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spk01: Welcome to the Integrist first quarter 2023 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Bill Seymour, Vice President of Investor Relations. Sir?
spk11: Good morning, everyone. Earlier today, we announced the financial results for our first quarter of 2023. 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 filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find a reconciliation table in today's news release, as well as on our IR page of our website at antegris.com. On the call today are Bertrand Lawat, our CEO, who's joining us from Taiwan, and Greg Graves, our CFO. With that, I'll hand the call over to Bertrand.
spk05: Thank you, Bill. Good morning to all. I would start by saying that I am very pleased with our performance in the first quarter, especially in light of the dynamic semi-market backdrop. During the quarter, we delivered strong results above our guidance on all fronts. Sales were $922 million, EBITDA margins were 27%, and non-GAAP EPS were $0.65. Let me make a few additional comments on our financial performance. While sales were down sequentially for us in the quarter, we believe we significantly outperformed the market. This outperformance was driven in large part by our strong position at the leading edge technology nodes and also from the impact of easing supply chain constraints, particularly for our AMH and MC divisions. In terms of profitability, gross margins were up sequentially and EBITDA margins were essentially flat. Next, I would like to highlight a few very important items that the team is focused on. First, on the CMC integration, the integration is proceeding very well. We are on track to complete the migration to a common ERP platform by the end of the third quarter, which also puts us on track to achieve the 75 million run rate cost synergy target by the fourth quarter as originally planned. As you know, that pay down is also a high priority for us and divestitures of non-core assets are a significant lever we can use to reduce our debt. As you've seen so far this year, we have entered into agreements for the sale of two businesses for a total of $835 million. The first divestiture was QED, which was part of CMC. We sold QED for $135 million. That sale closed in Q1 and in April. We used the proceeds to pay down the bridge loan. And yesterday, We announced an agreement to sell the electronic chemicals business, which was also a part of CMC, to Fujifilm for $700 million at a low teens multiple. We expect the EC sale to close by the end of 2023. We think Fujifilm will be a great owner for the electronic chemicals business. They will be well positioned to support the growing market demand for its high-purity processed chemicals in North America, Europe, and beyond, with the high level of quality and service that FAB customers require. The proceeds for the sale of EC, when realized, will also be used for debt pay down. Another priority for the team has been aligning our cost structure to the current industry environment. To that end, we have taken several actions to lower costs including headcount reductions and a few small site closures. These actions, in addition to the CMC synergies, will help reduce our cost basis. While effectively managing our cost structure is important, we also continue to make investments that are critical to our long-term growth and success. To that end, we have maintained our significant R&D investments with particular focus on differentiated and high-growth products like advanced deposition materials, CMP slurries, and liquid filtration. Also critical to our long-term growth are our announced capacity expansions. Our new manufacturing facility in Taiwan is approaching completion with initial production expected to begin in the third quarter. I was proud to participate in the opening ceremonies of this facility in Kaohsiung yesterday. The site will be a showcase of Integris' commitment, not only as a technology leader, but also as a world-class manufacturer. We believe these attributes represent a real competitive advantage, as the technology roadmaps of our customers become increasingly challenging and require incredibly precise and stable manufacturing capabilities. delivered from their most trusted suppliers. We also expect to break ground soon on our new manufacturing center in Colorado Springs, which is targeted to begin initial commercial operations in early 2025. Both the Taiwan and Colorado Springs facilities are critical to address our long-term capacity needs, and both have excellent financial return profiles. Looking at the rest of 2023, forecasting the industry this year continues to be challenging. However, based on discussions with our customers and using third-party estimates, we expect that semiconductor fab utilization will likely bottom in Q2. For the full year 2023, we now expect the market will be down In the mid-teens, or a bit more than the down 13% we cited on the last earnings call. Given our strong position in the new technology nodes, we now expect to outperform the market on a pro forma basis at or slightly above the high end of the three to six points outperformance range target we discussed in our recent analyst day. Putting it all together, we continue to expect our pro forma sales in 2023 to be down on percentage basis in the high single digits. Wrapping up our outlook for 2023, we also continue to expect EBITDA will be approximately 27% to 28% of revenue for the year. And we expect full year 2023 non-GAAP EPS to exceed $2.30 per share. Our approach this year is playing both defense and offense, being mindful of cost, but also preparing to quickly re-accelerate when signs of an improving market emerge. The semiconductor industry remains poised for significant long-term growth, on the way to $1 trillion by 2030. driven by exciting catalysts such as AI and EVs, to name just a few. In addition, the pace of node transitions continue to be on track, and device architectures are becoming much more complex, trends which ultimately play to our strength. Integracy's breadth of capabilities in material science and materials purity will enable us to offer unique solutions to help our customers improve device performance and shorten their time to yield. These trends and our increasingly mission-critical solutions are translating into rapidly expanding content per wafer and market share growth for Integris. Finally, I want to take a moment to thank our customers for the trust and confidence they place in Integris. And I also want to thank the Integris team for displaying strong adaptability and a keen focus on our customers in a challenging industry environment. Before I hand over to Greg, I want to welcome Linda Lagorga to our team as our new CFO. Linda will be officially joining us next week, and we cannot wait to have her on board. But today, I want to take a minute to again thank Greg for his immense contributions to Integris and for being such a great partner to me and the rest of the leadership team for all these years. So now let me turn the call to Greg. Greg?
spk06: Good morning, everyone, and thank you, Bertrand. On to our results for Q1. Our sales in the first quarter were $922 million, down 4% year-over-year on a pro forma basis and down 3% sequentially. Sales were up 42% year-over-year on a reported basis. FX negatively impacted revenue by $18 million year-over-year on a pro forma basis and positively impacted revenue by $12 million sequentially. Gap gross margin was 43.5% and non-gap gross margin was 44.3% in Q1, above our guidance of 43%. The sequential strength in non-GAAP gross margin was driven by favorable FX rates and product mix. We expect gross margin to be 42% to 43% in Q2, both on a GAAP and non-GAAP basis. The modestly lower margin reflects less favorable FX trends and the impact of lower volume. GAAP operating expenses were $388 million in Q1 This included 184 million of non-GAAP items, specifically 89 million of goodwill impairment related to the sale of the electronic chemicals business, 58 million of amortization of intangible assets, 17 million of integration costs, and 21 million of other net costs. Non-GAAP operating expenses in Q1 were 204 million, within our guidance range. We expect GAAP operating expenses to be approximately 262 to 267 million in Q2 and non-GAAP operating expenses to be approximately 185 to 190 million in Q2. The sequential decrease in non-GAAP OpEx from Q1 to Q2 is primarily driven by a decrease in non-cash equity compensation expense, which is higher in Q1 than other quarters. Q1 gap operating income was $13 million, and non-gap operating income was $205 million. Adjusted EBITDA in Q1 was $252 million, or 27.3% of revenue, and was above our guidance. Looking below the line, the GAAP tax rate in the quarter was negative as we had a pre-tax loss. The non-GAAP tax rate was approximately 17%. We expect the non-GAAP tax rate for the full year 2023 will also be approximately 17%. Q1 GAAP diluted EPS was a negative 59 cents per share. The negative GAAP EPS was driven primarily by the goodwill impairment taken in Q1 related to the electronic chemicals sale. Non-GAAP EPS was 65 cents per share above our guidance. Turning to our performance by division, for ease of analysis, the year-on-year comparisons I am referencing here are on a pro forma basis for the SCEM and APS divisions. Q1 sales of $269 million for MC were up 1% from last year and down 5% sequentially. The sequential sales decline was driven primarily by lower sales of our CapEx-driven solutions in MC. Adjusted operating margin for MC was approximately 37% for the quarter, flat year-on-year, and down slightly sequentially. The sequential margin decrease was driven primarily by lower volumes. Q1 sales of 219 million for AMH were up 10% versus last year and up 2% sequentially. Sales growth year-over-year was driven by strength in wafer and fluid handling solutions. Adjusted operating margin for AMH was over 22%, down year-over-year and up slightly sequentially. The modest year-over-year margin decline was primarily driven by higher OPEX investments. Q1 sales of 198 million for SCEM were down 6% year-over-year and down 3% sequentially. The sales decline was driven primarily by the impact of the sale of QED in mid-Q1. Adjusted operating margin for SCEM was over 11 percent for the quarter, down year-over-year, but up sequentially as expected. The sequential margin increase was driven by lower OPEX spend, improved execution, and favorable FX. Q1 sales of $250 million for APS were down 16 percent year-over-year and down just 1 percent sequentially. The sales decline in APS was driven by lower sales of CMP consumables, except for SIC slurries, which had significant growth. Adjusted operating margin for APS was approximately 23% for the quarter. Operating margin was down year on year, but was up sequentially, despite the sequential sales decline. The year-over-year margin decline was primarily driven by the lower volumes. The sequential margin improvement was the result of solid cost controls. Moving on to cash flow in the balance sheet. First quarter cash flow from operations was 152 million, and free cash flow was 18 million. It is worth noting that Q1 is typically the lowest free cash flow quarter of the year, as this is when we pay out variable compensation related to the prior year. CapEx for the quarter was 134 million. We continue to expect to spend approximately 500 million in total CapEx in 2023, a significant portion of which will be for our new facilities in Taiwan and Colorado Springs. We also continue to expect CapEx will decline to a longer-term run rate of approximately 10 percent of sales starting in 2024. As we have said, We are highly focused on improving our cash flow and especially inventory turns. While inventory increased in Q1, our inventories have started to decline and we expect the declines to accelerate as the year progresses. A bit on our capital structure. As Bertrand referenced, in April we paid off the balance of a short-term high-interest loan associated with the funding of the CMC transaction. Excluding that $135 million, at the end of Q1, our gross debt was $5.8 billion and our net debt was $5.2 billion. This equates to a gross leverage ratio of five times and a net leverage ratio of 4.6 times pro forma for the announced cost synergies. As a reminder, going forward, after taking into account the hedge we put in place, our variable rate debt is expected to be a bit more than 10 percent of total debt outstanding. The blended interest rate on the debt portfolio is approximately 5.5 percent. As Bertrand said, we are very focused on debt pay down and deleveraging. On that note, we expect to steadily lower our leverage toward our target of 3.5 times gross leverage by the end of 2024. Our liquidity position continues to be solid. As of the end of Q1, we had over $700 million of cash on hand, $135 million of which was used to repay the short-term loan in April, and well over $1 billion of total liquidity, including our $575 million undrawn revolving credit facility. Now for our Q2 outlook. We expect sales to range from 870 to 900 million. We expect the EBITDA margin to be approximately 27 to 28 percent. We expect GAAP EPS to be 9 to 14 cents per share and non-GAAP EPS to be 53 to 58 cents per share. A few additional modeling items. We expect interest expense of approximately 84 million per quarter for the rest of 2023. Depreciation is expected to be over 55 million in Q2, up from 47 million in Q1, and increasing to over 60 million in Q4. And to be clear, all the guidance we've provided today, both for Q2 and for the full year 2023, includes the electronic chemicals business. In closing, I feel very confident as I am preparing to step down that Integra has never been better positioned. The semi-market, even given the challenging near-term environment, is much more diverse than it used to be and has many drivers for attractive long-term secular growth. Our model is 80% unit-driven and, as a result, is more resilient than it used to be. We have increased opportunities to grow our content per wafer and continue to outperform the market. Our model has significant variable cost, which helps us in a down year. And while we do have significant debt, the debt structure is rock solid. It's approximately 90 percent fixed rate. There are no meaningful covenants and no meaningful maturities until 2028. We are, of course, committed to paying down the debt, and have options to do that, including using the $700 million of proceeds from the EC sale post-close. In closing, I want to thank my team for all of the great support over the years. And finally, I want to welcome Linda to the team. She is the right person at the right time. Operator will now open up for questions.
spk01: Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question will come from Toshiya Hari with Goldman Sachs. Your line is now open.
spk02: Hi, good morning, guys. Thank you so much for taking the question. Bertrand, maybe first one for you, I guess a multi-part question on how to think about revenue going forward. You talked about the market being down in the mid-teens as kind of your outlook. I was hoping you could differentiate between how you're thinking about wafer starts and WFE and construction capex. And you mentioned that you expect the market to trough in Q2. Is that a statement for all three buckets of your business, if you will? And then my second part would be some of the drivers behind the outperformance. You talked about leading edge customers, no transitions, and also easing supply constraints. I was hoping you could expand on those two. Thank you.
spk05: A lot of questions here to share, so I will try to remember them all, but don't hesitate to come back online if I have forgotten anything of significance. Let's start with the annual guidance. A little bit more detail and to unpack my statement. MSI, we expect wafer starts to be down in the mid-teens, so a little bit worse than last time we spoke. Our forecast right now for CAPEX is down near 20%, so pretty much in line with our views about three months ago. So that gives you the blend of down mid-teens for the industry. The way to think about the year at this point is that, again, we expect MSI to bottom. We believe that it's going to be true in advanced logic and memory. And we expect some recovery, some sequential growth in the subsequent quarters for the balance of the year. So that's the way to think about it. about the year. And if you do the math, you will see that it gives you a rate of outperformance of about six to seven points and an overall annual growth rate of about down in a high single digit. So we talked about the reasons for that outperformance. So it's continued strong level of demands for some of our strategic products, in particular liquid filters which are in very high demand. The reasons for that are unchanged and I believe clear to the audience the need for higher levels of purity is unabated in this industry. Purity is very important at the leading edge to achieve optimum yields and it's increasingly important for mainstream fabs to achieve long-term reliability of their chips. Another factor for the outperformance is, again, the easing of a number of supply chain constraints. You can see evidence of that in particular in MCNA image. You'll recall last year we talked about some new internal capacity coming online in the back half of the year, so we've been able to ramp up some of those new equipments in particular in liquid filtration and fluid handling. And then we are seeing also some new capacity coming online with some critical suppliers of resin in particular. So I think those are the various factors behind the performance in Q1 and how we expect the year to play out.
spk02: That's very helpful. Thank you. Thank you, Bertrand. And then as my follow-up, I guess a couple of questions on the cost side. You guys talked about some headcount reductions, some small site closures. You're guiding Q2 OPEX to 185 to 190. As we think about the second half run rate from an OPEX perspective, is the 185 to 190 kind of the new base that we should be working with, or... Could there be further reductions given some of the initiatives going on today and perhaps synergies with CMC? And then specifically on SCM, margins were up sequentially from Q4 to Q1, but they remain pretty low relative to where you were a year ago, a year and a half ago. So what needs to happen within SCM for your margins to perhaps normalize higher? Thank you.
spk06: Okay, yeah, so I'll go ahead and take that. Tashia, how are you doing this morning? So OPEX, you should think about that 185 to 190 as sort of the run rate as we go through the year. If you think about that on a pro forma basis, it's about $10 million higher than where we were last year in the second quarter. But if you unpack that, it's all ER&D. And as Bertrand mentioned, we're sort of driving with one foot on the gas, one foot on the brake, and we're trying to watch the costs around the SG&A side of the house and the ER&D side of the house, but we do want to make sure we're continuing to invest for the long term. As it relates to the SEM division, as you highlighted, we did have a slight improvement in the operating margins there. I think as we think about the balance of the year, There are a couple parts of that business where the volumes are very low and they have relatively high fixed costs, so we need to see higher volumes in those portions of the business. And I would just say, in general, the margin is going to improve. It's primarily a volume-related issue. With the exception of those two, I talked about two pockets where we've got very low volumes relative to historical standards. And those would be non- Those aren't core areas per se.
spk02: Got it. Thanks so much, Greg, and congrats again on your retirement. Yeah, thank you.
spk01: Thank you. Our next question will come from Kieran DeBrun with Misuho Group. Your line is open.
spk08: Hi, good morning. Congratulations on the good quarter, and again, congratulations, Greg. I was wondering, in APS specifically, I mean, it seems like you're seeing really good demand for the silicon carbide flurries. Maybe you can parse out, you know, what's driving that strong demand, like how you're thinking about that business going forward. And then, you know, your outlook for the consumable portion of the business and like throughout the remainder of the year and how you expect that to trend. I mean, you covered it, I guess, more broadly in terms of where the Total business is trending, but if we can just dial down a little bit more into APS, that would be helpful.
spk05: Yeah, so we like talking about the SIC slurry business because, first of all, there are a number of very significant investments taking place in this particular segment. Many customers are investing massively to build new capacity for And then the other reason we like to talk about it is that our market position in these particular applications is very, very strong, both for slurries and for pads as well, by the way. So it's small today, but we expect this part of the business to grow very rapidly. We saw that in Q1. We expect to see that, as Greg mentioned, through the balance of the year. So that part of the business will be expanding and will be a little bit swimming against the current here. For the rest of the consumable business, I think, again, we expect that part of the business to be down sequentially in Q2. That's largely a function of further slowdown in wafer starts especially in advanced logic. And then we expect a steady but modest recovery in the back half of the year. As I mentioned in our previous earnings call, we continue to expect our liquid filtration product lines to do the best across the portfolio. And as I was just saying earlier, As an answer to the previous question, it's largely a function of the growing importance of materials purity for our customers and therefore the growing importance of the solutions we provide for them. So that's the way to think about consumable revenue for the balance of the year.
spk08: Great. Thank you. And then maybe just a really quick follow-up. You know, the Taiwan facility seems to be on track or even ahead of schedule. How do we think about the contributions as you ramp up that facility in the back half of the year? And then I know it's early for 2024, but any initial thoughts on how to, you know, kind of think about that business and the additions to your portfolio? Thank you.
spk05: Yes, you're right. I mean, this facility is coming online, in fact, on plan. But that in itself is quite an accomplishment, given the fact that we announced the investment late 2020, and this massive construction took place during a global pandemic. So the fact that we are able to hit the timeline and to do all of that within budget is quite an accomplishment. And frankly, that's why it was important for me to travel to Taiwan to recognize the team. And frankly, I wouldn't miss the opening and an opportunity to interact with a lot of our major customers who attended the opening. So this is going to be a great showcase for Integris. Not only are we adding new capacity, but we are also investing in the most advanced manufacturing site when it comes to liquid filters, when it comes to high purity drums, when it comes to low K and high K dielectric materials. So again, exciting times, exciting week for us, obviously, between reporting strong results and opening this very important facility. When it comes to its contribution, as we've said many times, I mean, this year it's going to be a little bit of a drag. to margin in the back half of the year. We are still in the middle of internal and customer qualifications. We expect the first shipments to customers, so billable shipments by Q3, but it will be modest. And then the ramp really will take place in 2024. And I would expect to be maybe reaching full capacity sometime in 2025. Great. Thank you. I'll turn it over.
spk01: Thank you. Our next question will come from Sydney Ho with Deutsche Bank. Your line is open.
spk04: Thank you and good morning. Thanks for the update on the four-year guidance. Do you still expect second half revenue to be slightly skewed towards the second half of the year? I think last quarter you talked about three nanometer RAM being a big driver in the second half. Has there been any changes to your expectations about these nodal transitions for three nanometers as well as for on the memory side as well?
spk05: Yes, Sydney. So right now, I think on balance, I would say that, you know, second half will be essentially flat with the first half. So we expect, as I mentioned earlier, Q2 revenue to be the lowest point this year for us. But after that, we expect, you know, the sequential increase every quarter to be relatively modest through the balance of the year. And that's going to be a function of recovery and MSI and also the benefits of some of the node transition. So that's, again, where we expect to do better than the market. But, you know, On balance, as I said, second half, think about second half as flat to the first half.
spk04: Okay, that's helpful. Related to the electronics chemicals business, can you talk about the financial profile of that business in terms of revenue and profitability? I think you guys talked about what it was in 2022, but also related to that, does the announced divestiture of the business change the way you think about the cost and product synergies you laid out in your analyst day the last time, and what about your CapEx outlook going forward?
spk05: Sure. All good questions. So the decision, first of all, the decision to divest is really the result of really careful and objective assessment of the various parts of the CMC portfolio. We talked about it during the analyst day we had at the end of last year, and by the time we presented to you at the end of last year, we knew that we wanted to divest the EC business. So we took that into account and it was factored in the cost synergies that we were targeting. So no change to that commitment to deliver $75 million of cost synergies. When it comes to the on the financial profile of that business, I would just say that, you know, think about 2022 sales around $360 million and think about an EBITDA number between $50 and $55 million. And again, you know, EBITDA is directional. This is a carve out, but that's the range you should probably have in mind.
spk06: And Sydney, as you think about that business, it's called $700 million in proceeds. The operating income is obviously lower than the EBITDA, but we're going to pay off debt that currently is at a rate of 7.7%. So the impact on the P&L of this divestiture is neutral to slightly positive. Great.
spk04: Super helpful. Thank you very much.
spk01: Thank you. Our next question will come from Charles Shi with Needham and Company. Your line is open.
spk12: Thank you for letting me ask a couple of questions. I really want to understand a bit of the near-term dynamics here when I look at your segment, revenue performance in Q1. I would have thought that SCEM and APS to be down a little bit more than what you have reported and MC and AMH to be holding up slightly better. Given that SCEM and APS are more unit driven, the other two are more CapEx driven. Can you help me understand a bit more how to reconcile that looks like a CAPEX still holding relatively strong in Q1, but you see a little bit more of the sequential decline, especially in MC, but SEM and APS, which are supposed to be more unit-driven, probably should have done more, but you're actually doing okay. Thank you.
spk05: Yeah, good question. And there's certainly more than meets the eye. So I'm happy to try to unpack that a little bit more for you. So remember first that when we talk about our CAPEX exposure, a lot of that exposure is to new fab constructions. And there was, believe it or not, a fairly steady level of investments in new fab construction projects. That helped sustain our fluid handling business in particular, and that's largely what helped our AMH business to perform so well year on year and sequentially. The other part of that is what I was mentioning earlier, which is really the easing of a number of supply chain constraints. MC, it's a little bit of a tale of two cities. You have, on the one hand, products that are components used in equipment platforms and demand for those products obviously is under a lot of pressure so it's down fairly significantly but it was offset nicely by our liquid filtration business as i mentioned earlier strong demand for those products you understand the need for greater purity and what it does for our customers, and then we also benefited from new capacity that came online late last year, and there was good timing because of the strong demand for those products. When it comes to ACM and APS, I agree with your statement. I think we were pleased with the performance. It was largely in line with what we were expecting, and the decline is a function of the exposure to memory. Those two divisions I've seen actually a fairly steady decline in demand starting late last year. We saw continuation of that in Q1, as expected. We are actually encouraged by the recent trend, and we're seeing actually signs of improvement for those businesses going forward, and that's one of the reasons why we believe that we expect to turn the corner in Q2.
spk12: Thank you, Bertrand. I think that the other question, I think you talked about MSI or FAP utilization to bottom in Q2. I think it specifically called out advanced fancy logic and the memory. Do you have any view about the mature node FoundryLogic side of the MSI? And if you can, can you kind of quantify to us how much of the exposure of your business to that part of the FoundryLogic side of the market? I know you're probably more levered to the advanced, but some comment on that part of the market would be great. Thank you.
spk05: Yeah, so mainstream certainly has been an area of strength across our portfolio. It was true in Q1. We expect that to continue to be true in Q2. And certainly, one of the reasons we have more muted expectations for the back half of the year is that we have some concern about the sustainability of demand from those mainstream fabs, and that's something we try to factor into our guidance for the back half of the year. When it comes to, you know, Our overall exposure, it's something that is hard to do, but directionally, I would say that we have about 70% exposure to logic and foundry and about 30% exposure to memory for our fab customer business. And that fab customer business represents roughly 55% of our revenue.
spk12: And within that 70% of the fab business, leverage to logic, foundry, how much of that is mature or mainstream side of the logic foundry?
spk05: That's the question. So that part gets a bit trickier to quantify because sometimes we don't have perfect visibility. But I would say think about 60-40. 60% of that would be advanced. 40% would be mainstream, roughly. Okay.
spk12: Thank you, Patron, for the clarification. Thank you. Sure.
spk01: Thank you. Our next question will come from John Roberts with Credit Suisse. Your line is open.
spk07: Thank you and welcome, Linda. I'm sure you're listening in and best wishes again, Greg. When you talk about easing of supply chain, I assume you're talking about the US-China trade restrictions that were impactful in the fourth quarter. Have they largely gone away or half gone away? Or has there been a sequential progression in your solutions to that headwind that you had in the fourth quarter?
spk05: So the easing of the supply chain constraints really refer to something different. It's really about Two things. One was the number of internal capacity constraints that we had all the way until the end of last year. But as I mentioned, a number of new process equipment lines came online. So we resolved most of our internal limitations. And then the second part was really getting access to enough quantities of certain raw materials. And as I said, the situation, we're not entirely out of the woods, but we've made great progress versus where we were last year.
spk07: And the U.S.-China technology restrictions are not having an impact at this point?
spk05: Yeah, so the impact is something that we quantified during the previous quarter's call. We spent a lot of time working with the U.S. administration at the end of Q4 and our Chinese customers collecting certifications from our customers or performing due diligence on their operations. And we quantified the permanent impact, negative impact to our top line to be about $20 million, a loss of $20 million of revenue, permanent loss by quarter. And we saw actually about that number impacting mostly SEM and APS in Q1. Great.
spk07: Thank you.
spk01: Thank you. Our next question will come from Alexey Yevremov with KeyBank Capital Markets. Your line is open.
spk03: Thanks, and good morning, everyone. Bertrand, do you have any views on node transitions as it relates to your business sort of beyond the back half of this year?
spk05: Beyond the back half of this year? What I can tell you is that for this year, we think that those node transitions are largely on schedule. I mean, beyond this year, We don't really like to comment on that. It would be speculative. There's a lot that can change between now and then. But I would say that for this year, the node transitions are largely on track. And we know that all of our customers are expressing a desire to continue to maintain the cadence of node transitions. It's in their best interest to maintain a rapid transition to the new nodes. That's the source of competitive advantage for them, and we believe that, again, they're going to do everything they can to maintain a very rapid cadence, which plays to our strength because we believe we can help them. We can help them with very unique new materials, and we can help them solve their contamination issues, which means, you know, achieve faster time to yield. But again, I'm not going to comment on 2024. It's too early.
spk03: Fair enough. And then on just the current year, should we think about your demand for your products broadly as sort of coincidental with fab utilization or would it be somewhat lagging or maybe leading the industry growth, the industry trough?
spk05: My answer would differ by division. Days of much stronger correlation to wafer starts with SEM and APS. The correlation is good, but not as strong with MC in particular. The reason being that sometimes when customers actually ramp up production in a fab, they will use large quantities of filters, for instance, to just purge the lines, the chemical loops in the fabs. So that will create a little bit of a bump up front. And then those volumes actually will recede to what would be the normal level of daily consumption. So that's why sometimes when you have a large node, you can see some weird trends. I mean, they are totally expected and understood on our side, but sometimes externally it's a bit hard to read. Thanks a lot.
spk01: Thank you. Our next question will come from Chris Kepch with Loop Capital Markets. Your line is open.
spk09: Yeah, good morning. This is rare for me, but I do want to give a shout out to Greg. You know, the history there. You've been through a lot with the company. Kudos to all your accomplishments. I've appreciated the relationship over the years and wish you the best and hope to keep in touch. so uh good luck and so just on on the on the results yeah thank you chris i appreciate it cheers um so just you know terrific narrative especially considering the macro i do have a follow-up and and it's really you know focused on this this um not just your sales resilience but really the comments about the outperformance relative to the market being greater than expected i'm just curious bertrand is this a statement about um where you see the end market, you know, recovery being stronger vis-a-vis what may continue to, you know, be slower language. In other words, it's known that you have, you know, more process for record wins and therefore more content per wafer, if you will, at these advanced, more complex nodes. So for you to outperform greater than expected, is it really just a statement about, you know, a view that, that's where the demand will hold in better vis-a-vis maybe some of the legacy nodes or some of the more mature nodes.
spk05: Yes, I mean, Chris, this is exactly what's happening. I mean, we're seeing steady integrase content per wafer increase, node after node. You know, even when you hear about wafer start reductions in memory, you you know that a lot of those reductions are taking place in the lagging nodes. So at some level, it gives us, it creates additional opportunity for us to continue to push forward and to enjoy greater content per wafer. So the algorithm that we laid out for you in the last two or three analysis days, it's you know, in full gear and we are, you know, we are seeing the benefits of that and we're seeing the, you know, we have often had the question about whether the algorithm would stop working in a downturn and, you know, here we are demonstrating that, you know, Integris is truly a resilient business on a cross cycle basis. You know, we've been able to deliver very compelling outperformance in an upturn, and I think that we are obviously not immune to a downturn. Our revenue will be down, but relative to the rest of the industry, I believe that we will be able to deliver some fairly strong results. I don't want to be bragging, we're going to be down, so there's really no reason for us to be bragging about a down year, but I think on a relative basis, I think we will prove to be resilient.
spk09: Got it. And just as a follow-up, the one thing that I've observed over the many years is that when there's node transitions, particularly more challenging ones that, you know, initially, I mean, it shows up at the chipmaker in the form of gross margin weakness, but, you know, the initial ramp, there's low yields, which, you know, effectively results in higher consumables in order to get the dye production done. even if the yields are low. So there's a disproportionate benefit to the leading-edge consumable supplier when these node transitions happen. I'm wondering if that dynamic is playing in to the extent that you have visibility to it.
spk05: Yes, it is playing in in two ways. It's playing in in the FAB environment exactly as you described it, Chris, but it's also playing in upstream in the supply lines because increasingly, I mean, as our fab customers transition to more demanding nodes, they will push their bulk chemical suppliers to significantly increase the purity levels of a broader array of process chemistries coming into the fabs. And it translates into great opportunities for more point of filtrations using more advanced filters that need to be replaced more frequently upstream in those supply lines. And it's also going to drive consumptions of more high purity drums. And those are exactly the types of investments we've been making here in Kaohsiung and Taiwan. We are adding capacity to our advanced filters. We are adding capacity to our high purity drums to serve the extended ecosystem of our strategic FAB customers here on the island. But it's happening everywhere in the world where there is a big push to the advanced nodes. Very helpful. Thank you. Thank you.
spk01: All right. Thank you. Our next question will come from Mike Harrison with Seaport Research Partners. Your line is open.
spk10: Hi, good morning. I'm curious on the microcontamination control business and the weakness that you saw on the CapEx or more equipment-related side. Do you view those CapEx-related products as leading indicators, and do you view the Q1 weakness as maybe just a temporary impact or air pocket, or do you expect further weakness on the equipment side?
spk05: So typically those are indeed, you know, leading indicators of what to expect in terms of WFE. And, you know, so we expect those product lines to continue to face some headwinds going into Q2. And then we frankly have very little visibility for the backup of the year. But internally right now we are not counting on a, on any recovery for those products in 2023.
spk10: All right, thank you for that. And then on the ATS business, I'm curious if you could comment on opportunities you're seeing in the PADS side of the business. That was always an area that CMC saw as having a lot of growth potential. I think they had some challenges delivering on that growth, but I'm curious if you're maybe seeing more success already or expecting that you can be more successful on the PADS side.
spk05: It's a good question. So as I mentioned, actually, we are very excited about emerging opportunities in SIC applications, not just for the slurries, but for the PADS as well. In addition to that, we've seen some nice progress for silicon applications. It's still early days, but that part of the business has been, over the last few quarters, has been performing actually better than expected. And to your point, we have high expectations for this business to continue to perform better than it has historically.
spk10: All right. Thank you very much.
spk11: All right. Thank you very much. Thank you for joining our call today. Please follow up with me. This is Bill Seymour. If you have anything else you want to cover and have a great day. Thank you.
spk01: Thank you, ladies and gentlemen. This concludes today's Integris first quarter 2023 earnings conference call. Please disconnect your line at this time and have a wonderful day.
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