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spk12: Welcome to the Integris Third 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 and 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 could hear your questions clearly, we ask that you pick up your handset for best audio quality. Lastly, if you should require operator assistance, please press star and zero. I would now like to turn the call over to Bill Seymour, Vice President of Investor Relations.
spk11: Good morning, everyone. Earlier today, we announced the financial results for our third 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 have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find a reconciliation table in today's news release as well as on our IR page, our website, and integris.com. On the call today are Bertrand Leroy, our CEO, and Linda LaGorga, our CFO. With that, I'll hand the call over to Bertrand.
spk09: Thank you, Bill, and good morning. I will start by saying that I am pleased with another quarter of solid performance. In an industry environment that continues to be challenging, the Integris team delivered results that were in line or better than our guidance, and we made good progress on all our key commitments. First, on our financial performance, sales were $888 million, and EBITDA margin was 26.5%. both squarely at the midpoint of our guidance range. Non-GAAP EPS was 68 cents exceeding our guidance range. Let me make a few additional comments on our sales performance. Sales were down 1% sequentially in line with our guidance. The drivers of that decline were similar to last quarter. For our unit-driven products, sales were down across most product areas as utilization rates in both logic and memory continued to bump along the bottom. However, we did see growth in product lines that are of increasing importance to our customers' technology roadmaps. In particular, we saw growth in advanced deposition materials and wet and clean liquid filters. In addition, we had another strong quarter in SIC slurries and pads, reflecting the growth of that industry segment in our strong market position. In addition, like last quarter, our performance was mixed in our CAPEX-driven solutions. Sales were down for our FOOPS and other products tied to WFE, in contrast to the steady demand for our gas purification systems and sensing and control products, which are tied to new fab construction. Next, I would like to provide an update on the key commitments the team is focused on. First, on the CMC integration. We wrapped up all the ERP conversion on time in August and we are on track to achieve the 75 million run rate cost synergy target this quarter. We executed four ERP conversions within 13 months of the closing of the CMC acquisition. This is a major accomplishment for the team and a testament to our integration capabilities. Having the whole company on one common ERP platform will allow us to better serve our customers with streamlined end-to-end supply chain and operational capabilities. On the revenue synergies, we have seen early wins in combining products in the CMP module, including slurries, pads, formulated cleans, and filters. Looking further out, there's growing interest from our customers in our end-to-end solutions and our ability to co-develop solutions to support the adoption of materials like molybdenum and other precursors. Our customers see great benefits in integrated solutions as they enable faster development times and improve speed to yield, which ultimately for them means faster time to market. Next, diversity choose and pay down. Here, we have made significant progress on our commitments. On October 2nd, we closed the sale of our electronic chemicals business to Fujifilm. Regarding the termination of our distribution agreement with Element Solutions, the deal is largely wrapped up and customer transitions are almost complete. We expect to receive the balance of the proceeds for this transaction by the end of the year. Finally, on the PIM business, which sells drag reducing agents for the oil and gas industry, as we mentioned last quarter, we are working on the sale of the PIM business. The sale process remains ongoing, and we will update you when we have more to share. Summing it up, so far this year, we have sold three businesses, not including the PIM business. And we are using the $1 billion in proceeds from those sales to significantly bring down our debt, just as we said we would. In addition, as you will hear from Linda, these transactions are driving both gross margin and EPS accretion. Lastly, as we discussed, we are focused on improving our free cash flow and specifically inventory turns. We saw very good improvement in inventory reductions in the third quarter, which put a bit of pressure on gross margin but contributed to improving cash flow for the quarter. Linda will also discuss this in more detail shortly. Let me now cover a few other important items before moving on to the outlook. First, on our new facility in Taiwan, as planned, we have begun initial shipments from the Kaohsiung facility. These volumes remain very small. but reflect the steady progress our local team is making. We continue to expect to ramp to higher volumes of production during the second half of 2024. Our new capacity and new facility in Taiwan is critical to addressing our long-term needs. Last quarter, we shared that we were combining the SCM and APS divisions starting in the third quarter. This combination has been completed. The new division is called Material Solutions. Material Solutions will provide our customers the opportunity to leverage our end-to-end capabilities, which we believe will accelerate their roadmaps by reducing their time to yield and by providing better device performance and superior cost of ownership. I believe that this division has tremendous opportunity for growth and margin expansion. Last week, we submitted an application for CHIPS Act funding for our new Colorado Springs facility, which we originally announced in December 2022. We believe that this project is clearly in line with the goals of the Department of Commerce to strengthen the domestic semiconductor ecosystem and improve the resiliency of the domestic supply chain. We look forward to continuing our engagement with the CHIPS program office on our project. Turning to the recently released export controls for China, we do not expect to see any new material direct impact to our business. Next, a few updates on our corporate social responsibility program. In the next few weeks, we will be publishing our latest CSR report. We are proud of the progress we have made since launching our program in 2020, but we also know we can do even more. Integris recognizes climate change is a critical issue for the world at large and our communities. On that note, I am pleased to announce that one of the new goals we are introducing is the commitment to reduce our Scope 1 and Scope 2 greenhouse gas emissions by 42%. In addition, we are pleased that Integris was recently awarded the Gold Sustainability Rating from EcoVedis, which puts us in the top 3% of all companies, demonstrating our strong commitment to corporate social responsibility, our colleagues, and our corporate values. Now, looking at the rest of 2023, little has changed. in our view of the market. We believe the industry, both for logic and memory, has likely reached the bottom in terms of utilization rates. However, we do not expect any meaningful improvement in the market in the short term. As it pertains to Integris, given our strong market position, we continue to expect to outperform the market by at least six points in 2023. Despite the challenging short-term market conditions, we remain very optimistic about the long-term growth prospects for the semiconductor industry and for Integris. The market will return to growth on the way to doubling in size to $1 trillion. At the same time, the industry is entering a period of unprecedented technology change and device complexity, with chips shrinking below 1 nanometer and with the proliferation of 3D structures across most device architectures. This means the industry is moving toward integrous because our value proposition is unique and increasingly important to our customers' roadmaps, especially in the areas of material science, materials purity, and end-to-end solutions that enable faster time to yield. This will ultimately translate into rapidly expanding content per wafer, and superior growth for integrals. Let me now turn the call over to Linda. Linda?
spk05: Good morning, everyone, and thank you, Bertrand. Our sales in the second quarter were $888 million, down 11% year-over-year and down 1% sequentially. FX negatively impacted revenue by approximately $4 million year-over-year and negatively impacted revenue by about $6 million sequentially in Q3. As a reminder, the third quarter results and our original guidance still included the full revenue impact of the electronic chemicals business and the business we are selling to Element Solutions. Gross margin on a GAAP basis was 41.3%. and was 41.4% on a non-GAAP basis in the third quarter within our guidance range. The expected sequential decline in the non-GAAP gross margin was driven by lower plant volumes from our continued focus on inventory reduction, the temporary impact of the termination of our distribution agreement with Element Solutions, and the continued ramp of our new facility in Taiwan. Operating expenses on a GAAP basis were $250 million in Q3. Operating expenses on a non-GAAP basis in Q3 were $172 million below our guidance. Adjusted EBITDA in Q3 was $235 million or 26.5% of revenue at the midpoint of our guidance range. The GAAP tax rate was negative in Q3. The non-GAAP tax rate was 9.3% below our guidance. Both our GAAP and non-GAAP tax rates were positively impacted by the recent IRS announcement that temporarily allows for certain additional foreign tax credits. GAAP diluted EPS was 22 cents per share in the third quarter. Non-GAAP EPS was 68 cents per share above our guidance driven by lower operating expenses, modestly lower interest expense, and the positive impact of our lower tax rate. This is partially offset by the negative impact of the FX in our other income and expense line. Bertrand said, our third quarter results now reflect the combination of the SCEM and APS divisions into the new division, Materials Solutions. We have provided historical recast financials for the three divisions in our earnings slide. MC sales in the quarter of $286 million were up 2% from last year and up 1% sequentially. The modest sequential sales growth was driven primarily by wet edge and clean liquid filters, which are unit driven, and gas purification solutions, which are tied to facilities-based CapEx. Adjusted operating margin for MC was 35.4% for the quarter, essentially flat sequentially. AMH sales in Q3 of $180 million were down 14% versus last year and down 5% sequentially. The drivers of the sequential sales decline in AMH were similar to last quarter. Products which are more tied to fab construction, like sensing and control solutions, continued to grow, and products more tied to WFE, like FOOPS, declined. Adjusted operating margin for AMH was 17.8%, down sequentially, primarily driven by lower volumes. For the new division material solutions, sales in Q3 of $436 million were down 16% year-over-year and down 1% sequentially. The modest sequential sales decline was driven by lower volumes across certain product lines particularly in memory applications. This was offset by strong growth in SIC slurries and pads, advanced deposition materials, and specialty coatings. Adjusted operating margin for MS was 16.8% for the quarter. The modest sequential margin decline was primarily driven by the temporary impact of the termination of our distribution agreement with Element Solutions. Moving on to cash flow. We continue to be committed to improving free cash flow. And as an organization, we have put a lot of focus on lowering inventory to that end. These efforts are showing great results with inventory down almost $80 million sequentially in Q3. CapEx for the quarter was $78 million. We continue to expect to spend approximately $450 million in total CapEx in 2023. Third quarter free cash flow improved significantly to $122 million. This was driven primarily by our progress toward our goal to reduce inventory this year by approximately $100 million. Next, let's discuss our capital structure. At the end of Q3, our gross debt was $5.5 billion and our net debt was $4.9 billion. Gross leverage was 5.5 times and net leverage was 4.9 times pro forma for our announced cost synergies. During the third quarter, we made a $75 million voluntary debt payment and executed a 25 basis points reprice in our term loan. During the fourth quarter, we will pay down approximately $730 million of debt with the proceeds from the electronics chemicals divestiture and the remainder of the proceeds from the element transaction. As a result of this pay down, by the end of the year we expect our gross debt to drop to approximately $4.8 billion and gross leverage to approximately five times. The blended interest rate on our debt portfolio will be approximately 5.5 percent and the proportion of the portfolio that is variable will be close to zero. Moving on to our Q4 outlook. Before I start, to be clear, our guidance and our results for the fourth quarter will not include the sold electronic chemicals business and will include only a minimal P&L impact from the business we sold to Element Solutions. We expect sales to range from $770 to $790 million in Q4. To the point I just made, this does not include approximately $90 million of sales from the sold electronic chemicals and element businesses. So on a comparable basis, it implies an approximate 2.2% sales decline from Q3 to the midpoint of our guidance for Q4. We expect the EBITDA margin to be approximately 26% to 27%. We expect GAAP EPS to be 25 to 30 cents per share and non-GAAP EPS to be 55 to 60 cents per share. Let me provide some additional modeling items. We expect gross margin to be 42 to 43% in Q4, both on a GAAP and non-GAAP basis. The higher margin compared to Q3 reflects the positive impact of the divestitures and strong cost controls, offset by the impact of further inventory reductions. We expect GAAP operating expenses to range from $21 million to $226 million in Q4, and non-GAAP operating expenses to range from $165 million to $170 million. Depreciation is expected to be approximately $40 million in Q4. We expect interest expense to be approximately $66 million in Q4. That amount does not include a full quarter impact of the expected debt pay down. We expect the non-GAAP tax rate for the fourth quarter to be approximately 12%. Early next year, we're planning to do a brief virtual analyst meeting where we will update the financial model moving forward. We'll send more information on this in the coming few months. I'll now hand it back over to Bertrand for some additional closing remarks.
spk09: Thank you, Linda. In this soft industry environment, we continue to focus on the things that are within our control. And in that context, we are very pleased with the quality of our execution. We have successfully wrapped up the CMC integration and expect to realize the full cost synergies by year end. We have made great progress in divesting non-core assets and are using the proceeds to pay down debt. We are effectively balancing short-term cost management while making critical investments for the future. We're using this industry downturn to actively engage with our customers on their technology roadmaps, and we have strong conviction in the long-term growth potential of the industry and the growing importance of our value proposition. With that, operator, let's open the line for questions.
spk12: The floor is now open for questions. At this time, if you have a question or comment, please press star and 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star and 2. Again, we ask that you pick up your handset when posing your question for optimal sound quality. Our first question is coming from Toshiya Hari with Goldman Sachs. Please go ahead. Your line is open.
spk01: so much. I had two questions. First, Bertrand, just on the overall market backdrop, I think you mentioned that your outlook really hasn't changed. But curious, you know, what you're seeing in the respective applications or end markets, you know, DRAM, NAND, leading edge logic and foundry, and importantly, the trailing edge, I think things seem to be slowing down a little bit. So, you know, what you're seeing across those four buckets, and I know it's premature to talk about 2024 and don't expect you to give us a market forecast, but what are some of the key swing factors that we should be monitoring as we think about 2024, both in terms of the market, but also, importantly, your rate of outperformance?
spk09: Yes, thank you, Toshi. When it comes to the market, both in terms of Q3 and what we are expecting going into Q4, this is really largely in line with our assumptions for the second half of the year. We are seeing some modest recovery in advanced logic, so it's good that this particular segment is stabilizing after a steady decline for three or four quarters. But on the logic side, this is offset by the contraction that we're seeing in mainstream FABs. We saw a little bit of that in Q3, and we expect a continuation and an acceleration of that contraction in mainstream FABs in Q4. memory remains mixed we saw DRAM improving as expected but 3D9 has remained fairly depressed with wafer starts continuing to come down in Q3 and we expect no real recovery in in Q4 so roughly again industry conditions that we outlined on the previous call when it comes to 2024 It's a bit early for us to go into a lot of specifics. I would probably only limit my comment to saying that we expect WIFI starts to be more favorable in 2024. But again, we'll provide some more qualification of that statement when we report our Q4 earnings in February.
spk01: Great. Thank you. And then as my follow-up, maybe one question on gross margins for Linda. So Q4 guidance, I guess at the midpoint is 42.5. I guess you're guiding to about 120 basis points of improvement sequentially. You talked about divestitures, cost controls, and I guess those two as tailwinds, and then the work you're doing on the inventory side as a headwind. Can you kind of break down some of those drivers and how they're impacting your guidance? And also curious if FX is playing a role at all. Thank you.
spk05: Yeah, absolutely. So a couple things. As we said, the gross margin will be accretive from the divestitures, but we're not seeing the full accretion at this time because of the plant utilization, which is partly driven by the inventory reductions. The inventory reductions are incredibly important to us, right? We're focused on free cash flow. We had an incredible third quarter with the $80 million inventory reduction, and it's allowed us to have a very strong cash flow number this quarter. So you have that tailwind from the divestitures slightly offset by some of our core initiatives, including the inventory reductions. So, you know, as we continue to plan and evolve As you mentioned, we're always going to be looking at cost controls across our P&L, and we have done that as another offset, and we will continue to do that. But you're thinking about it right with that balance between the divestitures and some of the key initiatives that we're driving right now is a bit of a headwind.
spk01: And Linda, sorry, the inventory reductions, is it fair to assume that you'll be done exiting this calendar year, or could that continue into 2024?
spk05: Well, to me, working cap is always important, and we're going to always maintain a focus on working cap. We have a bigger opportunity this year because we started with a higher level of inventory, but definitely things aren't going to stop on that focus when we head into 24, so it will continue. But I think you'll see the numbers come down. Eighty million is an incredibly big number. As we go into Q4, you know, what we're targeting to try to see is another $40 to $50 million inventory reduction. And then, you know, as Bertrand said, we'll be giving more color as we go into 2024 with our analyst day. But it's a continuing effort.
spk01: Very helpful. Thank you.
spk12: We'll take our next question from Charles Shee with Nita. Please go ahead. Your line is open.
spk10: Hey, good morning. Thanks for taking my question. First off, Batra, I kind of want to ask, because if I back out that 19 million contribution from EC and the distributor agreement you have with Element Solutions relative to the guidance you provided a quarter ago, looks like Q4 is still slightly below what what was implied in your guidance about a quarter ago. So I wonder what exactly is baked into the relatively lighter outlook for Q4? Is it still mostly the memory or there's some of the mature FoundryLogic-related weakness baked into the number? Thanks.
spk09: Yeah, so good question. So again, if you look at the midpoint of our guidance, that's about $780 million. That's about 2% down sequentially, and that's really a reflection of a few factors. First, the market continues to be soft, as I implied in my previous answer. We also want to recognize that Q4 is seasonally a weaker quarter for us. And then the final factor is really the level of utilization that we expect to see in some of our mainstream customers which is maybe a little bit steeper for reduction than what we were expecting a few months ago but on balance again I think that this is a solid quarter where we expect to continue to outpace the industry and again if you take that quarter in the broader context of the year As we mentioned, we expect to be down about essentially 7% on a comparable basis versus, you know, if you look at excluding QED, electronics, chemicals, and the Enthon business from both our 2022 and 2023 numbers, our top line on a comparable basis will be down seven percent 2023 over 2022 which again is essentially six points of outperformance against the industry which is you know in line with the commitment that we have made all along since the beginning of the year um
spk10: Thanks, Bertrand. So maybe just a very quick follow-up. What's the assumption for MSI this year? Obviously, there's some production cuts on memory side, and of course, you just mentioned the mature side.
spk09: I wonder what's the latest thinking in terms of MSI for... The way we think about it right now is we think about MSI down in the low to mid-teens for the year. We expect CapEx to be down approximately 20%. And so the industry down in the low to mid-teens. So MSI down low teens, CapEx down approximately 20%, and the industry blend down low to mid-teens.
spk13: Thanks, Bertrand.
spk12: And we'll take our next question from Mike Harrison with Seaport Research Partners. Please go ahead. Your light is open.
spk03: Hi, good morning. Bertrand, you gave a little bit of an update on the Taiwan facility and the ramp-up process, which sounds like it's still going to take a few more quarters. Just curious if you can kind of walk through quantitatively how we should think about that margin drag and the impact that it had in Q3, and then how that is going to compare in Q4. Is it going to be a pretty similar drag until we get those commercial volumes starting up in the second half of next year, or how should we think about that?
spk09: Yeah, so the drag on margin will be very, very similar in Q3, Q4, and as we enter the beginning of next year. The reason for that is really the pace at which we expect to complete our qualification. Remember that there are three major types of products that we intend to manufacture in Taiwan. The first one would be our deposition material products. Our qualification for those products have gone extremely well. We are essentially complete. and we're starting to accept purchase orders from customers for deposition materials. Next would be our fluid handling products, specifically our high purity drums. We have completed our internal qualifications, but the customer qualifications for those products can take up to six to nine months, so we do not expect to see any significant volumes until the second half of next year. And then last but not least, the last part will be the liquid filtration manufacturing in Taiwan. This will be by far the largest value of production coming out of that building. And we are very actively completing our internal qualifications, but we don't expect customer qualifications to be completed until the second quarter of next year. So again, we don't expect release significant volumes of production until the second half of the year, and that really means that there won't be really a lot of relief on the P&L drag until that point in time.
spk03: All right, that's very helpful. And then kind of a housekeeping question regarding the interest expense number for Linda. You mentioned that the $66 million guidance in Q4 doesn't really fully reflect all of the pay down from divestitures, maybe some cash flow, and obviously some changes that you've made with refinancing. So what is the starting point in 2024 with the modifications that you've made and the pay down that you expect to make before year end?
spk05: Yes, that interest expense number would be approximately $62 million. So the reason it wasn't all paid down this quarter is because it was staggered throughout the quarter, that 730, based on the hedge.
spk13: Excellent. Thanks very much.
spk12: And we'll take our next question from Cindy Ho with Deutsche Bank. Please go ahead. Your light is open.
spk08: Great. Thank you. Good morning. For 2024, it's good to hear that you guys are reiterating your view that waiver start will get better. But specifically for first half, do you expect any kind of inflection point or more of the same as in the second half? Are there any areas that you think could see a seasonal or cyclical increase? How about areas that may see risks, like we talked about, mature notes or maybe some of the CapEx-related strength you were seeing this year?
spk09: Sidney, I appreciate you being curious about 2024, but as I said earlier, and I will stick to that, it's too early for us to talk about 2024, but I promise you that we will do that in February.
spk08: Okay. Well, I'll ask a different question then. In your preparing marks for TRON, you highlight the strength of silicate carbide, slurries, and pads. And over the past few weeks, we're starting to hear some weakness in solving carbides. I'm curious what are you seeing in that business? Is your business tend to be a leading indicator for things to come or just give us a sense of where things are there?
spk09: Yeah, so good question. And indeed, this business has been growing very rapidly for us. There are two sides to the opportunity. I mean, one would be things related to the new fab construction, so wafer carriers, large gas purification systems, so products that you're all very familiar with. But the one area that we've been highlighting in the last quarters are really consumable products. They are SIC slurries and pads, as well as post-CMP cleaning solutions. Specifically, when it comes to SIC slurries and pads, we've seen very rapid adoption of our solutions, and those solutions obviously are being used as a function of the level of FAB activity. So it's true that some customers are talking about bringing down utilization rates, but there's just so much new capacity that is coming online that we don't expect to see a very adverse impact to that business. As a matter of fact, we are actively adding capacity. I mean, this business essentially doubled in 2023 compared to 2022. It's still small. Think about it as something like about $40 million annually, but it's growing very rapidly, and we are adding capacity ahead of what we expect to be very significant demand for those solutions.
spk08: Okay, that's helpful. Maybe just quickly a question for Linda. I may have missed it on the call, but can you quantify what's the drag on the gross margin from the Taiwan facility and what's the impact on the distribution agreement being terminated? I think last quarter you talked about that potentially being a half point of headwind. Just want to get those numbers in.
spk05: Yeah, you're correct. Last quarter on the drag from the elements solutions, transition of the distribution agreement to be approximately 50 basis points. As far as the specific dollar drag or percent drag from the Taiwan facility, we haven't quantified that. As Bertrand said, it is going to be an impact on gross margins until we've fully ramped up that facility. Okay.
spk13: Thank you very much.
spk12: We'll take our next question from Alexi Yeffermont with KeyBank Capital Markets. Please go ahead. Your line is open.
spk06: Thanks, and good morning, everyone. This is Ryan on for Alexi. Just want to start with a congratulations on coming up with a new name for Materials Solutions. So nice work there. You know, first question for me, I just kind of wanted to dig into what you're seeing on the memory side a little bit. Where do you think kind of inventories sit in the chain? It seems like some commentary from some industry peers has been a little bit better. So just wondering what you guys are kind of seeing there. Thanks.
spk09: Yes. Look, I mean, we don't have perfect visibility, and we rely, obviously, extensively on what we are hearing from our customers directly. And we are hearing... the same type of updates as what you're mentioning. I think that the most of our customers have been very effectively reducing inventory levels in their channels and we have seen actually some level of stabilization in fab utilization which again would suggest that this is indeed happening. We also seeing some firming up of memory pricing, which is another indicator typically of the level of balance between supply and demand in memory. So again, we don't have perfect visibility. We're just looking at the same indicators as you are. And that leads us to believe that we are close to the bottom. But as I said, it's just too early to talk about green shoots and recovery. We don't really have that level of visibility yet.
spk06: Great. That's helpful. Thank you. And then, you know, just last one from me here. Just any update on terms of node transitions, what you're currently seeing, and any early previews you can give us into next year. Thanks so much.
spk09: So for this year, we've seen all of the node transitions in Logic taking place on time which was really good news for us important news for us and you saw evidence of that in our business performance in q3 in taiwan when it comes to memory we signaled to all of you that we were expecting delays in the no transitions in 3d9 and we saw that we were expecting originally going into the year we're expecting many customers to transition to 200 200 plus layer architectures before the end of the year and that is not happening but we are you know hoping to see high volume productions at 200 layers plus you know early 2024 but again we'll update you with more specifics on 2024 in a few months.
spk12: We'll take our next question from Tim Arcuri with UBS. Please go ahead. Your line is open.
spk02: Thanks a lot. Bertrand, I'm not going to ask about all of 24, but I'm just wondering if maybe you can guide us just for what a normal seasonal March would be. Like if you sort of think about, I mean, I know that there's a lot of moving parts and you're trying to sell PIM, but is there some way to sort of like – sort of tie into a normal seasonal March? Uh, can you just, you know, speak about what you consider to be a normal March?
spk09: Yeah, again, so, so without, you know, normal March, I mean, it's feels like every year has been a little bit, um, unique recently. Um, but I mean, typically again, we, um, we see, um, you know, Q2 and, um, and Q3 being our strongest quarters in a regular year. And then Q4 typically is seasonally down versus Q3. That would be what I would call a normal March. But the question then becomes, will we see normal and steady conditions in 2024, or would we see actually steady increase in with a start and fab utilization and is that going to impact what would be a normal pattern in 2024 and again i'm not going to go down that path but i just want to caveat that a normal year may or may not be what we see in 2024. sure sure um okay and then can you talk about uh competition in china um we keep hearing about
spk02: these materials companies. They don't seem to be competing with you all that much, but there is a lot of subsidization of the materials supply chain in China. Can you just speak about how competitive you think they're becoming with you? Do you see them? If so, where? Thanks.
spk09: You're right. We're seeing a lot of Chinese competitors that on paper would provide similar types of products, but so far they have not been able to really match the performance of the solutions we develop, and we are hearing that loudly and clearly from our Chinese competitors, Chinese customers. They see the value of using our solutions that helps them improve their device performance, that helps them improve their yields and they are sticking to the integral solutions when available. And so again, we are keeping a close eye on what's happening in China, but you know, so far we feel very good about our competitive position in China.
spk03: Okay. Thank you.
spk09: Sure.
spk12: We'll take our next question for Chris Kapsch with Loop Capital Markets. Please go ahead. Your light is open.
spk04: Yeah, good morning. Question focused on the new material solution segment. So I think it was on a proform basis, if you will, the revenues you mentioned down 16% year over year, 1% sequentially. Sounds as though the key drivers, the softness, the fab utilization rates, the function wafer starts. Just looking for a little more color. Did the Anthone transaction contribute to those variances? I assume you weren't stating those proforma to reflect the Anthone deal. And then you called out memory. So just wondering if the weakness within this new materials solution segment is skewed towards memory. And within that, is it skewed towards deposition products that were formerly SEM for 3D NAND architectures? Or is it maybe more a function of the CMP module and slurries for legacy technology nodes, perhaps? Or is it balanced across those different product segments?
spk09: Yeah, so if you look at material solutions, you're correct. They're down about 15% year-to-date. And I would remind you that this is the division with the greatest exposure to memory, number one, but also remember that this is the division that suffered the greatest impact from the export restrictions to China. enacted in October 2022, right? So when you recast for that, actually the division is performing in line with our expectations. And, you know, for us in 2023, the focus for the division has been to engage with customers on those new materials and trying to develop those co-optimized solutions across the array of capabilities that we have and integrates from the film to the polishing solutions all the way to post-CMP cleaning solutions and etching chemistries. I would say that we are very pleased with the quality of those engagements, which have been validating the potential that we see for this division. Again, this year, not particularly exciting for the reasons I was mentioning, you know, exposure to memory, impact of China. But if you look under the hood, a lot of really exciting opportunities in terms of new materials and, you know, new slurries opportunities and ancillary cleaning and etching chemistries.
spk04: Fair enough. Just one follow-up on your comments about the memory market and the push out and the ramp of HVM for 2XX layered architectures. Just given the downdraft in the memory, I'm just wondering if it's pronounced enough that there's instances where these advanced memory makers look to accelerate the roadmap because the roadmap right now goes to 300 plus layers all the way to 1000 plus layers obviously that's disproportionately beneficial to you given the content per wafer I'm just curious if there's instances where they you know look at this you know sort of soft backdrop as an opportunity to accelerate that transition to advanced nodes or is it really they have to crawl at 200 layers before they walk at you know 300 layers or how is that dynamic playing out thank you
spk09: Yeah, good question. So it's true. I mean, again, this year was a difficult year for memory at low levels, you know, capacity utilization reduction, but also decommissioning of some older fabs. So all of that had some devastating impact on this particular part of our business. Now, it's true that some customers are thinking about skipping a node. So all of that is something that we will be discussing with them over the next several months and quarters. And we've seen that in the past. So the question will be, do they have enough confidence and conviction to do that? And when do they plan to execute on it? Of course, our role as a supplier will be to be ready for them if they choose to accelerate the introduction of a new node. And as you pointed, the more layers on a 3D NAND chip, the better it is for integrity. we for sure will be very focused on giving them the comfort they need to potentially skip notes. But it's too early for us to really talk about it.
spk12: Interesting. Thank you. We'll take our next question from Bhavesh Lidoya with BMO Capital Markets. Please go ahead. Your line is open.
spk07: Hi. Good morning, Bertrand and Linda. Thanks for taking my questions. You mentioned like-for-like sales expected to be down 2% sequentially in 4Q. As we think about EBITDA or EBITDA margins specifically, you have some additional noise from the Taiwan facility ramp-up or the inventory reduction actions you have been taking. If we exclude those moving pieces, can you share some thoughts on how your underlying margins are performing, maybe around price versus cost, how they are trending up, down, flat, any color there?
spk05: Let me talk about it this way and hopefully this addresses your question. As I think about our Q4 EBITDA margins and let's step back, we talked about gross margin being accretive from the divestitures with some of the other pressures on the gross margin from inventory reduction and all the transitional period we're going through as a company. But as I think about getting down to EBITDA, as the CFO, I'm always looking at how we balance cost and investment. And this quarter, we just completed the divestitures. You see the transition of the distribution agreements well on its way. The divestitures are lower OPEX businesses. Going forward, we're always going to be looking at our cost structure. We're going to make the critical investments that we need to make in R&D. Regarding SG&A, we're going to make sure we have the right level of SG&A to balance the ongoing and what we need for the ongoing support of the business. What I would think about where we are now in this transitionary year, most importantly as we think about this cost structure and we think about it over the long term, we still remain incredibly committed to deliver the 40% EBITDA flow through. So this is just a transitionary year with gives and takes.
spk07: Understood. And maybe the next one, can you give us an update on the Colorado Springs project? Has there been any change in the investment size or type of timing there given some of the delays in the industry? Is it still $600 billion, only 2025? And then... I believe you had mentioned the IRR for the Taiwan project to be in the mid-20s. With the CHIPS Act funding, does the Colorado Springs project get close to that?
spk09: All right, so let me answer the question on Colorado Springs. So you're right that the total investment over the next several years will be approximately $600 million, right? Now, the first phase that we have initiated is It's going to be a 100,000 square foot facility. It's going to be about $250 million. And that's really, again, the basis upon which we are seeking funding under the U.S. CHIPS Act. You know, we continue to expect that the production for that first phase will be early 2025. And, you know, we expect the returns... to be attractive, but we need help from the US administration in order to get returns similar to what we were able to commit to in our Taiwanese investment. And that's the basis for discussion for the US administration.
spk13: Got it. Thank you. Thank you.
spk12: And there are no further questions. I'll turn the floor back over to Bill Seymour for any closing comments.
spk11: Thank you. And thank you for joining our call today. Please follow up with me directly if you have any additional questions. Have a good day. You can now disconnect. Thank you.
spk12: Thank you. And this does conclude today's integrous third quarter 2023 earnings conference call. Please disconnect your line at this time and have a wonderful day.
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