Good day, everyone, and welcome to the Entegris Q4 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, Entegris’ VP of Investor Relations. Please go ahead, sir.

Good morning, everyone. Earlier today, we announced the financial results for our fourth 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. To help in your modeling, we had provided in our earnings slide the pro forma P&L for all the quarters and full year of 2022. On the call today are Bertrand Loy, our CEO; and Greg Graves, our CFO. With that, I’ll hand the call over to Bertrand.

Thank you, Bill. Good morning to all. I’d start that our results in the fourth quarter were solid, especially in light of the recent decline in the semi market. For the quarter, on the pro forma basis, sales were within our guidance up 1% year-on-year and down 5% sequentially. On a reported basis, sales were up 49% year-on-year. EBITDA margins were 28% in a quarter and non-GAAP EPS was $0.83. Looking at the full year 2022 pro forma sales of $3.9 billion were up 13%, and EBITDA exceeded 29% of sales. We estimate our sales growth was approximately 800 basis points above the market growth for the year on a pro forma basis, this above market growth was driven in large part by a strong position at the leading edge technology nodes, led by solutions like liquid filtration, selective edge, gas purification systems and advanced deposition materials, solutions which are of growing importance to our customers and technology road map. Other highlights of 2022 included the announcement of a strategic collaboration with Lam Research to develop dry photoresist for EUV lithography to be used in the production of next generation logic and DRAM semiconductors. Another was the very good progress made in the construction of our new manufacturing facility in Taiwan, which is expected to start initial production by the end of the third quarter of this year. And in December, we announced plans to build a new manufacturing center in Colorado Springs, which is targeted to begin initial commercial operations in the second half of 2024. Moving on to an update on the CMC integration, we've been making excellent progress on many critical fronts. We are on track to deliver the $75 million run rate cost synergy target by the second half of this year. The major milestone for…

Good morning, everyone and thank you for Bertrand for the nice comments. It has been an absolute privilege to lead the finance and IT organizations all these years and it has been gratifying to partner with you. We are a good team. I look forward to working with our team to achieve a smooth transition after my successor is selected. Onto our results for Q4, our sales in the fourth quarter were $946 million, up 1% year-over-year on a pro forma basis and down 5% sequentially. FX negatively impacted revenue by $38 million year-over-year on a pro forma basis and 6% sequentially. GAAP and non-GAAP gross margin was 42.8% in Q4, slightly above our guidance. We expect gross margin to be approximately 43% both on a GAAP and non-0GAAP basis in Q1. GAAP operating expenses were $261 million in Q4, this included $76 million of non-GAAP items, $53 million of amortization of intangible assets, and $22 million of integration and other costs. Non-GAAP operating expenses in Q4 were $185 million. The higher than expected OpEx was driven by higher ER&D spending. We expect GAAP operating expenses to be approximately $285 million to $290 million Q1 and non-GAAP operating expenses to be approximately $200 million to $205 million. The sequential increase in non-GAAP OpEx from Q4 to Q1is driven by a $15 million increase in noncash equity compensation expense resulting from the alignment of CMC’s and Entegris’ equity benefit plans. We expect Q1 OpEx to be the high watermark for the year and expect OpEx to be down $15 million to $18 million sequentially in Q2 as noncash equity compensation returns to more normalized quarterly levels. Q4 GAAP operating income was $144 million. Non-GAAP operating income was $219 million or 23% of revenue. Adjusted EBITDA was $261 million or 28% of…

[Operator Instructions] We'll hear first from the line of Toshiya Hari at Goldman Sachs.

Good morning. Thank you for taking the question. And big congrats to Greg on an amazing run. I had two questions. First one for Bertrand. I was hoping you could talk a little bit about the overall industry dynamics, how you're thinking about the year. You did give quite a bit of color in your prepared remarks, but you called Q2 as sort of the potential bottom for the industry. I guess as we model your business, should we be thinking your business bottoms in Q2 as well, and more importantly, the recovery into the second half. Can you speak to some of the drivers that you're focused on both on the CapEx side as well as the wafer start side of your business? Thanks.

Yes. Good morning, Toshiya. Thank you for the question. As I said in my prepared remark, it's a bit difficult to forecast 2023 at this point. The current visibility is limited, but as of today, based on direct discussions with customers, we expect the blended industry index for us to be down 13%. And behind that number we are assuming MSI down approximately 10 points with Q2 likely to bottom. And remember that about 80% of our business is unit driven. For CapEx, we expect the contraction close to 20% for the year and we currently expect the second half lower than the first half as our OEM customers will be working through their current backlog in the first part of the year. But remember that the CapEx business only represents approximately 20% of our total revenue. And then finally, maybe a quick comment on the node transitions that we expect in 2023 and that can probably help you understand how we're thinking about the shape of the year for us. As you know, our customers node transitions are key factors to our ability to achieve top line outperformance. And this year in particular, that five points outperformance target that we have. And as of right now, these node transitions appear to be mostly on schedule, with a number of very important transitions expected in the second half of the year in LAN and logic in particular. So the net of all of this is we expect the full year to be down approximately 8% and we expect the back half of the year for us to be a little bit better than the first half of the year.

That's great color. Thank you for that. And then one for Greg. You talked about gross leverage coming down from 4.9 I think you said 3.5 by the end of ‘23. It would be really helpful if you can kind of provide a bridge. How you guys get there, again, from 4.9 to 3.5? The PIM deal not closing was obviously a disappointment, but what are your thoughts on DRA and QED and anything else that you guys have planned as you look to de-lever the balance sheet? Thank you.

Yes Hi, Toshiya. Yes, I'm not going to provide a specific bridge. I mean, that continues to be our target. We do continue to look at various asset sales. We continue to look at the cost structure. We continue, we'll have some benefit as we move through the year on synergies, we expect that we'll bring working capital down, so while 2023 from a performance perspective is not what we've seen in the prior years, as we move forward, we expect the company will come back to be the strong cash generator that it's always been. And with regard to asset sales, I mean we’ve been obviously, we're quite confident that the QED transaction will close, and we'll continue to review our options with regard to the rest of the portfolio.

Our next question will come from Kieran de Brun at Mizuho.

Good morning, and congratulations again, Greg. I think maybe if you can just help us parse out how to think about the first half or second half following up on those questions, but specifically when we think about SCEM and Micro Contamination control, it seems like MC still remains pretty resilient and should kind of, I guess, be that bright spot as we kind of move through the year. But SCEM, I think, was a little bit weaker than maybe we were expecting on the margin. So if you can just help us bridge how you're thinking about that improving throughout the year and trending, that would be helpful.

Yes. So if you think about SCEM, certainly, we've seen some significant sequential decline. Remember two things, right. One is that this is the division with the most exposure to memory, and this is also the division with the most exposure to advanced nodes in China. So there was a double negative impact on this business for the last couple of quarters. So I think things will stabilize, and we expect a number of new products linked to some of the node transitions in the back half of the year to help both in terms of growth and in terms of margin potential for the business. If you think about SCEM for 2022, the division actually performed on a full year basis, performed actually pretty well, and very much in line with our expectation, and outpacing the industry by about six points. And we would expect a similar level of outperformance in 2023 as a result of the opportunities that we have in some of the new nodes in the back half of the year. On MC, you're right. I think we are seeing a very resilient business. We know that purity is increasingly important to our customers. Purity in the manufacturing processes, translates into yield optimization, translates to faster time to yield and also translates to long term device reliability. And we have incredible franchise when it comes to advanced purification. So we do believe that this business will prove to be very resilient in 2023. We think that this is probably going to be the best performing division for Entegris in 2023.

Great. And then maybe just a really quick follow up, I think on the revenue synergy side, you mentioned having the dedicated team in place. It seems like there's more visibility and traction into the potential for those revenue synergies going forward. I'm just curious, are there any kind of preliminary thoughts and things that you've seen based on what that team has already achieved that are giving you optimism towards some of those synergies in the back half of this year maybe, and into 2024? Thank you.

Yes. Obviously, the team is very focused on short term cross-selling opportunities. This is something that we started to aggressively pursue in 2022. This will remain a big area of focus in 2023 as well. The development teams have been hard at work in 2022, are also trying to optimize the complementary solution sets around the CMC module. I would not expect any new products coming out of those efforts to hit the marketplace until probably late 2023, early 2024. And then, of course, we've been very actively engaged with our customers, telling them about the value that we can create for them. That end-to-end solution selling, from film development to polishing solutions, all the way post CMC cleaning capabilities. And it's fair to say that they see the value of our offering. They are eager to engage more fully with us. And frankly, a downturn environment provides a lot of opportunities for us to accelerate these engagements. So we can be very focused on those in 2023. But it was good time to unlock those revenue synergies, as we said during the Analyst Day.

Our next question will come from Sidney Ho at Deutsche Bank.

Thanks for taking my questions. Greg, congrats on your retirement. It was very nice working with you. So my question is just a follow up to an earlier question on the market outlook, but trying to talk about MSI down about 10%. I'm hoping you can double click on that a little bit. Can you talk about the trends you see between memory versus logic and foundry? Are you expecting both segments to bottom in the second quarter this year, or they have different cadence and maybe remind us your revenue exposure to those two different segments. And then I have follow-up question.

Yes. When it comes to our fab revenues, our fab revenues represent about 50% of our total revenue. We have about a 70:30 ratio between logic and memory. So this is the fact. When it comes to exactly when we will see the bottom in memory versus logic, I'm not going to answer that question quite yet, Sidney, I think, as I said, there's a lack of visibility right now in the industry. I think that we are engaged with our customers. We are mostly focused, frankly, on their ramps for the new nodes, and we're keeping an eye -- early on the pulse of the industry. But I'm not going to comment very precisely on the question.

Okay, maybe a follow up question on the gross margin side, you guys printed Q4 42.8% guiding up a little bit in Q1. Going forward is the biggest leverage coming from volume and what kind of incremental growth and margin should we be thinking about? I'm just trying to figure out your path to go back to the 46%, 47% range that you used to be. Maybe that's not realistic, given the inclusion of the CMP products. Thank you.

Yes. So I'll take that, Sidney. So as it relates to gross margin. If you look at gross margin over really the last eight quarters pro forma basis, it's been right between 42% and 44%, meaning the outlook for Q1, we said slightly higher. When you think about sort of the headwinds and tailwinds, the headwinds are obviously lower volumes and then we'll be bringing additional assets, particularly the KSP facility online some point in the middle of this year. And then the tailwinds continue to be, I mean our highest, our fastest growing business continues to be our MC business, which also happens to be our most profitable business. When I think about margins, generically when you talk about that 46-ish range to get back there short of very large increase in volumes. It would also, there are a number of things, as you point out in the CMC portfolio that have relatively low gross margins. I mean I think we commented including the PIM business which is a business that we were attempted that we thought we were going to dispose of. So I mean I would say it’s higher volumes, it’s improving mix, and that is potential adjustments to the portfolio would drive the margin higher longer term.

We will here next from John Roberts at Credit Suisse.

Thanks, Greg, for all your help. And could you comment, are you seeing any additional pricing pressure in light of the severe volume weakness that you have?

I can take that, Greg, if you want –

Yes, go ahead.

Yes, just to say that as you would expect, we're watching very carefully the evolution of our input costs and we will continue to take appropriate steps as needed as we have in the past couple of years. And we will continue to raise prices as necessary, but we're not going to go into a lot of detailed descriptions of our pricing strategy.

Okay. Could I ask, how deep was the pool of potential buyers for PIM and how would you characterize the potential buyers a strategic versus financial outside of [inaudible]?

Yes, what I would just say again is we decided to terminate the transaction. Concerned about the certainty of the deal. So at this point, we are in the process of regrouping, assessing our options. As we said a few months back, we continue to believe that we are not the best owner for this business. This is a product platform that is noncore to the rest of Entegris. That's probably as far as we go on this quarter today, and we will update you when appropriate.

Mike Harrison with Seaport Research Partners.

Hi, good morning. I was wondering if you can talk a little bit about the China export restriction and how you see the impact there going forward. It sounds like for Q4, it was toward the lower end of your expectations, and you're expecting it to be about $20 million a quarter going forward. Is that going to be kind of the number for the full year, or is it declining during the year? And I guess just from a segment perspective, it seems like SCEM saw the biggest impact. Is that the case, or can you maybe give some more detail on how those restrictions impacted other segments?

Yes. So let me start maybe with the last part of your question. Every division did see an impact, a negative impact on the restrictions. But as I said earlier, SCEM was the division seeing or being the most affected by those restrictions, simply because we had uncovered many new opportunities at the leading edge in China, and the new restrictions obviously are preventing us from serving those applications and these customers. So back to the first part of your question. As many other companies in the industry, we spend the better part of the fourth quarter to engage very closely with our Chinese domestic customers. We performed very extensive due diligence to assess whether these Chinese customers would be committed to operate within the new permissible guidelines. We completed the assessment, and based on that, we can now quantify the more permanent impact, which is, as I said, on the call about $20 million per quarter. I'm not going to speculate on how it's going to evolve during the year, but assume, for modeling purpose, a negative impact of about $20 million per quarter. And that's already reflected into the overall annual guidance that we provided.

Understood. All right, thank you. And then we discussed this a little bit on the last call, but it seems like you're still talking about good growth that you're seeing in advanced nodes or more advanced applications, yet in a couple of your segments, including advanced planarization solutions, you're talking about a negative mix impact. So I just want to understand why is mix getting worse if your highest value applications are still strong?

Greg, do you want to take that? Do you want me to take that?

Yes, why don't you go ahead, Bertrand.

Well, I think that if you look at margins on new products, typically those margins are higher than all the technologies, I think that the reason we've been seeing some pressure on gross margin really has to do with the lack of leverage due to reduced volumes, but I'm not sure I want to go beyond that.

Okay, it sounds like you just don't even really want to comment on mix, or is mix depressed right now?

No, I guess I'll comment on it. Yes, I think mix is depressed right now. I mean if you look at some of our higher margin products, they tend to be, as Bertrand said, in the more advanced nodes, I mean, we have a lot of activity in the memory sector. The memory sector has been weaker. I'm not saying that our margins are higher in the memory sector than in other sectors, but the weakness in the memory sector has impacted some of our most advanced products. And so I could go division by division but that's not but we don't disclose sort of margins by product line or division. But broadly speaking, we've seen weakness in some of our higher margin products. And I will say it's not a secular thing, it's just -- it's the nature of what's happening in the market right now. When I look at our new products, I mean, we've got as much confidence as we've ever had in terms of our position in the marketplace and where we're going. But we can't swim against the current.

And you would expect mix to improve with some of the advanced node transitions going on and the better performance in the second half. Is that fair?

I think that's fair.

Our next question will come today from Charles Shi at Needham and Company.

Hi, good morning. Thank you for taking my questions. Maybe the first one. Can you guys give us a sense how the business will trend into first quarter ‘23? I mean, a little bit segment detail. And as a second part to the same question, I mean looking into the full year ‘23, I think Bertrand you mentioned that Q2 potentially be the bottom for MSI. But if I look at your historical performance, let's say 2019, different segment kind of top at slightly different quarters, SCEM in 2019, SCEM first to top, MC and AMH kind of a quarter later. I mean, obviously ‘23 downturn seems to be going to be a lot more strategic year than 2019. Could you kind of give us some sense by segment? Will the same pattern in terms of timing of the top could that repeat? And that's my first question. Thank you.

So on the Q1 guidance, we expect, if you look at the midpoint of the guidance, it's a sequential decline of about five points. It's driven by further deterioration in wafer starts both in memory and advanced logic, as well as a further decline in our OEM business. On the positive side, as we think about Q1, we expect mainstream fab to remain relatively steady, and the same would be true for new fab construction projects, which have been steady in Q4, and we expect to continue to be steady in Q1. So if you think about the other part of the question about will be the four divisions bottom at different time? I would say most likely. I'm not going to give you a specific breakdown simply because, as I said, the visibility is not very clear right now. But in general terms, think about SCEM and APS being really terms businesses with very short lead times, and think about MC and AMH with businesses that have a little bit more exposure to CapEx but also have traditionally longer lead times. So I think that I would expect APS and SCEM to bottom a little bit earlier than MC and AMH, but I won't give you exactly which quarter because we don't have that degree of precision quite yet.

Thank you, Bertrand. So maybe my second question. I want to ask you a bit more about potential further divestiture after your CMC acquisition. I don't know if you have further plans, but here's my question. I think some part of the CMC portfolio doesn't seem to fit with your strategic model. I mean you want to be in the sticky product categories. I'm thinking some of the more industrial gas chemical like business that you inherited from CMC doesn't seem to fit. Is there a potential for the divestiture possible in that area? Or but I also see like the reshoring, fab reshoring localization of semiconductor manufacturing may provide you some tactical opportunities for revenue growth or share gains in those more, I mean, I would say less sticky product categories there. Can you provide us some comments there? Thank you.

Yes, we'll go back to what we said during the recent Analyst Day in 2022, which is we spend a lot of time asking ourselves that very question are we the right owners of the various parts of the CMC materials portfolio? We have reached conclusions and now we're left with the question of finding the right timing for us to act on those decisions. But I will not go into a lot more specifics at this point. I think we have a clear view of we believe belongs long term in the portfolio of Entegris. And as I said, we'll keep you updated when the time is right.

Next, we'll hear from the line of Aleksey Yefremov with KeyBanc Capital Markets.

Thanks and good morning, everyone. Bertrand, your comments about node transitions largely being on track, is this related to 2023 or also looking out to 2024? Things are also on track.

My comment was really on 2023.

I mean would you care to comment beyond that if you have any more or less visibility into node transitions?

I think that those node transitions always fluctuate, and we do not control the timing of those node transitions when customers change their plan. So I don't think it would be prudent for me to comment on 2024 node traditions. I would just say that if indeed our NAND and logic customers stick to their 2023 node transition that would be a great start, and we'll be very happy with that outcome. And then later in 2023, I'd be happy to answer your question and try to provide some color on what to expect in 2024. It's just too early for me to comment right now on 2024.

Understood. Thank you. And on the short term you mentioned, 2Q is likely to bottom for the industry. Does this also imply that your second quarter is likely weaker than first quarter in terms of sales and EBITDA or that's not necessarily the case.

We will provide Q2 guidance when we report our first quarter results. But directionally, I would say that we expect some level of sequential decline, but we will provide some more details around that in a few months.

Our next question comes from Timothy Arcuri at UBS.

Hi, thanks a lot. Greg, there's assets being held on the balance sheet. I think it's $247 million being held on the balance sheet. The sale price of the PIM business was $240 million, and I think the QED was $135 million. So, to clarify, does the guidance for March still include PIM? I assume it does, and I think that was running at $25 million per quarter.

Yes. The guidance for the full year includes the entirety of the portfolio with the exception of QED. That $247 million you're seeing; QED is not there because we had not executed the transaction prior to yearend. At yearend, which is the date of the balance sheet, the expectation is that business is going to be sold. That $240 million is the PIM business.

That's PIM. Okay, got it. Okay. And then, Bertrand, just a question for you, and I ask you this a lot, but sort of the question is more around your visibility into the amount of inventory that your customers have of your stuff. You have service people on site at all these different customers, but we've just come through sort of the mother of all inventory building cycles during the past year, year and a half, where people couldn't get product and they were just stockpiling what they could get. So how much visibility do you have in terms of inventory of your materials at your customer site, and how would you characterize it versus sort of normal inventory? Thanks.

Yes, it's a good question. Look, we have some level of visibility. It's not perfect visibility. I would say that at this point, we have no reason to believe there is a significant inventory of Entegris products in the channel. And the reason for that belief is that we have not seen any unusual amount of order cancellations or push out. So that's something that we are obviously watching very, very carefully. But as of right now, we have no reason to believe there's a ballooning inventory situation.

Christian Schwab at Craig-Hallum Capital Group.

Hey, thanks for taking the question. Congratulations, Greg. It's been great working with you. On the China exposure ,can you clarify that between domestic and multinational mix?

Yes. So we think that it's about 60% domestic and about 40% international. When it comes to the revenue that you are seeing in our financial reports in China prior to the export restrictions. I have not rerun the numbers.

Okay. Is there a Chinese alternative to your different products that you're selling into domestic carriers, domestic manufacturers? The reason I ask that is a lot of our checks are suggesting that they're done buying from US Vendors, if they can at all help it and move to somebody in the China supply chain. Is that part of the reason for the revenue or is it just purely they can't get advanced manufacturing equipment.

So when it comes to competitive alternatives to our products, I think they are limited. And there are a few older generation materials that are available from China, manufactured by Chinese suppliers. But this is really a minority for the most part. There are no current alternatives to what we do in China. And again, so for us, part of the exercise was really to validate which customers we would still be able to serve going forward. And we had to do that in the context of the new restrictions. And we completed the assessment, as I said, and we believe that the negative impact would be about $80 million per year. So $20 million before.

Okay, great. Then my last question. I know we talked about earlier the long term growth drivers and a $1 trillion worth of revenue, which has been talked about for years, but we did probably $600 million last year, and obviously this is going to be a big downturn. I guess if you have conviction in that $1 trillion, when do you see -- when would you anticipate a material improvement in the entire business to have confidence that number is still directionally accurate?

Look, I mean, I think for all of you who have been in this industry long enough, you'll remember that this industry can contract quickly and can rebound very quickly. Today, we're still trying to figure out exactly when the bottom will be. Once we know that, then I think it's going to be fair for you to ask the next question, which will be the rate of recovery. But I'm not going to speculate quite yet today. We just don't have enough visibility. But if you look at previous cycles, I don't think that the industry conditions that we are currently experiencing are putting at risk the possibility of reaching $1 trillion in semiconductor revenue or even exceeding that in 2030. I mean, this industry has demonstrated time and time again that it can lead. We accelerate in an exponential way. And frankly, that's what I would expect as a result of the emergence of a number of new drivers for semiconductors, which is going to be changing every part of our lives going forward, from transportation systems to healthcare, to the way we relate and interact with one another. So my conviction in secular growth potential of this industry remains absolutely intact. The only question we have to deal with right now is how much of a downturn are we going to be seeing and the timing of the recovery, but none of what we're seeing today is putting a question that the secular growth potential of this industry or the secular growth potential of our business.

And ladies and gentlemen, our final question today comes from the line of Chris Kapsch at Loop Capital Markets.

Yes. Thank you. Good morning. So one question was with respect to your comments about the prospective outperformance relative to the market. I think you said 500 bps. Just curious if, given the node transitions that you see and you anticipate in the second half of this year, is it fair to think about your outperformance relative to the market expanding? Given that was kind of an average, so higher than that exiting 2023 into ‘24, given those node transitions and you're presumable over indexing to those nodes.

So, Chris, if your question is, should we expect a little bit more outperformance in the back half of the year as compared to the first half of the year? The answer is yes.

Okay. And then so the other question I had related to the CMC portfolio, so back in late 2021, that company won what I thought it was an important patent infringement litigation, and the DOJ gave the customer involved a pretty healthy period to transition, given the challenges of re-qualifying and process of records. And so curious if you're now seeing any benefit from that, is that something that could buttress your demand in your advanced oxide slurries and curious if you can comment on any similar litigation in other jurisdictions around the world. Thank you.

So, Chris. Good question, but as you understand, I can't comment, really, on any ongoing litigation. But what I can share with you is that obviously, we were very pleased with the ITC ruling. And what I can also say is that we've been working very, very closely with customers to help them transition away from the infringing products. We are seeing today positive revenues coming from this work. But I won't go into quantifying this for you but it’s positive and it's playing out the way we were hoping it was. At this time, we have no further questions. I'll turn it back to you, Mr. Seymour. Thank you.

Thank you very much for joining the call today. Please follow up with me if you have any additional questions. Have a good day.

This does conclude today's teleconference. And we thank you all for your participation. You may now disconnect your lines. And we hope that you enjoy the rest of your day.