Good day, everyone, and welcome to the Entegris Q3 2022 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, VP of Investor Relations. Please go ahead, sir.

Good morning, everyone. Earlier today, we announced the financial results for our third quarter of 2022. 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 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 a reconciliation table in today’s news release as well as on our IR page of our website at entegris.com. On the call today are Bertrand Loy, our CEO; and Greg Graves, our CFO. With that, I’ll hand it over to Bertrand.

Thank you, Bill, and good morning to all. Let’s turn to our results. Sales growth and overall execution were solid in the quarter, especially considering the growing uncertainty in the semi market. For the quarter, on a pro forma basis, sales were up 14% year-on-year and down 2% sequentially. On a reported basis, sales were up 71% year-on-year and up 44% sequentially. EBITDA margins were 30% in the quarter, in line with our guidance, and non-GAAP EPS on an as-reported basis was down year-over-year, mostly reflecting the increase in interest expense. Let me make a few additional comments on our sales performance. In the third quarter, growth in our unit-driven solutions was led by liquid filtration, formulated cleans and CMP consumables. Solutions, which are of growing importance to our customers’ technology road maps. Growth also remained strong in the quarter in many of our CapEx-driven solutions, which are linked to new fab investments. So far this year, we have yet to see any meaningful slowdown in new fab construction projects, and this has helped sustained strong growth in fluid and wafer handling solutions as well as gas filtration and purification products. As I said, our overall sales performance was solid in the quarter, especially in light of the emerging industry softness. And while sales were slightly below our guidance, they would have been closer to the midpoint of the range, excluding the impact of foreign exchange and the underperformance of the pipeline and industrial materials business, the business we expect to divest this quarter. Moving on to an update on the CMC integration. As we said in our recent analyst meeting, we’ve been making fast progress on many critical fronts. The organizational structure was largely finalized during the integration planning pre-close. And we are on track to achieve the cost…

Thank you, Bertrand, and good morning, everyone. Our sales in the third quarter were $994 million, up 14% year-over-year and down 2% sequentially on a pro forma basis. On a sequential basis, FX had an approximately $12 million negative impact to net sales in Q3 largely due to a strengthening in the U.S. dollar in September. GAAP gross margin was 37% in the third quarter. As expected, gross margin was negatively impacted by a purchase accounting inventory markup of $62 million related to the inventory that came with CMC as it came on to our balance sheet at fair market value or essentially the selling price. Non-GAAP gross margin was approximately 44% in Q3. Gross margins were lower than expected primarily driven by lower volumes and an inventory valuation adjustment in AMH. We expect gross margin to be approximately 42.5% both on a GAAP and non-GAAP basis in Q4. The drivers of the expected sequential decline in gross margin are lower volumes, unfavorable FX, and mix, the lower – I’d note that the lower volumes are in higher-margin products. GAAP operating expenses were $357 million in Q3, GAAP operating expenses included $176 million of non-GAAP items, $65 million of amortization of intangible assets, $58 million of contractual deal-related integration costs, including change in control payments, $32 million of deal-related transaction costs and $21 million of integration costs. Non-GAAP operating expenses in Q3 were $180 million, in line with our expectations. We expect GAAP operating expenses to be approximately $259 million to $264 million in Q4 and non-GAAP operating expenses to be approximately $170 million to $175 million. Q3 GAAP operating income was $15 million. Non-GAAP operating income was $253 million or 26% of revenue. It’s also worth noting that as a result of higher asset valuation and related higher depreciation…

Thank you. [Operator Instructions] And we’ll take our first question from Sidney Ho with Deutsche Bank. Please go ahead.

Thank you. Good morning, everyone. So at the Analyst Day, you guys talked about three-year CAGR between 2022 and 2025 for MSI to be up 6% and CapEx to be flat. How are you thinking about for 2023 only at this point for both MSI and CapEx, given, what we learned from the memory companies and maybe impact of these China restrictions that you mentioned? And specific to MSI, is there a range that you can share with us?

Hi, Sidney. So obviously, there is growing evidence that we are headed into a downturn in 2023. But it’s too early for us to give a much quantification of the various industry drivers. I think at this point, the depth and the duration of the downturn remain very unclear. And I would make a similar statement when it comes to the permanent impact of the new export controlled restrictions. That situation remains dynamic. We have some homework to do. We’re waiting clarification from the U.S. government. So it’s a little bit too early for us to comment about the impact of that on 2023 as well. We will do all of that when we report our Q4 earnings sometime in early February.

Okay. Maybe my follow-up question is on the gross margin. So there seems to be a lot of cross current impacting gross margin. If I look at your Q4 guidance of 42.5%, can you help us understand how much are you – do you think you are underearning what you think a normalized gross margin level could be at the Q4 revenue level? And if you can talk about the various components that impact gross margin in the Q4, that would be great? Thank you.

Yes, hi Sidney, it’s Greg. I’m not going to comment on the gross margin beyond Q4, because as you point out, there are a lot of cross currents. What I will say is that and when I look at the fundamentals of the business, I don’t have any concern over sort of the long term – longer-term gross margin trend. I mean, look, I mean, if you think about some of the cross currents, I mean, we clearly are experiencing higher raw materials, higher logistics costs. But at the same time, we’ve done well on the pricing front on a very strategic basis, not on an across the board basis. So like I said, fundamentally when I think about the longer-term margin, I don’t have any particular concern. When I look at the outlook for Q4, it really boils down to the fact that the weakness in the business that we’re experiencing tends to be in our – some of our higher margin products. And so that is essentially what drives the dip in Q4. And obviously, the lower volumes play into it as well.

Okay, thank you.

[Operator Instructions] And we’ll take our next question from Kieran de Brun with Mizuho. Please go ahead.

Hi, good morning. I was just wondering maybe to begin on the export controls, is there a particular segment that’s getting more impacted from kind of the U.S. export controls? And then if it does end up being permanent, how do you think about reallocating some of those sales in different geographies? Thank you.

Yes, so I would say that each divisions will be impacted by the new export controlled rules. But APS in particular is where we expect to see the biggest impact, mostly because of the greater historical exposure to the China market. When it comes to the second part of your question, it’s too early for us to really elaborate on that. I would be speculating and I don’t want to do that.

Great, thank you. And then maybe just a quick follow-up on APS, in regards to the CMP product lines. I mean memory, I think anecdotally from what we’ve heard from different industry participants has been a little bit weaker. I know it’s preliminary for 2023, but maybe you could just discuss how that kind of outlook and the demand backdrop changed maybe from 2Q to 3Q, and how you’re thinking about the fourth quarter into 2023? Thank you.

Yes, so I won’t go into 2023, but I certainly can try to be helpful in terms of the short-term trends that we are seeing in Q3 and then what we expect to see in Q4. If you think about it at high level, I would say that when it comes to the Q4 top line guidance, the larger factor explaining the sequential decline is really the anticipated loss of revenue from China as we comply with the new export control rules. And we estimate that to be about $40 million to $50 million for the quarter. The second factor is in fact the impact of the expected divestiture of the PIM business, which we expect to close in late November, and that will have a negative impact of about $10 million sequentially Q4 over Q3. And the last factor is the expected sequential decline in the industry CapEx and MSI. And overall we expect the industry to be down sequentially in the mid-single digit. So if you think about it in terms of the various divisions, as I said, I think I would expect the division, the most impacted by those factors to be APS simply because of their exposure to memory and China. So when you think about Q4, I would say that I would expect MC, AMH and SCM to be essentially flat to modestly down or again, and including all of the factors, the China impact as well as the industry headwinds.

Great. Thank you very much.

We will take our next question from John Roberts with Credit Suisse. Please go ahead. John, your line is open. You may be muted on your side.

Sorry. Yes, thank you. Sorry, I was muted. Are there any inventory effects that are exacerbating the 40 million to 50 million in the December quarter? Is that really all consumption driven and then it will get bigger as we go into 2023?

Look, I mean, we don’t think so. I think that, as I said, that the situation remains pretty dynamic and I’m not quite ready to quantify the impact of those restrictions in 2023. I mean, we’re currently working with the U.S. government to get further clarifications on the rules. We are working with our China customers to get certifications and of course, we’re working internally on operationalizing all of those new rules. So, we have work to do and we will update you as we complete the work and as we better understand the long-term impact of those new rules.

And now that you’ve had a few more months to review the portfolio, are there any additional divestments that are envisioned?

During the recent Analyst Call, we said that we have for the most part completing the analysis of the portfolio. And then the questions that we have now is really around how and when to execute on some of those decisions. So I’m not going to go into any more details than that and just commit to you that we will update you when appropriate.

Thank you.

We’ll take our next question from Mike Harrison with Seaport Research Partners. Please go ahead.

Hi, good morning. We’ve seen a number of your customers announce that they’re pulling back on their capital expenditure plans. Are those generally just reducing capacity expansions? Are there some delays that are happening in their technology roadmaps? Maybe give us a little bit of a sense of kind of what that means for node transitions as you look forward in the next few years?

It's a good question. It's an important question. And obviously, as you would expect, we're very focused on understanding some of those decisions that our major customers will be making over the next 12 to 18 months. But as of right now, we are not seeing any slowdown in new fab construction projects, and that's good because that remains the primary driver for our CapEx projects. More broadly, we continue to expect steady node transitions in 2023. That is most likely going to be particularly true in the memory segment. Typically, in downturns, we have seen greater focus by our memory customers to shift more activity to the leading edge where they enjoy greater margins and potentially enjoy a competitive advantage. So I think that typically downturns are an additional incentives for our memory customers to aggressively transition to new nodes, so again, I think that’s the current operating assumption subject to change, and we will update you in early February when we report our Q4 results.

All right. And then my other question is on cash flow. I was wondering if you would expect slower market demand to impact your cash flow over the next year or two and therefore, impact your plans to reduce balance sheet leverage.

Yes I’ll make two comments on that. One is, I mean obviously, if the profitability declines significantly as a result of a major downturn and that’s going to impact our cash flow. But I would also highlight that in prior downturns, the impact has not been what you might expect because obviously, we’ve got high-quality receivables. Those come off the balance sheet. We should see reductions in inventory in a downturn, all those items help the cash flow as well. So I think it’s inevitable that there would be some decline, but I don’t think it’s as great as you would expect because of the impacts of working capital. And the other point I would make as it relates to debt reduction is we do intend to when the PIM transaction closes later in the quarter, we’ll pay down the balance of the bridge loan that we have outstanding that is our highest cost debt. We’ll probably – with that paid off, I mean that’s our really only near-term obligation will probably be a little bit more aggressive in terms of – I shouldn’t say, aggressive is not the right word, we’ll probably carry a little bit lower liquidity levels, which will also allow us to pay down additional debt.

[Operator Instructions] We’ll take our next question from Timothy Arcuri with UBS. Please go ahead.

Hi, thanks. Bertrand, I wanted to ask on China. So I mean, based on what the equipment companies have already said that’s coming out of their shipments for the fourth quarter, I mean some of them can sort of, paper it over with deferred revenue, but there’s clearly about $2 billion less of wafer fab equipment shipping inside of Q4. And so I’m a little surprised to hear that the impact from China is spread across the businesses. And in fact, you said even more in APS and really not as much inside of AMH. So can you talk about that? And I guess also as it relates to gross margin, I wanted Greg, you to clarify your comment because I think you said that gross margin is lower because high-margin businesses are down, but I mean, even APS is a relatively low-margin business. So can you just clarify that? Thanks.

Yes, Tim, I think your assessment of the – how the export restrictions are impacting our business is correct. It’s impacting our business, our direct business to fab customers, and it’s impacting indirectly Entegris with some of the components we would typically sell to the equipment makers. Having said that, I stand by the comment I made earlier simply because there is actually a pretty significant backlog right now that we have with our OEM customers. And I think that, that should actually moderate the short-term impact of those China restrictions when it comes to AMH in particular. So again, I was making a comment in the context of Q4 and the impact to Q4.

Yes. Tim, as it relates to the gross margin, I think my comment would be within – well, each of the divisions, there’s a relatively wide dispersion in terms of gross margins on the various products, and so I’ll stand by my comment that we’re losing volumes in some of our highest margin products.

Okay. Cool. Great. And then I guess, last for me. So it sounds like the impact from China on AMH is probably still to be seen as you get inside of 2023, and AMH, we know that WFE is going to be down 25% next year, 2025. AMH is 60% CapEx driven. So is it kind of fair? I mean I’m not asking you for like firm guidance next year, but is it sort of fair to assume that AMH is down maybe half of that, maybe it’s down like low to mid-teens when you take into account the fact that the CapEx is coming down and also you probably haven’t even felt the full impact from China within AMH. Thanks.

Look, again, I won’t comment specifically on 2023, but remember a few things is that – so it’s true that AMH is the one division most exposed to the industry CapEx. But also remember that about half of their exposure relates to new fab construction projects. And as of right now, most of our customers are still proceeding with those construction projects. This could change. But as of right now, this is not the indications we have received from our customers. So it’s too early for us to really quantify the impact of many of those industry drivers, we will do that in February.

Okay, Bertrand. Thank you.

Thank you.

[Operator Instructions] We’ll take our next question from Chris Kapsch with Loop Capital Markets. Please go ahead.

Yes, good morning. And just one follow-up on the comments about the weaker sequential trends and higher-margin products. So I just want to know – make sure I understand if it’s fair to or accurate to extrapolate that to weakness in memory. And then within that, I mean having covered CCMP, I’m assuming you’re talking about the tungsten slurries being the higher margin. So you’re feeling that. But I want to confirm that, but also just curious if the weakness in memory, are you seeing it across technology nodes? Or is it – is the slowdown more pronounced in more advanced technology nodes, are they slowing the progression to the higher density architectures and therefore, affecting some of your growth in your – in your SCEM products that are – that have higher content per die, if you will, in those advanced nodes. Thanks.

Yes. So Chris, I’ll take the first part or second part, and then I’ll turn back to Greg on the margin implications. But we have seen in Q3 sequential decline in our memory segment. And that did impact both APS and certain product lines of our SCEM division as well. And we expect to see a repeat of that in Q4. The two things that I would want to highlight is that, first, we saw a significant contraction in HDD business. And I know it’s – and that’s actually a series of applications that APS has great exposure to, and that’s one of the reasons we’ve seen maybe a more pronounced contraction in APS as compared to SCEM. On a going-forward basis, typically as I said earlier, we expect our 3D NAND customers and DRAM customers to migrate more wafer productions to the leading edge where they have a greater competitive advantage. So again, there are a lot of puts and takes. We expect, again some headwind from an industry standpoint, but we expect an offset in terms of the growing Entegris content per wafer at the leading edge, so we try to put all of that into numbers in a few months, but we’re not ready to do that on this call today. Then on the margin front Greg, I don’t know if you have anything...

Yes. No. I mean, Chris, I would – I’m not going to get into specifics of margins by products and which are the higher and which are the lower other than to say that there is dispersion within each of the divisions. But I would say your comment around your historical observations on CCMP would be accurate. And I would also say, as it relates to the comment Bertrand just made around SCEM. I mean the volumes that we’re losing there tend to be the higher margin volumes that were losing their tend to be more exposed to memory as well. But in both of those divisions, we’re seeing the degradation in volume tends to be in the higher margin products.

Okay. Thanks for that. And then sort of a different topic, I guess, industry downturns in the past have provided an opportunity for more tool time to qualify next-gen products. And so just curious if any observations about what innovation programs you might be most excited about looking through the cycle and/or it may be too early, but just any evidence that some ideas around just the cross-fertilization of the two businesses might lead to top line synergy programs? Any evidence that anything – any innovation or programs that you’re excited about that you’re willing to share at this point? Thanks.

I’m glad actually that you’re asking the question in the way you are, Chris and you’re right, that downturns actually provide many opportunities to engage with our customers. And I can tell you that our customers are seeing the potential of this expanded platform. They understand that today, Entegris is emerging as a must-have partner and emerging as the partner that can most likely help them achieve both greater performance at a device level, but also faster time to yield. So we are seeing a lot of excitement with our customers, a lot of excitement internally with the development teams as well, and the downturn will provide an opportunity for us to really engage with our customers, validated a lot of the hypothesis that we have, and some of which we have shared with you during the recent Analyst Day. So I won’t go beyond what I already mentioned during the Analyst Day, but I think there are many opportunities for us within the CMP module to co-optimize a number of solutions. And then I think longer term, there is a desire for us really to provide that end-to-end solution for our customers from fin composition to polishing solutions all the way to best known methods of post-CMP cleaning. So the downturn will provide us many, many opportunities to use the tool time that our customers will have to actually validate many of those solution sets for them. So again, there is always a silver lining.

Thank you very much.

Yes. Okay. Thank you, Operator. That was the final question. Thank you, everyone, for joining the call today. Please reach out if you have any questions, and have a good day. Thank you very much.

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