Entegris (NASDAQ:ENTG) Q2 2020 Earnings Call

0:00 Please stand by. We're about to begin. Good day, everyone, and welcome to INTEGRIS' second quarter 2020 earnings release call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Bill Seymour, VP of Investor Relations. Please go ahead, sir. Good morning, everyone.

0:22 Earlier today, we announced the financial results for our second quarter of 2020. Before we begin, I would like to remind listeners that our comments today will include 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 are 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 press release, as well as on the investor relations page of our website at integris.com.

1:15 On the call today are Bertrand Loy, our CEO, and Greg Graves, our CFO. Before I turn the call over to Bertrand, in case you didn't see it, we've rescheduled our 2020 Investor and Analyst Day. which will now take place on November 17th in New York. If we aren't able to hold the meeting in person, we'll be doing it virtually. We'll be sending out the event details and registration information in the near future. With that, I'll hand the call over to Bertrand.

1:45 Thank you, Bill, and good morning, everyone. I will start today with an update on the ongoing impact of the pandemic on our teams and operations. I will then discuss our second quarter performance, especially in the context of our expectations going into the second quarter. And I will then review what we expect for the balance of the year. Greg will follow with more details on our guidance for the third quarter, and then we will open the line for questions. Since early in the outbreak of the pandemic, we have been very focused on keeping our teens safe. We have implemented rigorous safety measures in all our sites, including temperature checks, strict social distancing and contact tracing protocols, mandatory mask usage, and frequent disinfecting of common areas.

2:36 Despite brief interruptions in a few facilities early in the quarter, our manufacturing and R&D facilities remained largely operational throughout the quarter. As we exit Q2, Our global supply chain is operating smoothly and our manufacturing sites are all fully operational. Our safety facilities and manufacturing production teams have been truly heroic in their efforts to keep our teams safe and our business running during this challenging time. Let me turn now to our second quarter performance. And I will start by saying that I am very pleased with our results, especially in light of the many operational risks and business uncertainty we were facing coming into the second quarter.

3:27 In the second quarter, sales grew 18% year-on-year and 9% sequentially above our guidance. Growth was strong across all three divisions in our core semiconductor markets as we benefited from several no transitions primarily at our larger customers. Our gross margins improved and our EBITDA was up 38% year over year. Finally, non-GAAP EPS was well above our guidance, up sequentially, and up over 50% year on year. Let me continue with a little bit more context on our second quarter performance. When we provided guidance for the second quarter in late April, our order book was at a record level, which gave us confidence, despite all of the uncertainty in the market, to guide to a sequential increase in sales.

4:22 Ultimately, our Q2 sales ended up significantly better than we expected, and the main drivers for this outperformance were the following. First, the accelerated demand for our leading-edge solutions in advanced technology nodes, the theme you will hear more about. Second, The increasing need for end-to-end contamination control solutions up and down the supply chain, including products like our 2-nanometer Torrento liquid filter and our high-purity liquid containers. And on top of this, the overall industry was better than we expected. Finally, while there were some modest inventory bills at some of our five customers, we do not believe this was a significant driver.

5:07 All in all, A very good quarter, considering what we expected going into the second quarter, and truly a testament to the execution of our team. Before moving on to the outlook, I would like to highlight that a few weeks ago, we acquired Global Measurement Technologies, a leader in the design and production of high-precision analytical instruments for CMP slurries and formulated cleaning chemistries. The acquisition of GMTI strengthened Integracy's position as the premier supplier of yield enhancement solutions for the semiconductor market. With the combination of GMTI's cutting-edge measurement systems, our particle sizing systems business, the technology we acquired in early 2018, as you remember, and our extensive portfolio of filtration and other contamination control solutions We bring a complete suite of solutions that allow our customers to achieve process stability and optimize yields in the complex GMP environment.

6:14 We expect GMPI to be slightly accretive to our non-GAAP EPS this year. Looking ahead to the rest of 2020, from an end market perspective, while there continues to be uncertainty around the impact of the pandemic, We are more optimistic about the remainder of the year. The semi-market appears to be holding up better than originally feared, driven by the well-documented strength in areas like data centers, 5G, laptops, and gaming. In our own business, demand signals continue to be strong, and our order book remains at record levels. In addition, we expect to enjoy the benefit of new DPOR positions in new technology nodes in both logic and memory, which will help us sustain our market outperformance in the second half of the year.

7:11 For the full year 2020, we now expect to achieve sales of approximately $1.75 to $1.8 billion, up 10 to 13% compared to 2019. In terms of EPS, We expect to achieve full-year 2020 non-GAAP EPS in excess of $2.35. Clearly, we are still in uncertain times, and as such, there are risks to our view, most significantly related to the ongoing impact of the pandemic to the global economic recovery. And frankly, it seems hard to believe that the semi-industry would remain relatively untouched by the pandemic.

7:58 But having said that, and to be clear, we have seen no real indication of a downturn in the semiconductor market, or for that matter in our business, for the upcoming few months. Furthermore, our advanced memory and logic customers continue to be very committed to their node transitions for the back half of the year, and we expect this will drive strong demand for our next-generation materials and advanced filtration solutions. Looking further ahead, we continue to be very optimistic about the fundamentals of the industry, and we expect that the semiconductor industry will come out of the pandemic more attractive than ever, with enhanced drivers like digitalization and automation of the economy providing strong catalysts for sustained secular growth.

8:53 At Integris, we have talked a lot about the growing importance of processed materials and materials purity on the semiconductor performance and reliability. We expect these two themes will be at the forefront of the semiconductor roadmap, both in logic and in memory, for the next five to ten years. And we expect Integris will be a clear beneficiary of these trends. In conclusion, I am very pleased with the performance and the resilience of our business, and I am optimistic about our prospects for the rest of 2020. We feel very confident that our disciplined execution and strong liquidity will allow us to navigate this period of uncertainty while continuing to invest in our future.

9:41 I also want to take a minute to thank the Integris teams for their extraordinary work and dedication, without which None of this would have been possible. Now, let me turn the call to Greg. Greg?

9:55 Thank you, Bertrand. In my comments today, I'm going to cover our second quarter financial performance and our third quarter guidance. The second quarter was an excellent quarter for integris. Q2 sales of $448 million were above our guidance and were up 18% year over year and 9% sequentially. This was driven primarily by our own market outperformance, as Bertrand discussed. Q2 GAAP diluted EPS was 50 cents per share, down 45% year-over-year and up 11% sequentially. As a reminder, Q2 last year included the Versum transaction termination fee, which was included in our GAAP numbers.

10:42 Non-GAAP EPS of 60 cents was also above our guidance range and up 54% year over year and up 9% sequentially. Moving on to gross margin, GAAP and non-GAAP gross margin were both 46% in Q2 versus our guidance of approximately 44%. The higher than expected gross margin was driven principally by the higher sales volume and strong execution by our manufacturing and supply chain teams. In addition, the amount of higher COVID-related logistics and freight costs is less than initially anticipated. We expect gross margin to be approximately 46%, both on a GAAP and non-GAAP basis in Q3, as higher volumes are offset by modest headwinds in freight and logistics costs.

11:39 GAAP operating expenses were approximately $113 million in Q2, and included a total of approximately $17 million of non-GAAP items from amortization of intangible assets, restructuring and other costs. Non-GAAP operating expenses in Q2 were $95 million, which was above our guidance. The primary driver of this was higher performance-related compensation costs driven by the improved annual outlook. We expect gap operating expenses to be $109 to $111 million and non-gap operating expenses to be $95 to $97 million in the third quarter.

12:24 Q2 gap operating income was $95 million, or 21.1% of revenue, and non-gap operating income was $111 million, or 24.7% of revenue. Adjusted EBITDA was approximately $131 million, or 29.3% of revenue. Our GAAP tax rate was approximately 17%, and our non-GAAP tax rate was 18% for the quarter. The rate was slightly lower than expected due to a discrete benefit related to stock-based compensation. For the full year 2020, we now expect both our GAAP and non-GAAP tax rate to be 18% to 19%, which implies a quarterly rate of approximately 20% for Q3 and Q4.

13:19 Turning to our performance by division, Q2 sales of $146 million for SCEM were up 15% year over year, primarily driven by advanced deposition materials, cleaning chemistries, and the impact of acquisitions. The growth was offset by declines in non-semi-related sales, particularly in end markets that were most impacted by the pandemic. Adjusted operating margin for SEM of 22% was up over 200 basis points year-over-year. The year-over-year increase in operating margin was driven primarily by higher volume. The 110 basis points sequential decline in margin was driven primarily by higher compensation costs I referred to earlier.

14:11 Q2 sales of $184 million for MC were up 22% from last year and up 15% sequentially. On a year-over-year basis, liquid filtration, gas filtration, and the impact of the ANOW acquisition drove the sales growth. The sequential sales increase was driven by liquid filtration, and Gas Filtration and Purification. Adjusted operating margin for MC was 34.1%, up over 500 basis points year-over-year and up 200 basis points sequentially. Both the year-over-year and sequential margin increase was driven primarily by higher volumes and favorable product mix.

15:00 Q2 sales for AMH of $126 million was up 18% versus last year and up 9% sequentially. The year-over-year sales increase was primarily driven by high purity liquid containers and wafer handling products. The sequential sales increase was also primarily driven by high purity liquid packaging products. Adjusted operating margin for AMH was 18.7% up almost 500 basis points year over year. The year over year and sequential margin increase was driven by the higher sales volume and solid cost management.

15:45 Cash flow from operations for the quarter was $130 million. Free cash flow was $106 million. CapEx for the quarter was $24 million. We continue to expect to spend approximately $120 million in CapEx in 2020. related to ongoing investments in support of our new product introductions as well as capacity expansions. During Q2, we used approximately $11 million for our quarterly dividend. As previously indicated, we suspended our share repurchases in March and absent a major dislocation in the equity market or greater clarity in the economic outlook, we would not expect to buy any stock for the balance of the year.

16:32 As a reminder, last quarter in a favorable debt market, we took the opportunity to increase our flexibility and further strengthen our balance sheet and liquidity position. We completed a $400 million senior unsecured notes offering and used the proceeds to repay the approximately $140 million outstanding balance on our revolver and to repay $150 million of our term loan. We would expect to repay an additional $100 million of the term loan in the next couple of quarters. An item of note for your modeling, with the addition of the new notes, we are expecting interest expense to be approximately $12.5 million per quarter going forward.

17:21 Turning to our outlook for Q3, we expect sales to range from $450 to $475 million. We expect GAAP EPS to be 51 to 57 cents per share and non-GAAP EPS to be 60 to 66 cents per share. In summary, we were extremely pleased with our performance here today. During the second quarter, our revenue EBITDA and EPS were at record levels. Our team showed incredible commitment and executed extremely well in a difficult environment. Demand for our advanced products continues to accelerate as the semiconductor industry transitions to new nodes requiring greater purity and increased materials intensity.

18:13 And finally, we continue to have confidence in the strength of our platform, importance of our value proposition, the quality of our execution, and our strong balance sheet as we enter the back end of the year. Operator will now open up for questions. Thank you. And ladies and gentlemen, if you'd like to ask a question at this time, please signal by pressing star 1 on your telephone keypad. And if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll move into our first question from Toshia with, excuse me, Toshia Hari with Goldman Sachs. Please go ahead.

18:57 Good morning and congrats on the strong execution. Bertrand, I was hoping you could update us on how you're thinking about broader market trends, both in terms of industry weaker starts as well as capex. I forget if you gave a number last quarter, but how are you thinking about those two buckets for the entirety of 2020? And what level of outperformance are you assuming in both those markets for Integra specifically? and I guess what are the key drivers of the outperformance in your wafer start business as well as your capex business? And then I've got a follow-up.

19:43 Good morning, Koshia. Yes, a lot of questions. I'm going to try to remember them all and take them one by one. But, you know, generally speaking, first of all, you know, the market going into E2Q2 did behave in a way that was very consistent with our operating assumptions. If you remember, on our first quarter call, we decided that we were expecting strength in advanced logic, we were expecting healthy levels of wafer starts in advanced memory, and then relatively limited demand in mainstream FABs. And for the mainstream FABs, we said that probably would be application dependent.

20:36 And frankly, the second quarter played out pretty much in line with those operating assumptions, and I would expect those trends to continue for the balance of the year. So when you think about our full year guidance, we essentially expect the total market based on our mix of units and CapEx during sales to be down in the mid single digits for 2020. We expect the acquisitions that we have already completed, including GMTI to contribute approximately three points of growth in 2020. And then the balance obviously amounts to a very significant organic growth in excess of the market, and that is primary driven by the node transitions that we have experienced in logic and that we expect to see in the back end of the year in memory.

21:42 And the other thing is, again, we expect more wafers to transition to those advanced nodes. And as you know, at those advanced nodes, we have greater integrous content for wafers. So all of those factors with compounding and I think, again, that's one of the reasons why we are optimistic about the back end of the year. That's great.

22:07 Thank you. And then as a quick follow-up, Bertrand, in your prior remarks, you talked about there being some signs of your OEM customers building a little bit of inventory. I guess the question on this customer purchasing pattern than what we're seeing in the market today, I suppose given, you know, COVID-19 and maybe to a lesser extent the U.S. trade, the U.S. and China trade tensions, there is an incentive on the part of your customers to be a little bit more, you know, I guess prudent in procuring materials and components. But is that a concern for you at all? Should we be worried about, you know, a correction driven by inventory dynamics into the second half or sometime in 2021 or As you mentioned in your preparative marks, it's pretty minimal based on what you know and what you're seeing

23:00 in the market. Thank you. As I said in my preparative mark, there was likely a little bit of inventory built by our customers, but nothing really material to our performance in the second quarter. Thank you. and we'll next go to Sydney Ho at Deutsche Bank. Please go

23:28 ahead. Great. Thanks and congrats on the very solid results and guide. My first question is last quarter you predicted you'll see the demand drop off sometimes in the summer and the comments today suggest that that's probably not going to happen given My math is right. Your four-year guidance will seem to suggest Q4 revenue down maybe a couple percentage points. I just want to get your view on how we should reconcile the strength of your business and the industry versus maybe the macro headlines, especially on consumer spending, on maybe certain parts of enterprise spending, and to the previous question about some of these inventory, potential inventory bills.

24:14 Yeah, so as we are entering Q3, the realities that we're facing are very similar to where we were standing three months ago. We are looking at a very, very strong backlog, record levels, once again. The booking momentum continues to be very, very strong. As I was mentioning, there is no sign of deceleration in Advanced Logic. We continue to hear from all of our memory customers that they remain committed to their node migrations in the back end of the year, and we have a lot of design wins attached to those.

25:00 So that's a long way of saying that we believe that the industry conditions would be favorable to integration in the back end of the year. It doesn't mean that there is that the uncertainty is entirely gone. There's still plenty of uncertainty about the timing, the weight, the pace of the economic recovery and how that could impact some segments of the semiconductor industry. But let's face it, COVID-19 is still a reality that we would have to live with for several quarters, whether we like it or not. But at the same time, there are many reasons for us to be optimistic. I think that it is becoming increasingly obvious that the long-term fundamentals of the semiconductor industry are very promising as we benefit from greater automation of the economy, digitalization of our lives.

26:00 And in fact, what we're seeing this year is probably in some small fashion, some validation real-time of this hypothesis. and I think that's reassuring. I think this is particularly driving in the short term, you know, demand for high-performance servers, gaming, 5G, which really drives leading-edge chip consumption and that's a positive for integrates, obviously.

26:29 Great. That's very helpful. My follow-up question is, As I looked back in the last quarter, Q2, the sequential revenue growth was a lot more skewed towards the silica, the MC side of things, and especially chemical side is up only marginally. How should we read into this difference in growth rate? I recall in the past, Bertrand, you said that some of the SEM products tend to reflect more real-time demand because there's no reason for customers to buy ahead. Just want to get your thoughts on the difference between the two segments.

27:08 I think it's always, it's always dangerous to look at trends on a quarterly basis. I always prefer to look at that on a year-to-date basis. And if you do that, you will see that the performance of all of our pre-divisions has been very strong and very consistent with what you would expect a CEM on a has been growing at about 15%. Microcontamination for the first half of the year is up 11%. So again, a strong performance across the board and pretty much in line with our expectations.

27:55 Great. Thank you very much. Our next question will come from Chris Kapsch with Luke Capital Markets. Please go ahead.

28:08 Yeah, good morning. Thank you for taking my questions.

28:11 So one was a follow-up on the generally positive comments about the second half outlook and that benefiting from, among other things, just the continued no transitions. I'm just wondering if you could elaborate a little bit on On where you're most excited, I think in a response to another question, you indicated that in the second half, it might be more about the node transitions in memory vis-a-vis, say, logic and foundry. But can you just elaborate a little bit on any specifics that you anticipate will benefit your top-line strengths from those transitions?

28:52 Yeah, so the way we think about the second half is that We intend to consolidate the progress that we've made in logic and foundry, and we want to expand on our opportunities in memory. And there will be two ways this will play out. The first one is we have a lot of new DPOR wins on the 1-2-X architectures. And then the other way memory will be a big driver for us is that there will be natural transition of more WaferStars to be advanced memory architecture. Just to put that in perspective for you, if you think about 3DNAN and just 3DNAN for a second, in 2019, less than 20% of the wafers were produced at 96 or higher.

29:46 In 2020, we expect that more than 50% of the wafers will be produced at 96 or higher, where we have higher integrity content for wafers. So, that gives you an idea of how meaningful those drivers will be for us in memory in the back end of the year and frankly going forward. So I want to add to that and provide a little bit of product context to the back end of the year. We expect liquid filtration, deposition materials, high quality drums, and our particle size and system product lines to be the major contributors and the rest of the group in the back end of the year.

30:30 That's helpful, thanks. And the follow-up would be maybe a little nuanced around the AMH segment, which probably doesn't get as much attention as the other two. But you had mentioned the strong year-over-year growth there was associated with high purity liquid packaging products. I'm just curious to get a little bit more color. Are you, is that to imply that the strength is more focused in, say, photoresist versus Deposition Clean, other filtration products. And is it really about systems and consumables, or is there more strength in consumables? I'm curious because I'm just wondering if this trend where, particularly with Soda Resist, if chip-making customers are still implementing, retrofitting their legacy nodes, with filtration systems to get after latent defects. I'm wondering if that's still a trend that's benefiting your business in that segment specifically.

31:27 Thanks.

31:31 So we expect the trend that you're describing about retrofitting older fabs to achieve greater reliability of the chipsets to be a factor down the road. It was not a factor. in Q2, and I don't expect that to be a factor for the balance of the year. What we saw in Q2 and what we expect to continue to see in the back end of the year is a strong demand for our high-purity containers that are now required across a broad range of chemistries, photo resist being only one of them, but a lot of solvents, sulfuric acid, and so on, do require more advanced chemistry packaging solutions to meet more stringent transportation standards. So that is a consumable product, and I think the success of that product line is really transforming, frankly, the profile of AMH, or will transform overall and over time the profile of AMH. We also saw some good performance, and we expect that to continue from QSS, the business we acquired in Q1 of 2018. And all of that was offset by weakness in data storage and, frankly, some weakness in Q2 of our FOOP business as well, which

33:03 is a lumpy business that was just coming off three Record Quarters in Q3, Q4 last year and Q1 of this year, as many of our customers were gearing up for no transition. So overall, to your point, I think AMH had a very, very strong first half of the year, and I think they are on track to deliver a fantastic performance this year. That's helpful, Collar. Thank you, and congrats and kudos on the execution and strong performance. Thank you. Thank you. We'll next go to Patrick Ho with Stiefel. Please go

33:46 ahead. Thank you very much and congrats on a really nice quarter. Bertrand, maybe first off, maybe on a qualitative business, you talked about no transitions and the shift particularly in 3D NIN as you go to 90 plus layers and the industry continues to move to 120 plus layers. Can you qualitatively talk about Not only the increase in wafer starts that are driving the business there, but the types of new materials, some of the process wins. How much more, I guess, new product concentration or capital intensity are you seeing as you migrate to those higher layer counts?

34:33 So, Patrick, can I? We are seeing significant increase in materials intensity at those more advanced nodes in 3D NAN in particular. We have mentioned in the past deposition materials, selective etching chemistries, new doping processes, and those would be opportunities at the FAB level. We have also called out new coding solutions for chamber components in Edge tools. So there's a broad array of opportunities on the materials side for us, both at the FAB level but also at the OEM level.

35:23 And as you know, as the leaders in memory continue to add layer counts Those architectures are increasingly prone to contamination, and that opens up the door to many new opportunities on our filtration platforms as well. So memory historically was not a big area of focus for Integri, but this is changing rapidly, and I think memory is clearly providing many, many opportunities for us to contribute value on the way forward. Great, that's helpful.

36:04 And maybe as my follow-up question, I know, Bill Charm, you've mentioned in the past, particularly for your microcontamination control business, that you want to provide end-to-end solutions from, you know, chemical suppliers all the way through the fab. Can you describe the business opportunities on the chemical supplier side and how that's contributing to the growth Given the purity requirements that they also have and how you can enhance the overall yield process for your semiconductor customers.

36:40 Right, so this is a theme that has served us really, really well. Obviously, with the most stringent purity requirements in the advanced paths, It is virtually impossible to expect to intercept all of the contaminants of concern in the fab environment. So increasingly, the advanced fabs are placing new purity requirements on their bulk chemical suppliers, which in turn are also placing new purity requirements on their suppliers. So the whole ecosystem now has to contend with and more stringent purity requirements. And what it means is that we are seeing the, you know, the adoption of more filtration forms up the supply lines.

37:40 Those filters continue to be more and more advanced at every new transition and the frequency of replacement of those filters continue to increase as well. So that is what has been driving the fast growth in our surf market for advanced liquid filters. And as I was mentioning in a previous comment, filters are not the only beneficiary of that. We have some of the best high purity containers for different types of chemistries. And of course, we have leadership position in fluid handling and all the solutions in terms of all of the tubing and piping that would be involved in the bulk chemical manufacturing groups.

38:33 Great. Thank you very much. Thank you. Thank you. And we'll next move to Amanda Scarnati with CIDI. Please go ahead. Your line is open.

38:46 Hi. Good morning. This first question is for Greg. Greg, you mentioned that CapEx is still expected to be around $120 million this year, which implies a little bit of a step up in the second half. Can you talk about sort of what you're seeing there and if any of this is sort of driven by capacity constraints to meet customer demand or if this is sort of the expected CapEx plans that you had?

39:11 In general, I would say it's expected CapEx plans that we have. I mean, some of the spending we're doing is capacity related. We talked a lot about our high purity drum business or our high purity liquid packaging business. And we've got a significant capital expenditure going on in Korea, for instance, to expand our liquid packaging capacity. But I would say the balance of it is that's probably the largest project we've got. We've got a project. We talked a lot about deposition materials. We've got a project in the queue to expand our capacity and deposition materials at our facility here in the U.S. So it's a combination, but it's not – there really haven't been any significant shifts from when we started the year in terms of where we expect to spend capital.

40:01 Okay. And then Bertrand, this is a little bit more strategy focused on M&A. Can you just talk a little bit first about the global measurements and if that's more sort of memory-focused or logic-focused. And then as you look at M&A going forward, you know, it seems that you're kind of focused a little bit more on smaller acquisitions, maybe to fill out the portfolio that you would have gotten with Resume. Is that the right way to look at M&A going forward to the smaller acquisitions to fill out the portfolio? Or, you know, is there any sort of, you know, desire for something a little bit larger at this point? Right. So, Amanda, let me start with a brief description of GMTI.

40:49 But think about GMTI as the twin brother of PSS, the company that we acquired in 2018. It's similar size, very complementary value propositions, the same applications. And as you know, PSS was a great success, and we intend to apply the same approach as we integrate GMPI, leveraging our global distribution platforms, introducing more advanced quality systems. I think the recipe would work equally well with GMPI. So with GMPI now, we have really extended our offering to be in a position to provide those end-to-end solutions that we were talking about in the previous question.

41:41 Our offering now includes flow control, particle sizing monitoring, advanced filtration, and now with GMPI more precision concentration monitoring capabilities as well. And that really puts Integris in a leading position as the supplier of yield-enhancing solution for CMP Delivery Processes. So again, just expanding on the set of capabilities that we can offer in those very complex processes. So very excited about the NTIA. More broadly, yes, it is an example of the types of small deals that you can expect us to make, high-quality company, complementary with what we do. You know, we continue to expect to find deals that can be larger than this.

42:42 But as you know, we don't control actionability of those mid-size transactions. So we have a rich pipeline, and hopefully we can continue to be active on DM&F, which is part of our growth strategy. Great. Thank you. Thank you. And we'll next go to Weston Twigg with KeyBank Capital Markets. Please go ahead. Your line is open.

43:12 Hi. Thanks for taking my question. I wanted to ask about R&D, and I'm wondering if you still expect your R&D profile to expand through the end of the year. And then sort of in a related question, I guess, how is that driving your product portfolio versus what your competitors are doing? I'm just wondering how your positioning may change through this pandemic versus what you see your competition doing. and the rest of the industry. Wes, we continue to be committed to doing our investment in ER&D.

43:47 In fact, if you look at our ER&D spend line, it was a record level of 7.3% of revenue, but we spent almost $33 million, which was up from $30 million in Q1. up about 10% from where it was in Q2 last year as well. So we believe, you know, we continue to believe that we have an opportunity to gain on our competition through this period of time because we do believe that our competitors that are part of large specialty camera, large industrial companies are going to be pressed on the R&D side as those companies look to reduce costs across the board. And we continue to have a rich opportunity pipeline in some of the things that we've continued to talk about, advanced deposition, advanced filtration. So we are completely committed to the R&D fund.

44:46 Okay, thanks.

44:47 And then just as a quick follow-up question, global measurements, did you mention the revenue contribution through the back half of the year from global measurements?

44:58 It'll be very... Go ahead, Bertrand. No, go ahead, go ahead.

45:05 The revenue contribution will be very modest, less than $10 million. Okay, thank you. Thank you. We'll next go to Mike Harrison with Seaport Global Securities. Please go ahead. Hi, good morning.

45:28 Just kind of following up on the competitive environment, in the filtration business, you have a competitor that has a broader range of markets that they serve.

45:40 Some of those markets might be under more pressure than what you're seeing in semiconductors.

45:46 So have you seen them change their focus at all to increase the – and a lot of business that they're trying to do or the offerings that they have for the semiconductor industry from Mackey Competitor.

46:05 I'm not going to go into those detail of specific competitors. What I will tell you is that we obviously monitor our competitors and the evolution of their strategy very closely. and I think that we have demonstrated over time that we are pretty good at adjusting and adapting to maintain the leadership positions that we have in most of the segments that we serve. All right. And then in terms of the microcontamination control margin,

46:51 Pretty strong performance this quarter. Just wondering if you can comment on whether that strength is sustainable, or do you feel like there was something unusual about the mix or other dynamics going on this quarter? I mean, they really benefited from two things. Obviously, the higher volumes go a long way, having to leverage the fixed cost structure of the business. They did benefit from favorable mix, and the fastest Growing parts of that business also happen to be the highest margin parts of that business. All right, and if I can sneak one more in.

47:34 Curious about the higher compensation costs that you saw in the SCEM business. Is that kind of one time, or is that something that lingers for the rest of the year? Thank you. Compensation costs will be higher through the balance of the year. In short, what happened is we came out of Q1 and we accrued our variable compensation at very low levels because we had no idea what was going to happen. With the much stronger performance in Q2, it's an annual plan. We raised that compensation cost. We had to catch up for Q1 as well. It'll be at a more normalized level, the balance of the year, so it should come down a little bit.

48:31 Thank you. And we'll next move to Paritosh Mishra with Berenberg. Please go ahead.

48:37 Thanks, and good morning, Bertrand and Greg. Can you talk about the FDM segment? and within that you have several different product types, product categories, specialty gas, deposition materials. So I was just hoping if you could give some more color as to how these product categories are growing and which one are you most excited about given the no changes ahead in the second half of next year and maybe if you could talk a little bit about the mix also within that segment.

49:13 Yes, so SEM had actually probably the most complexity built in. I mean, we saw a lot of strength in Q2 in disposition materials, in our formulated clean business, and, of course, we saw some of the benefits of the recent acquisitions in that business. So all of that was on the plus side. and the more mature product lines actually behave relatively steadily. But then, unfortunately, there was a very sharp decline in our graphite materials sales.

50:05 These materials are, have a lot of exposure to non-semi-applications in markets electric discharge, machining, aerospace, gas forming applications, for instance. And those markets were severely depressed in Q2, and we don't expect, frankly, to see any meaningful recovery in the back end of the year. Just to quantify that for you, I mean, those segments were essentially down 50% versus the peak of last year. So what we're most excited about for the back end of the year for that division will be the new deposition materials tied to the new nodes in logic and memory, as well as some of the new cleaning chemistries that we intend to roll out to the market in the back end of the year.

50:58 Got it. That was very useful.

51:00 And maybe as a quick follow-up, can you remind me your current exposure to the CMP process? Is it primarily on the silicon carbide side, or do you have other products also?

51:13 which I think is the question is it's really on the hard material. So it's silicon carbide, gallium nitride, and only that. Got it. Thank you. Thank you. Our next question comes from David Silver with CL King. Please go ahead.

51:33 Yeah. Hi. Thank you. I have kind of a big picture question, Bertrand, I'm hoping you can comment on. So your record results you mentioned, they benefited from meaningful node transitions on the logic side. And, you know, it wasn't too long ago where the industry, your major customers, seemed to be stumbling a bit on implementing kind of that next node transition in logic. and I would just say my impression of industry discussions is greater confidence in not just the current node transition but the next one and the one after that. So I was just wondering, I mean, is it EUV or is there another kind of facilitating technology that you would say has made the difference in the decision making and the investment decisions of your major customers?

52:34 or, you know, is this kind of a phase where the industry roadmaps that, I don't know, I or maybe some other people considered more aspirational than realistic, I mean, are those timetables becoming more realistic? And if so, you know, what would you say, again, is kind of behind that growing confidence or? Willingness to invest on a more compressed timetable.

53:07 So what I would say is that the roadmaps are becoming increasingly ambitious, both in logic and in memory. Memory is a question of stacking up more areas. In logic, it's about further miniaturization. and all of that is very complex. But I think that as an industry, as an ecosystem, we have become a lot better at collaborating. I think that there's been a greater commitment to R&D by all of the major players. And as a result of that, I think there's probably greater confidence that we can do it.

53:54 and that's great news for us because everywhere you want to look at in logic or in memory, all of those architectures will be increasingly relying on new materials with better structural and better electrical properties and all of those new architectures are increasingly susceptible to contaminants. So if you sum it up, the value proposition of integris is continuing to grow in importance and we will continue to have opportunities to increase the content per wafer for many years to come. So that's really the reason we are optimistic and that's the confidence that we have behind the, you know, our goal to outpace the market for many years to come.

54:49 Okay, thank you, and I apologize for not – I should have reworded my question to say facilitating technologies in addition to the ones that you provide. I had a question maybe now – we haven't discussed this, but maybe on the lagging edge of the industry. So I recall between 2016 and 2018, you know, your company actually was able to double earnings per share. and there were certainly a number of demand drivers but to me I do believe part of the equation there was rising demand for current generation or even trailing edge chips to satisfy maybe Internet of Things related demand. So first generation electronics in autos and industrial settings where there hadn't really been that level of electronic intensity before.

55:45 And I'm wondering if you have any thoughts about what the shape of the post-pandemic business environment is going to be. So, you know, will the work-at-home economy, will the need for greater separation or automation in industrial settings, is that a recipe for longer production runs and extended product life cycles for current generation chips, which... in turn could probably translate into incremental very high margin sales from your existing portfolio of products and services. Thank you.

56:32 Yeah, so I mean the way I would probably, so the short answer is yes. I think what you're describing are some of the secular trends that we're excited about. The way I would maybe reframe what you said is that semiconductor demand will be accelerating. Technically, the roadmaps are becoming more challenging. That will drive requirements for the materials more stringent purity, which means that we will have an opportunity to increase our content per wafer. And as you said, over time, a lot of the older process nodes will transition to more advanced and I would expect that to be the case in the years to come.

57:23 So that's why I believe our growth prospects are actually pretty exciting. Okay. Thank you very much. Thank you. And ladies and gentlemen, we'll take our final question from Toshi Yahari with Goldman Sachs. Go ahead. Thank you for squeezing in my follow-up.

57:50 Bertrand, I had a question that's not very related to earnings. One of your large OEM customers talked a lot about environmental sustainability at their keynote at Semicon West, the virtual show. And the company talked about getting the overall supply chain involved in driving, I suppose, environmental sustainability over the long run. Is this something that I'm sure you guys are focused on it as well, but do you sense your customer base, your IBMs and Foundry customers are increasingly focused on this? And to the extent they are, do you feel like efforts here could drive, it could be a source of differentiation for a company like Integris going forward?

58:36 Thank you.

58:39 Yes, it's actually a great question and very interesting. Family Question. We have done a lot in CEDRIS. I don't think we have been very effective at communicating broadly what we have done, but we have an ongoing effort to correct that. So you should actually see a lot more, should be a lot more visibility to our CSR program. And there will be four pillars to that. One is innovation. The other one is safety. Third one would be inclusion and personal growth. And the last one would be sustainability programs. And I think we will actually, as part of that program, make it more visible to investment community and our customers how we are contributing to the safety of their processes, but also the safety of many of the So more to come on that.

59:54 Thank you. Thank you, and ladies and gentlemen, that will conclude today's call. We do thank you for your participation. You may now disconnect.