition is that it brings not only complementary membrane technology, but also expands greatly the filtration portfolio that we already have at Entegris. And that's going to help us not only expand in China and capitalize on the strength of the Chinese market, but also access and help Anow expand their reach and expand their technical capabilities to access non-Chinese market on a global scale. So we are very excited to welcome our new colleagues to the Entegris team. We have high expectations for this business. This is a business that today generates a little bit less than $20 million annually. And we would expect that business to grow in the mid-20s on a CAGR basis for the years to come.

We'll now take our next question from Sidney Ho from Deutsche Bank.

I just want to follow with the previous question. I know Q4 guidance of 8% to 9% is pretty good. But it's not as much as your implied guidance from the last quarter especially given there's some upside from large Taiwan customers, and I think you just mentioned that Q3 was supply constrained in I think SCEM. I wonder if there's any offset here as compared to what you expected a quarter ago?

So Sidney, no, I think what we are guiding to is very much consistent with what we have been describing. If you look at Q4 and you put that in the broader context of the full year performance, we are very much in line with the stated objective of outpacing the industry by 500 to 600 basis points in 2019. And I think that that's really what the midpoint of that guidance would suggest. So no, we feel good. As I said, we feel good about the success of a number of new products that we introduced in the market this year. We feel good about the level of engagement with our advanced logic and advanced memory customers. And frankly, I think that the guidance that we're providing for Q4 and for the full year I think is well ahead of our stated long-term objectives of outpacing the industry by 200 to 300 basis points.

My follow-up to that is, I think last quarter you expected the industry MSI for this year to be down 3% to 4%. What are your thoughts now, I guess for both MSI and the CapEx side of things? And do you have any preliminary thoughts on MSI for next year, and what are the moving parts that we should be paying attention to?

So I think that last time we spoke we were projecting MSI down in the mid-single-digits, and I think right now we expect MSI down about 7% on a full year basis in 2019. And we expect CapEx to be down into low-teens for 2019. And that's really what is behind our full year guidance for 2019. It's too early for us to quantify our views on 2020. I think that there's certainly a lot more optimism in the industry right now, more positive tone around capital spending and production levels. But I think it's too early for you -- for us to give you a guidance around 2020.

And just to be clear, the CapEx being down low-teens is an improvement from what you thought before?

Yes.

Our next question comes from Patrick Ho from Stifle. Please go ahead your line is now open.

Bertrand, maybe first is a big picture question in terms of the opportunities for your Specialty Chemicals and Electronic Materials business, as NAND goes to additional layers, how do you see the opportunity from a content perspective, both I guess from an increase in layers as well as potentially new materials being used? How do you see that opportunity as the 3D NAND industry moves to 128 layers and above?

That certainly remains one of the most attractive opportunities for us, both in terms of deposition materials, but also in terms of new ways of cleaning the wafers in between various deposition steps and after the CMP process steps. So I think we have many opportunities for us to position our SCEM portfolio on the technology roadmap of advanced memory makers and our teams have been very busy doing that for the last several years. So as we see more wafers produce that 96 and then 128 layers, you should see an acceleration in the top-line of SCEM platform.

And maybe as my follow-up question, looking at the advanced foundry and logic and where there's also a lot more changes on the manufacturing front, there's also a lot more new materials being used in those manufacturing processes. How do you look at advanced logic in terms of the opportunities ahead, both from a content perspective also and new materials that are such as cobalt. Materials from that front where it hasn't been used previously, how do you see the opportunities from a big picture perspective?

I think that all of those opportunities are again, very, very exciting. We have been consciously focused on some of those new materials, cobalt, lithium and a few others. Waiting for those materials to be broadly adopted by the semiconductor industry, both in logic and memory, I think we are approaching that turning point. And I think that with the acquisition of DSC and MPD and all of the investments that we have made internally, I think that we are really well positioned to support the adoption of those materials. Many of those materials by the way will be solid materials. And that comes with a number of challenges. And I think that at Entegris is we've been able to really develop some very unique solutions, leveraging the capabilities of our three divisions to palletize those materials in a solid form, but also to develop a very unique delivery system that considerably made the solid before the metal can be deposited onto the wafer and purify the gas on the outlet. So we have that very unique system approach that is leveraging all of the capabilities of the various business units that we have in our portfolio. So again, I think we are very well positioned to support the adoption or the introduction of those new metals in the advanced chips and we just cannot wait for that to be the case.

And final question from me related to those two questions for Greg in terms of R&D spending. I know R&D can be lumpy just because of the timing of certain projects. But given a lot of these changes and inflections in the semiconductor manufacturing process, how do you see R&D longer term? Is there a need to kind of, I guess, elevate R&D to keep up with these? Or do you feel very comfortable with the percentages you have today?

Our targeted R&D spend is 8% of revenue over the long haul Patrick and we were a little bit light of that in the most recent quarter. But that's our intent now, but you're accurate. I mean, we will need to increase that spending over time. But at this point, our intent is to increase that really in line with the increases in revenue.

We'll now take our next question from Chris Kapsch from Loop Capital Markets.

So I'm juggling some conference calls this morning. So apologize if you’ve touched on this already. But obviously, there was -- everybody saw the news about TSMC's pretty dramatic CapEx increase, and I guess pundits are referring that up about being all about 5G. But my curiosity is that you've -- Bertrand you've talked about how impressed you were with TSMC's ramp and yield improvement at 7 nanometers and that they're already starting to take out 5 nanometers. So my question now to you is, is there any way to frame up the opportunity for Entegris as TSMC transitions and ramps to 5 nanometer node in terms of either the process of record wins that you've been able to achieve or if there's a way to think of it in terms of content per chipset? And just timing on -- and which segments would benefit the most from that transition.

So Chris, we won't talk about customer specific opportunities, we have never done that. But I think if you look at our performance in Taiwan, I think that itself is a good proxy for the magnitude of the opportunities that we have at certain customers on the island. I would only say that a lot of the new architectures will drive the need for the adoption of new materials and new chemistries. We also require greater level security and all of that will actually render our value proposition increasingly important for all of the technology leaders. So I think we are really well positioned. This is really what is behind our long-term commitment to outpace the industry by 200 to 300 basis points. So again, putting aside any customer specific consideration, the reason why we've been willing to make that very bold commitment to consistently outpace the industry is because we believe that there are a number of exciting opportunities in SCEM, in filtration and even in AMH at those advanced nodes, and I would leave it that.

Our next question comes from David Silver from C.L. King.

I'll also preface my remarks by apologizing, I have had to jump around a little bit. I'd like to maybe follow-up and broaden the last question regarding TSMC. But during this earnings period, we've heard comments from other chip makers, some of whom was cut their CapEx, some of whom have forecast sharp declines in revenues for the coming quarters, and of course, there were the comments from TSMC. And I'm just wondering, given your perspective on the industry, could you -- what might be the one or two key data points that you take away? So for instance, is this a directional divergence between let's say, IDMs and foundry, memory versus logic? And I'm also wondering, if there is a divergence between maybe a more rapid adoption of the next node or the node transitions you've mentioned. And maybe some diminution or erosion in the IoT demand from legacy nodes that I believe has been a pleasant surprise or a pleasant tailwind to your business and others suppliers over the last few years? Thank you.

So the way I would probably answer the question is to say that 2019 has been a difficult year to navigate. The industry was choppy. You could see very uneven trends across many different segments and I think you mentioned some of them with some muted levels of production in mainstream fab, some high level of activity on the leading edge and industry CapEx that was really playing yo-yo throughout the year. And I think that this is why we are actually very proud of our performance in 2019. I think that we've been able to demonstrate the resilience of our business model, and the relative stability of our platform in what is still again a very challenging business environment in 2019. So, again, that bodes well for hopefully better years where most of those drivers turn positive. And as I mentioned, I think that there are a lot of reasons for us to be excited about what's ahead of us on the technology roadmap of the advanced memory and advanced logic makers.

And then just a quick -- I'd like to follow-up maybe on the question earlier I believe regarding your M&A pipeline. So you've noted that your company has made a couple of niche acquisitions to support your efforts in advanced deposition materials. And you also mentioned that the pipeline remains rich. And I'm just wondering, does advanced deposition materials remain a priority as you explore the pipeline of opportunities? Or is the strategy at this point to develop what's already in house? Thank you.

So if you go back, you would see that our capital allocation framework has been very transparent and very consistent over the last several years and we have consistently highlighted filtration, highlighted materials, and high-treated packaging as areas of our portfolio where we would want to add to. So when it comes to deposition materials, I think that's one of the areas where you should expect us to continue to invest into and we talked about the reasons behind that choice but there are other types of materials that could actually become of interest to us. And as I mentioned, I think that pipeline that we're looking at is a reflection of where we believe there’s values to be created and growth to be generated. And I think that we've been pretty successful at acquiring and integrating companies. I'm actually very pleased with the results of the various acquisitions that we've completed over the last two years, and I certainly hope that we can add to that pipeline.

Our next question comes from Amanda Scarnati from Citi.

Just talking about sort of capacity. You'd mentioned earlier that new capacity was coming online earlier this year, with the expectation to add $4 million to $5 million in revenue this quarter and next quarter. Can you just talk about how that capacity is ramping up? And is it still already fully committed or are you seeing anything different with regard to that?

Yes, Amanda, this is a good question. And this is actually one of the operational setbacks that we faced in our SCEM division in Q3. The capacity that we were expecting to bring online in Q3 had some start-up issues, and we're late. And we expect that capacity to come online within the next couple of weeks at this point. So we didn't have access to that capacity in Q3. We expect to recover from that in Q4.

And so when that is fully ramped up, is it still about $5 million a quarter at sort of max capacity? Or is there an opportunity to kind of recover some of that, that you would have spent in or would have received in the third quarter?

Yes. Given where we are in the quarter, I would say I’d expect probably 2 million to 3 million in Q4 but then you're right. Once the full capacity is online and we have the benefit of that on a full quarter, I’d expect that to be closer to 4 million to 5 million and we should be able to recover some of that business indeed.

And then can you just remind us what your percentage of sales as to leading edge versus lagging edge? And how that's changed over the last couple of quarters? Are you starting to see any more sort of new activity coming from the leading edge customers?

We don't track that very precisely. I mean what we look at this really -- would be revenue coming from new products and that number is about 30% roughly. It has come down a little bit this year, simply is a reflection of the fact that the activity levels in advanced memory was a bit lower in '19 than '18. But I think we're seeing the inflection point and I think that we expect new products to contribute back to about 30% in 2020 and beyond.

Our next question comes from Blake Keating from Seaport Global Securities.

This is Blake Keating on for Mike Harrison. You commented last quarter that visibility was getting better because forecasts were turning into orders. Is your visibility still improving such that you can kind of see that spend recovery? Or should we expect a more uneven recovery over the next three to four quarters?

So that comment was really done in the context of our CapEx business. And we -- I believe that we have actually a pretty good visibility on that part of our business, which represents about 30% of our total platform.

And then another question on M&A. Can you update us on how the integration process is going and maybe your confidence level in being able to leverage these additional capabilities? And then also, you kind of touched on it already. But are there still some regions of the world or capabilities where you could improve through acquisitions? And are there acquisitions currently in the pipeline that you're excited about?

That's a good question. So if you look at the acquisitions that we completed last year, so SAES Pure Gas and PSS, both of those acquisitions are doing extremely well. Actually both of those platforms generated record quarters in Q3. So very, very pleased with the performance of those businesses. DSC and MPD were still in the very early innings of that integration. And there's actually a lot of -- a lot of the integration of MPD would have to do with how we integrate DSC, MPD and our own capability. So that's an integration plan that will be completed by the middle of 2020. So it's a little bit too early frankly for us to comment on that. But the teams are very focused and we are obviously keeping a very, very close eye on that. So the second part of your question around the regional footprint and our desire to maybe strengthen our footprint or capability through M&A in certain regions. So I think Anow is a perfect example of that. We have been investing a lot in China, obviously. We are -- we have invested in new sales offices, in local partnerships. We announced an investment in a new tech center in Shanghai earlier this year. And Anow is just another option for us and that option is really around manufacturing not only filters, but potentially later on other types of Entegris products in China to support our local customers. And so actually that’s one of the many reasons why we are very excited about Anow.

Next question comes from Paretosh Misra from Berenberg.

In your CapEx driven business, how is the book-to-bill ratio versus what it looked like three months ago?

So still greater than 1. And so, I mean, again, we have a fair amount of visibility on that part of the business. And we expect that business to do pretty well in Q4 as well.

And then the second -- so this -- it's more like a housekeeping question. But in the acquisition that you did in Q3, Hangzhou Anow, have you provided any revenue or EBIT expectations from that?

I just mentioned earlier that current revenue is just short of $20 million and that we're expecting the business to grow in the mid 20% on a CAGR basis over the next few years. We didn't comment on the profitability profile of that business.

Got it, and apologies for missing that. And last one, and….

It’s okay.

Sorry if you've answered that one already, too. But the $20 million in cost savings that you flagged in the previous earnings call, is that all completely incorporated in your Q4 expectation or some of that might come in next year?

Yes. What we're saying is by the end of Q4 we'll see the full benefit of that. So we saw -- you look at our OpEx, in Q3 was slightly better than expected, part of that was as a result of those cost savings. We'll see some additional parts of that in Q4, but will be at the full run rate as we enter Q1.

Our next question comes from Krish Sankar from Cowen and Company.

I have two of them. Bertrand, if I look at your China revenues year-to-date, so it’s about $150 million compared to the last year-to-date it was about $145 million or so. I was under the impression China has been spending quite a lot, so I'm kind of curious why your China-based revenues haven't grown more in-line with Chinese CapEx versus -- just any color on that would be helpful? And I also had a follow-up.

Yes, so if you look at our China business on a year-to-date basis, it's actually up 3% which I think is a good result given the fact that the level of CapEx in China this year in '19 was significantly lower than last year. So -- and if you look at it on a sequential basis, our Microcontamination business was up, our AMH business was up. There were a couple of very customer-specific situations for our SCEM business to be down sequentially in China. But overall, we feel pretty good about the level of activity and our performance in China, given the industry context and the geopolitical context in 2019.

That’s helpful, Bertrand. And then final question on gross margin. Clearly foundry is spending a lot right now and at some point in the future, memory will recover. Does your gross margin profile defer between selling to foundry and memory customers?

Actually there's really not much a difference in margin between the two customer groups, nor is there a difference in our margin really between unit-driven products and CapEx driven products. I mean I would say really in all categories we have products that are well above the corporate average, some of that are below the corporate average, obviously. But as it relates to any specific category, our margins are relatively similar.

Our final question is a follow-up from Toshiya Hari from Goldman Sachs.

Thanks so much for taking the follow-up. Bertrand, your North America business was up nicely. I think up 10% year-to-date. I think if you look at just the third quarter I think it was up in sort of the mid to high teens. Was the node transition at the leading edge in logic kind of the key driver there on a year-over-year or was there more to it, perhaps M&A? Thank you.

Yes, so -- right. So there’s couple of components. One is indeed the inclusion of MPD in North America revenue. But then on an organic basis, very significant growth in our Microcontamination business. And that's a function of many opportunities in leading edge fabs, as well as opportunities with chemical manufacturers supplying some of those leading edge nodes as well, so indirectly all related to leading edge. So -- but as you said, very, very pleasing to see the strength of North America sequentially and on a year-to-date basis.

That's our final question, operator. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.