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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day ladies and gentlemen and welcome to the Entegris Second Quarter 2018 Earnings Call. Today's call is being recorded.
At this time for opening remarks and introductions, I would like to turn the call over to Mr. Steve Cantor, Vice President of Corporate Relations. Please go ahead sir.
Good morning and thank you all for joining our call. Earlier today we announced the financial results for our second quarter ended June 30, 2018. You can access a copy of our press release on our Web site entegris.com.
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 which are outlined in detail in the reports and filings with the SEC. On this call, we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. And you can find a reconciliation table in today's press release as well as on our Web site.
On the call today are Bertrand Loy, President and CEO and Greg Graves, CFO. Bertrand will now begin the call. Bertrand?
Thank you, Steve.
I would make some comments on our second quarter performance and our outlook for the second half of 2018. Greg will follow with more details on our financial results and he will provide guidance for the third quarter. We will then open the line for questions.
We achieved another record top-line and bottom-line performance. During our second quarter, we grew our sales 16% year-over-year achieving strong growth across all three divisions and outpacing our markets. We grew our profits faster than sales growing non-GAAP EPS by 44% and adjusted EBITDA by 24%.
We also completed the acquisition of SAES Pure Gas on June 25 adding the leading provider of bulk gas purification systems to our micro contamination control platform. And overall, we are on track to deliver a very strong 2018 well in excess of our original target.
Industry environment in Q2 reflected robust levels of semiconductor production as the industries and market demand continues to broaden beyond PC and mobile devices. While these industry trends were mostly favorable, they were not uniformly positive. Growth in industrial and automotive applications did offset softer production a leading logic and foundry makers. And despite spending push outs by some memory makers and uncertainty stemming from U.S.-China trade relations there continues to be steady investments in new fab projects.
Against these crosscurrents of demand, we continue to achieve our goal of outpacing the industry. In the second quarter, we did this by a substantial margin. Our ability to achieve this goal with consistency stems from our unique value proposition, the broad diversity of our customer base and the breadth of our technology. This comprehensive and unmatched set of solutions is enabling Entegris to help solve increasingly complex semiconductor manufacturing process challenges around engineered materials as well as the purity and the handling of those chemistries and processed materials.
The increasing value of the Entegris platform is enabling us to expand our served available markets and grow our share across all three divisions. We saw the benefit of our unique model in the second quarter. While our leading edge logic and foundry revenue was somewhat muted, we recorded strong demand for our filtration products, specialty gas and specialty materials at memory and mainstream semiconductor manufacturers.
Our sales to OEM customers grew sharply reflecting demand for fluid handling and gas purification solutions related to ongoing fab build out projects and new fab activity.
Our sales to materials company, which include chemical makers as well as with the growers grew double digits reflecting strong sales for wafer shippers, high purity containers and filtration solutions. By geography sales in North America grew 18% reflecting strong demand from OEMs.
Growth in Korea and Japan was 24% and 34% respectively and was driven by memory and OEM customers. We continued to experience lower sales in Taiwan reflecting weakness at foundry manufacturers in Q2, but increased production at mainstream fabs boosted our sales in Europe and Southeast Asia. While we were pleased with our sales performance in Q2, we are even more excited about the additional design wins and process of record nominations, we continue to achieve across our portfolio.
We continue to gain market acceptance for next generation filtration solutions, advanced deposition materials and specialty gas solutions for N7 and N5 nodes as well as for 9x vertical nano implications and for EUV.
In terms of the quality of our execution. We generated record cash flow and continued to grow our operating earnings faster than our revenue. Through the first half, we generated $215 million of adjusted EBITDA or 28.7% of sales achieving this is enabling us to execute on our capital allocation strategy balancing internal investments, returning cash to shareholders and most significantly act on highly strategic and accretive acquisitions that leverage the strength of our global platform, broad customer base and diversified solutions set.
To that end, we were very pleased to complete the acquisition of SAES Pure Gas or SPG at the end of June for $355 million in cash or approximately 9x times fully synergized 2017 EBITDA. SPG complements our offering of gas purification solutions and gives us the unique capability to provide complete end-to-end solutions from the point when gas enters the fab to the point where it is used in the process chamber.
The need in the semiconductor industry to handle higher volumes of process gas is at ever greater purity level has been a key secular driver for SPG and has enabled it to significantly outpace the industry CapEx spending.
For many years now, we've been very clear about our preference to create long-term shareholder value with the right acquisitions. We've also been very consistent in defining our acquisition framework including the current characteristics and the price of the businesses we want to add to our platform.
SPG fits this framework as do the acquisitions of Particle Sizing Systems or PSS and Flex Concepts which we completed this year. PSS adds innovative fluid sensing technologies for CMP applications and Flex Concepts augments our emerging life sciences business with new capabilities for single use bio-processing bags. The addition of these businesses will not only add to our capabilities and value proposition, but we believe they will contribute to our top-line growth and will significantly add to our earnings powers this year and beyond.
With or financial discipline, strong balance sheet and focused capital deployment, we see the potential for additional high-quality acquisitions to achieve earnings per share in excess of $3 in three years.
In summary, our results in the first half put us on pace for another strong year for Entegris. Given current industry trends and demand for our solutions, we are positioned to grow approximately 16% in 2018 including the addition of the 3 acquisitions completed in the first half of this year.
I will now turn the call to Greg for the financial detail. Greg?
Thank you, Bertrand.
We are very pleased with our results for the first half of 2018. First half sales of $750 million were up 16% over the prior year and we achieved GAAP EPS of $0.78 per share. On a non-GAAP basis, first half EPS of $0.96 increased 52% from the same period in 2017.
For the second quarter sales of $383 million grew 16% from a year ago and were up 4% from Q1. Q2 GAAP diluted earnings per share was $0.38. On a non-GAAP basis, we achieved earnings per share of $0.49 up 44% from Q2 of last year and up 4% sequentially.
Our operating performance in the second quarter reflected non-GAAP gross margins of 47.7% which compared to 47.9% in the first quarter. The gross margin was impacted positively from higher sales volume and a one-time benefit from a $2.9 million insurance claim related to production downtime caused by a fire at our graphite facility in 2016. These tailwinds were offset by the less favorable effects from FX and sales mix and we experienced in Q1.
We expect gross margin on a non-GAAP basis in Q3 to be 46% to 47% in line with normalized levels and consistent with our model inclusive of SPG.
GAAP operating expenses included $5.1 million of costs related to the SPG acquisition and $1.2 million of integration expense including what we incurred in Q2; we expect total integration expenses from the SPG transaction to be approximately $5 million to $6 million.
With regard to SPG, we expect to realize approximately $5 million of total cost synergies of which 60% will be in place by the end of Q1 of 2019 and the balance in place by the end of next year.
Non-GAAP operating expenses in Q2 of $89.1 million were at the low end of our expectations. Excluding amortization expense of $18 million and integration related expenses, we expect non-GAAP operating expenses to be $90 million to $92 million in the third quarter. The higher operating expenses include the addition of SPG.
Non-GAAP operating margin of 24.4% increased 200 basis points from Q2 a year ago. Our GAAP tax rate of 17% was slightly better than expected and reflects the discrete tax benefit related to tax reform and an improvement in our foreign tax credit positions. These factors also lead to a better than expected Q2 non-GAAP tax rate of 16%. And our expectation for a full year non-GAAP tax rate of 19%. This suggests the tax rate of approximately 20% in Q3 and Q4. Adjusted EBITDA for the quarter was a record $109 million or 28.5% of revenue.
Turning to our performance by division, Q2 sales of $134 million for specialty chemicals and engineered materials or SCEM grew 11% from a year ago and were up 3% from Q1. The quarterly growth was driven by strong performance in graphite coatings and formulated cleans.
Adjusted operating margin for SCEM and was 27.8% up from the same period last year and up from Q1 reflecting the one-time benefit from the insurance claim I mentioned earlier. Excluding the $2.9 million benefit from the insurance claim, the SCEM adjusted operating margin would have been 25.7% still above our targeted range.
Q2 sales of $125 million for micro contamination control or MC were up 19% from Q2 of last year and were up 5% from Q1. The growth in the quarter reflected strength in liquid filters and new purifier solutions for wet etch and clean and bulk photo applications.
Adjusted operating margin for MC of 31.5% declined from last year and from Q1. The decline from Q1 was due to the negative impact of FX and higher R&D spending. We expect the MC operating margin to improve in Q3 and to be in line with our long-term target of 34% to 36% by the first quarter of 2019.
Q2 sales for Advanced Material Handling or AMH of $124 million were up 20% from Q2 of last year and grew 5% sequentially. The sequential sales performance primarily reflected strength in fluid handling components for new fab infrastructure projects as well as the impact of the PSS acquisition.
Adjusted operating margin for AMH of 18.6% improved from last year and declined slightly from Q1. The decrease from Q1 reflected less favorable FX trends and higher R&D spending offset in part by more favorable product mix.
The Q2 AMH operating margins are within its long-term targeted range of 18% to 20%. Cash flow from operations for the quarter of $98 million grew 15% from Q2 a year ago. Free cash flow was $72 million or 19% of revenue.
Our cash balance as of June 30 was $257 million and total long-term debt was $650 million. We have no mandatory debt repayments until 2021 and we have suspended our voluntary debt repayments until we rebuild our domestic liquidity.
Uses of cash during the quarter included $355 million for the purchase of SPG and $26 million of total CapEx. The CapEx spend in Q2 was consistent with our expectations for full year CapEx of approximately $100 million to $120 million. Consistent with our capital allocation strategy in Q2 we use $10 million for our quarterly dividend and $10 million for stock repurchases.
Turning to our outlook for Q3, we expect sales to range from $395 million to $410 million, which includes a full quarter of SPG. At these revenue levels, we expect non-GAAP EPS to be $0.46 to $0.51 per share consistent with our target model.
In summary, we are pleased with our execution; we are excited about the addition of SPG. We continue to be disciplined with our capital allocation and finally we are excited about our prospects for the balance of 2018 and beyond.
Operator, we will now take questions.
Thank you. [Operator Instructions] Our first question today comes from Toshiya Hari of Goldman Sachs. Please go ahead.
Hi. Good morning and thanks very much for taking my question.
Bertrand, I guess the first one is more of a housekeeping question. SPG, what level of revenue and OpEx is embedded in your Q3 guide and your view on accretion into 2019. I realize you literally just announced this deal, but how has that changed at all given some of the some of the industry dynamics we've seen over the past couple of months?
Toshi, I can take the first part of the question and we turn to Greg for the second part of the question. But as we mentioned, during our recent mini-analyst day during SEMICON West, we have embedded about $50 million to $55 million of revenue coming from SPG for the second half of the year.
And the OpEx related to SPG in the model is between $3 million and $4 million. And with regard to your accretion -- and with regard to accretion question, no change to our views on that. I think we talked about $0.08 to $0.10 in the current calendar year and then something $0.16 to $0.20 next year.
Okay. Got it. And then as my follow up, Bertrand in your prepared remarks you talked about some of the pushes and pulls that you saw in the quarter and probably continue to see into Q3. And on the negative side, you talked about weakness in leading edge foundry and logic and some of the fab push outs. If you can kind of elaborate on those two points, how big was the impact in Q2? And when do you see those reverting and kind of contributing positively to your financials, is it Q4, or is it more 2019? Any additional color there would be helpful. Thank you.
So if you think about the industry environment that we experienced in Q2 it was very much consistent with the expectations that we had going into the quarter. So what we saw was very strong level of activity in mainstream fabs. And across the memory sector, we experienced continued robust capital spending in the industry and that was offset somewhat by a more muted logic sector. We expect the trends to improve with regard to the logic segment in the back-end of the year. And we certainly hope that there will be some more meaningful node transitions going into 2019 that will be some -- providing some type of tailwind for a number of our product lines. More specifically advanced filtration and advanced materials. So that's how you should think about the overall industry environment in the quarter and what we expect going forward.
And then the fab push outs?
Well, again, I think that as it comes to what we have in mind for the full year, we expect the industry CapEx to be about 8%. So certainly a slow down in the back end of the year that will have some bearing on our CapEx business, but that will be offset by strength in our unit driven business and that's really what we're trying to reflect in the overall guidance that we're providing for Q3 and the balance of the year.
Very helpful. Thank you so much.
Thank you. We now move to Patrick Ho of Stifel. Please go ahead.
Thank you very much. Maybe first off for Greg in terms of the gross margin profile with the addition of pure gas. How much do you see from a gross margin perspective as that being additive on a going forward basis?
Yes. So when you talk about the margin structure of SPG, operating margins for that business are in line with our corporate average or maybe slightly above really in line with the kinds of operating numbers you'll see in our MC business. Gross margins are slightly below the corporate average, so if you were to look at this quarter and our guidance, having SPG has approximately 30 basis point negative impact on our gross margin going forward. Like I said positive to operating margins and slightly dilutive to gross margin.
Great. That's helpful. And maybe the follow-up to Bertrand in terms of the market environment obviously there's a lot of moving pieces going on right now. A key driver for your specialty chemicals and engineering materials business is the adoption on the memory front. How do you see, memory trending in the second half of the year and into 2019. Given some of the pulls and pushes we're seeing both in DRAM and NAND today?
Yes, Patrick. So for Entegris both advanced DRAM and NAND continue to be a very, very fertile ground for service market expansion and it has benefited all three divisions. So if you think about the first half of the year, memory contributed about 40% of our revenue. And that has to be compared to a contribution of just about a third of our revenue a year ago, so very significant growth momentum in the memory segment of our business. And we frankly expect that momentum to carry through the balance of the year and into 2019.
I also want you to remember that a lot of the new opportunities for advanced material in particular and advanced filtration are still ahead of us. So I think that there are a lot of reasons to be very, very optimistic as it comes to the memory segment for Entegris.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from Edwin Mok from Needham and Company. Please go ahead.
Hi. Good morning guys. So sorry my line got cut-off, so if someone asked this question I apologize. But did you guys talk about how much of your revenue you expect to come from your acquisition in the second half of the year? And also I think on -- when you acquired SPG, you said you expect earnings accretion in $0.08 to $0.10 a share, $0.17 and $0.20, [indiscernible] that, are those till the targets?
So I will take the first half Edwin and then we will turn to Greg for the question on EPS. But, maybe I can take your question in the context of the annual guidance for Entegris. So we expect the annual growth rate for us to be about 16% in 2018 and they are four components beyond that.
The first one is, the industry baseline and we expect both MSI and CapEx to grow at about 8% this year in 2018. So that's the first component. The second component is our commitment to outpace the industry by about 200 basis points. The third component is we expect to pickup some positive foreign exchange of -- a little bit less than a point. And then, approximately 500 basis point will come from the addition of SAES and PSS this year. So that's how you should think about the impact of those two acquisitions in 2018 and how you should think about the overall annual guidance.
Great. Actually that's extremely helpful, can't break it down like that. And Greg any thoughts on the earnings accretion side?
Yes. On the earnings accretion side, we said in 2018, $0.08 to $0.10 that's embedded in our guidance. And I think you said you've gotten cut off, we talked on the previous question, I mean essentially PSS slightly dilutive to gross margin maybe 30 basis points accretive to operating margin however higher than corporate average operating margins.
And maybe if your line was cut off Edwin, maybe I should also add that on the top-line there is really no change to our expectations with respect to the revenue coming from SPG in the back end of the year. So the expectation is about $50 million to $55 million of revenue in the back end of the year.
Okay, great. That's extremely helpful. And then, I've been trying to cover a longer term high level question on the contamination. So we've heard from some people saying that [train ash] [ph] we start to see increase demand for contamination, right? And of the contamination controls and obviously that could be a positive trends for you guys.
I guess my -- really what I'm trying to understand is, what is driving that? Why this historically the lean ash customer tend to have a process called [indiscernible] they try not to change that maybe they should focus more on cost than actually adding more fuel filtration that may drive cost upstream. Can you talk a little bit about why the trend that guys actually have increased demand for contamination control?
Right. So they are -- we could spend a lot of time on the topic Edwin and I will try to just give you a very simple answer, but the first thing to remember is that purity is increasingly important to not only the yield, but really to the device performance and the device reliability.
As a result, I think there's a much greater focus across the various segments of the industry logic, memory and even trailing edge fabs now to achieve greater levels of purity. So that's the first thing that you need to keep in mind.
The other thing that you need to keep in mind is to achieve those very, very high levels of purity, the ecosystem needs to start thinking about reaching higher levels of purity much earlier in the supply chain and that's providing us with the opportunity to add a number of new filtration points not just in the fab or sub-fab, but increasingly with the bulk chemical manufacturers and even with sub-suppliers. So think about the proliferation of filtration points and the ecosystem now being asked to use much more advanced filtration solutions than in the past, which drives the adoption of better filters, but also increases the frequency of replacement of those filters.
So when you think about the growth that we've seen in micro contamination, so last year was growing at about 20% this year still growing at about the same pace. That's really a function in all of those trends. It's the importance of purity. And it's really the complexity to reach those very, very high levels of purity. Does that answer your question?
Yes. I think that's actually helpful. One last question if I may. Greg, MC margin declined this quarter and I think in the [prepared] [ph] margin said that you expected to recover in the coming quarters. Are you guys taking any such good steps around that and what drove the decline in that?
I would say nothing specific in terms of any kind of restructuring actions or anything. If you think about that business they were the largest beneficiary of the currency tailwind in Q1. So, if you think about that business they were the largest beneficiary of the currency tailwind in Q1 that obviously didn't repeat in Q2. It's our fastest growing business. And so we are investing significantly in R&D and we saw a spike up in some projects related to R&D costs in Q2 that we don't expect to repeat in Q3. So as we move into Q3 like I said we'd expect to see it improve closer to that 34 to 36 target. And little bit incremental improvement in Q4 and then by Q1 we should be back in that target range.
Okay, great. That's all I have. Thank you.
Thank you. We now open -- take a question from Sidney Ho of Deutsche Bank. Please go ahead.
Thanks for taking my questions and congratulate on good result in a very busy quarter in the first half on the M&A front. The first question I have is on the AMH side, in Q2 it was up 5% quarter-over-quarter. That's a little better than I expected. What is driving that upside and was CapEx slowing down quite a bit in three reason -- third quarter. I understand your definition of CapEx may be different than the industry standard, but how should we think about that with the growth in AMH in the third quarter or the second half knowing that the first half was really strong?
Yes. So Sidney, so yes indeed, this 2018 is proving to be another really, really strong year for AMH. We are seeing a lot of action around the new fabs that are being built in many parts of the world. Lots of opportunities for our group platform that really has become the industry standard for all of the advanced fabs and that's really what is driving the performance year-to-date.
This is as we have said many times. This is a business that is tied to the industry CapEx. So we would expect that business to come down a little bit in the back end of the year as a result of and expected contraction in the industry CapEx on a sequential basis. But we expect overall this division to have a record year -- this year. And again very, very pleased with the market share gains that we've been able to generate across a number of product lines in this division.
That's great.
The other thing I'd point out there certainly is the AMH business, they are a beneficiary of -- well, PSS is part of that business as well. And so that is not a huge driver because it is relatively smaller acquisition, but it is a tailwind for their revenues on a year-over-year basis.
Got it. Great. Thanks. My follow-up question is on the OpEx side, I'm actually quite impressed that your OpEx is up only very slightly in Q3 even though with a full quarter of SPG. I think Greg you mentioned $3 million to $4 million, is it per quarter or second half of the year. Maybe to clarify that.
But is there any offset in Q3 from the organic business that drives that only margin will increase and longer term how should we think about OpEx beyond the Q3 level. Is it a better to think about it as a percentage of revenue or percentage of revenue growth?
Well, I mean our goal with regard to -- I mean we obviously want. But, first of all, I mean we're always intently focused on the G&A -- the SG&A spend and clearly growing that at a slower rate than sales and that's what we expect to get a portion of our operating leverage as we move forward. I mean as you think about the balance of the year that number that we talked about 90 to 92 in Q3. That type of number is probably a safe number for Q4 as well. But in general like I said, we over a long period of time control that SG&A pretty tightly.
As it relates to overall OpEx, I mean our goal, we clearly would like to grow R&D closer to the rate of sales. I mean we've talked about sort of an 8% to 9% target and R&D spend that we are running just under -- most recent quarter we were just under 8%.
Okay. Maybe if I can squeeze in one last question. And this is on China, I know I asked this question only two weeks ago. But given the rising global trade tensions in China is a rapidly growing geography for you. I was hoping you can give us a little more color as to how to assess the risk there, say how much revenue is coming from local Chinese manufacturers versus multinationals. How much of this is so through partnerships in China and what portion of your sales are considered leading edge versus lagging edge there?
So, Sidney I don't really have that level of detail available for this call. But what I would tell you is China overall is indeed a very important market. It represents about 12% of our revenue. This is also a region where we've seen very significant growth. We are growing at about 36% year-to-date and that's coming from a couple of very, very strong growth years in 2016 and in 2017. So we have been doing really, really well leveraging this strong level of investment certainly in new fabs and new capacity, but also this very strong fab activity. So we are again very -- the trade tensions that you're describing are an evolving matter. We're going to stay very, very close to that as of right now. We are not overly concerned. And -- but again, if we see risk to our business, we would be ready to take appropriate steps to try to isolate some of those risks.
So again not very concerned today, very pleased with the momentum that we're seeing in China and frankly the momentum that we are seeing across a number of other geographies and I think that maybe the way I would want to conclude my answer is to say that we have a really resilient business model in Entegris and I actually I'm very, very pleased with the much greater level of exposure that we've been able to gain across a number of different customer segments, but also regional markets. And I think that that's probably what makes Entegris very unique in this industry. We're not depending on any given customer. We are not depending on any given market. We're not depending on any given customer segment.
That's great. Thank you very much.
Thank you. [Operator Instructions] We now take a question from Chris Kapsch of Loop Capital Markets. Please go ahead. Mr. Kapsch, your line is open.
Yes. My question focuses around the comments on the SC, the specialty chemicals business. And I think you called out the growth there being muted a bit little at least relative expectations and sounds like that had to do with softness in foundry demand in Taiwan. But if you look at both I guess lot logic and foundry logic and foundry -- key logic and foundry customers and the ramp up in Taiwan and with Intel the 7 and 10 nanometer node specifically and given that it seems like you have a sort of disproportionate process or record wins with those key customers. Just wondering what visibility you have into those no transitions driving. Maybe a recovery in the magnitude of the growth for that segment. And what's the timing of that something you expect in the second half or is it as you referred to Bertrand more of a 2019 phenomena?
So, Chris, I mean, first say that, I'm actually very pleased with the SCM performance so far this year and if any of my previous comment suggested something different. I apologize that was certainly not intended. If you look at SCM year-to-date they've been growing at about 12.5%. And if you think about what we estimate with the stock growth to be year-to-date, it's probably in the 7% to 8% range. So significantly growing faster than the market, so very pleased with the performance.
Having said that, there is I think an upside case for SCM and that's really what I think we will be experiencing when a number of those large node transitions really materialize, which I would expect to be the case in 2019. Similarly, I think the other big driver for the SCM business will be greater levels of production at 6x and 9x vertical NAND, which I would expect to see in 2019 and 2020 and beyond. So I think the SCM performance so far is very good. And I think it will become much stronger as we see more wafers being produced at those new nodes and logic and also more complex architectures in-memory.
That's helpful. I appreciate it. And just one follow-up to that in terms of the transition to the vertical NAND architectures with greater number of layers 6x, 9x you referred to. Do you have per capita, do you have greater content as those stacks get deeper, I mean, I know that just by nature of their more processing steps all consumable players will benefit. But there's something also about that architecture that you'll get sort of an outsized benefit in terms of demand and process of record for those more complex architectures? Thanks.
So you're correct in the way you're framing your question Chris. There will be two benefits and we refer to that as the material intensity. The first comes from just a mere addition of more process steps and more layers, but more importantly for us the opportunity is really around the introduction of a number of new materials because those very high [indiscernible] structures are calling for different fencing materials, different ways to edge those very deep and narrow structures.
And that as I said is a very fertile ground for Entegris and we are very well positioned on the technology roadmap of all of the NAND players in the world and those opportunities will materialize in 2019 and beyond. So again, memory is a very important segment for us today and I would expect that to continue to grow in importance tomorrow.
I limited my comments to the impact to SCM because that was the question I know that I don't need to go in a long narrative around similar types of opportunities that it relates to our micro contamination control product lines in advanced memory fabs. I think you understand that opportunity as well. So again memory across the board and across divisions will be a very important segment for us going forward.
Thanks for the additional color.
Thank you. We now move to Amanda Scarnati of Citi. Please go ahead.
Hi. Thanks for taking the question. Just jumping over to the logic side on the 7 nanometer node transition, can you just talk about the impact to Entegris with the addition of the UV and the addition of new materials like cobalt? How that would impact your growth potential? And then, on the other side if that how -- if 7 nanometer ends up being a more on compassing node than 10 nanometer? What's the potential there is as well?
Yes. I'm going to thank you for asking. We are very well positioned on all of those event nodes. It's actually more a question of when they will reach very high volumes. As it relates to EUV specifically, I would just say we are ready. And not only are we ready, but we are really looking forward to supporting the EUV insertions. We have developed a number of new solutions to that end. I think that over the years we've described a few of them, but if I was to name only but a few I would say that we have been continuously improving our bulk and point of use filtration solutions for EUV resist. We have also developed a vertical path that hopefully will become the industry standard.
I would also say that the timing of the acquisition of SAES is perfect because there would be a lot of very large quantities of gases used around the scanner. So in other words all of those applications will create many opportunities for Entegris to increase our stand and increase our shares.
Can you just remind us, I know you touched on this a little bit earlier, but the JVs that you have in China, can you just remind us how they're tracking toward your expectations. And then, if there's any surprises that you've seen with the JVs?
So Amanda we actually -- they're really not JVs, they are more sort of contract manufacturing arrangements. But we have one with regard to specialty gas. So we've got a partner there who is helping us with refilling cylinders and distributing those in China. And then, we've got a partner that is manufacturing kiosk for us. So those are both part of the SCM business. They are supply chain plays and they are both tracking sort of in line with our expectations.
And then, no surprises there with IP concerns or any of the trade war concerns as well?
No, no. And in both cases, I mean we're not transferring any meaningful IP into China.
That's all I had. Thank you.
Thank you. We now go to Toshiya Hari of Goldman Sachs for a follow-up question.
Yes. Thanks. Thanks so much for taking the follow-up. Bertrand, if I take the midpoint of your full year revenue guidance, I think the implied second half revenue was up 8% to 9%, when you exclude the acquisition of SPG. When you think about your CapEx driven business and your wafer start driven business, is it fair to say that you embed the CapEx side down year-over-year in the second half and the wafer start driven businesses up kind of in the 10% range. Is that sort of a fair description of what you're embedding in your second half numbers?
Yes. That's exactly the way to think about it Toshiya. When you think about the second half versus the first half, we expect CapEx to contract in a mid to high single digit range and we expect wafer starts to be flat to up modestly. And as you said, if you look at Q3 specifically we expect them assigned CapEx to be in the 7% to 8% range up versus last year. And our pro forma business is expected to grow at 8% to 9%. So again, very much in line with that 1 to 200 basis point performance in excess of the industry.
Okay. Great. And this one, this is for Greg. Your tax rates been coming in below your guidance, yet you're still kind of sticking to your 20% near term and long term tax rate guide. Is that still the right place to be or did you think the tax rate could be coming in lower going forward. Thank you.
Yes. So, I mean except the full year rate from '20 to '19, but much of that benefit was discrete items in Q2. I mean if we talked about -- as we came out of Q1, we talked about a full year of '20 and we are not talking about a full year of '19. I'll be candid with the change in the tax law and some of the variation around -- we have to revalue some of the assets and liabilities every quarter based on currency. It's becoming more and more difficult to predict the tax rate. But I would say in general, we should think about the core rate in that 19% to 20% range.
Got it. Thank you.
Thank you. We'd now like to turn the call back over to Mr. Steve Cantor for any additional or closing remarks.
Before concluding I do want to note that in August management will be presenting at the Needham Industrial Conference, the KeyBanc Growth Conference and the Jefferies Semi Conferences. So if you'd like more information on those, you can email me. With that I'd like to thank you again for joining the call and have a great day.
Thank you. Ladies and gentlemen that will conclude today's conference call. Thank you for your participation. You may now disconnect.