Entegris, Inc. (NASDAQ:ENTG) Q4 2023 Earnings Call Transcript

Entegris, Inc. (NASDAQ:ENTG) Q4 2023 Earnings Call Transcript February 14, 2024

Entegris, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Bill Seymour: Good morning, and welcome to Entegris Fourth Quarter Earnings and Analyst Update Webcast. Last night, we released our fourth quarter earnings and we posted the earnings slides and earnings prepared remarks on the IR site. We will not be presenting the prepared remarks for Q4 live in today’s session. So please refer to those online, if you already have it. In today’s session, we will present a brief analyst update presentation. And then we will take Q&A on both the presentation and Q4 earnings. We expect the webcast today will be approximately an hour and 15 minutes, including the Q&A. Some webcast related housekeeping items, if you’re experiencing any technical problems, please click on the little I on the left-hand bar of the screen to troubleshoot or chat with tech support.

You can minimize or enlarge your slide window at any time by clicking on the top-right corner of the box. The slides will advance automatically throughout the webcast. The Q&A session will be at the end-of-the presentation. Please submit your questions in the Q&A box located in the bottom-left corner of the screen. You can also email questions to Beth and me directly. In the resource box, you will find a copy of today’s presentation slides and a few other items of interest. One other item of note in the appendix of today’s presentation, we have included for your reference, consolidated results and divisional results for 2023 that exclude last year’s divestitures and the PIM business for the full-year and by quarter. The speakers today are Bertrand Loy, President and CEO; and Linda LaGorga, our CFO.

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 those risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in the presentation, which is posted on our IR page of our website. With that, I’ll hand over to Bertrand.

Bertrand Loy: Good morning, and thank you for joining us. Today’s analyst update will be brief. The main purpose is to provide you with a refreshed financial model, focused on our core business and excluding all completed and planned divestitures. Before I move on to the update, a quick recap of our results we posted last night. We are very pleased with the quality of our execution in 2023. Our unit-driven model displayed resilience during the current industry downturn. And we closed 2023 with strong fourth quarter sales and EPS results, both above our guidance. For the year, we outperformed the market by 6 points, driven in large part by our strong position at the leading-edge technology nodes and the backlog we had entering the year.

In addition, we divested three non-core businesses and used the proceeds and free-cash flow to pay-off $1.3 billion of debt. In terms of our guidance for 2024, we believe we have taken a prudent view of the industry in the short-term while being fully prepared for what we believe is likely to be a significant snapback in the market. On to the agenda for the briefing today. I will talk about Entegris’ business model. our sales growth algorithm, and provide an overview of our three divisions. Linda will cover our capital structure, capital allocation priorities, our updated target model, and our updated three-year financial targets. Then we will take questions on both the analyst update presentation and our fourth quarter earnings. Here is what I would like to impress upon you today.

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Q&A Session

Entegris’ unit-driven business model is unique, highly differentiated and has strong competitive moats. While 2023 was a challenging year, we remain as optimistic as ever about the long-term growth prospects for the semiconductor industry. The industry is entering a period of unprecedented technology change and device complexity. Our core value proposition in materials science, materials purity and end-to-end solutions has become increasingly enabling and critical for our customers. All of this means the market is moving toward Entegris. And this ultimately translates into rapidly expanding Entegris content per wafer and strong outperformance for the years to come, reinforcing Entegris as a value compounder with attractive organic sales growth leading to significant EBITDA and EPS expansion, especially given our commitment to lower our debt.

For the past decades, our mission has not changed. We help our customers improve their productivity, performance and technology by providing enhanced materials and process solutions for the most advanced manufacturing environments. Our platform is now comprised of three divisions and I will provide more detail on each of them in a moment. 75% of our revenue is unit driven or recurring. These unit-driven products can be chemistries and materials that are used daily in semiconductor manufacturing fabs or they can be advanced filters and other consumable products that are single-use and are replaced frequently. The remaining 25% of our revenue is CapEx-driven products. They can be gas filters, dispense systems, and other components that we sell to equipment makers.

Or they can also be wafer carriers gas purification systems or fluid-handling solutions that we sell when new fabs are built. You can see in the middle of the slide that our customer base is unique as our solutions are widely used across the broad industry ecosystem. And as you can see further to the right when it comes to our fab customers, we have greater exposure to logic and foundry, representing about 70% of our fab revenues while memory customers represent the rest, approximately 30%. This profile, unique in the industry, provides greater resilience and stability to our business model and financial performance on a cross-cycle basis. On the next slide, I want to touch on the three dimensions of our competitive advantage that we have built over decades.

No one in the industry comes close to these combined capabilities, especially while being almost exclusively focused on semi. First, on the left, the customer value-creation flywheel. I am sure that you’ve read Jim Collins’ book, Good to Great. So you will recognize the flywheel concept, which is meant to call-out the major steps the organization needs to go through to create and compound customer value over-time. It thoughts up to five years ahead of new node transitions when a customer asks us to help them solve key challenges they are expecting to face. We then start our development work, share samples and ultimately provide them with the new enabling solution. Finally, we must quickly ramp production to high volumes at extremely high levels of quality.

The point is it is hard to do. And doing it right time and again creates customer trust. And this is the virtuous cycle depicted here. The next dimension of our competitive advantage is our commitment to industry leadership in the areas of technology, global infrastructure and operational excellence. On the technology front, we have a very strong foothold. But we steadily continue to invest in research and product development to effectively partner with our customers on incrementally more complex challenges requiring earlier involvement. On the global infrastructure front, our customers are increasingly expecting us to be close to them. So, we have ramped our investments in local manufacturing and local tech centers in all major markets. These investments are proving to be a great source of differentiation for us, accelerating learning and customer engagement.

The last ring of this graphic is operational excellence. Our customers continue to expect tighter process windows, more process stability and process control, which we achieve with greater automation, process cleanliness and greater control of our supply lines. The final dimension is our end-to-end offering, which obviously has been greatly strengthened by our combination with CMC Materials. No other materials companies serving the semiconductor industry comes close to our breadth of technology capabilities. And we believe this brings huge value to our customers and ultimately means better device performance, lower-cost of ownership, and faster time to solution. Despite the recent downturn, our views have not changed. And we continue to expect global semiconductor revenue to reach $1 trillion by 2030.

The digitalization of our lives is accelerating. It is reshaping in very fundamental ways everything around us, which will drive exponential demand for faster, more energy-efficient, and more reliable semiconductors. These themes are all well-understood and I do not believe I need to belabor them today. My message here is simply that the semiconductor industry is a great place to be. And this is particularly true for Entegris as you will see on the next slide. Our customers have a major overarching goal, and that is to improve chip performance. And to do this, they have two major tools in their toolbox. More complex chip architectures and miniaturization of the critical dimensions on the wafer. To enable this, our customer’s technology road maps are calling for new materials and ever greater process purity to achieve optimal yields and optimal cost.

At Entegris, we operates at the intersection of materials science and materials purity. And this is precisely what our customers need right now. This is what we mean when we say the market is moving to Entegris. From a materials science perspective, these more complex structures mean more layers, more process steps, and more novel materials. This translates into more material spend per wafer and greater content per wafer for Entegris particularly in new leading-edge logic and 3D NAND nodes. From a materials purity perspective, greater miniaturization is making yield management exponentially more challenging and more expensive for our customers. The point here is our solutions help our customers improve their yields. And, for example, using our advanced filters can positively impact yields in a fab by several points.

The punch line of this slide is that the compounding process complexity of our customers’ technology roadmaps is making our solutions increasingly valuable to our customers. And this is expected to translate into expanding Entegris content per wafer, expanding served market, and ultimately, it is expected to fuel our market outperformance. These more complex chip architectures and demanding applications like AI are requiring new enabling solutions. Solutions like the ones listed on this slide. This is great for Entegris because we are engaged on all these fronts, deploying our unique breadth of capabilities in material science and materials purity to develop enabling solutions, unique solutions, which will result in new revenue streams for Entegris.

So, what does that all mean for Entegris? Well, let me summarize this and introduce, in fact reaffirm our organic growth algorithm. First, we expect our core market, the semiconductor industry, to grow twice GDP growth. And then we continue to expect to outperform the industry by three to six points. This outperformance will be driven by greater Entegris content per wafer as we have discussed and market-share gains as we continue to capitalize on our unique portfolio of capabilities to create highly differentiated, mission-critical solutions for our customers. We have made and will continue to make significant investments to realize these growth opportunities. Our R&D investments reflect our commitment to supporting our customers’ technology road maps and are critical to winning positions in new nodes.

This is why our R&D spending was up last year even in a challenging industry environment. And going forward, we expect our R&D spending to be approximately 9% of sales. Our investments in production capacity are also vital for us to fully realize our long-term growth. In the last two years, our CapEx has been elevated, as we invested in two new facilities in Taiwan and Colorado, and going-forward, we expect our CapEx to come back-down to 10% of sales. And by the way, we should be close to 10% this year in 2024. Moving on to our three divisions and let’s start with our newest, Materials Solution. MS is the combination of the SCM and APS divisions to former single, almost 100% unit driven platform. With MS, our customers will benefit from a more robust end-to-end solutions set critical to their road maps.