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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, everyone, and welcome to the Entegris Fourth Quarter 2017 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 Steve Cantor, Vice President of Corporate Relations. Please go ahead, sir.
Thank you. Good morning, everyone, and thanks for joining our call. Earlier today, we announced the financial results for our fourth quarter and fiscal year ended December 31. You can access a copy of our press release on our website at www.www.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 our 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. You can find a reconciliation table in today’s press release and on our website.
Please note that, we will be holding an Analyst meeting on March 20 at our headquarters facility in Massachusetts, and you can contact me for more information and to register.
And with that, 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 will make some comments on our 2017 performance and provide an outlook for 2018. Greg will follow with more details on our financial results and provide guidance for the first quarter. We will then open the line for questions.
Our record fourth quarter capped the most successful year in Entegris’ 51-year history. We grew fiscal 2017 sales 14% to $1.3 billion, achieving growth across all three divisions. We expanded our served markets with new value-added solutions and new customer engagements.
We exceeded our financial commitment for 2017 to grow our bottom line at twice the rate of our top line. Indeed, our adjusted EBITDA and non-GAAP EPS grew by 35% and 53%, respectively. We refinanced our senior notes at a favorable rate as part of our value-creating capital allocation framework that balances internal investments, acquisitions, debt repayment and returning cash to shareholders.
The strong market growth in 2017 confirmed our conviction that the semiconductor industry is in the midst of a multi-year growth cycle. When I expressed this you publicly three years ago, I recall that my optimism was met by some with a degree of skepticism.
As we enter 2018, there is compelling evidence that chip demand is accelerating and more exciting times lie ahead. Supported by the stable growing global economy, we are now seeing new applications for semiconductors that expand well beyond PCs, smartphones and mobile computing. Demand for higher-performing logic devices and high-end graphics chips is being driven by artificial intelligence, cloud computing and many new emerging applications.
3D NAND technology is transforming data centers, as well as enabling new edge computing devices in a growing number of applications in automotive, IoT, industrial and robotics. While we certainly benefited from the tailwind of robust semiconductor production in 2017, it is Entegris’ portfolio of value materials-related solutions, that is driving our market expansion and our market outperformance. Entegris’ value proposition is to enable the integration of new materials at the required levels of purity in our customers processes.
One of our key strengths is the breadth of our technology portfolio and the diversity of our customer set, which allows us to participate in a multitude of technology and market inflections across the industry. Our ability to grow 14% and outperform our markets in 2017 was due in part to two to three of these inflections: the emergence of 3D NAND, continued node shrink and growth of the Chinese semiconductor market. I will talk briefly about each of these.
Up until recently, advanced foundry and logic have been the primary drivers for Entegris’ solutions, but this has changed. With the emergence of 3D NAND, memory-related solutions accounted for approximately 35% of our sales to fab customers in 2017, compared to 27% last year.
The growing complexity of 3D NAND structures and related process challenges have opened up new opportunities for solutions across our portfolio and across all three divisions. Our fluid handling solutions and advanced FOUPs benefited from the significant investment in new advanced memory fabs. As these new fabs ramped up production, we started to enjoy additional revenue opportunities for our deposition materials, formulated cleans and filtration solutions, which are used in their daily production cycles.
In particular, our new advanced deposition materials, which offer better electrical and structural properties continue to be embraced by our memory customers, as they integrate new process innovations to increase the number of layers from 32 to 64 and beyond.
Second, the purity requirements at the advanced nodes continue to increase. Advanced logic and advanced memory feature very complex structures with ever smaller geometries and high expect ratios, which are highly susceptible to contaminants. Our filtration and purification solutions are becoming increasingly critical for the most advanced fabs if they want to achieve optimal yields.
More and more, these requirements are being pushed up into the supply chain as bulk chemical manufacturers are expected to increase purity levels in their own manufacturing processes. These combined trends drove our filtration sales up 20% in 2017, as we introduced a number of new products, including new purification solutions and advanced filters that offer greater selectivity and retention.
Third, we grew our sales in China by 26%, as we continue to benefit from the construction and ramp of a number of new fabs for both leading-edge and mainstream applications. To support our China’s strategy and drive future growth, we entered into two relationships with local partners, Spectrum and Jingxing, to increase our capacity and reduce lead times for certain specialty gases and deposition materials. Chinese customer qualifications for these products are underway, and we expect these partnerships to contribute to our growth in 2018.
Beyond China, we grew our revenue in Korea 49% in 2017, reflecting strong investments, increased fab activity in both logic and memory and broader acceptance of our solutions across the Peninsula. In Europe, we grew 14%, driven by strong production of IoT and automotive devices, and we were also pleased with our growth in Japan and in the U.S., which grew 9% and 13%, respectively, as the result of high levels of OEM activity and increased demand from biochemical customers.
We achieved another year of strong operating performance and cash flow. We generated record level EBITDA of $357 million, or nearly 27% of sales, compared to 22% in 2016. We increased our free cash flow from 40%, sorry, we increased our free cash flow 40% from last year to $200 million, or 15% of sales, compared to 12% in 2016. This cash flow is enabling us to continue to deliver on our capital allocation strategy, balancing internal investments, acquisitions, debt repayment and returning cash to shareholders. I’ll touch on each of these elements briefly.
In 2017, our internal investments included $107 million in R&D and $94 million in CapEx. Our CapEx investments added manufacturing capacity and capabilities in support of a number of new growth initiatives in advanced deposition, specialty graphite, coatings and filtration.
We also upgraded our technical centers in Taiwan and the U.S., adding scientific talent and advanced metrology capabilities. We believe these investments will allow us to respond faster to our customers and further differentiate us from our competitors.
In terms of acquisitions, we completed two small transactions in the past 12 months. The first in April 2017 was the acquisition of a filtration product line, we now call, Trinzik. And recently, we announced the purchase of Particle Sizing Systems, or PSS, for $37 million in cash. PSS technology enables customers to prevent costly yield excursions by automating real-time analysis of particle sizes in critical fluid processes.
PSS in line monitoring solutions expand our value proposition in CMP. Both Trinzik and PSS exemplify what you can expect from Entegris in terms of acquisitions. These are two established, successful, growing and profitable businesses that will benefit from gaining access to our quality systems, supply chain teams and our global Entegris distribution channels.
During the year, we also repaid $100 million of our term loan, continuing our cadence of repaying $25 million per quarter. Finally, we returned $38 million to shareholders, $28 million through an ongoing quarterly share repurchase program and $10 million through the initiation of a quarterly dividend of $0.07 per share.
As I look ahead, we with both technology transitions and demand trends accelerating, we expect to continue to outperform our markets in 2018. As a result, our goal for the year is to grow our top line between 8% and 10% ahead of our objective of 5% to 8% compounded growth over the next five years.
Before turning the call to Greg, I want to express my pride and gratitude to the Entegris teams around the world for their dedication and the quality of their work. Entegris’ success is the direct result of their collective efforts, as they go the extra mile every day to support our customers and as we continue to strive to reach new levels of excellence.
I will now turn the call to Greg for the financial detail.
Thank you, Bertrand. We had many reasons to be pleased with our fourth quarter and full-year performance, which reflected record levels of sales, earnings and cash flow.
Q4 sales of $351 million grew 14% from a year ago and 1% from Q3. Our Q4 GAAP loss per share of $0.20 reflected the $70 million-plus impact of tax reform and $20 million of costs related to the refinancing of our senior notes.
On a non-GAAP basis, we achieved earnings per share of $0.42, which was above the high-end of our guidance and up 75% from Q4 last year. Our Q4 operating performance reflected gross margins of 46.7%, which improved from an adjusted gross margin of 46.2% in the third quarter, as our manufacturing teams again executed very well and we continued to benefit from higher volumes. We expect our gross margin in Q1 to be approximately 46% to 47%.
Non-GAAP operating expenses in Q4 were $82 million, in line with our expectations and up slightly from Q3. We expect non-GAAP operating expenses to be $83 million to $85 million in the first quarter. Non-GAAP operating margin was 23.4%, roughly in line with Q3.
Our GAAP tax rate was 54% for the full-year 2017, reflecting a one-time charge of $67 million, comprised of $73 million charge related to the tax on accumulated foreign profits and $4 million for potential future withholding taxes, offset in part by a $10 million benefit related to the revaluation of our net deferred U.S. tax liabilities. Excluding these impacts, our non-GAAP tax rate was 22%.
For 2018, we are expecting our non-GAAP rate to be reduced to approximately 21%, reflecting the favorable impact of tax reform and the anticipated geographic distribution of income, the majority of which is derived from outside the U.S. While the new tax law did not significantly lower our global tax rate, it does give us the ability to repatriate a significant amount of cash in 2018.
Adjusted EBITDA for the quarter was a record $97 million, or 28% of revenue. For 2017, we have generated $357 million in adjusted EBITDA, which is nearly 27% of revenue and represents a 35% increase over the prior year. The full-year growth in EBITDA relative to revenue demonstrates the operating leverage in our model and is consistent with our 2017 objective of growing EBITDA at more than twice the rate of sales.
Turning to our performance by division. Fiscal 2017 sales for Specialty Chemicals and Engineered Materials, or SCEM, grew 13% from a year ago. SCEM segment non-GAAP adjusted operating margin was 27.4%, up from 22.6% in Q4, up from 26. – 22.6% in Q3. In Q4, SCEM sales of $125 million grew 13% from Q4 of last year and were up slightly from Q3. The quarterly growth was driven by continued strong demand for advanced deposition materials for 3D NAND and advanced node applications.
Fiscal 2017 sales for Microcontamination Control, or MC, grew 20%. MC achieved an adjusted operating margin of 37.2%, up from 30.5% in 2016. In Q4, MC sales of $116 million were up 17% from Q4 of last year and were essentially even with Q3. The strong sales reflected strength in liquid filters and new purifier solutions for wet etch and clean and bulk photo applications, as well as strength in gas filter products driven by strong industry tool shipments.
The performance of the Trinzik product line we acquired from Gore in April is ahead of plan, and we are finalizing the qualification of the manufacturing equipment that has been moved into our Billerica facility.
Fiscal 2017 sales for Advanced Materials Handling, or AMH, of $421 million grew 10% from a year ago. AMH’s non-GAAP adjusted operating margin of 20.3% was down from 20.9%, primarily as a result of less favorable mix.
During the year, we implemented a number of steps to align this business to achieve its long-term profitability targets. In Q4, AMH sales of $110 million were up a 11% from Q4 of last year and grew 4% from Q3. The strong year-over-year sales reflected strength in the wafer handling products, as well as our fluid handling components for new fab infrastructure product – projects, as well as OEM shipments of new wet etch and clean and CMP tools.
Cash flow from operations for the quarter was $86 million and free cash flow was $60 million, or 17% of revenue. DSO were 48 days, a modest improvement from the third quarter and inventory turns of 3.8 declined from 3.9 in Q3.
Turning to the balance sheet. During the quarter, we took advantage of the favorable debt market to complete a successful $550 million notes offering to refinance $360 million of existing notes. The offering not only lowered our interest rate from 6% to 4.625, but allowed us to raise $170 million of incremental capital on favorable terms to use for potential accretive acquisitions. In addition, the new debt has an investment grade style covenant package that significantly increases our financial flexibility.
During the quarter, we reduced our term loan by an additional $25 million. At year-end, total long-term debt was $674 million and our net leverage was 0.1 times. Uses of cash during the quarter included CapEx of $27 million consistent with our expectations. For the full-year, we invested $94 million in CapEx.
We expect to spend approximately $100 million to $110 million in 2018 related to ongoing investments to support our new product introductions and growth in advanced deposition, filtration, specialty materials and specialty gas solutions. As of December 31, our cash balance was $625 million, of which approximately $270 million was in the U.S. As mentioned earlier, we are reviewing our options to repatriate a meaningful amount of cash in 2018.
Turning to our outlook for Q1, we expect sales to range from $355 million to $365 million. At these revenue levels, we expect non-GAAP EPS to be $0.39 to $0.44 per share. At our upcoming Analyst Meeting in March, we intend to provide more color on our growth plan and to reflect – and to refresh our target operating model.
In summary, we are pleased with our operating and financial performance, and specifically, the earnings flow-through we are achieving relative to our top line growth. Our business continues to generate significant cash flow and the portion available to deploy pursuant to our capital allocation strategy will increase with the new tax law.
Finally, with positive industry momentum and a product portfolio that is leveraged to key industry trends since – such as 3D NAND and the Internet of Things, we are excited about our prospects for 2018.
Operator, we’ll now take questions.
Thank you, sir. [Operator Instructions] We’ll go first to Toshiya Hari with Goldman Sachs.
Great. Thanks very much for taking the question and congrats on the strong results. Bertrand, I was hoping you could provide a little bit more color on your Q1 guide and some of the comments you made on 2018 as a whole. I guess, what are your expectations for the individual segments from a revenue growth perspective, both for Q1 and 2018? And if you can touch on any contribution from PSS, that would be great?
Thank you, Toshi. Just – so you probably have three questions. Let me start with the Q1 guidance, then I will expand a little bit on some of the assumptions behind the full-year 2018 guidance and then I’ll take your final questions about PSS. So around the Q1 guidance, we expect to encounter fairly mixed industry environment. But overall, we expect our business to continue to perform better than the industry and better than normal seasonal trend.
So if I want to give a little bit more color to that, I would say that, we expect steady levels of activity in 3D NAND and the – in the older logic fabs. And that most likely will be offset by sequentially lower utilization in advanced logic, and we expect similar type of lower utilization levels at a number of our foundry customers as well. So the net effect of that will be most likely in MSI modesty down sequentially in Q1.
On the CapEx front, we expect the industry to be relatively strong in the first-half of the year. And in Q1, specifically, we would expect CapEx to be up 5% to 10% sequentially, roughly. So at the midpoint, our guidance represents about a 3% sequential increase versus Q4, which is essentially up 200 basis points over the industry, so very consistent with our long-term growth. So that’s for Q1.
So your next question was around the full-year 2018 guidance. And in 2018, again, we continue to be very optimistic. We expect 2018 to be another very good year for the industry and a great year for Entegris. Three quarter of our revenues, as you know, is driven by the level of activity in the fabs, and we expect MSI to grow at about 6% in 2018. And again, like in 2017, we expect DRAM, 3D NAND and IoT to drive IT demand in 2018.
If you look at the underlying trends for industry CapEx, we would expect the industry CapEx for the full-year to grow at about 6% roughly. And – but we expect most of that positive impact to impact the first-half of the year. So in other words, mostly front-end loaded for our business, at least.
So if you blend all of that what we are proposing as a guidance for 2018 is essentially outperforming the industry by about 200 to 300 basis points. And that’s really going to come from continuing to capitalize on the new product momentum that number of new products that we launched in 2017 and also we expect to fully leverage the new capacity that we invested in during 2017. So that’s my commentary around 2018.
And yes, you’re right, we – one of the big news obviously over the last few weeks is the acquisition of PSS. We are very proud of being able to add that technology to our portfolio, I think this is a very unique technology that provides more accurate measurement in terms of size and concentration levels of particles in process fluids. One of the major applications that we’re most excited about is really the ability to identify agglomeration of slurries that could compromise yields in the CMP process.
And I think it’s – we’re very excited in the technology itself. I think, it’s a very exciting technology in its own right. But we’re of course, are very encouraged by the potential pull-through opportunity for our filtration product. So overall, great technology, a business that we expect to grow very nicely in 2018 and that we expect to be accretive in 2018 as well.
Great. Bertrand, could you perhaps quantify the impact from PSS?
The revenue for PSS on a full-year basis is about – between $10 million to $15 million.
Okay. Great, thank you so much. And then as a follow-up for Greg, on the gross margin front, obviously, you guys continue to do very well here delivering upside in Q4 and guiding well into Q1. I guess, longer-term on a two to three-year basis, what is the potential upside from a gross margin standpoint? And if you can give us an update on some of the restructuring initiatives in AMH and how big the contribution there was for Q4 and perhaps Q1, that would be great? Thanks so much.
Yes. So with regard to gross margin, we guided to 46% to 47%. We were at 46.7% in the quarter. I would say – I said the quarter was really impacted by strong performance on the manufacturing side higher volumes. Mix was actually slightly negative. So even at 46.7%, I mean, our mix was not quite as good as in Q3.
As we move out – if you think two or three years down the road, I’m not going to stretch it too far, but I would think we could get into that 48% range. I just have always said I don’t see this as a business, where we’re going to get up into the 50% range. I just don’t think the customers can let us go there. And that was sort of the first part of your question. Second part of your question, could you repeat that, Toshiya?
AMH and…
Oh, AMH, yes. So in the current quarter, the impact was really – we made headcount reduction, so we saw the benefit of that. Much – the other areas where we’re going to benefit in AMH is, we’re exiting a facility, which doesn’t happen until the end of the second quarter, so we didn’t see the benefit of that. And we’re also execute – exiting a smaller business that we’re in the process of, I would just say, exiting that business, and that probably doesn’t happen until the end of Q2 either.
Okay, very clear. Thank you so much.
So I would say between now and Q3, we’re not going to see much incremental impact from the restructuring in that business by that time. But as we get out of the facility at the end of Q2 and get out of that, the smaller business we’re exiting, that happens in mid-year of Q3, you’ll see better results.
Got it. Thank you.
We’ll take our next question from Patrick Ho with Stifel Nicolaus.
Thank you very much and congrats on the nice quarter and the year. Bertrand, maybe first a little bit more color on the emerging opportunity in Chinese. You saw really strong growth in 2017, and it sounds like you’re expecting that growth to continue. Can you give a little bit of color in terms of where you’re seeing the most activity? You mentioned a little bit leading-edge, as well as mainstream, is there one of those two segments that seem higher growth at least in the near-term?
Hi, Patrick. So there are really three big drivers for the – beyond the directed year that we saw in China. So the first two are the ones that you mentioned. So activity in advanced fabs, primary advanced memory fabs and then strong levels of activity in some of the, what I would say, mainstream logic fabs.
But the third one, which was probably the biggest driver for our business in 2017 was all of the opportunities that we uncovered around the new fabs that were built in China. That was true in 2017, that was also true obviously in 2016 as well, and we expect that trend to continue into 2018.
So again, China is a very important region for us. We’ve made some very significant investments. We talked about the two partnerships that we entered into – in 2017. We are in the process of completing a number of customer qualifications. I would expect most of those qualifications to be completed in the course of early Q1 – late Q1, early Q2, And that would open up a lot of new capacity in China, that would also allow us to shorten our lead times. And all of that will put us in a great position to continue to grow in China.
So again, great – a great performance in China, where we grew 26% in 2017. We’ve been growing in China at about 17% for the last four years and we continue to have high-growth expectations in 2018.
Great. That’s helpful. And maybe as my follow-up question for Greg in terms of the OpEx management, which actually has been really good, given how strong your revenues have ramped over the past year. Can you give us a little bit of color of some of the levers that you’re, I guess, managing at this point, particularly as revenues continue to ramp, do you need investments in some of these regions like China? How do you manage and drive some of the operating margin targets that you’re now starting to hit?
Yes. So I’ll take that really in two pieces. On the SG&A side, I mean, it’s just – it’s a laser focus. I’m trying to become more efficient consistently in areas like finance, IT, HR, but the – legal, the primary, what I’ll call, kind of corporate functions. I mean, if you were to look at our SG&A year-over-year, it would have – if you stripped out the increases related to higher variable compensation, I mean, we would have been pretty, pretty nearly flat on the SG&A side.
On the ER&D side and from a dollar perspective, we were essentially flat year-over-year. I would say, we probably would have liked to spend a little bit more on ER&D. In other words, we would like to hire some technical people a little bit faster. But I mean, there it’s a matter of the dollar amount we’re spending today yields pretty good in part, because we’re just getting better and better at how we invest our ER&D dollars and the choices we make around ER&D investments.
Great. Thank you very much.
Our next question comes from Edwin Mok with Needham and Company.
Great. Thanks for taking my question. So I guess, I have a follow-up question with Patrick’s question on the cost side. You guys talk about AMH, obviously, making progress and sounds like by 3Q we start to see some of the benefits. Is any other steps that you guys are planning for, any kind of cost improvement across the model, across the different businesses?
At this point, we don’t have any thing specific in that regard, Edwin. I mean, we’re constantly, like I said, watching costs. We use zero-based budgeting in lot of our analysis around sort of what are we spending in different functional areas. So to me, it’s just a consistent discipline, but we don’t have a specific initiative like AMH, where we realigned that business a couple of quarters ago.
So I would only add to that. I mean, indeed, this is just part of being in this industry, right? We need to obviously be very focused on providing unique technology to our customers at an affordable cost. So constantly looking for ways to optimize our cost structure in our manufacturing sites, but also getting to add leverage of our SG&A line is something that is part of our culture.
So we were very pleased in that context to meet and exceed our objective in 2017 of growing our bottom line at twice the rate of the top line growth. And if you look at 2018, we would expect to be again in a position to grow our bottom line faster than the top line growth, it’s not going to be the same relation as what we generated in 2017, but again, I would expect to generate some really exciting flow through in 2018.
Okay, that’s helpful. On the SCEM business, I think, I’ll try and talk about some of the new product that you had ramping. Is that what like quantifies that mostly success into this 3D NAND that you highlight, or is it coming from kind of different areas, you could give some color in terms of some or examples of new product that are successful in some these end market, would be helpful?
So, Edwin – so you’re right, a lot of outperformance in 2017 was really driven by the success of number of new products, that will be again the case in 2018. So there are two big trends that we benefited in 2017 and that we expect to continue to benefit in 2018. The first one is, as you mentioned, related to 3D NAND and that’s really the material intensity that we’ve been describing multiple times.
And as you know, in advanced memory fabs, new materials with better electrical properties will be critical for those customers to increase their big density. So we have invested a lot in R&D and we have established a very exciting pipeline of opportunities with new capacitors, new metals, interlayer dielectric, gate dielectric. So a number of new products that we’ve launched to the market last year and we will continue to launch in 2018. But that’s one of the two trends.
The other trend that we’ve commented about is the need for greater purity in process chemistries. And this trend, as you remember, really started in advanced logic fabs probably about 10 years ago. These requirements have since been adopted by all of the advanced memory makers. And currently in both memory and logic, those semiconductor manufacturers are pushing the requirement for greater purity up their supply chains and they are demanding greater cleanliness from their biochemical suppliers.
So that’s the trend that we are leaving right now. And I would actually speculate that we will see the emergence of a similar trend in the trailing edge fabs. And the reason for that is that a lot of their products are being used in emerging automotive and industrial applications, where reliance will be very, very important.
So I would expect that contamination control solutions will be used not only to optimize years, but increasingly to improve the long-term reliability of the chips. And we are starting to see a number of those customers and again, here I’m talking about legacy fabs, that are becoming more concerned about the latent reliability defects in their products. So that could actually be a very exciting breakthrough for our filtration and contamination control solutions at large.
Great. That’s really a good color. Thank you. Last question I have just on the Korea facility in terms of adding capacity in Korea facility, right? Where you stand on that right now? Is that largely completed or should we expect some more?
Well, I think, that your question really relates to a statement that we made about a couple of years ago when we were describing the Korea facility as being significantly underutilized. And back then two years ago, it’s true that the facility was probably only utilized up to 10% to 20%.
We are in the process of transferring a lot of manufacturing activity or a lot of the new deposition materials, a lot of the new coating solutions will be made in Jangan in Korea. One element of the AMH restructuring plan is also consisting of in-sourcing some manufacturing that we used to outsource actually in Korea. So that’s going to also contribute to filling up this facility.
So today, I would probably estimate that we are running at about 60% capacity, and here I’m really talking about floor capacity utilization. So again, you can look at that as an area of opportunity as we continue to fill up the sites that that could actually be again having some benefits to our overall gross margin down the road.
Great. That’s the other one, I’m asking on. Thank you.
We’ll go next to Sidney Ho with Deutsche Bank.
Thanks for taking my questions. If you look back a year ago when the consensus was expecting you to grow 5% to 6% in 2017, what are the two to three factors that drove the upside? And to get to your forecast of 8% to 10% growth in 2018, which of these factors do you expect to repeat this year, and what are some of the new drivers?
So, Sidney, if you look back at the year in 2017, we started the year with some more modest projections in terms of wafer starts and in terms of industry CapEx. And that’s really the primary driver for the big difference between what we originally guided to and what we ended up delivering for the year.
I mean, throughout the year in 2017, our new products performed really well. So that was really not a surprise, but industry was really the one part of, I mean, that drove the outperformance in 2017.
So when I think about 2018, I would say that, we are pretty bullish on memory, and we expect vertical NAND be density to increase at between 40% to 50%. And we know that this will have a positive impact on our business with significant opportunities around deposition materials, but also emerging opportunities with our FOUP platform and contamination control solutions.
I’m very bullish on IoT trends as well and that will benefit all three divisions of Entegris. And we’re very excited about the news from some of our customers talking about adding capacity to their existing 300 millimeter fabs around the 45-nanometer node. And in some cases, we are hearing, talk about potentially upgrading older fabs to tighten nodes, and that would also benefit our business.
Now I’m more cautiously optimistic on CapEx, and we have some degree of visibility for the next couple of quarters. But I wouldn’t say that, we have a lot of visibility beyond that. And I’m also cautiously optimistic on advanced logic and foundry. So that’s really the way I would characterize the guidance that we provided for 2018. Now we are obviously constantly gathering new information and updating our forecast and we will continue to share with you our evolving views around the industry and how it will impact Entegris as we report our future earnings.
Okay, thanks.
But for now, I would say that, 8% to 10% is a good – it’s a good place to start the year.
That’s helpful. Just a follow-up on that. You have a pretty sizable business that is not tied to leading-edge process node. Can you remind us how big that business is? And what kind of growth rate do you expect that business to grow this year? Any color would be helpful?
Yes, we don’t really disclose these numbers, so won’t be able to do that very precisely today. But I would say that, about 20% to 30% of our fab business is trailing-edge, and I would expect that business to actually grow at a faster pace than the industry MSI.
And the other thing I would say, Sydney, and that’s part of you said, what – when you think about what drove the growth last year, it’s really what’s helped a lot a sort of, I’ll call it, legacy – some of the legacy products, I mean, and the growth rates that we’ve seen in them. I mean, if you think about 200 millimeter and below wafer shippers, I mean, those had double-digit growth last year, which you would have not.
I mean, if you would have asked me three years ago, do you think that business is ever going to grow? I would have said, no. But with everything going on in a legacy nodes, it happened and that provides a lot of stability for the base.
Got it. That’s great. Maybe one last question for me, it looks like on the M&A side, it looks like you continue to look for smaller tuck-in acquisitions based on – just based on last two transactions. What is your appetite for larger deals like the ones you did with a few years ago? Maybe you can walk us through your M&A, how you think about M&A strategy?
So, Sydney, as I indicated in my prepared comments, the two transactions that we announced over the last 12 months are kind of indicative of the type of transactions you should expect us to do going forward, at least, for the near-term. Remember that what we’re trying to do is to find high-quality businesses at an affordable prices. And I would say that, we are more likely to find this type of a combination in pursuing small to mid-size transactions.
Okay. Thank you very much.
We’ll go next to Weston Twigg with KeyBanc.
Hi, thanks for taking my question. Actually, I have a few, if you don’t mind. The first one was just related to the growth rate in Korea was 49% in 2017, seems like a huge number much faster growth in, say, wafer output and likely faster than CapEx. So just wanted to comment on what was the main driver? Was it share gains or something else and does that continue again in 2018?
So, yes, we grew 49% in Korea that was one of the highlights of the year. As you recall, we made a number of very significant investments in Korea. We talked about Jangan and the local manufacturing capability that we have there, but we also expanded our technical center in Korea. And these investments were actually very timely and it paid off.
As I mentioned, a lot of our advanced memory customers have been in a process of evaluating new deposition materials. They’re also realizing that they need more advanced contamination control solutions. So again, the timing of those investments were perfect. There were a great playgrounds for us to collaborate with our Korean customers. And as a result, we have uncovered many, many opportunities across our portfolio.
So the examples of that would be advanced products, advanced fluidic solutions, both of which are really becoming the industry standards for advanced fabs. And those opportunities extended to our gas and liquid filtration and deposition material. So that’s the recipe for the success in 2017. And to your question, yes, we expect the same factors and same drivers to have a favorable impact in 2018 as well.
Okay, that’s a helpful color. A couple of other questions. One, just on the EPS guidance versus revenue, you got an EPS kind of flattish on higher revenue. Just wondering what – what’s changing as a mix or some other factor that would deliver that kind of guidance?
Yes, I mean, at the midpoint, it’s flat with midpoint – with Q4, and essentially midpoint of guidance $10 million higher in revenue. It’s primarily, I mean, we have a slightly higher OpEx in the quarter couple of million dollars higher was our guidance. And that reflects Q1 is typically a higher quarter in terms of compensation costs.
Okay. So that would come down – the OpEx would come down?
Yes, depending on the overall business performance, they usually have a pretty meaningful benefits here in Q1, as well as well we’ll have higher ER&D in Q1 slightly higher.
Got it. Okay. Then….
But I mean, I guided, I mean, we guided that’s how we guided the comparable gross margin slightly higher OpEx, so that’s kind of the algorithm.
Makes sense. Okay. And then just…
And the tax rate will be a little bit higher in Q1. We talked about 21% tax rate for next year. In Q4, the tax – the non-GAAP rate was 19.
Good point, okay. And then just finally, just wondering about wafer constraints, the silicon wafer production is still somewhat constrained relative to demand. There’s not a lot of new capacity coming on line and at least in early 2018. So I’m wondering if actually silicon wafer constraints would impact your ability to grow related to MSI expansion?
So based on our current estimates, we do not believe, it would be the case. And again, that’s a risk that we kind of factored into our guidance.
Okay. Very helpful. Thanks.
We’ll go next to Chris Kapsch with Loop Capital Markets.
Yes, good morning. I had a follow-up on the guidance for our first quarter and the implied above seasonal trends. I think, you said MSI for the industry expected to be down, get that. And then obviously leading, there’s a couple of bellwether logic and foundry producers that are talking about acute seasonality in the first quarter. So as you mentioned, healthy CapEx first-half of this year, obviously, that flows through the first quarter. But it sounds like, what is really implied is continued benefit from a really strong memory end market.
My question is the benefit that you’re seeing, is it skewed more towards just the transition from 2D to 3D, or are you getting sort of an amplified benefit as these folks that are – the customers that are already producing at 3D transitioned from 32 to 64 to 96, eventually 128. Are you getting an amplified benefit from material consumption that is influencing the above seasonal guide for the first quarter?
So we will benefit from both of those trends. But again, if you think about it from a product standpoint, which is really the story line behind our guidance for Q1, we expect growth to come from three major product areas. The first would be new product introductions in liquid filtration and SCEM and we talked about that at length in the past.
The other factor going into Q1 is, we – I expect to enjoy the benefits from the new capacity that we added in specialty gases and gas filters, so a lot of that new capacity came online in December. And I would expect as a result that a number of new opportunities will open up for those products in Q1.
And then lastly, I continue to expect very strong performance from our fluid handling business. I would expect those solutions to continue to equip a number of the advanced fabs. And as a matter of fact, I mean, those fluidic solutions have really become the defacto standard for the industry, as I mentioned earlier. And we continue to expect a lot of activity in terms of new fabs built in Korea and in China in particular.
Okay. Thank you for that additional color, Bertrand. And then just another question as a follow-up very interesting comments about how you see some trailing edge fabs, I don’t know if it’s 28 or maybe even older 28 nanometer nodes or older. But how they’re looking to implement increased purity requirements and filtration requirements?
My question is on that sort of forthcoming trend, if that’s an appropriate description, the – are you – is it extra filtration, or tighter contamination requirements are being adopted at the fab itself, or are those legacy fabs also now imposing those increased purity requirements on their suppliers as is the case for leading-edge fabs that that’s what I’m curious about? Thank you.
It’s a great question, Chris. At this very moment, the opportunities are relatively limited to fab-based solutions. But again, I would speculate that, we would see the emergence of similar types of expectations and requirements for the upstream into supply chain. Again, this is very – a fairly recent development in the industry, so it’s a little bit hard for us to really totally size what the impact will be. But right now it’s really mostly fab-based.
Got it. And then for those trailing edge fabs, did you – could you just clarify the focus on doing – adopting these tighter requirements. Is it more about yields, or is it – did you– as you suggest that, I think, the addressing what could be latent defects in the chips that they may produce?
So in the past, a lot of the filtration and purification solutions used in those older fabs were aimed at the yield optimization. But frankly, a lot of those fabs are already operating at fairly high yield. So their focus and where the opportunity really lies is really around not trying to remove killer defects, because again, it’s done that for the most part. But it’s really to focus on reliability defects that could create or undermine the long-term reliability of the chips.
That’s helpful. Thank you.
[Operator Instructions] We’ll go next to Mike Harrison with Seaport Global Securities.
Hi, good morning. I was wondering looking at the growth chart by region, you were asked about the Korea growth, which is very strong, but Taiwan stands out on the other end as being relatively weak. What was that decline driven by? Was it just market-driven, or are there some share losses there? And if it is share loss, is that intentional or can you maybe give us some color on that?
Yes. So 2017 was really more of a phase of, I would say, digestion in Taiwan after a record year in 2016. If you recall in 2016, we had a record sales for our FOUP products in particular. And as you know, those sales can be very lumpy and can distort trends.
So – and the other fact for you to remember is that, many of the investments made by our Taiwanese customers in 2017s were made in China. And we recorded revenues of those opportunities in China. So that’s another way to say that our performance in Taiwan in 2017 was in line with our expectation when we started the year.
All right. And just wondering if you can talk a little bit about the seasonality of the business and maybe how it’s changed over the past few years? Your guidance is suggesting about 3% sequential growth over a very strong Q4. I think, if you look at some of the customers out there, it’s a little bit more mixed with some of them may be looking for a sequential decline that would be typical of the seasonality from Q4 into Q1. So are you – are we just seeing that you guys are expecting the materials markets to grow faster than overall semiconductors, or the other – there are other share gains or other things at work there?
Yes. So the short answer is yes. We are expecting the materials business to grow faster than the underlying semiconductor growth. And as I mentioned, I think, when you characterized is indeed what we expect, we expect to see MSI to contract sequentially in Q1. But we expect again, a number of our new solutions to continue to do very well in the marketplace and that’s what will allow us do better than the seasonal trends that you’re characterizing.
All right. Then last question for me is, wondering if you can break out the growth that you’re seeing right now in your product lines that serve CapEx-driven markets versus unit-driven markets? I’m kind of just wondering what you’re seeing in terms of leading indicators that could give you additional confidence on the growth?
So again, if you call, majority of our revenue is driven by fab activity. So in other words 75% or so of our revenue would be unit-driven. Again, we expect MSI going into 2018 to grow at about 6%. And that growth will be mostly driven by strong activity in 3D NAND fabs and trailing edge logic fabs. And again, we have a number of new products that we have positioned on the 3D technology roadmap. And we believe that our consumable business will once again in 2018 perform ahead of MSI and ahead of our competitors.
On the CapEx side, I think, I mentioned that, we would expect CapEx – the industry CapEx to grow also at about 6%, driven by continued activity in new fab build up in Korea and in China, in particular. And there, as I mentioned in previous comments, I would expect to continue to see great opportunities for our fluid handling solutions and our FOUP platform, which as I mentioned, already becoming state-of-the-art solutions for the advanced memory and advanced logic fabs.
All right. Thanks very much.
We’ll take our final question from David Silver with Morningstar.
Yes. Hi, thank you. I guess, I wanted to start with a big picture question on EUV lithography. So I was listening to the quarterly conference calls for one or two equipment manufacturers, where they noted a pretty big pickup in shipments of the EUV equipment. And I’m just wondering, my recollection is that process was going to displace processes that were inherently more materials intensive. And so first off all, if I’m just wondering how quickly you expect to see this equipment put to work? And then could you comment on how you anticipate that technology transition affecting demand for your overall portfolio? Thank you.
Yes. So overall, we expect the EUV adoption to be a net positive for Entegris. So on the one hand, you’re right that we will see, as you describe, we’ll see a reduction in the rate of growth in the number of steps used to process wafer. But remember, that we expect EUV option to be limited to a fairly small number of critical layers. And as such, we believe that the growth in process steps will continue node after node, albeit at a smaller rate. So that’s on the one hand.
On the other hand, the adoption of EUV will open a number of new opportunities for Entegris. Specifically, we expect that EUV resist will require better filtration, better packaging solutions, and we also expect to develop new contamination control solutions around scanner itself and around radicals. So those are new opportunities, new applications that we do not serve today.
So, we’ve been very engaged with all of the industry participants for many years now. And I would only say that, we are very ready to support the adoption of EUV by the industry in 2018.
Great. Thank you very much for that. Could I also ask in your CapEx projection of $100 million to $110 million for 2018, could you remind me what the growth versus sustaining portions of that are? And then if you wouldn’t mind, if you could highlight the newer initiatives included in the growth portion of your 2018 CapEx? Thank you.
Sure. It’s – probably 70% to 80% of it is growth-related and that falls really into two pieces. One is a number of our chemical and gas businesses. We own the fleet of containers. In other words, we own the cylinders in our gas business. We own the containers in our deposition surface modification or our surface prep business. And so those are clearly sort of growth-related. If those businesses grow, we need more container capacity.
The other piece is growth-related to – we talk about our deposition business. We’ve got a major investment coming there in 2018. We’ve got a significant investment in our liquid filtration business in 2018. Those are a couple of our instances. But the vast majority of that CapEx is to support growth.
Okay. Would it be okay if I squeeze one more question in, or are [Multiple Speakers]
Yes. Just we’re kind of running long here, so David, just one quick one.
No problem. No, that’s fine. I’ll follow up offline. Thank you very much.
Okay, thank you.
Thank you.
This concludes our question-and-answer session. I’d like to turn the conference back to Steven Cantor for closing remarks.
All right. Thank you. Before closing today’s call, I do want to note that, we will be participating in a couple of conferences this month, the Goldman and Morgan Stanley, our Investor Conferences, and also again, to remind everyone about our Analyst Day on March 20 at our headquarters facility in Massachusetts, and you can contact me for more information and to register. Thank you, again, for joining the call, and have a great day.
Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation. You may now disconnect.