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spk07: Good day, everyone, and welcome to Integra's fourth quarter 2020 earnings release. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Bill Seymour, VP of Investor Relations. Please go ahead, sir.
spk05: Good morning, everyone.
spk06: Earlier today, we announced the financial results for our fourth quarter and full year 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 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 investor relations page of our website at vintegris.com. On the call today are Bertrand Law, our CEO, and Greg Graves, our CFO. With that, I'll hand the call over to Bertrand.
spk03: Thank you, Bill, and good morning, everyone. Throughout the pandemic, our priority has remained the same, ensuring the safety of our Integris colleagues and valued partners. I am proud of what we have achieved here during this challenging year, all the while delivering for our customers. Turning first to our fourth quarter performance, I will start by saying that I am pleased with our results and a strong close to a record year. In the fourth quarter, sales grew 21% year-on-year and 8% sequentially above our guidance. Year-on-year, growth was strong across all three divisions as we benefited from several no transitions and strong overall demand for our products and solutions. While growth margins declined in Q4, we leveraged lower OPEX into adjusted EBITDA growth of 4% sequentially and 19% year-over-year. Finally, Fourth quarter non-GAAP UPS of 71 cents was above our guidance, up 29% year-on-year and up 6% sequentially. Looking at the full year 2020, we achieved record sales up 17%. Our sales were up 14% on an organic basis, which means we outperformed the market by several hundred basis points for the year. This significant outperformance was driven in large part by our strong position and wins with leading-edge solutions like liquid filtration, advanced deposition materials, fluid handling solutions, and other areas of increasing importance to our customers. In 2020, we once again showcased the leverage in our model with EBITDA flow-through of close to 40%, translating into strong EBITDA growth of 24%, EPS growth of 32%, and free cash flow up almost 70%, excluding the net version termination fee from 2019. Our focus on operational excellence paid dividends during the year. Even in the backdrop of the challenges of the pandemic, we achieved our best year on record in quality and safety. Our quality levels were 100 times better than just 10 years ago at 5.25 sigma. and the injury rate was the lowest level ever. During the year, consistent with the framework we laid out in our analyst day, we allocated a total of more than $470 million of capital, which included reinvestments in our business in the form of $132 million in capex and $136 million in R&D. And we returned almost $90 million to shareholders in dividends and buybacks. In addition, last year we completed two acquisitions, SYNMAT, which makes CMP flurries for silicon carbide and gallium nitride substrates, and GMTI, a leader in the design and production of high-precision analytical instruments for CMP and formulated cleaning chemistries. These acquisitions are good examples of the types of technology and applications we want to add to the Integris platform. High quality, value creative, differentiated businesses in high growth markets. I am also very proud of last year's launch of Integris' Corporate Social Responsibility Program. The program represents a strong commitment by the management team and the board of Integris, recognizing the responsibility we have to our people, partners, the environment, and our communities. We did set ambitious goals for each of our four CSR pillars, which are closely connected not only to our value system, but also to the value proposition of Integris and our business strategy. There will be more to come on CSR and ESG later this year. Wrapping up 2020, our excellent performance showcased the strength of our team's execution and our highly resilient, differentiated, unit-driven business model. I cannot say enough how proud I am of the dedication, ingenuity, and perseverance of our team demonstrated during such a challenging year. Looking ahead, we continue to be very optimistic about the long-term fundamentals of the semiconductor market, accelerating chip demand and a higher proportion of wafers produced at the leading edge provide a great base for very attractive secular industry growth. On top of this, at Integris, we are benefiting from the growing importance to device architectures of the two intersecting themes of process materials and materials' purity. We expect these key trends will continue to result in our rapidly expanding SAM and increased Integris content per wafer. For 2021, specifically, the semi-market outlook appears to be very healthy, driven by an expected rebound in global GDP, strong overall chip demand, and robust industry capex investments, boosted by strength in 5G, high-performance computing, PC, and a recovery in automotive and industrial demand. Looking at our own business, we expect our sales growth in 2021 to range from 11% to 13%. Let me unpack that for you. To start, for the full year 2021, we expect the market, based on our unit capex mix, will be up approximately 7% to 8%. And given our strong position and wins in the new technology nodes, we expect to outperform the market by approximately 300 to 400 basis points consistent with what we laid out during our recent analyst day. On top of this, we expect approximately 100 basis points of growth from sales of our Aramis high purity bags used for the distribution and storage of the COVID-19 vaccine. Summing all these items up gives us our 11 to 13% sales growth expectations for 2021. And we expect the EBITDA flow through of our model to continue to be in line with our target model. And we expect to achieve a full year 2021 non-GAAP EPS in excess of $2.85. In conclusion, I am very pleased with the performance and the resilience of our business in 2020, and I am excited about our prospects in 2021. Lastly, I want to thank our customers for the trust and confidence they place in Integris. And again, thank you to the Integris teams around the world for their incredible efforts and attitude. Now, let me turn the call to Greg.
spk01: Greg?
spk07: Thank you Bertrand. The fourth quarter was another record for Integris. Q4 sales were 518 million above the high end of our guidance and up 21% year over year and 8% sequentially. Q4 gap diluted EPS was 63 cents per share. Non-gap EPS of 71 cents was above the top end of our guidance range and up 29% year over year and 6% sequentially. Moving on to gross margin, GAAP and non-GAAP gross margin were both approximately 45% in Q4 versus our guidance of approximately 47%. The lower than expected gross margin was driven primarily by three factors. First was a discrete inventory valuation adjustment in SCEM. Second was the impact of lower factory utilization as we made a deliberate effort to reduce inventory levels across the company And we experienced weak demand in our non-semi businesses. And third was manufacturing inefficiencies related to capacity additions for significant new product ramps. We expect gross margin to improve sequentially and be approximately 45.5% both on a gap and non-gap basis in Q1. We also expect gross margin will improve throughout the rest of the year and be approximately 46.5% for all of 2021. GAAP operating expenses were approximately $118 million in Q4 and included approximately $14 million of non-GAAP items from amortization of intangible assets, integration, and other costs. Non-GAAP operating expenses in Q4 were $104 million which was in line with our guidance. We expect GAAP operating expenses to be approximately $118 to $120 million in Q1. We expect non-GAAP operating expenses to be approximately $104 to $106 million in Q1. Q4 GAAP operating income was $113 million. Non-GAAP operating income was $127 million, or 24.5 percent of revenue. Adjusted EBITDA was approximately $148 million or 28.7% of revenue. EBITDA margin for the year was 29.2%, up 170 basis points compared to 2019. During the fourth quarter, other income, which is usually pretty minimal, was positive $5.3 million. This was driven by our foreign entities' balance sheets benefiting from a weak US dollar. Our GAAP tax rate was 18.6% and our non-GAAP tax rate was 19.1% for the quarter, lower than our guidance of approximately 21%. For the full year 2021, we expect both our GAAP and non-GAAP tax rate to be approximately 19%. It's worth noting for modeling purposes that the first quarter typically has the lowest tax rate of the year. Turning to our performance by division, Q4 sales of $169 million for SCEM were up 15% year-over-year and up 12% sequentially. The year-over-year growth was primarily driven by advanced deposition materials, cleaning chemistries, specialty gases, advanced coatings, and a modest impact from the CINMAT acquisition. On a sequential basis, growth was primarily driven by specialty gases, advanced deposition materials, and advanced coatings. Adjusted operating margin for SCEM was 18% for the quarter, down over 400 basis points sequentially. The decrease in operating margin was primarily related to the weakness in non-semi-business and the discrete inventory valuation adjustment previously mentioned. Q4 sales of $206 million for MC were up 21% from last year and up 6% sequentially. Liquid filtration and bulk gas purification drove the sales growth both year on year and sequentially. Adjusted operating margin for MC was 35%, up modestly both year over year and sequentially. The year-over-year and sequential margin increase was driven primarily by higher volumes and solid cost management. Q4 sales of $152 million for AMH were up 29% versus last year and up 5% sequentially. The sales increase was driven by growth across all major product platforms, the impact of the GMTI acquisition, and sales of our Aramis high-purity bags used for the COVID-19 vaccine that Bertrand referenced. Another item that impacted AMH sales in Q4 was catch-up royalty income earned from Gudang Precision related to the recently announced licensing agreements associated with the use of our reticle pod technology for both conventional and EUV lithography. Adjusted operating margin for AMH was 23%, up 500 basis points year over year, and down slightly sequentially. Fourth quarter cash flow from operations was very strong at $204 million, driven by significant working capital improvement. For the full year, cash flow from operations was $447 million, and free cash flow was $315 million. And as Bertrand said, up almost 70% versus 2019, excluding the net presumed termination fee we received in 2019. CapEx for the quarter was $52 million, and for the full year was $132 million. In 2021, we expect to spend approximately $200 million in CapEx. Three-quarters of that spend will be for growth investments. This level is higher than the 7 to 8 percent of sales we target for annual CapEx spend. However, there are a couple of unique investments I'd like to highlight. The first is related to capacity additions to accommodate the rapid expected growth of the high purity bags for the COVID-19 vaccine. The second and more significant item is $40 million in CapEx for the first stage of a three to five year $200 million investment in our new facility in Taiwan that we announced last year. This new facility will ultimately support all three of our divisions. Consistent with our capital allocation strategy, during Q4 we used approximately $11 million for our quarterly dividend and we repurchased $15 million of our shares. For all of 2020, we repurchased approximately 780,000 shares at an average price of $57 per share. Now for our Q1 outlook. We expect sales to range from $510 to $525 million. We expect GAAP EPS to be 61 to 66 cents per share and non-GAAP EPS to be 69 to 74 cents per share. In summary, I would like to express my gratitude to the entire Integra's team for an amazing year in 2020, especially considering the challenges we faced with the pandemic and the strong revenue ramp throughout the year. Operator will now open up for questions. Thank you. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit one on your touch tone telephone. If you're using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one to ask a question. And we'll take our first question from Mike Harrison with Seaport Global Securities.
spk04: Hi, good morning. Congratulations on the nice finish to the year and the strong guidance here. I was wondering if you can talk a little bit about some of the key applications that are driving the better sales outlook than I think some of us were modeling. Maybe talk a little bit about how much of the outperformance would be related to the share gains and to revenue synergies from some of your recent acquisitions. And also talk about how much additional tailwind you should be getting from node transitions as we get into 2021.
spk03: A lot of questions here, Mike. So I would say that, so first of all, thank you for the nice comments and questions. We are indeed very excited about the prospects going into 2021. The industry backdrop is strong, but as you pointed out, we expect to meaningfully outperform the industry once again by about 300 to 400 basis points in our core semiconductor applications, and then by about 100 basis points coming from a new initiative in life science. As it relates to the core semi-outperformance, it will be just a continuation of the themes we developed during the recent Analyze Day. So it's really about capitalizing on the new opportunities that we see for our liquid filtration, deposition materials, etching chemistries in the new advanced memory and advanced logic architectures. As you understand, there are opportunities for us to improve the integrous content per wafer at those advanced nodes, and we intend to fully capitalize on that in 2021 as more wafers are produced at those advanced nodes. And then, as I was mentioning, there is something new for us in 2021, and that is the great success that we've been able to generate a lot of interest for this bag with very unique attributes that is proving to be extremely important for the storage and transportation of the COVID-19 vaccine, and we saw some interesting uptick in sales in Q4, and we expect 2021 to be a breakthrough year for this application.
spk04: All right, and then on the non-semiconductor business weakness, can you just talk a little bit about whether that was related to underlying market weakness or more timing, and maybe comment also on what you're seeing in automotive. We're hearing that there are some shortages going on in chips there.
spk03: Thanks. Yeah, so I think you're probably referring to the comment that Greg made around the significant absorption that we saw in some of our non- initiatives and I think mostly it relates to the graphite product line. This particular material is used across a broad array of industrial applications. And as we mentioned a few times during 2020, this particular business was under severe pressure. I think that this business is down essentially 30% in 2020 as compared to 2019. And remember that we had actually added significant capacity about a year ago, hoping to capitalize on new opportunities, new industrial opportunities, which obviously didn't really pan out in 2020. We've seen some recovery in this business in Q4, but certainly not enough really to offset the very, very slow start to the year.
spk04: All right. Thanks very much.
spk07: Sure. Next, we'll go to Toshiya Hari with Goldman Sachs.
spk00: Hi, guys. Good morning, and thank you very much for taking the question. Brett, I had two questions for you guys, if I may. First one on the full year outlook. You spoke to a potential growth rate of 11 to 13% for Integris in 2021, which is obviously very, very strong. That said, I guess if we take the midpoint of your Q1 guidance, revenue guidance, and if we sort of flatline that throughout the remainder of the year, we sort of get to the midpoint of that 11% to 13% range. Typically, you know, knowing your business, things, you know, sort of strengthen throughout the year. Am I missing anything or are there any concerns into the second half? How should we think about, you know, your full year guidance? And then I've got a quick follow-up.
spk03: Sure. Well, I think the way you want to think about Q1, which I think is really at the heart of the question, is how to think about the Q1 outperformance or how to think about the 2021 outperformance in the context of the Q1 guidance. And the way I would probably answer the question is to remind you that a lot of the no transitions happen later in 2020. And that Q1 2019, Q1 2020 was also where we experienced the strongest headwinds from COVID-19. So in other way, Q1 2020 was obviously somewhat of an easier comparison for us.
spk00: Understood. And then as my follow-up, just on gross margin, maybe this one's for Greg. You mentioned a couple of items that drove gross margins a little lower relative to guidance for Q4. Curious if any of these were kind of more structural in nature, or were they all sort of transient one-time issues? And how should we think about gross margins, not just for 2021, but throughout the next couple of years? Thank you.
spk07: Yeah. So, hi, Tushiya. First of all, I'd say that the issues around the gross margin were really non-systemic. And we had probably the best year that we've had in the last five in terms of ASP erosions and nothing there. No meaningful changes in the material or input dynamics. So primarily discrete in nature. So the piece related to the inventory adjustment, that simply won't recur. And then, you know, we'll look for, Patron already commented on that specialty materials business, and we'll look for some increases in volumes to help us out there. But, I mean, if you look at the margin by division, I mean, the gross margin issue is essentially all related to SCEM. So as we think about, you know, we guided to 45.5 or Q1, which is up slightly from Q2. for and pretty much in line with where we were for the full year in 2020. We think 46.5 for all of 21. And then I would expect it to, you know, the gross margin to have a slight upward bias over the next couple of years as volumes continue to improve.
spk00: Thank you very much.
spk07: And as a reminder, ladies and gentlemen, it's Star 1 if you'd like to ask a question. Next, we'll go to Sidney Ho with Deutsche Bank.
spk10: Thanks for taking my questions, and congrats on the strong quarter and guide. So just going back to the 2021 outlook of up 11% to 13%, Can you maybe talk about the growth expectations by segment? And if I look back in history, your revenue for the calendar year is typically second half weighted, maybe 48% in the first half. Do you think this year will be much different from that trend?
spk03: So, Sydney, the way I would first answer the question is saying that we expect the microcontamination and SEM divisions to really lead the growth in 2021, expect those two divisions to grow in the mid-teens, and I would expect AMH to be probably in the high single digit on a full year basis for 2021. In terms of the shape of the year, I don't think we want to go too deep in details here, but I think directionally, I think you're right. I would expect more new fab construction projects later in the year, and that will benefit our CapEx business later in the year. And as you know, there are many customers that are Also planning on a number of significant load transitions later in the year, which should also positively impact our business as we proceed deeper into 2021.
spk10: Okay, that's helpful. My follow-up question is, in the last quarter, Patron, you talked about there was some pull-in from Chinese customers ahead of export controls. Have you seen those activities become more normalized, or are they still building waivers and inventory? And also related to that, do you guys have any issues shipping products to SMIC right now?
spk03: Okay, so first in terms of the inventory built, we saw more of that in Q4, and I would say that on a full year basis, we estimate that a little less than 1% of our top line probably was a function of some of our customers, mostly Chinese customers, building up some inventory. Right now, as a result of that, we expect hopefully more clarity, more transparency from the new U.S. administration, and we would expect that trend to subside in 2021. As a matter of fact, we expect most of our Chinese customers to consume the inventory that they've been building up in 2020 and as a result right now in our forecast we estimate our China business to be essentially flat versus 2020 when it comes to SMIC I would say that you know at a practical level you know we spend a lot of time assessing there are two components to that the products that we manufacture outside of the US and After careful analysis of our bill of materials, we have reached a conclusion that US content for those products is de minimis, and therefore we are currently shipping to SMIC from all of our non-US locations. For the U.S.-made products, we have put all of the shipments on hold right now, and we are applying for licenses, and we're waiting for approval. And we have no reason to believe, based on our current understanding of the rule, we have no reason to believe that those licenses would be denied. But, again, we won't know for sure until we get the approval.
spk10: Great. Thanks for the detailed explanation, and congrats again.
spk03: Thank you.
spk07: Okay, next we'll go to Patrick Ho with Stiefel.
spk09: Thank you very much and congrats on a great quarter and a nice 2020. Bertrand, first off, in terms of your outlook for 2021, the last few years you've talked about new products like the advanced deposition and the liquid filtration being key drivers for your outperformance. As we look ahead to 2021, do you have anything, I guess, on the new products front that gives you excitement over the next few years where you'll start seeing some of the ramp up in 2021?
spk03: So Patrick, I would probably be very boring and probably tell you just much of the same. We believe that our advanced filtration and purification solutions will continue to be increasingly important for the industry. And that trend is not going to stop anytime soon as our customers continue to transition to more challenging architectures. And I think if you recall what we presented during the analyst day, Jim O'Neill, our CTO, described to you in great detail how our deposition materials and our selective etched chemistries will be essential for the higher layer count architectures in memory. and the gate all around technology in advanced logic. So again, those will be the products, well, those were the products that drove the growth in 2020, and I would expect the same products to drive the growth in 2021 and beyond.
spk09: Great, that's helpful. And maybe my follow-up for Greg, you had a great working capital quarter in December, which drove the strong cash flow generation. One, to detail what type of linearity you saw, just given how you were able to collect DSOs very well. And two, do you expect to get to more, I guess, normalized levels in the March quarter?
spk07: Yeah, so Patrick, first of all, thanks for noticing that. I mean, our team would be, you know, we talk a lot about working capital management. Our team would be happy to notice that people are paying attention. So that's great. So first of all, on DSOs, so best quarter that I remember, I mean, our DSOs coming out were 47 days. But we also benefited from the fact that, and we've talked about it before, that the calendar year ends right on the end of sort of a calendar quarter, whereas the other quarters this year ended a few days before the calendar quarter. And when you end a few days before, you don't end up collecting until the calendar quarter. A lot of Asian customers pay right on the day. So that was, well, DSOs were down, but a fair amount of the benefit related to ending right on the calendar day. So, and then you think about inventory, that's been something we've talked about all year long, but our turns were 3.5 times, which is the best levels we've had in probably about eight quarters. So we felt good about what the team did there as well, especially given sort of the business volumes we were facing.
spk09: Great. Thank you very much.
spk07: Next, we'll go to Weston Twigg with KeyBank Capital Markets.
spk09: Hey, thanks for taking my question. I just wanted to dig into a couple of revenue streams here. First, on the Aramis bags, it sounds really interesting. You gave us a growth estimate for this year, but can you help us just kind of figure out roughly how large that business was in Q4?
spk03: Hi, Wes. This is certainly a business that has experienced explosive growth. If you look back at 2019, revenue for this product line was about $1 million on a full year 2020. That number is just above $10 million, and we would expect that product line to reach and hopefully exceed $30 million in 2021.
spk09: Okay, that's very helpful. And then similarly for the graphite, Sorry, go ahead.
spk03: Just maybe as a little bit of context here, you, I think, all know that we don't really have many product lines that would exceed $50 million in annual top lines. So we are really considering this RMS product line as a growing and very strategic product line, obviously.
spk09: I guess actually just following up on that, do you see that as this new vaccine technology by Moderna and Pfizer as it comes out, as it rolls out, and maybe other vaccines are maybe using the same technology, is this going to become a standard packaging and transportation product across more vaccine lines, do you think?
spk03: So I think that I would actually even expand that description of the market opportunity. What we're really targeting are the novel biologic therapies. So think about vaccine antibodies and cell therapies, not just around the fight against COVID-19, but really in oncology and other type of therapeutic areas. So again, what our customers really like in these bags are the fact that they are uniquely resistant to very very cold temperatures they're not brittle and then they can withstand gamma sterilization so and this is a two very very unique attributes in the marketplace for these facts and this is why they are getting so much attention right now okay that's very helpful and then I just wanted to ask about the graphite business yeah I think you mentioned that it's starting to recover
spk09: Can you remind us, your main product lines, I think I know that there's exposure to phones, for example, and then what would drive a recovery in that graphite business this year to get some of that, get the utilization rates up a little bit in the new factory capacity space?
spk07: Yeah, so, Wes, that business is a pretty diverse business. I mean, we're selling graphite that's used for metal cutting applications into the electronics. to start discharge machining business. We're selling into the glass forming market, including glass forming for handset applications. We have an aerospace part of the business. There's a medical part of the business, so very diverse. The part of the business that was weakest last year was primarily that core industrial business, the machining related business, as well as the business that we sell into the handset market. And we saw improving trends in that business in Q4, and we expect to see better trends when we look at the full year 2021.
spk09: Okay, that's helpful. Thank you.
spk07: Next, we'll go to Paritosh Misra with Berenberg.
spk09: Thank you. Good morning. What do you expect to be the bigger driver of this three to 4% or performance in this year. Would that be logic or memory and any contrast you could provide between last year and this year with regard to the key technological transitions. That are going to take place this year.
spk03: So Paratesh, let's start maybe with 2020. I mean, we saw a very significant increase in our memory market. We grew close to 30% in memory. The growth in logic was also very attractive. It was in the 20% in advanced logic. And I would expect the opportunities going into 21 to be of very much of the same nature. Again, more wafers being produced at 96 layers and higher. and that's going to drive more consumption of the new materials and the cleaning chemistries I was describing. And, of course, we expect a very strong environment for advanced logic with more advanced logic wafers being produced in 2021. So I would say that memory will probably still be the primary driver, but advanced logic will be a very close second.
spk09: Thanks for the color patrol. And my second question was just about the competitive landscape. So given the strong industry demand that you're also forecasting 78% for next year, are you seeing increased competition from suppliers? And if there are any specific products where you're seeing more competition, either from any Western producers or local Asian producers?
spk03: Well, we never take success for granted, and we continue to focus intensely on making sure that our differentiation is very real and very unique. And I would say that as of right now, we feel very good about our competitive position. And this is one of the reasons why we have that degree of confidence in our ability to outpace the market in 2021 and beyond.
spk09: Great. Thanks, guys, and good luck in 2021. Thank you.
spk01: Next, we'll go to Chris Kapsch with Loop Capital Markets.
spk05: Yeah, good morning. Just following up on the outperformance relative to the industry that you mentioned, I think you said that this skewed towards SEM and MC segments, and then in the last question you mentioned that it's really probably going to be led by memory and then advanced logic. But I'm curious, like, to the extent that that the outperformance is led by memory. It sounds like it's deposition materials and therefore SEM. I'm wondering within, you know, given the strong outlook for revenue growth within MC, does that also skew memory or is it balanced across memory and logic boundary? Any color on that? And then one follow-up.
spk03: Yeah, I think, I mean, look, the need for higher purity levels exists both in advanced logic and advanced memory. To your point, those requirements are more stringent in advanced logic, but advanced memory is catching up really quickly, and I think we had the slide during the recent analysis day talking about that and then trying to frame that on a per wafer basis. So you are correct in your statement that advanced logic will be still the primary driver for micro contamination. But again, memory may be a close second on this one and then the opposite would be true for SEM with memory being the primary driver and advanced logic being the close second. I think one of the uniqueness of the Integris platform is that we have exposure to all segments, memory, logic, chemical manufacturers, OEMs. And we have tremendous opportunities across all of those segments. And I think that's what is behind the resilience of our business model. And frankly, I think that's what gives us strength and the conviction that we have in our growth prospects.
spk05: Okay. Thanks for that. And then just to follow up is that you mentioned that in terms of revenue growth in 2021, the mid-teens in SEM and MC and high single-digit AMH, and given that MC is your highest margin business and And then given that the driver probably in SEM is these advanced products that come with higher margins. So connecting the dots, it seems like the implication for your margins might be higher than what you've directionally talked about. So I guess the question is, is there some – is this drag – maybe there's a way you can quantify the drag in the graphite business on the SEM segment in the fourth quarter, and are you expecting that to persist? into and through 21 or any way to reconcile that strong growth in your highest margin segments vis-a-vis the more muted margin improvement expectations. Thanks.
spk07: Okay, so a lot there, Chris. So let's first talk about the operating margin, which I guess is tangential to the gross margin in SCEM. So the vast majority of that are, you know, headwind that we experience would be non-recurring in nature. I referred to an adjustment related to inventory. That was about 1% of gross margins across the company, but it was all within SCEM. That's not going to persist. The volumes that we talked about as being a headwind, that was also in the SCEM business. We expect those volumes to improve throughout the year. We're not necessarily expecting a big snapback in Q1, but do expect those volumes to improve throughout the year. So when you think about the three divisions, I mean, we're already on the target with regard to AMH. We were already on our three-year target with regard to the MC business. So, I mean, can they do better than they're doing? Sure. But, I mean, at 35%, they're sort of right in the middle of our long-term target. And then, yeah, kind of in a nutshell, I mean, you're right. I mean, the advanced products are the faster-growing products, so mix should play an important role in the margin as well.
spk05: Okay, so I guess just I'll parse it out in my modeling, but it just sounds like maybe there's, you know, is there some other mixed drags in 2021, or maybe there's some upsides to the overall
spk07: margin profile, um, relative to what, you know, so I, so we said, you know, 46 and a half percent for the year, which is up from where we finished the full year 2020. Um, you know, I'm, I'm, I'm not, if you're looking for me to say there's upside, I'm not, I'm not, I mean, I'm coming off a quarter that was 45%. So it's not, I'm not in the mood to push the number for, um, 2021. I, you know, we said 46, five.
spk05: All right, that's helpful. Thanks for the color, Greg.
spk07: Okay, next we'll go to Kirsh Sankar with Killing Company.
spk01: Hi, thanks for taking my question, and congratulations on really strong results. Votron, I have two questions for you. The first one is on the memory. It looks like your memory field is going to grow year-over-year this year. Are you still seeing mostly no transition from customers, and if so, If and when they go to capacity, how would that impact your memory series? I'm going to add a follow-up.
spk03: So, yes, I think we are certainly seeing and expecting a lot of note transitions in memory. I think we are early in the year, so we are seeing plans. We are having all of the right discussions in terms of getting ready for those transitions. But We've learned the hard way in this industry to not get ahead of yourself. Some customers sometimes choose for a number of reasons to delay their transitions. At this point in the year, I think we're just looking at a very attractive table. I'm looking at it as I'm speaking of planned no transitions. It's like looking at a menu and salivating in a nice restaurant. But, I mean, we want to see those no transitions happening. The other big factor that I was mentioning is that we expect a lot of wafers to be to be run at 96 layers and higher. I think in 2020, about 50% to 60% of the wafers were at 96 or higher. I expect that number to be 70% to 75% in 2021. So that's going to help us obviously as well. And you had a second question?
spk01: Yeah, I had a follow-up on FinMAP. You know, it clearly looks like that business has tremendous potential. I'm just kind of curious, when do you think it's going to be meaningful to number? Do you have to wait for silicon carbide to be used in all electric vehicles in 2024 timeframe? Or do you think it can scale up before that?
spk03: I think it will be a steady progress. I mean, we are working with a number of customers that have aggressive capacity addition plans. And as those... you know, gallium nitride and silicon carbide substrates are more broadly adapted in electric vehicles. I think we're going to see that business grow very nicely on a, you know, in a very steady basis for the next few years. So I agree with you. I think it's a very promising business for us.
spk01: Thanks, Bertrand. I appreciate it.
spk07: Next, we'll go to David Silver with CL King.
spk08: Yeah, hi, thanks. So I have kind of a more quarter-related question than maybe a more strategic one. But in the fourth quarter, I was hoping you might be able to add a little color to the inventory adjustment or what came behind that. So in other words, was that a collection of items that are maybe part of a normal year-end true-up? Or what I'm kind of wondering is, Bertrand, you've talked about new deposition materials being a focus of the SCEM unit, and I'm wondering if the timing of the inventory evaluation adjustment you took signals a transition to a new technology or a new material. you know, within your portfolios? Are you phasing out kind of current generation products and transitioning to maybe a new ADM or other type of product? Thanks.
spk07: Yeah, so David, first of all, let me say it did not relate to deposition materials. The vast majority of it related to one immaterial issue that sort of built up over a series of quarters. We noticed that Something didn't quite look right on one of our inventory lines at one of our manufacturing plants. And as we analyzed it, we sort of needed to correct it. And it was as simple as that. And it was all, I mean, I said it was about 1% of gross margin. The vast majority of that, you know, 75 basis points, that related to one item. And then we had another small inventory adjustment as we moved one of our new businesses onto SAP.
spk08: Okay, thank you for that. And then just kind of a big picture question and following up, I think, on an earlier question about trends in the automotive side of things where a number of companies have expressed, you know, an inability to receive the required number of chips. You know, I'd also say, I guess there was an announcement in the last day or two that I kind of thought was unusual, but the Taiwan Economic Minister made a statement where he was kind of directing the domestic chip industry to maximize production of chips for the global automotive industry. And I'm just wondering if you could maybe provide a little bit of background there. I mean, I'm not aware of kind of this type of shortage situation permeating such a large industry and to the point where I guess government officials are at least publicly kind of directing the industry to maybe prioritize some chip production types over others. I'm just wondering how you kind of interpret those items and whether that will have an effect on the types or the rates at which your businesses are in demand over, let's say, the next few months.
spk03: So I cannot comment on what is behind the announcement by the Taiwanese government, but what is behind those trends is that many, many of... the automakers are migrating their chipsets away from 65 or 45 nanometer processes to 28 and below. And that's positive for us because it means that more wafers will be produced at more advanced nodes where we have higher Integris content. So again, it's just part of the general trend that we've been flagging. I think it's true for high-performance computing, but it's becoming increasingly true for automotive and other industrial applications as well. And that's very positive for the industry, and that's very positive for Integris.
spk08: Okay, great. And then just one last one maybe for Greg. But the... the other income, I guess the unusually somewhat higher than normal profit on that line. Is that the royalty income issue you cited, or is that due to something else?
spk07: No, it's an issue that really relates to technical, I mean, the way we value dollar-denominated assets in legal entities where the functional currency is other than the dollar. It's strictly a balance sheet thing. It's not a cash flow thing, but it relates to the consolidation of our legal entities. The dollar has been relatively stable, so we haven't seen much of that in the recent past. It's really a function of the dollar weakening against other currencies, but it's a non-operating item.
spk08: That's why it's below the line. Got you. Thank you very much.
spk01: And that does conclude today's question and answer session and does conclude today's conference.
spk07: We thank you for your participation, everyone.
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