Entegris Inc (ENTG) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to Entegris' Second 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.

Okay. Thank you, Kim, and good morning, everyone. Earlier today, we announced the financial results for our second quarter ended July 1, 2017. You can access a copy of our press release and our supplemental slides on our website, 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 supplemental slides on our website.

On the call today are Bertrand Loy, President and CEO; and Greg Graves, Chief Financial Officer. Bertrand will now begin the call. Bertrand?

Thank you, Steve, and good morning, everyone. I will make some comments on our second quarter performance, Greg will follow with more details on our Q2 financial results and provide guidance for our third quarter of 2017. We will then open the lines for questions.

And I am very pleased with the quality of our execution year-to-date. During the second quarter, we continued to demonstrate the strength of our business model and its powerful earnings leverage and cash flow generation capability. Our sales grew 9% from a year ago and 4% sequentially, reflecting strong performance across all 3 divisions. We achieved quarterly GAAP EPS of $0.28 and non-GAAP EPS of $0.34. We generated record quarterly adjusted EBITDA of $88 million or 26.8% of revenue, and we continued to pay down our debt.

As I have stated before, I believe that we are at the beginning of a multiyear period of expansion for the semiconductor industry, driven by the broadening of IC drivers beyond PCs and mobile devices. Cloud computing, Big Data and artificial intelligence as well as new automotive and industrial applications are requiring more computing power, better data storage solutions and faster networks. These emerging applications are propelling new advancements in semiconductor process technology in both logic and memory. As a result, we expect these demand drivers to spur new investment in fab capacity and in turn drive greater fab activity and output across the board for years to come. With these favorable industry trends as a backdrop, we are very excited about our growth path, not only in 2017 but beyond. The breadth of our technology portfolio and the investments we have made both in R&D and in our internal manufacturing capabilities have put us in an ideal position to expand our sales markets and to grow our market share. As logic and memory industry leaders continue to migrate to more complex chip architectures, requiring higher performing and cleaner materials, we are working, collaboratively, very closely with customers spanning the entire industry ecosystem, including chemical companies, equipment makers and semiconductor manufacturers. More and more of these collaborations are centering on new comprehensive solutions that leverage our broad array of technologies, allowing us to develop new advanced materials, purify them at the required levels and provide the means to maintain the purity and stability of these chemicals and materials from the point of manufacturing all the way to the point of use.

Looking at our second quarter performance in more detail, our businesses performed well, with all of our key growth initiatives on track or ahead of plan. Geographically, we achieved strong double-digit growth in Korea and China as we leverage our customer relationships and the investments we made in local technical centers, manufacturing capabilities and new partnerships in those regions to support new 3D NAND and foundry fab projects.

Our Specialty Chemicals and Engineered Materials division grew 8% from a year ago and 11% year-to-date, reflecting strong performance across the portfolio and record quarters for our specialty gas and advanced deposition materials businesses. These are among the fastest-growing areas for Entegris, as new innovative engineered materials are now the critical enablers of performance in logic and advanced memory devices. In addition, demand for graphite material used in glass forming applications remained very strong. And we recently announced an agreement to expand our production capacity to meet the growing demand for this material.

Our Microcontamination Control division achieved its fifth consecutive quarter of record sales. So we grew sales 14% from last year and 21% year-to-date. The continuing growth of this division reflects strong fundamental demand for advanced filters used in both dry and wet processes as well as key share wins. The growth is coming from wet etch and clean and photolitho applications in the fab as well as upstream with the biochemical manufacturers. In addition, our gas filtration products reflected continued strength from OEM customers for the new etch tools.

Finally, I am pleased to report that the integration of the Gore product line we acquired in April is progressing very well. We are on track to meet or exceed our revenue and bottom line objectives for these filtration products, which will be commercialized under the name: Trinzik.

The Advanced Materials Handling division grew 4% from last year and 10% year-to-date. Overall, this business performed in line with our expectations, with higher sales of legacy wafer handling products and sustained strength in certain fluid handling components, driven by OEM demand. I'm pleased with the initial improvements in the operating performance of AMH, and we expect to see further margin expansion in the back end of the year as a result of ongoing cost savings and efficiency initiatives to improve its profitability.

One element of these efforts is the closing of the leased facility in Colorado that had been originally dedicated to 450-millimeter wafer handling solutions. We expect the closure of this Colorado site to be completed during the first quarter of 2018.

This past quarter, we also discontinued our investments in the eVOLV program. eVOLV is a process technology using organic chemistries to reclaim precious metals from discarded electronic circuit boards, which came to us as part of the ATMI acquisition. The technology was sound, but in the end, the business model was not economically viable. This decision will allow us to redeploy some of the funding to other rapidly growing areas of our portfolio.

At our analyst meeting in March, we reaffirmed our financial commitments to grow faster than our market, to increase our EBITDA margin from 22% to 25% and to be good stewards of our investors' capital. Our results, thus far this year, have put us on a solid path to deliver on all these commitments in fiscal 2017.

With the prospect for accelerated production ramps at a number of logic and advanced memory customers in the back end of the year, we expect to grow our topline in excess of 10% in 2017 and to continue to outperform our markets in 2018 and beyond.

I will now turn the call to Greg for the financial detail. Greg?

Thank you, Bertrand. Second quarter sales of $329 million grew 9% from a year ago and 4% from Q1. The strong sales were driven by strength across the business. For the first half of 2017, sales were up 13% over the prior year. Our operating performance reflected a non-GAAP gross margin of 46.3%, which improved from 44% in Q1. We expect non-GAAP gross margin to be approximately 42% to 46% in Q3 -- excuse me, 45% to 46% in Q3. Non-GAAP operating expenses in Q2 were $78 million, which was at the low end of our expectations and essentially flat with Q1. We expect non-GAAP operating expenses to be $79 million to $81 million in the third quarter. Non-GAAP operating margin was 22.4%, up from 19.5% in Q1. Net interest expense of $8.1 million in Q2 continue to decline, reflecting our debt repayments.

Our GAAP tax rate for the quarter was 22%. Our core tax rate at 26%, which excludes certain discrete items and the tax-effective non-GAAP adjustments to net income, was higher than the 22% in Q1 due to a less favorable geographic income mix. For 2017, we're expecting our core tax rate to be approximately 24%.

Our non-GAAP earnings per share was $0.34, which was above the high end of our guidance. Adjusted EBITDA for the quarter was a record $88 million or 26.8% of revenue. For the first 6 months of 2017, we have generated $164 million in adjusted EBITDA, which is 25.4% of revenue and represents a 30% increase over the prior year. The growth in EBITDA demonstrates the operating leverage in our model and is consistent with our objective of growing EBITDA at more than twice the rate of sales.

I'll summarize the results by division. In Q2, Specialty Chemicals and Engineered Materials, or SCEM, recorded sales of $121 million, which were up 8% from Q2 of last year and up 6% from Q1. SCEM's non-GAAP adjusted operating margin improved to 28.2%, up from 24.6% in Q1, due to favorable product mix and strong execution in our manufacturing facilities.

Q2 sales for Microcontamination Control, or MC, of a $104 million, grew 14% from the prior year and were up 4% from Q1. MC's non-GAAP adjusted operating margin was 36%, up 70 basis points from Q1 and it was in line with our expectations.

Second quarter sales for Advanced Materials Handling, or AMH, of $103 million grew 4% from a year ago and were flat sequentially. AMH's non-GAAP adjusted operating margin of approximately 21% continued to improve and was up from 17.8% in Q1. This improvement reflected better product mix in the early stages of our ongoing margin improvement initiatives for this division.

Our GAAP results reflected asset impairment charges and severance of $3.6 million related to the closing of an AMH facility and discontinuing the eVOLV initiative. The quarterly gross saving related to these 2 actions is approximately $1.5 million.

Cash flow from operations for the quarter was $85 million and free cash flow was $65 million. Compared to Q1, DSOs of 47 days declined from 51 days and inventory turns of 3.7 declined slightly from 3.8.

Second quarter CapEx was $20 million, consistent with our full year CapEx plans of $90 million to $100 million. We expect CapEx in the back half of the year to be higher than the first half as we invest in capabilities and capacity to support several growth initiatives.

Our cash balance is $405 million, of which $100 million was in the U.S. During the quarter, we reduced our long-term debt by an additional $25 million. Total long-term debt, including current maturities, was $536 million, and our net leverage was 0.4x. We also repurchased $4 million of stock in the quarter to offset dilution from share-based compensation. Beginning in Q3, we are increasing our repurchase program to $10 million of stock per quarter. As Bertrand said, we are continuing to execute our capital allocation strategy, which balances debt repayment, building liquidity for potential M&A and modest share repurchases to neutralize the impact of share-based compensation dilution. We are also increasing our investment to capitalize on the growth opportunities in our core business.

Turning to our outlook for Q3. We expect sales to range from $325 million to $340 million, reflecting good industry momentum and strong demand for our solutions. At these revenue levels, we expect non-GAAP EPS to be $0.30 to $0.35 per share, consistent with our annual target model. For the full year, we expect revenue to be up in excess of 10% and EPS to be consistent with our target model. In summary, we are excited about our growth opportunities and the progress of our key strategic initiatives. We are pleased with our operating and financial performance, and specifically, the earnings flow-through we are achieving relative to our revenue growth.

Finally, our outlook remains positive. We are on pace to achieve another record year in 2017 and feel very good about our prospects in 2018.

Operator, we'll now take questions.

(Operator Instructions) And we'll take our first question from Toshiya Hari with Goldman Sachs.

Bertrand, you delivered very significant upside to your guidance in Q2 in a fairly challenging environment, given your largest customer, they were down about 9% on a sequential basis. Can you talk about some of the drivers that led to the upside both from a revenue standpoint and a gross margin standpoint?

Yes, so -- well, thank you, Toshiya, for the comments. I will take the first part of the question around the revenue and I will turn to Greg to explain some of the improvements that we saw in gross margin. But overall, we were very pleased with the performance across the board. We saw continued strength in the number of new products that we introduced earlier in the year and late last year, chief among them: new filtration solutions and new advanced deposition materials. As you can see, our Microcontamination division, year-to-date, is growing at about 21% over the last year, so very strong performance, and again, pointing to the strength of the new products that we have recently introduced. But again, the strength was really broad-based. We were also very pleased to see strength in a number of very mature product lines as we continue to enjoy the strong level of activity in the legacy fabs. So again, broad-based strong performance for us in this quarter. And Greg, I will turn to you for the second part of the question. I think it was...

So on gross margin, we saw very strong margins in our SCEM business as well as an improvement in the margins in our AMH business. In both cases, they were, the margins were impacted by favorable product mix. But I would also say, in both cases, we had very strong execution at the manufacturing level and it's just -- it's the little things, it's improving our scrap performance, it's delivering on our cost-reduction initiative. So like I said, overall great performance by our supply chain team.

Okay. And then, Bertrand, you talked about your expectations for continued positive momentum into 2018. With the company of your kind of lead times, I think it's kind of rare for you to even discuss 2018 at this point. What gives you the confidence to hint that 2018 could be another strong year?

Well, if you recall, Toshiya, during our recent Analyst Day in March of this year, we stated our multiyear objective of outpacing the industry by about 100 to 200 basis points. And behind that strong conviction in our ability to do that year after year after year, it is the fact that we have a very rich pipeline of opportunities that we are starting only now to capitalize on. So we talked about some of those new products that we are starting to see contributing to the topline, deposition materials and filtration, but we have more in the hopper. Later this year, we expect to launch a new family of specialty coatings, coatings that are used to coat etch chamber components, so that's going be a big growth driver for our SCEM division in the back half of this year, and certainly, will be a big growth contribution going into next year. Likewise, we have a heightened degree of confidence in the gas forming opportunity. We announced recently that we are, in fact, increasing capacity for our graphite material to be in a position to fully leverage the ramp that we expect for this material and for that particular application. So again, I think we have a very broad pipeline of opportunity. We are serving many different segments across the industry ecosystem. And I think that well-balanced portfolio of technologies and markets is giving us the conviction that we will find growth for the years to come.

Great. And if I can squeeze in just one last one. On AMH and the profitability in this segment. Very encouraging to see you guys take proactive steps despite the improvement you've already seen so far. But post some of the initiatives that you are working on today, what do you think is kind of the steady-state EBIT margin or OP margin structure of this business relative to SCEM and MC?

So Toshiya, I can take the first cut of this and, Greg, feel free to add. But if you recall, during the Analyst Day, we established an objective and we communicated an objective to see a margin expansion for that business to the 22% to 24% range. So that's really the objective that we are after. So it's very encouraging to see the first step in the right direction in Q2. This team is very focused in identifying other opportunities to improve margins, and I would expect that performance to continue to steadily improve through the balance of this year and then going into 2018. So our objective, again, of having a steady bottom line between 22% to 24% for that division remains intact.

We'll move to our next question from Patrick Ho with Stifel.

Bertrand, first, in terms of some of these growth initiatives that are obviously paying dividends for you already, can you remind us where you're seeing, one, the opportunities that come from market expansion opportunities versus share gain? And in particular in the share gains, where do you believe you're seeing the greatest momentum on that front?

So Patrick, if you look at many of the growth opportunities that we described in the Analyst Day. They really had to do with market expansion. Think about the bulk photoresist filtration opportunity, which is really about capturing new increased [inaudible] requirements upstream in the ecosystem. And so it's really about bringing photoresist materials to higher levels of purity. So those requirements didn't exist when the industry was operating fab in the 3x or 4x processes. So those acquirements are new as the industry transitions to the 1x nodes. And I would characterize that as really as some expansion. The same would be true for the specialty coating materials and the same would be true for many of the deposition materials that we've been developing for both advanced logic and memory. Having said that, we continue to do very well in terms of market share gains. I would point to filtration, in general, we are very focused on this industry, as you know. We have increased our level of R&D. We have increased our level of investment in better, more capable manufacturing capabilities. And I'm extremely pleased with the evaluations performed by many technology leaders in the industry of our recent filtration products. I think we are in an ideal position to continue to gain share across many different types of filtration.

Finally, I would also say that we are continuing to take share on some of the high-value components that we are selling to the OEM. Our OEM business year-to-date is growing at about 40%, so well in excess of the overall WFE growth rate. So again, I think the key message for you is that we are participating in all of the major segments of this industry, and we are doing, actually, very well in all of those various segments.

Great. And maybe a question for you, Greg. In terms of the model improvements we've seen this quarter. You talked about it at your Analyst Day, some of the internal improvements you're trying to make in the AMH business segment, and we're seeing it today. Can you talk about the other 2? Whether those are just more product mix and things of that nature? Or can you also make internal improvements in the Specialty Chemicals and Engineered Materials business as well as on the Microcontamination Control front as well?

Patrick, as part of our annual plan, I mean, each of the divisions clearly, has initiative around the improvements for their gross margin, around gaining more leverage in terms of their operating expenses. I think our biggest opportunity is in AMH, and our probably the second largest opportunity is in SCEM. The MC business, I mean, at 36%, and those are pretty healthy operating margins, that doesn't mean they can't get better, but we're investing heavily in that business, both from an ER&D perspective. We're also investing in some new membrane systems, some additional capacity. So like I said, that business, I think where we are today is a pretty good number. The SCEM business, there's opportunity as we -- as some of the newer initiatives there begin to mature, we'd expect to see improved profitability on some of those product lines.

We'll take our next question from Edwin Mok with Needham & Company.

So first, I guess, you talk about this year, you had said we have growth of 10% this year. In light of your kind of strong guidance -- the strong result and guidance, maybe a better way to ask that is, that kind of implies to some seasonality in the fourth quarter, it being a seasonal decline in the fourth quarter, do you think that is still what you've got baking into that? Or we're going to be better than seasonal, given the strength of your business?

Edwin, I mean, as of right now, this is indeed how we're thinking about the balance of the year. So we think about wafer start and CapEx being essentially flat and stable at the levels that we saw coming out of Q2, with maybe a little bit of a downside whereas going into Q3, especially around CapEx. We, obviously, would have a little bit more visibility as we progress through the year and we'll provide more clarity as we release our Q3 earnings and guide for Q4. But overall, again, it's -- our expectations for the year is for wafer starts to grow at about 8% to 9% and for CapEx to grow at about 9% to 10% again for full year '17. And then, in that context, I would expect our topline to grow in excess of 10%.

Okay. We-- one question I have is, we always get this question from investors, how much exposure you guys have for pure foundry, logic, DRAM and then specifically for 3D NAND, because we've seen pretty big ramp up in capacity there, and therefore, many investors thinks the amount of demand for consumables, right? Such as the stuff you provide, right, it's going to come pretty aggressively as we go forward. Is there a way you can kind of talk about how much exposure you have for 3D NAND? And maybe give some examples on where you guys are gaining share or gaining footprint in 3D NAND supply chain?

So we've been, again, trying really hard to gain a better grasp at our exposure to those various different types of processes. A good approximation is to say that we continue to have most exposure to logic and foundry and that represents about 50% of our revenue. And the exposure to NAND is about 20% roughly, but that part of our portfolio is actually growing really fast. It's growing, obviously, as a result of the massive investments going into those new fabs and that benefits all of the components that we sell to the equipment makers, benefits our FOUP business, benefits our fluid handling business. But more importantly, I think we are really excited about what it will mean, going forward, as those fabs start running their processes, using the materials from the chemistries they will be buying from us, replacing the filters that we will be supplying to them, as those geometries continue, again, to become more and more demanding, requiring more performing materials at higher levels of purity. So I think we are at the very beginning of a new phase of growth for us. And I would expect, again, our exposure to NAND to continue to grow over time.

Great. The last question I have is -- Bertrand, while answering one of your questions, you mentioned that your sales to the OEM is growing at roughly around 40% year-to-date, that's a really impressive number and much bigger than the WFE model that I think most of us have already mentioned. Just curious, what's striving that growth? Is it because of this new coating material that you guys have talked about before? Is that a big driver for that? Or is it generally just demand created from those OEM or share gain in certain areas?

So it's really the share gain at this point. Remember that the coating materials, we have actually not even started selling those solutions yet. So that growth story has yet to materialize, and I would expect that to contribute to our growth rate in the second half of this year. So what we've seen so far is just, again, market share gains across our gas filters, our flow controllers, dispense systems and all sorts of high value components that we sell to our OEM customers. So we are very pleased with the performance, obviously growing 40%, the OEM business, is a tremendous accomplishment. It's a small part of our business. It only represents about 15% of our revenue, but really, really, pleased with the performance.

(Operator Instructions) We'll go next to Chris Kapsch with Aegis Capital.

Question, I guess, sort of big picture for Bertrand. The framework that you laid out in terms of the overall backdrop for the -- for your -- the end markets that you address. Over 3 to 5 years, you talked about GDP growth of 2% to 3%, the semiconductor growing up maybe 1 percentage point above that GDP and then Entegris-specific initiatives adding another 1 to 2 percentage points. So 4% to 6% sort of topline kind of paradigm, not including inorganic growth acquisitions. And so you mentioned now we're on track, wafer starts to do maybe 8% to 9% growth this year. And I think the overwhelming consensus is that, for the semiconductor industry this -- the strength that we're seeing is a little bit more secular in nature than merely cyclical. So I'm just wondering, is it worth revisiting kind of the backdrop assumptions? Or does that start to influence your thinking in terms of your growth and investment and allocation of capital?

Yes, Chris, and this is a great question. I -- that -- the model that we -- that you're referring to is a model that we introduced, in fact, 1.5 years ago. And you're right that at that point in time, we may not have had as much information as we do have today. So when you're suggesting there may be an upside potential or on upside scenario to what we presented, that may be the case and I know something we're going to be looking, obviously, into. And when we are ready, we can present those numbers to you, probably as part of our next Analyst Day. But remember that, that 4% to 6% growth target was a 3- to 5-year compounded average growth rate. And you're right that today, we feel pretty good about our performance. We grew 9% in '16, we expect to grow in excess of 10% in '17. So as I've said, again, as we have a little bit more information, we'll -- we may decide to provide a longer-term guidance. But we're not at a point today where we will do that.

Okay. Yes, I mean, just wanted -- I mean, I understand that it's a longer-term framework, I'm just wondering, is the feedback that you get from all your interactions with key customers, is it enough to feel that the semiconductor industry strength is over a long period of time is a little bit better than say 100 basis points above GDP? But -- so we could stay tuned...

So at this point, I'd just want to -- at high level I would say, I probably would concur with you. And that's, again, that's why we cast our objective as growing 100 to 200 basis points above and beyond the industry growth rate. So I hope you're right. And if we have enough conviction that this is the case, we would recast our underlying market assumptions and add to that 100 to 200 basis points.

And then I -- just a follow-up on some of the discussion around the margin drivers and improvement, very impressive. Obviously, the variance is there. And Greg, you highlighted the SCEM and AMH segments as showing the most margin growth and I -- so I was just wondering if really what's going on is, if it's just mostly about -- you said mix, but you also said manufacturing. I'm just wondering if it's mostly, even in the form of mix, is it really about operating leverage, given the strong topline environment? Or are you starting to see actual traction of new products and more advanced products, more higher value products, actually contribute to the favorable mix at this point as well?

I would say, I mean, to your first point. I mean clearly, volume is going to play a role in it, right? We have a fixed-cost structure and if volume moves up, that obviously helps us on the gross margin. I didn't say that in my formal remarks but it kind of goes without saying. And I would just say, from a mix perspective, in the SCEM business for instance, I mean the margins, there is a wide -- there is a dispersion in the margins. And in the current quarter, for instance, specialty gas is a very good business for us. And so we had a very strong quarter in specialty gas, that actually helped us from a mix perspective. That's a for instance. But it's really -- it's hard to pinpoint 2 or 3 things. Like I said, it's just -- it's a fundamental focus on the execution at our manufacturing facilities, it's the higher volumes, it's not any 1 thing specific or even -- if I were to give you a list of what was driving the margin, it would be 10 things for every division.

Okay. And then, just along those lines, is it similarly difficult to say which sort of end market bucket -- like if you look at it from a foundry versus logic versus memory, is it also similarly difficult to say any of the demand strength from any of those basket of customers is driving the mix more so than the others?

Yes, I mean, if you're talking about the contributors to our growth performance, topline growth performance during the quarter, I would say that year-to-date, most of the growth came from our memory customers. We were pleased to see a little bit of an improvement in our logic and foundry customers in Q2, after a very soft start of the year. But again, most of the growth, year-to-date, came from memory, came from OEM and in a few non-selling markets.

We'll go next to Amanda Scarnati with Citi.

Just a quick question, Greg, on the decision to commit more to buybacks versus paying down the debt and kind of what went into that decision? And where you stand on the long term use of cash?

So fundamentally, Amanda, we are focused on trying to not have dilution related to this share-based compensation. As the stock price has moved up, essentially the treasury stock method of calculating shares outstanding becomes more dilutive at higher stock prices. So we were at $4 million -- we initially came thinking that a $4 million or $5 million a quarter, we'd be able to hold our share count constant, and that hasn't been the case. So we said to hold that constant over the next several years, where do we need to be, and so we moved it from 4% to 10%. It's that really -- I mean, it still -- when you think about allocation of capital, we were still allocating the majority of it toward debt repayments. It's not really a fundamental change, it's just we don't want the share accrete that comes with the share-based comp. And because of the treasury stock method of calculating shares outstanding, there was some changes in an accounting standard that affected our share count, so we made the decision to increase that. But like I said, I don't want you to come away thinking it's a fundamental shift in our capital allocation strategy.

Okay, so still paying down debt at similar level?

I mean, we'll still continue it. I mean, if you said -- for the foreseeable future, kind of that $25 million a quarter and $10 million in share repurchases per quarter.

And then, Bertrand from just a high level, if you look throughout the quarter, where did you see the bigger surprise in terms of upside? Was it the demand environment? Was it in new products and being able to deliver them to the market? Or was there something else that really surprised you to push that earnings number up?

So, Amanda, it was just really about the strength in the number of new products. It's always very hard to forecast how well new product platforms will do and how quickly they will be adopted. And we were very, very pleased to see the performance. Strong performance, again, in deposition materials, very strong performance in a number of new filtration solutions. And those products, again, continue to set new records after records. And so again, very, very pleased to see that level of performance and success. In Q2, and as I mentioned, we, and that's the thing when it's really exciting, is we expect to continue to see new records set in the back end of the year. Again -- and that's what we tried to capture in our guidance. Remember that our assumption is for wafer starts and CapEx to be essentially flat in Q3. And in spite of that, our -- the midpoint of our guidance represents an increase of 20% versus the same quarter last year and an increase from where we were in Q2. So again, high degree of optimism and conviction in the success of our new products.

We'll take our next question from Sidney Ho with Deutsche Bank.

I want to go back to Q2 in terms of revenue by segment, you are growing exactly what you think you will be growing the fastest, which is the Specialty Materials and Micro Contamination. But given the strength, we've seen in the equipment OEMs, I'm surprised you're not seeing more upside in your Advanced Materials Handling business, which I think is like 45% of highly wafer fab equipment. Is this an area that we should see a more outsized growth in the second half of the year?

It's a great question, Sidney, and I think that if you think about our CapEx business, you have 3 components to that. So 1 would be high-value components we sell to the OEM, and as I said, those components are doing extremely well. The other 2 components really have a different demand pattern and they relate to components we sell in the sub fab environment, so they -- our customers will buy those components when they build new fabs. And the build-up phase for those new fabs was a little softer in Q2 than they were in Q1 and even at some level last year. So I think -- so that actually didn't grow as fast but was in line with our expectations. Likewise, the third component to our CapEx business is what we call our FOUP products, so they are wafer carriers used in the fab environment, and that business is very notoriously lumpy and we saw a little bit of that in Q2. Our FOUP business declined sequentially and declined also versus Q2 of last year, which was a record quarter for that business. Again, we continue to have a very strong backlog for that business. We are the de facto standard in the leading-edge memory and logic fabs. So we feel very good about our competitive position. But it is lumpy, and year-to-date, didn't grow as fast as our OEM business. So think about, again, those 3 different segments of our CapEx business following very different demand patterns.

Okay. My second question is a follow-up to earlier questions and their longer-term sense. There seems to be a lot of tailwinds in terms of -- like, process steps are going up quite a bit from 10 to 7 to 5, and the number of layers in 3D NANDs are -- just keep going up. And at the same time, your peers in the equipment space also talk a lot about material-driven scaling. Following on that comment on that 46% growth CAGR or is it something that maybe you'll restate. I'm just curious if -- are there any offsets that we should consider that -- is it like an ASP, you will have a headwind? Is it certain things that we should consider that is -- that makes it not growing as quick -- as fast as some of these things that I mentioned earlier?

No, it was -- first of all, remember that, that 5% to 6% growth objective is based on a what could be arguably considered a conservative assumption for the underlying industry growth rate. If the industry growth rate is greater than what we presented during the Analyst Day, I would expect our long term growth rate to also be greater. I don't think that we want to be in a position today to talk about 2018 in any detail, we'll have to wait it little longer before we do that. But again, I think that we are increasingly optimistic about the prospects of this industry and certainly taking a lot of comfort having grown 9% last year, being on par to go in excess of 10% this year and feeling really, really good about the adoption of a number of new products. So stayed tuned. When the time is right, we'll talk about '18. But we won't do that today.

Okay. May be 1 last question. We've been hearing wafer price increases in the past few months and potentially shortages in the market. You serve both the wafer growers as well as their customers, just wondering if you have seen any impact on your business from this price increase or shortage of wafers.

No, I think while the wafer growers are currently adding capacity, I think that they are managing their capacity really well, in order to make sure that they are in a position of strength when they negotiate pricing. I mean, that's their strategy and that's their position. As it relates to us, no. I mean, it doesn't really change our competitive position with any one of those players. We have a very strong market share at 200 millimeter, as you know. Our market share at 300 millimeter is actually fairly modest in terms of shipping boxes. But as I mentioned in my comments earlier, we were very pleased with the performance of our 200-millimeter products and below. We have very strong market shares in those legacy fabs.

It appears we have no further questions at this time. I'd like to turn the conference back over to Mr. Steve Cantor for any additional or closing remarks.

I want to remind listeners that in August we will be participating in investor conferences in New York, Minneapolis, Chicago and Vail, Colorado. If you want more information on any of those, please contact me. We look forward to updating you on our Q3 results in October. Thank you, and have a great -- have a good day.

And, ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.