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spk08: Hey everyone and welcome to the Integra's third quarter 2020 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, Vice President of Investor Relations. Please go ahead, sir.
spk06: Earlier today, we announced the financial results for our third quarter of 2020. 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 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 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 press release, as well as on the investor relations page of our website at Integers.com. On the call today are Bertrand Lois, our CEO, and Greg Graves, our CFO. With that, I'll hand the call over to Bertrand.
spk04: Thank you, Bill, and good morning, everyone. As we have discussed since early in the outbreak, of the pandemic, our primary focus has been keeping our teams safe. To that end, we have continued to strengthen our safeguards and protocols, and I am proud of the safe environment we have created for our Integris colleagues. I am also very proud of the tremendous work by our global teams to maintain high service levels in support of our customer ramps around the world. And as we begin the final quarter of the year, our operations and supply chain are all operating at normal levels. Let me now turn to our third quarter performance. And I will start by saying that I am very pleased with our results and the quality of our execution. In the third quarter, sales grew 22% year-on-year and 7% sequentially above our guidance. Growth was strong across all three divisions as we benefited from several node transitions and strong overall demand for our products and solutions. Growth margins improved year on year and sequentially and adjusted EBITDA was up 32% year over year and up 8% sequentially. Finally, our non-GAAP EPS of 67 cents was above our guidance, up 34% year on year and up 12% sequentially, showcasing the leverage that exists in our business model. Our record Q3 revenue was driven by our continued outperformance in a few key areas. First, we continue to benefit from the accelerated demand for our leading edge solutions in advanced technology nodes, especially in liquid filtration, advanced deposition materials, and formulated claims. The second area of strength was in our ANH division and its solutions for new FAP projects. Growth was strong in fluid handling, FOOPS, and sensing and control products. Within our sensing and control platform, in particular TSS, which we acquired in 2018, and GMTI, which we just acquired in July of this year, had a strong quota. As you know, these complementary solutions provide critical particle and process control for the CMP slurry chemical delivery loops. All in all, a very good quarry and excellent execution by the team. Next, I would like to quickly address the evolving US-China trade situation. To put things in context, year to date, China represented 13% of our revenue and the local customers in China comprise less than half of that. We are obviously monitoring closely the latest developments from the US administration in order to remain in full compliance with the regulations. Unfortunately, to date, the various trade restrictions have had no material impact on our overall business. Now, I would like to discuss a new program I am very excited about. This summer, we officially launched Integris' Corporate Social Responsibility Program. We have been active in many elements of CSR and ESG in the past, but we had yet to fully articulate our philosophy, purpose, and aspirations. In my CSR letter posted on our website in August, we laid out our belief that What we do as a business must be closely linked to what we stand for as an organization and have a lasting positive impact on our world. It also laid out the four pillars of our CSR approach, which are innovation, safety, personal development and inclusion, and sustainability. Next week, we will be announcing ambitious goals for each of these four pillars. And there will be a lot more to come from us in the weeks to come on CSR and ESG and Integris. Looking ahead to the fourth quarter and the balance of the year. From an end market perspective, the semi-market appears to be holding up better than expected, driven by the well-documented strength in areas like data centers, 5G, laptops, and gaming, and relatively stable conditions in the memory segment. Lastly, global auto and industrial markets appear to be rebounding, which should translate into strong demand in mainstream traps. For the full year 2020, we now expect the market based on our unit capex mix will be up low to mid single digits compared to our previous expectations of down mid single digits. In addition, demand signals in our own business continue to be strong. In particular, our advanced memory and logic customers continue to be very committed to their new transitions. And given our new opportunities at these nodes, we expect to sustain our strong market outperformance. More broadly, we continue to be very optimistic about the long-term fundamentals of the semiconductor market. At Integris, we are benefiting from the two intersecting themes of the growing importance of process materials and materials' purity and the impact they have on semiconductor performance, cost, and reliability. We expect that these key trends will continue to result in increased Integris content per wafer. In conclusion, I am very pleased with the performance and the resilience of our business and I am optimistic that we will have a strong close to the year. In 2020, we expect to deliver record sales and EPS, which I am especially proud of, considering the many challenges we faced during the year. Before I turn the call over to Greg, I would like to remind you of our upcoming Virtual 2020 Investor and Analyst Day on November 17th. It's been a few years since we've done an Analyst Day, so we look forward to updating you on the Integris story. Now, let me turn the call to Greg. Greg?
spk07: Thank you, Bertrand. In my comments today, I'm going to cover our third quarter financial performance and our fourth quarter guidance. The third quarter was an excellent quarter for Integris, with record performance across the board. Q3 sales were $481 million, compared to $475 million at the high end of our guidance. Sales were up 22% year-over-year and 7% sequentially. This growth was driven primarily by our own market outperformance, as Bertrand discussed. Q3 GAAP diluted EPS was $0.58 per share, up 93% year-over-year and 16% sequentially. Non-GAAP EPS of $0.67 was slightly above the top end of our guidance range of $0.66 and up 34% year-over-year and 12% sequentially. Moving on to gross margin, gap and non-gap gross margin were both 47% in Q3 versus our guidance of approximately 46%. The higher-than-expected gross margin was driven by higher sales volume as well as very good execution by our manufacturing team. We expect gross margin to be approximately 47% both on a GAAP and non-GAAP basis in Q4. GAAP operating expenses were approximately 119 million in Q3 and included a total of approximately 15 million of non-GAAP items from amortization of intangible assets, integration, and other costs. Non-GAAP operating expenses in Q3 were 105 million which was higher than our guidance. There were two primary drivers of this. First was higher variable compensation driven by the better than expected Q3 performance and the improved annual outlook. The other factor was a $2 million contribution commitment made to the soon to be established Integers Foundation, which among other things will fund STEM education in underrepresented communities. We expect both GAAP and non-GAAP operating expenses will be approximately flat in Q4 compared to Q3. Q3 GAAP operating income was $107 million or 22.2% of revenue and non-GAAP operating income was $122 million or 25.3% of revenue. Adjusted EBITDA was approximately $142 million or 29.6% of revenue. Our GAAP tax rate was 17.3%, and our non-GAAP tax rate was 18.1% for the quarter, below our guidance of approximately 20%. For the full year 2020, consistent with our guidance last quarter, we expect both our GAAP and non-GAAP tax rate to be 18 to 19%, which implies a quarterly rate of approximately 21% for Q4. The higher rate in Q4 is a function of two factors. First, in Q3, we had a discrete benefit related to option exercises that will likely not recur in Q4. And second, in Q4, the benefit from foreign tax credits will be slightly less than initially anticipated. Turning to our performance by division, Q3 sales of $150 million for SCEM were up 18% year-over-year and up 3% sequentially. The growth was primarily driven by advanced deposition materials, advanced coatings, and cleaning chemistries. The SINMAT acquisition also had a modest positive impact on year-over-year growth. Adjusted operating margin for SCEM of 22%, was up over 300 basis points year-over-year. The year-over-year increase in operating margin was driven primarily by higher volume. Q3 sales of $194 million for MC were up 24% from last year and up 5% sequentially. On a year-over-year basis, liquid filtration, gas filtration, and the impact of the ANOW acquisition drove the sales growth. The sequential sales increase was driven primarily by liquid filtration. Adjusted operating margin for MC was 33.7%, up almost 200 basis points year-over-year and down slightly sequentially. The year-over-year margin increase was driven primarily by higher volumes and favorable mix. The sequential margin decline was driven primarily by higher R&D investments, and higher variable compensation costs. Q3 sales of $144 million for AMH were up 23% versus last year and up 14% sequentially. The year-over-year sales increase was primarily driven by high-purity liquid containers, fluid handling products, sensing and control products, and wafer handling products. The sequential sales increase was primarily driven by sensing and control products and fluid handling products. As Bertrand highlighted, the performance of PSS was particularly strong in the quarter. The GMT acquisition had a modest impact on both year-over-year and sequential growth. Adjusted operating margin for AMH was 23.3%, up 600 basis points year-over-year, and up 400 basis points sequentially. The year-over-year and sequential margin increase was driven by higher sales volume and solid cost management. Cash flow from operations for the quarter was 101 million. Free cash flow was 69 million. CapEx for the quarter was 33 million. We continue to expect to spend approximately 120 million in CapEx in 2020, related to ongoing investments in support of our new product introductions as well as capacity expansions. During Q3, we used approximately $11 million for our quarterly dividend. We did not do any share repurchases in the third quarter. However, we did reinstate our $15 million per quarter programmatic buyback at the beginning of Q4. We remain committed to our dividend and our programmatic buyback program. Turning to our outlook for Q4, we expect sales to range from 480 to 495 million. We expect GAAP EPS to be 55 to 60 cents per share and non-GAAP EPS to be 62 to 67 cents per share. In summary, we are extremely pleased with our performance in the third quarter and year to date. During the third quarter, our revenue, EBITDA, and EPS were all at record levels. Demand for our advanced products in the new logic and memory technology nodes continues to be very strong. And we have confidence in the strength of our platform, our value proposition, our execution, and our strong balance sheet. Operator will now open up for questions.
spk08: Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.
spk03: We'll take our first question from Sydney Ho with Deutsche Bank.
spk08: Please go ahead.
spk11: Great. Thank you, and good morning, everyone, and congratulations on Strongwater. The first question is, I appreciate your comment on this year's market outlook. Do you have any preliminary thoughts on how next year will look like may be asked differently. I think we've seen quite a change during the year, but assuming the market conditions hold the same as in Q4, how would 2021 be for your market adjusted for the mix? And maybe more specifically, in the CAPEX side of things, do you expect the SAP construction activities to be as strong as this year? That's my first question.
spk04: Good morning, Sidney, and thank you for your question. I would probably only say that we continue to be optimistic about the general health of the industry and our relative competitive position as we exit 2020. So there are reasons to be optimistic about 2021, but it's too early for us to go past those generic statements. So we will provide more details and be more specific about our 2021 outlook when we report our Q4 results in February.
spk11: Okay. Maybe my follow-up question is, kind of going back to Q3, thinking about clearly there's a lot of upside to it. But if I kind of look at the follow-through that you guys have talked about in the past, The incremental gross margin on the revenue side is close to 60%, even though most of the upside seems to be coming from AMH, which is obviously the lower margin business. But the incremental operating margin was lower than we would have expected. Just trying to understand the dynamics on both the gross margin and the operating margin side.
spk07: Yeah, so on the gross margin side, Sidney, I would say we've got two or three things at play there. I mean, the The tailwinds that we have are obviously the higher volumes. At the same time, we continue to have modest headwinds related to freight and logistics costs. We continue to have modest headwinds. Again, we're providing bonuses for our manufacturing teams. We have slightly higher variable compensation. So I'm actually really pleased with the margins. I mean, each quarter sequentially through 2019, 20, they've been up a little bit. When you think about the operating margin, if you look at full year, first nine months of the year, our flow through at the EBITDA line is 46%. Revenue's up 178 million, EBITDA's up 82 million, so very strong flow through. Year over year, the flow through is for the quarter was up 40%. So I think when you look at it on a quarter-by-quarter basis, I mean, we, again, had higher variable compensation. We had this fee out of the $2 million contribution related to our corporate social responsibility program. But I guess what I'm saying is I'm pleased with the profitability, and I think we continue to demonstrate the leverage in the model.
spk03: Okay, great. Thank you.
spk08: We'll take our next question from Toshia Harry with Goldman Sachs. Please go ahead.
spk10: Hi, good morning, and thanks for taking my question. I had to, if I may, Bertrand, if we take the midpoint of your Q4 revenue guidance, I think you'll be growing the business about 15% in 2020 versus 2019, which is obviously very strong outperformance relative to the updated market forecast that you provided about low single digits to mid single digits. I was hoping you could break down the 10 percentage point or 10 percentage point plus outperformance for the year into M&A and also the organic part of the story. And for the organic part, if you could highlight maybe two or three product areas where you feel like it's particularly contributing to that outperformance, that would be very helpful. Then I will follow up. Thanks.
spk04: Sure. Good morning, Toshio. Thank you for the question. Yeah, so let me try to help you with the 2020 guidance. So as you said, the full year guidance at the midpoint is about 15% up versus last year. What is very nice this year is that that growth rate is actually fairly consistent across all three divisions. They are all expected to grow in the mid-teens. From a market standpoint, we expect... the market based on our mix of unit and CapEx to be up in the low to mid single digits, so call it four to 5% up. The acquisitions that we've made recently will contribute about three points to the growth in 2020. There's another factor that I want to call out and that's some level of customer pull-ins, particularly in China. We saw that in Q3. We expect to see more of that in Q4 and that probably at the end of the year will contribute to about one point of our growth. But the rest is organic growth and that organic growth is well in excess of the industry. And if I want to call out some of the products, I would say that it's as I said, it's really across the board. So AMH has been doing very well, a lot of strength in our advanced groups of fluid handling solutions that are becoming increasingly a standard in the advanced fabs, both in memory and logic. Um, but we have also talked about the growing importance of our ultra pure packaging solutions. So AMH, has done really, really well this year on the back of strengthening all of those various product platforms. Microcontamination, the theme is well understood, I think, by all of you. It's really two big product lines driving the growth. It's Doranto and Protego. Those are the liquid filters and liquid purifiers that are used in aggressive cleaning chemistries by the industry. We expect those two products to achieve new records in Q4, and overall, we expect those products to have a great year. And SEM division is expected to grow in the mid-teens as well. It's a little bit of a tale of two cities for SEM this year. On the one hand, very, very strong growth in advanced deposition materials, cleaning chemistries, and specialty coatings. But they are facing a significant headwind in our graphite business used in a number of industrial applications. I mean, that business has shrunk significantly against last year and has not recovered. So with that as a backdrop, I think that the performance in SEM is actually really, really exceptional this year. So back to you, Tushia. I think you have a second question.
spk10: Yeah, I did. Thanks for the detailed response. My second one is on AMH profitability, 23.3% in margins, obviously a very impressive result. You talked about higher volume and solid cost management as contributors to that performance. I was hoping you could elaborate a little bit on the cost management side, what exactly drove the improvement in margins both sequentially and year over year? And I guess importantly going forward, should we consider this 23% plus level as a new normal for AMH or could margins revert lower to the high teens or 20%? Thanks so much.
spk07: I'll take that one. This is Greg. So I would not take the 23% to the bank as sort of the ongoing profitability of that business. They had a very good quarter from an execution standpoint. They clearly benefited from the higher volumes. I mean, I do think that the profitability of that business, though, over the longer term starts with a two. From a cost management perspective, this team, I mean, this is our most mature business, and this team, I would just say, has done a very good job managing costs across the board. It's not really anything but just generally focused on improving the profitability of the business.
spk03: Thank you.
spk08: We'll take our next question from Amanda Scarnatti with Citi. Please go ahead.
spk01: Hi, good morning. I just have a quick follow-up question. You mentioned that you're expecting to see sort of mid-teen growth from all the different segments this year. When I look at next quarter, that seems to imply that specialty chemicals should see some significant growth and the other two divisions could see a little bit of a pullback. Is that how you're looking at next quarter when you're giving your guidance?
spk04: Good morning, Amanda. We typically don't provide specific guidance by division on a quarterly basis for the outlook, but I try to be helpful. I would say that I would expect AMH to be modestly down sequentially, and that's in line with reduced sequential capex projections for the industry into four. The other two divisions are expected to be up sequentially. MC continuation of the trends I was describing, so liquid filtration really driving the sequential growth in microcontamination. But the fastest sequential growth is expected to come from And that really has to do with really capitalizing on a number of new product introductions in deposition materials and cleaning chemistries in particular. And again, here I'm talking about the sequential growth Q4 over Q3.
spk01: And then with the demand pull forward that you mentioned, I assume it's mostly from China as there's expectations of continued trade pressure and restrictions. But are you seeing anything else at the leading customers in Taiwan or in the U.S. in terms of pulling forward, and do you expect that to have any sort of significant impact going into 2021?
spk04: Look, I mean, that remains an open question. I mean, it's something that we've been trying to assess very, very carefully. We don't think that the inventory overhang will be a lingering issue as we go into 2021, but that remains to be seen. I think certainly we've seen some of our leading edge customers increasing the levels of inventory that they want to carry. But the feeling that we have is that this is really more of a permanent decision that they are making just to reduce the ongoing supply chain risks. So again, I don't think that The flip side of that, which would be a destocking risk, I don't think is something that we are overly worried about at this point.
spk01: Great. Thank you.
spk08: We'll take our next question from Patrick Ho with Stifel. Please go ahead.
spk11: Thank you very much and congrats on a really nice program outlook. Bertrand, maybe first off, you highlighted the strength that you're seeing at the advanced nodes as well as the higher layer counts of memory. Can you give a little bit of color on any signs of recovery in the more mature technology nodes? We've been getting data points of markets like automotive, CMOS, and sensors that are starting to pick up. Can you give a little color on how that's impacting some of your legacy businesses?
spk04: Good morning, Patrick. Yeah, so I think that the strength in the mainstream FABs is probably what drove our business ahead of our guidance for Q3. The recovery in mainstream FABs was certainly steeper and more broad-based than we originally feared and we expect that trend to be I mean, to continue going into Q4. I mean, obviously, like everybody else, we're all very closely watching, you know, this second wave of COVID-19. It's really, again, something that it's hard for us to assess, but, you know, what would be the impact on the economy and potentially on some segments of the semiconductor industry remains still but I don't think it would be a factor for the fourth quarter.
spk11: Great, that's helpful. And maybe as my follow-up question also for you, Bertrand, in terms of the DRAM market specifically, on the memory side, that market has actually held up pretty well given some of the demand drivers that you mentioned. We know a lot of the memory growth you've seen in recent years has been on the main class side with materials and contamination control products. but can you discuss some of the changes going on in DRAM that also will have a positive impact for your businesses?
spk04: So you're right that for us, the great opportunity in memory is around the 3D NAND architectures. Having said that, there are some opportunities in DRAM as well. I think the primary change really is around the further miniaturization of the features and that leads to need for greater purity. So that's going to impact a suite of products in micro contamination and AMH. And we also see actually some interesting opportunities for new materials as well. So we will actually share a little bit more during the analyst day and Jim O'Neill, our chief technology officer, will join us during the analyst day that we intend, I mean, that we planned for November the 17th. And during that event, we will try to go in more details into the technology roadmaps of our customers and how different parts of our portfolio intersect with the roadmap of our customers. So stay tuned. I think you will probably learn a lot more in a few weeks.
spk11: Great. Thank you very much.
spk08: We'll take our next question from Mike Harrison with Seaport Global Securities. Please go ahead.
spk05: Hi. Good morning. Good morning. I was wondering if you can talk a little bit about the operating expense line. It looks like in the quarter you came in a little bit higher than you anticipated. I know in monthly contamination control, you mentioned higher incentive comp and some investments, but maybe help us think about what portion of these higher expenses could be categorized as investments that maybe should leverage over time and what portion we should think of as just being, I guess, related to ongoing higher costs. Thanks.
spk07: So, hey, Mike, it's Greg. Grace, good morning. So when you look at the quarter versus Q2 or the quarter versus our expectations coming in, you're correct. I mean, we were a little higher than we expected to be. The vast majority of that increase was higher variable compensation, so about two-thirds of it related to higher variable comp. We did have, you know, higher investment in some of the divisions, NC in particular, and on the ER&D line, that will obviously benefit longer term. And of course, you know, the variable comp, it's called variable for a reason. I mean, if our performance were to, you know, at these levels, we're accruing at pretty high levels of variable comp, but if the performance were to come back, those numbers would obviously flex down as well.
spk05: All right, and then I think you also mentioned that there was strength in the... particle sizing systems business PSS that you acquired a couple years ago can you talk about what's driving that and are we kind of hitting an inflection point in additional customer acquisition or additional take of that technology yes I'm glad you're asking the question and
spk04: So PSS has been really a bright spot for us, not just in the quarter, but for a few quarters now. If you recall, it's a business that we acquired in early 2018, and that business today is running at about twice the pre-acquisition revenue levels. And it's really coming from the introduction of those solutions to a new set of customers. It was originally used at one or two large logic customers. We've been expanding the served market in logic, but more importantly, we've actually started to introduce these capabilities with success in the memory segment as well. So the business has done really well in a very short amount of time. I think that there's still a lot of potential for the business. So in two, three years from now, I would expect the revenue for PSS to still be a multiple of where they are today. And I would say that GMTI is another option that we have to actually grow that particular set of capabilities very nicely across multiple segments. So the recipe worked very well with PSS. I think that GMPI is very similar in terms of capabilities and in terms of opportunity, and I think that those two businesses will have a very positive impact on AMH, both in terms of growth as well as margin profile.
spk10: All right, that's great to hear. Thanks very much.
spk08: We'll take our next question from Weston Twigg with KeyBank Capital Markets. Please go ahead.
spk11: Hey, thanks for taking my question. And first, I just wanted to say thanks for the details on the corporate social responsibility program, and I'm looking forward to hearing more about that over the coming weeks. My first question is related to China. You mentioned that there's really no material impact in evaluating the business, and I'm wondering, is that just because the revenue contribution is quite low, or is it because, you know, you don't have products at all under this military end use restriction that has come up recently?
spk04: Yeah, good morning, Roy. And so it's a good question. And first, I mean, remember that we have a very broad customer base. So no customer really is, you know, with a few exceptions. I mean, most of our customers are just representing a few single digits of our total revenue, number one. And then number two, even if, this particular SMIC was to be placed on the entity list, we believe that we would still be able to supply many of our products to this customer because it would not be subject to the export control rules. And that is because many of our products are manufactured outside of the U.S. and they have a low U.S. content. And then for the other products, obviously, that are subject to these controls, we would seek the required export licenses from the U.S. government as everybody else. So that's really what leads us to say that we expect the overall impact to be non-material to our performance.
spk11: Okay, that's very helpful. And then my other question is just you had mentioned the graphite business has been under pressure since last year. Could you just give us an idea of how big that business is now and then your expectations of any continued recovery next year?
spk04: Yeah, so that business last year was about close to $100 million. And again, I think the headwind, I mean, we saw contraction of close to 50% in the year. We would expect a steady recovery as we get into 2021, but obviously this has been a pretty significant headwind for the SEM division this year.
spk11: Okay, that's helpful. Thank you.
spk08: We'll take our next question from Chris Kappish with Loop Capital Markets. Please go ahead.
spk09: Hey, good morning, guys. Bertrand, you've consistently discussed really for years now how Integris is well positioned competitively, particularly as the production of advanced chips becomes more materials intensive and how the purity of those materials is increasingly important. And that thesis has absolutely played out. So I just want to say kudos to you and your team. And the question I have is looking to 2021, and obviously without stealing any thunder from next month's investor event, When you reference your customers being committed to their leading-edge node transition, just wondering if you could talk about what transitions might be most profound in terms of moving the needle or impact on integrity results next year. Obviously, the memory-continued transition to the architectures with denser layers is going to be a contributor, but I'm wondering how that might compare to the benefit from node ramps and boundary logic customers.
spk04: Good morning, Chris, and thank you for the nice comment. So, I mean, if you look at the technology roadmap in memory and logic, it is clear that all of our customers have very, very ambitious objectives. Their roadmap include a combination of further miniaturization of critical dimensions, you know, taller structures with high aspect ratios, and down the road the introduction of nanowires, so data all around technology. All of this will play squarely in the value proposition of Integris because all of those technology inflections will require superior materials and greater levels of purity. And at the end, that really for us, it means that our served market will continue to grow faster than with a start. So rather than picking one or the other of these technology inflections, I think I would really encourage you to look at it in the aggregate because I really do believe that one of the unique strengths of Integris is really the breadth of capabilities and the quality of the opportunity pipeline as opposed to any particular product line or any particular technology transition. And we feel really, really good about the health of the opportunity pipeline. And that's something that we will discuss in more details with you in November. So stay tuned. I think you will probably learn a lot during the analysis.
spk09: Okay, fair enough. And then if I could have just one follow-up on, I guess, beyond your comments about China. I was hoping you could discuss the sales cadence or development by geography. You used to have that one-page pie chart in the quarterly deck that talked about this. But any color on sales trends by region would be appreciated. Thank you.
spk04: Yes, good. So... I'm going to try to make it short. I think the performance was really strong across the board. A lot of our regions have been growing on a year-to-date basis, right in excess of 10%. The two things I want to probably flag, and you will see that when we file our queue in a few hours. One, comments probably in Korea. In Korea, you would see that here today the growth is in the single digit. The reason for that is that we had significant sales of gas certification systems last year in conjunction with a number of new fab buildups. So if you were to normalize for that, Korea would be up 25% pretty much in line with the other geographies. What you will also probably note when you find a queue is that Taiwan was down sequentially. It's a sequential decline that we fully anticipated and it really has to do with the timing and the buying patterns by our customers when they prepare for more transitions and typically, They take order of FOOPs about three to six months ahead of the no transitions, and they also build some amount of inventory for filtration and critical chemistries a few months ahead of the ramp, which is what we saw in Q1 and Q2 of this year. So if you look at it on a year-to-date basis, we're growing in Taiwan at 20%, which is you know, a very, very strong performance, and we're going to be on track to deliver our best year on record in the island. So everything else that you will see will be pretty much, I would say, in line with your expectations, but I just wanted to single out those two geographies because you may have had some lingering questions as you look at the queue. So I wanted to provide some context.
spk09: Very helpful. Thank you. Appreciate it.
spk08: We'll take our next question from Pirtosh Misra with Bernberg. Please go ahead.
spk11: Great. Thanks, and good morning Bertrand, Greg, and Bill. I know you don't typically talk about pricing in your business. I was just wondering if you could broadly just discuss pricing trends that you're seeing this year. I'm mostly focused on the specialty materials or specialty chemicals part of your portfolio. And so just curious what you're seeing there, both on the advanced notes side and also on the mainstream FABs, where I believe you typically see a deflation in some of those products. So any color on that would be great.
spk07: Yeah. Hey, Paritosh. Good morning. It's Greg. So from a pricing perspective, when we talk about it broadly across the portfolio, I mean, historically, we've talked about price erosion. on an annual basis of 1% to 2% across the portfolio. This year, we're clearly running below that level, so our pricing has held up very well through the year. I think your comments were pretty much spot on. I mean, at the more advanced nodes, we are able, because we're delivering more value, we are able to secure more on the pricing front, whereas we do tend to have some price erosion with some of the older products at the legacy fabs. In aggregate, when we look across the portfolio, the erosion has been less than 1%. So we feel very good about the value proposition that we're delivering to the customer and our ability to maintain price.
spk11: Got it. That's very useful. And then second, just on the memory side, just kind of big picture analysis, and apologies if you already covered that, but what are you seeing and hearing regarding specifically the transformation to 96 plus layers this year? I think last quarter you were expecting us to be about 50% there. This year, is that still what you're seeing or any color on that would be great?
spk04: Yes, Paritash. So I think those trends are still... We made our expectation, we expect about 50% of the 3D nanowafers to be produced at 96 layers or higher, and we would expect that number to be at least 70% in 2021. So we certainly continue to expect further migration to the advanced nodes and advanced technology this year and for the years to come. Got it.
spk11: Thanks. Thanks, Micah.
spk08: We'll take our next question from David Silver with CL King Brokers. Please go ahead.
spk02: Yeah. Hi. Good morning. Thanks. So my question would be maybe focused on the R&D line of your income statement. So this was a record quarter in many areas, but I think it's also a record quarter again for your R&D spend. And, you know, at your previous investor day, I did speak with Jim a little bit, and he emphasized that the bulk of the projects that the R&D effort is focused on are things that will come to fruition maybe in a two- to four-year timeframe. So I guess a lot of the questions here are about, you know, 20 and 21, understandably, but you know, based on the jump up in R&D spend, I was wondering if you could characterize where that incremental effort, you know, seems to be focused. So in other words, I'm guessing ADM or advanced deposition materials and maybe, you know, improved efforts to prevent killer defects on the microcontamination side. But maybe if you could just characterize why you feel now is the time to kind of add another 15% or 20% to your R&D effort, and where are the incremental targets for that effort, you know, given your ability or your presence in so many different parts of the chip production process. So just maybe some characterization of how the R&D spend and the R&D effort is evolving would be very helpful. Thank you.
spk04: Sure. So if I step back, I would say that Integris has changed a lot over the last 10 years. The breadth of our portfolio has increased. Our capabilities are much better today than ever before. And as a result of that, our credibility and trust as a strategic supplier has increased. And what it means is that we are given more opportunities to contribute to the roadmap of our customers. And that's great. But with that comes expectations. And what we are expected to do is to put more risk R&D dollars to work. And we are actually gladly doing that. And we are doing that in particular to your point in microcontamination and SEM. Because that's where we see the biggest challenges for the technology roadmap and therefore the biggest opportunity for us. So that's why you should expect us to continue to increase our R&D spending in the years to come. And that's something that we will be, you know, describing a little bit more clarity during the end of this day as well.
spk02: Okay, thank you for that.
spk07: Just one follow-on comment. Patron talked a bit about how we're investing and where we're investing. I just want to make the comment, our team has become much better at picking the better opportunities and indeed making the investment call, killing the projects that aren't working. So not only are we spending more money, but in my judgment, we're spending it in a much wiser fashion.
spk02: And if I could just follow up on that just a little bit, but, um, you know, is there any way to characterize, um, I guess there's two ways to go with R and D one would be basic researchers or efforts you conduct internally, but, and then of course there's the, the projects you work with in collaboration with, you know, your, your key customers. So, you know, compared to a few years ago, I mean, would you say that the R and D effort is more collaborative or, about as collaborative? In other words, how closely aligned is it to, I guess, what the customers are bringing to you as opposed to maybe your own folks looking ahead and trying to anticipate things maybe as a competitive advantage? Thank you.
spk04: Yeah, so the business model has evolved. A lot of what we do is really customer-driven innovation, and it's usually a lot of multi-party joint development initiatives with equipment makers and fab So it's a three-party collaboration if you want. And as you would expect, we are increasingly spending in new platform developments and breakthrough technology as opposed to sustaining engineering. And the shift is actually very, very drastic if you compare where we are today. versus where we were 15 years ago, and I would expect that trend to continue going forward, which is a good thing because it means that we have access to the roadmap of our customers at an earlier stage and that they are engaging with us on some of their biggest challenges, which in turn allows us to create some very, very unique value for our customers.
spk02: Okay, that's great. Thank you very much.
spk08: We'll take our final question from Toshia Harry with Goldman Sachs. Please go ahead.
spk10: Hi. Thank you for taking my follow-up. I just have one, Bertrand. You guys talked about reinstating the $15 million share of the purchase program in the current quarter. To the extent there is an update, I'd like to get your thoughts on your capital allocation plans, both in the near term as well as in the long term. And specifically on M&A, if you can comment on robustness of your pipeline today, that would be super helpful. Thank you.
spk04: Sure. The capital allocation framework remains really unchanged. I mean, we had that permanent programmatic buyback of $15 million is essentially a fixed commitment that we've made to the investment community. We suspended it in Q2 due to the prevailing uncertainty in the operating environment. But today, we feel that it was appropriate for us to put it back in. Having said that, again, we are routinely looking at the various levels at our disposal, dividend buybacks, and then M&A. And that's something that we are routinely discussing with our board of directors. And we will continue to tune that depending on the level of activity that we expect to see on the M&A front in particular.
spk03: Thank you.
spk08: and at this time i'd like to turn the conference back to your speaker for any additional or closing remarks so thank you thank you very much that concludes our call for today ladies and gentlemen this does conclude today's conference we appreciate your participation you may now disconnect
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