Entegris, Inc.

Good morning and welcome to Integris' fourth quarter earnings and analyst update webcast. Last night, we released our fourth quarter earnings and we posted the earnings slides and earnings prepared remarks on the IR site. We will not be presenting the prepared remarks for Q4 live in today's session, so please refer to those online if you already haven't. In today's session, We will present a brief analyst update presentation, and then we will take Q&A on both the presentation and Q4 earnings. We expect the webcast today will be approximately an hour and 15 minutes, including the Q&A. Some webcast related housekeeping items. If you're experiencing any technical problems, please click on the little i on the left-hand bar of the screen to troubleshoot or chat with tech support. You can minimize or enlarge your slide window at any time by clicking on the top right corner of the box. The slides will advance automatically throughout the webcast. The Q&A session will be at the end of the presentation. Please submit your questions in the Q&A box located in the bottom left corner of the screen You can also email questions to Beth and me directly. In the resource box, you will find a copy of today's presentation slides and a few other items of interest. One other item of note, in the appendix of today's presentation, we have included for your reference consolidated results and divisional results for 2023 that exclude last year's divestitures and the PIM business for the full year and by quarter. The speakers today are Bertrand Law, President and CEO, and Linda LaGorga, our CFO. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding those risks and uncertainties is contained in our most recent annual report, and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. You can find reconciliation tables in the presentation, which is posted on our IR page of our website. With that, I'll hand over to Bertrand.

Good morning. And thank you for joining us. Today's analyst update will be brief. The main purpose is to provide you with a refreshed financial model focused on our core business and excluding all completed and planned divestitures. Before I move on to the update, a quick recap of our results we posted last night. We are very pleased with the quality of our execution in 2023. Our unit-driven model displayed resilience during the current industry downturn And we closed 2023 with strong fourth quarter sales and EPS results, both above our guidance. For the year, we outperformed the market by six points, driven in large part by our strong position at the leading edge technology nodes and the backlog we had entering the year. In addition, we divested three non-core businesses and used the proceeds and free cash flow to pay off $1.3 billion of debt. In terms of our guidance for 2024, we believe we have taken a prudent view of the industry in the short term, while being fully prepared for what we believe is likely to be a significant snapback in the market. Onto the agenda for the briefing today. I will talk about Integris' business model, our sales growth algorithm, and provide an overview of our three divisions. Linda, We'll cover our capital structure, capital allocation priorities, our updated target model, and our updated three-year financial targets. Then we will take questions on both the analyst update presentation and our fourth quarter earnings. Here is what I would like to impress upon you today. Integris' unit-driven business model is unique, highly differentiated, and has strong competitive modes. While 2023 was a challenging year, we remain as optimistic as ever about the long-term growth prospects for the semiconductor industry. The industry is entering a period of unprecedented technology change and device complexity. Our core value proposition in material science, materials purity, and end-to-end solutions has become increasingly enabling and critical for our customers. All of this means the market is moving toward integris and this ultimately translates into rapidly expanding integris content per wafer and strong outperformance for the years to come. Reinforcing integris as a value compounder with attractive organic sales growth leading to significant EBITDA and EPS expansion, especially given our commitment to lower our debt. For the past decades, our mission has not changed. We help our customers improve their productivity, performance and technology by providing enhanced materials and process solutions for the most advanced manufacturing environments. Our platform is now comprised of three divisions. and I will provide more detail on each of them in a moment. 75% of our revenue is unit-driven or recurring. These unit-driven products can be chemistries and materials that are used daily in semiconductor manufacturing fabs, or they can be advanced filters and other consumable products that are single-use and are replaced frequently. The remaining 25% of our revenue is capex-driven products. They can be gas filters, dispense systems, and other components that we sell to equipment makers. Or they can also be wafer carriers, gas purification systems, or fluid handling solutions that we sell when new fabs are built. You can see in the middle of the slide that our customer base is unique. as our solutions are widely used across the broad industry ecosystem. And as you can see further to the right, when it comes to our fab customers, we have greater exposure to logic and foundry, representing about 70% of our fab revenues, while memory customers represent the rest, approximately 30%. This profile, unique in the industry, provides greater resilience and stability to our business model and financial performance on a cross cycle basis. On the next slide, I want to touch on the three dimensions of our competitive advantage that we have built over decades. No one in the industry comes close to these combined capabilities, especially while being almost exclusively focused on SEMI. First, on the left, the customer value creation flywheel. I am sure that you've read Jim Collins' book, Good to Great, so you will recognize the flywheel concept, which is meant to call out the major steps the organization needs to go through to create and compound customer value over time. It starts up to five years ahead of new node transitions when a customer asks us to help them solve key challenges they are expecting to face. We then start our development work, share samples, and ultimately provide them with a new enabling solution. Finally, quickly ramp production to high volumes at extremely high levels of quality. The point is it is hard to do. And doing it right time and again creates customer trust. And this is the virtuous cycle depicted here. The next dimension of our competitive advantage is our commitment to industry leadership in the areas of technology, global infrastructure and operational excellence. On the technology front, we have a very strong foothold, but we steadily continue to invest in research and product development to effectively partner with our customers on incrementally more complex challenges requiring earlier involvement. On the global infrastructure front, Our customers are increasingly expecting us to be close to them. So we have ramped our investments in local manufacturing and local tech centers in all major markets. These investments are proving to be a great source of differentiation for us, accelerating learnings and customer engagement. The last ring of this graphic is operational excellence. Our customers continue to expect tighter process windows, more process stability and process control, which we achieve with greater automation, process cleanliness, and greater control of our supply lines. The final dimension is our end-to-end offering, which obviously has been greatly strengthened by our combination with CMC Materials. No other materials company serving the semiconductor industry comes close to our breadth of technology capabilities. And we believe this brings huge value to our customers and ultimately means better device performance, lower cost of ownership, and faster time to solution. Despite the recent downturn, our views have not changed. And we continue to expect global semiconductor revenue to reach $1 trillion by 2030. The digitalization of our lives is accelerating. It is reshaping in very fundamental ways everything around us, which will drive exponential demand for faster, more energy efficient and more reliable semiconductors. These themes are all well understood, and I do not believe I need to belabor them today. My message here is simply that the semiconductor industry is a great place to be. And this is particularly true for Integris, as you will see on the next slide. Our customers have a major overarching goal, and that is to improve chip performance. And to do this, they have two major tools in their toolbox. More complex chip architectures and miniaturization of the critical dimensions on the wafer. To enable this, our customers' technology roadmaps are calling for new materials and ever greater process purity to achieve optimal yields and optimal cost. At Integris, we operate at the intersection of material science and materials purity, and this is precisely what our customers need right now. This is what we mean when we say the market is moving to integrals. From a materials science perspective, these more complex structures mean more layers, more process steps, and more novel materials. This translates into more materials spent per wafer, and greater content per wafer for integris, particularly in new leading-edge logic and 3D NAND nodes. From a materials purity perspective, greater miniaturization is making yield management exponentially more challenging and more expensive for our customers. The point here is our solutions help our customers improve their yields. For example, using our advanced filters can positively impact yields in a fab by several points. The punchline of this slide is that the compounding process complexity of our customers' technology roadmaps is making our solutions increasingly valuable to our customers. And this is expected to translate into expanding integrous content per wafer, expanding served market and ultimately it is expected to fuel our market outperformance. These more complex chip architectures and demanding applications like AI are requiring new enabling solutions. Solutions like the ones listed on this slide. This is great for Integris because we are engaged on all these fronts. deploying our unique breadth of capabilities in material science and materials purity to develop enabling solutions, unique solutions, which will result in new revenue streams for Integris. So what does that all mean for Integris? Well, let me summarize this and introduce, in fact, reaffirm our organic growth algorithm. First, We expect our core market, the semiconductor industry, to grow at twice GDP growth. And then we continue to expect to outperform the industry by three to six points. This outperformance will be driven by greater integrity content per wafer, as we have discussed, and market share gains, as we continue to capitalize on our unique portfolio of capabilities to create highly differentiated, mission-critical solutions for our customers. We have made and will continue to make significant investments to realize these growth opportunities. Our R&D investments reflect our commitment to support our customers' technology roadmaps and are critical to winning positions in new nodes. This is why our R&D spending was up last year, even in a challenging industry environment. And going forward, we expect our R&D spending to be approximately 9% of sales. Our investments in production capacity are also vital for us to fully realize our long-term growth. In the last two years, our capex has been elevated as we invested in two new facilities in Taiwan and Colorado. And going forward, we expect our capex to come back down to 10% of sales. And by the way, we should be close to 10% this year in 2024. Moving on to our three divisions, and let's start with our newest materials solution. MS is the combination of the SCM and APS divisions to form a single, almost 100% unit-driven platform. With MS, our customers will benefit from a more robust end-to-end solution set critical to their roadmaps. A solution set that improves device performance, reduces time to yield, and provides superior cost of ownership for our customers. Some of the major product lines include advanced deposition materials, CMP slurries and pads, etching and cleaning chemistries, and other specialty materials and gases. All three of last year's divestitures came out of this division. We believe we can achieve four to six points of growth in excess of the industry as we unlock the full potential of our platform and execute on some very exciting opportunities in new materials like molybdenum, etching chemistries, and CMP slurries. With this growth and a highly differentiated solution set, we believe we can steadily improve MS margins from 16 percent last year to 22 to 24 percent over time. The Advanced Materials Handling Division manufactures fluid and wafer handling products that ensure higher purity levels and ultimately drives higher yields both within our customers' ecosystems as well as within their fab environment. 60% of AMH revenue is related to new fab construction projects and wafer fab equipment. These capital-driven products include wafer carriers, also known as FOOPs, EUV pods, sensing and control solutions, and high purity valves and tubing. 40% of the business is unit driven and comprised of products such as chemical containers and finished wafer packaging. Going forward, we expect top line growth of two to four points in excess of the industry and operating margins in the low to mid 20s. The microcontamination control division provides products that address a rapidly growing need in the semiconductor industry for purity and consistency of chemicals and materials. These solutions have become essential for our customers in their quest for yield optimization and long-term device reliability. As feature sizes continue to shrink and as new materials are adopted, the permissible sizing and classes of contaminants as well as their concentration levels, are becoming exponentially more stringent. As a result, the push to achieve ever greater process purity translates into the need for more advanced filters, greater frequency of replacement of these filters, and also includes the introduction of more points of filtration deeper upstream in the fab supply lines. All of this is expected to drive an outperformance of 5 to 7 points for MC. And given the growing value of these solutions for our customers, we expect operating margins to reach 35 to 37%. I will now hand it over to Linda.

Thank you, Bertrand, and good morning. Today, I plan to cover a few key topics. First, I will focus on our debt structure and our capital allocation priorities. Then I will turn to the forward-looking financial opportunity for Integris. The punchline of this slide is that our debt structure is rock solid. We ended 2023 with total debt of $4.7 billion after paying down $1.3 billion last year, a tremendous accomplishment. Debt pay down in 2023 was driven by proceeds from the divestitures of QED and electronic chemicals, the business we sold to Element Solutions, and free cash flow. The blended interest rate on the portfolio is a very attractive 5.1%. Our debt is comprised of both fixed rate notes and what remains of the term loan after last year's pay down. While the term loan is technically variable, we have hedged almost the entire $1.4 billion. So we currently have close to 0% variable rate debt. Other important points to note, we have no maturities until 2028 and no maintenance covenants on the debt. So again, our current debt is well-structured and de-risked. Looking at our capital allocation priorities going forward, our clear near-term priority is to further reduce our debt with a focus on the term loan. We expect gross leverage to be below four times by the end of 2024 and net leverage to be below 3.5 times. Debt paydown is a powerful contributor to our earnings. Each $100 million of debt pay down equals approximately 4 cents of EPS. The focus on debt pay down will continue to be balanced with making critical investments in our future. As Bertrand mentioned earlier, we plan to invest approximately 9% of revenue in R&D and approximately 10% of revenue in capital expenditures. Also, to maximize our debt repayment, we will drive further working capital improvements and continue what we started in 2023. This is an area of particular focus for me. We will also maximize cash repatriations and, in general, minimize our cash levels. This will be another major focus area for us. We also expect to average about $450 million of global cash on our balance sheet over the course of a year. Moving past the near term, we will seek to complement our organic growth with strategic acquisitions. We have a track record of creating shareholder value through M&A, so expect us to remain active on that front at the appropriate time. We will, of course, continue to pay a dividend, and we may consider share repurchases in the future, but for now, share repurchases remain on hold. So next, I want to spend some time on the future earnings power of the company. Not only have we shared this target model externally, but we also use this framework to plan, and more importantly, to run our business. It's pretty straightforward. As you can see, the model shows margin and EPS outcomes at different revenue levels. Core to the model is the assumption of a 40% flow through to EBITDA line over time. That flow-through will be driven by gross margin expansion and SG&A leverage over the next several years. A few other critical assumptions in this model. First, we assume an annual interest expense of approximately $230 million that remains constant in all revenue cases. This implies no additional debt pay down going forward. Of course, we do expect to continue to pay down the term loan, but as this is an illustrative model, we simplified the interest assumption by holding it constant. The model also assumes a tax rate of approximately 16 percent, depreciation of 5.5 percent, and share count of 152 million shares, again for all scenarios. Now focusing on our three-year financial targets, Patron spoke earlier about our sales growth algorithm and our demonstrated performance as a value compounder. So what does this mean in numbers? Starting from the left, we expect an approximately 11% sales growth CAGR from 2023 to 2026. The 2023 baseline excludes last year's divestitures and the business we sold to Element Solutions. In addition, we have excluded PIM from the 2023 baseline as we intend to sell the PIM business. That 11% growth rate assumption is essentially the midpoint of the range Bertrand laid out. This top line CAGR coupled with the 40% EBITDA flow through leads to an EBITDA margin of approximately 31% by 2026. which amounts to a CAGR of 15 percent. Key drivers of this, as I mentioned on the previous slide, are gross margin expansion and SG&A leverage. Taking a closer look at the gross margin improvement opportunity, the drivers of this are expected to be volume growth overall, ramping volumes in our Taiwan and Colorado facilities, and the benefits of product mix. For your reference, the 2023 gross margin headwind from our Taiwan facility was approximately 70 basis points. We expect that this headwind will start to alleviate as we ramp volume shipments in the second half of this year. Next, we expect EPS to be greater than $5 by 2026. This growth is driven by the EBITDA expansion and a few other key assumptions. First, we are assuming that the $1.4 billion term loan is paid off completely and only the existing bonds remain outstanding. This leads to an annual interest expense of approximately $160 million by 2026. This is different than our target model slide I just showed, where we assumed no additional debt pay down. And as I mentioned on the previous slide, we have assumed a tax rate of approximately 16% and a share count of approximately 152 million. Wrapping things up, we believe our model is highly differentiated. We remain very optimistic about the long-term secular growth of the semiconductor industry. The market is moving to us, meaning our unique position and value add is leading to higher integrous content per wafer and outperformance. Our capital structure is very solid and rapidly improving, which gives us a lot of optionality moving forward. Finally, the market growth and our outperformance leads to attractive sales growth. And with the leverage in our model and our commitment to pay down our debt, accelerated EPS growth. Thank you. This concludes our presentation, and I will turn it back to you, Bill, to moderate the Q&A.