Yahoo Finance Entegris, Inc. (NASDAQ:ENTG) Q1 2024 Earnings Call Transcript
Entegris, Inc. (NASDAQ:ENTG) Q1 2024 Earnings Call Transcript May 1, 2024
Entegris, Inc. beats earnings expectations. Reported EPS is $0.68, expectations were $0.61. ENTG isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Entegris First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. The floor will be open for your questions following the presentation. [Operator Instructions] I would now like to turn the call over to Bill Seymour, Vice President of Investor Relations.
Bill Seymour: Good morning, everyone. Earlier today, we announced the financial results for our first quarter of 2024. 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 of 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 a reconciliation table in today's news release as well as on the IR page of our website at entegris.com. And finally, for your reference, we have included in the earnings slide presentation consolidated divisional P&Ls for Q1 and for all 4 quarters of 2023 that exclude divestitures. On the call today are Bertrand Loy, our CEO; and Linda LaGorga, our CFO. With that, I'll hand the call over to Bertrand.
Bertrand Loy: Thank you, Bill, and good morning. I am pleased with our start to the year. For the first quarter, sales of $771 million were at the high end of our guidance. And gross margin, EBITDA and non-GAAP EPS were above our guidance. Looking deeper at our financial performance. Sales were down in all divisions and across most product areas as expected and in line with normal seasonality. However, we did see sequential growth in product lines that are critical to our customers' leading-edge node transitions, including selective edge and advanced deposition materials. From a profitability point of view, even with the market uncertainty, we chose to maintain high levels of investment in R&D. Despite this and despite the lower sales volumes, we delivered strong results in terms of gross margin and EBITDA.
Linda will provide more details on all of that shortly. Let me address a few other highlights of the quarter. On March 4, we announced the sale of the PIM business for a total of up to $285 million. The sale of PIM completes our planned divestiture of 4 noncore assets: PIM, QED, Electronic Chemicals and a business we sold to Element Solutions. The approximately $1.3 billion in proceeds from those divestitures were used to significantly pay down our debt. Next, we're making steady progress with our 2 major investments in new manufacturing capacity, which are vital for us to fully realize our mid- and long-term growth. In Taiwan, our new Kaohsiung facility is on track to ramp up production and is expected to contribute $40 million to $50 million of revenue in the second half of the year.
And in Colorado, construction at our Rock Reman site is progressing rapidly, and we continue to expect initial sales from this facility to be generated in the first half of 2025. Moving on to our outlook for this year. Our view of the semiconductor industry has not changed. We do believe that the market is healthier with normalizing inventories and a more stable demand environment. And we continue to expect a gradual market recovery throughout the year. With this as a backdrop and based on recent forecasts from our customers, for the full year 2024, we continue to expect the market will be up approximately 4% based on our unit and CapEx mix. In addition, given our strong market position in new logic and memory nodes, we continue to expect to outperform the market by 4 points to 5 points this year, excluding the impact of divestitures.
Putting it all together, we expect our sales in 2024 will be approximately $3.35 billion. We continue to expect EBITDA to be approximately 29% of revenue and non-GAAP EPS to be greater than $3.25. This annual guidance, of course, includes 2 months of the PIM business prior to its sale in early March. Let me now turn the call over to Linda. Linda?
Linda LaGorga: Good morning, and thank you, Bertrand. Our sales in the first quarter were at the high end of our guidance at $771 million, down 16% year-over-year and down 5% sequentially on an as-reported basis. Q1 sales included approximately 2 months of revenue from the PIM business. So excluding divestitures from the first quarter and prior periods, Q1 sales were down 5% year-over-year and down 4% sequentially. Foreign exchange negatively impacted revenue by approximately $8 million year-over-year and had no impact to revenue sequentially in Q1. Gross margin on a GAAP and non-GAAP basis was 45.6% in the first quarter, above our guidance. The higher margin compared to Q4 primarily reflects improved plant utilization and the PIM divestiture.
Operating expenses on a GAAP basis were $234 million in Q1. Operating expenses on a non-GAAP basis in Q1 were $174 million. Adjusted EBITDA in Q1 was $223 million or 29% of revenue, above our guidance range driven by the higher gross margin I just discussed and partially offset by increased R&D investment compared to Q4. Net interest expense was $54 million in Q1, below our guidance of $60 million, driven primarily by the positive impact of the PIM sale. The GAAP tax rate in Q1 was 7.1%, and the non-GAAP tax rate was 14.1%. GAAP diluted EPS was $0.30 per share in the first quarter. Non-GAAP EPS was $0.68 per share, above our guidance range, driven primarily by the higher gross margin and lower net interest expense. Sales for our Materials Solutions division in Q1 were $350 million.
Sales were down 4% sequentially on an as-reported basis. Excluding the impact of the divestitures, sales were down just 1% sequentially. During the quarter, MS benefited from the early-stage recovery in the memory market, offset by continued weakness in some mainstream end markets. Adjusted as-reported operating margin for MS was 21.5% for the quarter, up almost 500 basis points sequentially. The primary driver of that increase was improved plant utilization. Our AMH division sales in Q1 of $163 million were down 4% sequentially. The largest driver of the sequential sales decline in AMH were lower sales of fluid handling products. Adjusted operating margin for AMH was 15.1% for the quarter. The sequential increase in margin was primarily driven by the positive impact of improved plant utilization ahead of the expected sequential growth in Q2.
For our MC division, sales in the quarter of $268 million were down 7% sequentially. Revenue was lower in all major product lines, consistent with our expectations. Adjusted operating margin for CMC was 32.3% for the quarter. The sequential decline in margin was primarily driven by lower volumes and steady investment in R&D. Moving on to cash flow. First quarter free cash flow was $81 million. CapEx for the quarter was $67 million. We continue to expect to spend approximately $350 million in total CapEx in 2024. During the first quarter, we paid down a total of $419 million in debt through a combination of approximately $260 million in PIM sale proceeds and the rest from cash on hand. The term loan balance after the Q1 paydown was approximately $955 million, which means to date, we have paid down more than $1.5 billion of the term loan since the CMC acquisition.
In addition to the significant debt paydown, at the end of March, we executed a very successful 75 basis point repricing to our term loan, which resulted in a new interest rate of SOFR plus 1 75. Blended interest on the debt portfolio is now approximately 4.9%. And since the term loan is fully hedged, currently, 100% of our debt is fixed. At the end of Q1, our gross debt was approximately $4.3 billion, and our net debt was approximately $3.9 billion. Gross leverage was 4.6 times and net leverage was 4.3 times. We continue to expect our gross leverage will be below 4 times at the end of 2024. Moving on to our Q2 outlook. We expect sales to range from $790 million to $810 million. This equates to 8.5% sequential growth to the midpoint of the guidance range, excluding divestitures.
We expect the EBITDA margin to be approximately 28%. We expect GAAP EPS to be $0.42 to $0.47 per share and non-GAAP EPS to be $0.68 to $0.73 per share. Let me provide additional modeling information for Q2. We expect gross margin of 45.5% to 46.5%, both on a GAAP and non-GAAP basis, GAAP operating expenses of $242 million to $245 million and non-GAAP operating expenses of $191 million to $194 million. The sequential increase in non-GAAP OpEx from Q1 to Q2 is primarily driven by higher noncash equity compensation expense. This year and going forward, we changed the timing of our equity grants awards to Q2, whereas historically, these grants were made in Q1. We also expect depreciation of approximately $48 million, net interest expense of approximately $51 million and a non-GAAP tax rate of approximately 15%.
I'll now hand it back over to Bertrand for some closing remarks.
Bertrand Loy: Thank you, Linda. In closing, we are pleased with our start of the year. During the quarter, we completed our final planned divestiture, and we used the proceeds of that sale and other cash to significantly lower our debt. We continue to expect a gradual market recovery throughout the balance of the year. And we remain very optimistic about the secular long-term growth prospects for the semiconductor industry. In addition, the industry is entering a period of unprecedented technology change and device complexity. Our core competencies in materials science and materials purity, coupled with our unique ability to co-optimize solutions that shorten time to yield have become increasingly critical for our customers.
All of this means the market is moving toward Entegris, ultimately translating into rapidly expanding content per wafer and strong outperformance for us for years to come, reinforcing Entegris as a value compounder with attractive organic sales growth, leading to significant opportunity for EBITDA and EPS expansion. With that, operator, let's open the line for questions.
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