Entegris Inc (ENTG) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to Entegris' First 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 Steve Cantor, Vice President of Corporate Relations. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you all for joining our call. Earlier today we announced the financial results for our first quarter ended March 31, 2018. You can access a copy of our press release and 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 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. I will make some comments on our first quarter performance and on our outlook for the remainder of 2018. Greg will follow with more details on our financial results and provide guidance for the second quarter. We'll then open the line for questions.

The first quarter was an excellent start to the year. We grew sales year-over-year 16% to $367 million, growing faster than our markets. We continued to get traction in a number of key new products across our portfolio and across our major customer segments. We grew our profits much faster than our top line, generating EBITDA of $106 million and non-GAAP EPS of $0.47. And finally, we deployed our capital consistent with our stated strategy.

The industry environment in Q1 reflected healthy levels of semiconductor production and ongoing new-fab construction. Once again, we outperformed our markets, demonstrating the relevance of our value propositions, the importance of our diverse customer base and the resilience of our broad product portfolio.

Demand from advanced memory customers, particularly in NAND, continued to be the primary driver for our performance in the quarter. The successful transition to 64-layer 3-D NAND chips by all leading memory producers spurred demand for our newly introduced advanced deposition materials and our filtration and purification solutions. In addition, new-fab construction helped drive sales of our fluid-handling solutions and wafer carriers.

Our leading-edge logic and foundry business was soft this quarter, in line with our expectations, as our customers experienced more muted end demand for PCs and smartphones. However, demand from our mainstream logic fab customers remained strong, as IoT, industrial and automotive applications continued to drive high utilization rates. This benefitted our entire suite of consumable products, including process chemistries and filtration solutions.

Growth in sales to OEM customers reflected the industry's investments in new-fab capacity and process technology transitions, particularly for new advanced memory fabs. New tool shipments continue to drive demand for gas filters and gas purification systems, as well as advanced coatings and photoresist dispense systems.

Sales to materials companies, including chemical makers and wafer growers, also demonstrated positive trends and were up strongly from the prior year. We continued to expand our market opportunities for advanced filtration and ultrapure fluid containers as the chemical industry diligently works to increase the stability and the cleanliness of their chemistries during manufacturing and through transportation.

By geography, sales strength in North America reflected robust demand from OEMs and the addition of PSS, while growth in Korea and Japan was driven by memory and OEM customers. Weaker sales in Taiwan and Southeast Asia reflected muted first quarter foundry and data storage trends, respectively, while increased production at mainstream fabs boosted our sales in Europe.

During our Analyst Day in March, we described some key long-term operational goals for Entegris. First, we intend to continue our track record of organically growing faster than our markets, and second, we intend to continue to expand our bottom line faster than our top line. We achieved this in 2017, and this year, our strong start puts us on a path to achieve this goal once again in 2018.

Let me provide some more color around this. One of the fundamental drivers of our growth is the industry's intersecting needs for new materials and increasing purity requirements. These two requirements are essential to advancing the performance, cost and reliability of new semiconductor devices. We are the only company that can do both, which makes our value proposition very unique. Having these capabilities and the breadth of technologies under one roof is enabling us to not only develop highly differentiated solutions, but also to shorten development times. As a result, we expect to expand our served available market and to continue to outpace the industry.

Turning to the bottom line, I want to praise the Entegris teams for the quality of their execution this quarter. I was very pleased with the collective focus on managing our fixed cost, yield improvement initiatives and a new focus on cost optimization, a the new product development process.

During our Analyst Day, we extended our target operating model to reflect the incremental leverage we expect to capture as we continue to grow our top line.

Our strong ongoing operational execution is also enabling us to deliver on our capital allocation strategy, balancing internal investments, acquisitions, debt repayment and returning cash to shareholders. During the first quarter, we deployed more than $100 million in capital, which included capital investments of $21 million, focused on expanding our internal capabilities and capacity to support our organic growth; debt repayment of $25 million as part of our regular quarterly cadence of voluntary repayments of our term loan; share repurchases and cash dividends amounting to $20 million, as part of our ongoing quarterly programs; and $38 million related to the acquisition in January of 2018 of Particle Sizing Systems, or PSS, a provider of specialized sensing and controlled solutions.

As we discussed in last quarter's call, we are excited to add PSS' unique technology to our portfolio. The integration is proceeding well, and we are tracking favorably to the EPS accretion we expect this year and next. We are already working on additional growth opportunities for PSS by leveraging Entegris' customer relationships, quality systems and operational excellence.

In summary, the first quarter was a great start to the year and reflects the strength and resilience of our business model, the diversity of our customer base, the breadth of our solution set and the quality of our teams. Including the addition of PSS, our current target is to grow our top line in excess of 10% in 2018.

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

Thank you, Bertrand. We were very pleased with our first quarter results, which reflected record levels of sales and earnings. Q1 sales of $367 million grew 16% from a year ago and 5% from Q4. Foreign exchange was a tailwind of approximately 2% year-over-year and 1% sequentially.

Q1 GAAP diluted earnings per share was $0.40. On a non-GAAP basis, we achieved earnings per share of $0.47, which was above the high end of our guidance and up 68% from Q1 last year.

Our operating performance in the first quarter reflected gross margins of 47.9%, which was up from 46.7% in the fourth quarter, reflecting continued strong execution by our manufacturing teams and higher sales volumes, as well as the favorable impact from FX. We expect our gross margin in Q2 to be approximately 47%. The slightly lower margin expectation reflects similarly strong operational execution and product mix, but without the FX benefit we had in Q1.

Non-GAAP operating expenses in Q1 of $86 million were at the high end of our expectations. Excluding amortization expense of $12 million, we expect non-GAAP operating expenses to be $89 million to $92 million in the second quarter. The higher operating expenses include the addition of PSS, increases in R&D to support our growth initiatives, as well as higher variable compensation levels. Non-GAAP operating margin of 24.5% increased from 19.5% in Q1 a year ago and 23.4% in the fourth quarter.

Our GAAP tax rate was approximately 19%. This is slightly higher than we expected and reflects a favorable discrete item related to stock-based compensation, offset in part by a discrete charge related to tax reform. We expect the GAAP tax rate for the full year to be 20%. Our non-GAAP tax rate was 18% for the quarter, and we expect the full year rate to be approximately 20%. The lower-than-expected non-GAAP rate was the result of the same factors that impacted the GAAP rate.

Adjusted EBITDA for the quarter was a record $106 million, or 29% of revenue.

Before turning to our performance by division, I do want to remind investors that the adjusted operating margins for the divisions reflect reporting changes in which the majority of functional costs such as IT, finance and HR are now fully incorporated into the divisional numbers.

Q1 sales of $131 million for Specialty Chemicals and Engineered Materials, or SCEM, grew 14% from a year ago, and were up 4% from Q4. The quarterly growth was driven by strength in specialty gases, graphite and coatings. Adjusted operating margin for SCEM was 24.1%, up from 20.2% last year and up slightly from Q4, reflecting higher volumes and favorable product mix. Recall that both the Q1 and historical quarterly divisional operating margins reflect the new reporting convention.

Q1 sales of $119 million from Microcontamination Control, or MC, were up 19% from Q1 of last year and were up 3% from Q4. The growth 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. Adjusted operating margin for MC was 35.4%, up from 31% last year and 34% in Q4, reflecting higher volumes, favorable mix and the favorable impact of FX on gross margins.

Q1 sales for Advanced Materials Handling, or AMH, of $118 million were up 15% from Q1 of last year and grew 8% sequentially. The 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 19.6% improved from 13.6% last year and 16.6% in Q4, reflecting the favorable FX trends, favorable product mix and the addition of PSS. While the AMH operating margin will be down slightly in Q2, we expect the impact of cost-reduction actions taken in 2017 to be fully evident by the end of Q3 and to see AMH operating margins to be within its targeted range of 18% to 20%.

Cash flow from operations for the quarter of $39 million grew 16% from Q1 a year ago. This is consistent with typical seasonal patterns, as cash flow in the first quarter of the year reflects payment of variable compensation from the prior year. Free cash flow of $18 million, or 5% of revenue, increased from $11 million a year ago. Both DSOs and inventory turns were essentially flat with Q4.

As of March 31, our cash balance was $550 million, of which approximately $312 million was in the U.S. As a result of the new tax law, we were able to repatriate $152 million of cash in Q1 and expect to repatriate additional cash during the balance of the year.

During the quarter, we reduced our term loan by an additional $25 million. At quarter end, total long-term debt was $650 million.

Uses of cash during the quarter included $38 million for the purchase of PSS and $21 million of total CapEx. The CapEx spend in Q1 is consistent with our expectations for the full year of approximately $100 million to $120 million.

Turning to our outlook for Q2. We expect sales to range from $370 million to $385 million. At these revenue levels, we expect non-GAAP EPS to be $0.42 to $0.47 per share.

In summary, we are pleased with our execution both on the top line and the earnings leverage. We continue to be disciplined with our capital allocation, which we expect can add substantially to our earnings per share over the next three years. And finally, we are excited about our prospects for 2018 and beyond.

Operator, we'll now take questions.

(Operator Instructions)

We'll take our first question from Toshiya Hari with Goldman Sachs.

Bertrand, you talked a little bit about weakness in the leading-edge logic and foundry business, and I think your revenue from your -- the sales numbers from Taiwan kind of reflect that. I'm guessing you're embedding a fairly muted outlook for Q2 as well, but I'm more curious about the second half. Your biggest customer is clearly guiding the second half above the first half given seasonality, and potentially a pick-up in the smartphone business, and when you think about node transitions, 10 nanometer at logic and 7 nanometer -- and perhaps 7 nanometer plus -- at your largest foundry customer should help as well. So how are you looking at the second half for the leading-edge logic and foundry business today?

Yes, so Toshiya, let me try to maybe break your long question into pieces. And you're right, if you think about Taiwan first, in the first half of the year, the first half will be a difficult comparison for us in Taiwan because, remember, to your point, at last year in early 2017, there was a major node transition taking place in Taiwan. And remember that the sales of a number of our products can be lumpy when fab customers prepare for those fab transitions and during the first 6 months following a node transition. So this is what we experienced in Q1 and Q2 of '17 in Taiwan, with record sales of FOUPs and filtration products. So the back end of 2017 for us is more representative of what the revenue potential for Entegris is when the Taiwanese market is operating under more normal business conditions and when the processes have stabilized after a major ramp. So if you look at our performance in Taiwan on a sequential basis, down 2% versus Q4, this is in line, if not slightly better, than the normal seasonal trends of our Taiwanese customers. So we expect Q1, we expect Q2 to be relatively soft for our foundry business, but we certainly expect the second half of the year to be stronger in Taiwan and across our logic segment, as many of our customers are getting ready to transition to tighter nodes.

Great. And then as a follow-up, I had a question on gross margins. Greg, when I look at the incremental drop-through, both on a sequential basis and a year-over-year basis, you guys continue to deliver numbers that are north of 70%, and I appreciate the FX impact in the quarter, but I guess I'm trying to better understand sort of the disconnect between what you guys have been telling us in terms of gross margins; i.e., don't expect a significant improvement going forward, versus what you've been delivering over the past couple of quarters, if not the past couple of years. When I look at Q1, for example, I think the AMH business grew the fastest on a sequential basis, and my understanding was that business carries the lowest gross margins in the business, yet you guys did very well on a sequential basis. So I guess, how big was the FX impact, and how conservative are you being when you guide us -- when you guide gross margins for us longer-term? Thank you.

So the gross margin impact in the quarter from FX was approximately 70 to 80 basis points. And when we think about the guidance going forward, I continue to believe will execute better and better, but I also, at the same time, have always had a view that I think the customer is not going to let us have a margin up in the 50% range. I mean, we've always said, think of peak margins in the high 40s.

Okay. So I guess the sequential drop-off from Q1 to Q2, that's basically the FX benefit going away and everything else?

It's entirely the FX. I mean, we'd expect mix to be similar. We don't have any reason to believe we wouldn't continue to execute very well from an operational perspective. So it's entirely related to the FX.

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

So first question, I guess, kind of sticking on the financials. Looks like there's a pretty big step up in OpEx, sequentially. How much of that comes from PSS? And if you can give us some color in terms of how much revenue PSS contributed in the first quarter.

So order of magnitude, PSS is kind of low single digits in terms of revenue. I mean, we're not going to be more specific than that. From an OpEx perspective, it's in the $1 million or $2 million per quarter. I would say the other big impact on OpEx, though, is are increases in variable compensation as we deliver higher and higher levels of operating margin. Our variable comp is largely tied to that margin percentage. So those would be the two largest.

Just fair to say that this kind of higher-level OpEx is how we should think of our model kind of going forward?

I'm sorry, Edwin, I didn't catch the follow-up.

Yeah, just quick follow-on, that -- so it's fair to say that, given that you mentioned high variable comp, and you guys are quite profitable now, so we should assume this step up in OpEx is something to stick around for a while? This is how we should model it going forward?

As long as we're delivering at the current profitability levels, that's true.

Okay, great, that's helpful. And then kind of on the product and -- side, Bertrand, I noticed that you mentioned on the call that kind of your sales to the chemicals company is up quite strongly year-over-year. It seems like you are making some good progress in that end. How do you kind of think about that option in the longer term? Do you see a lot more growth out there, or is that something that you guys already have there? Any kind of comment you can make around that growth opportunity for the company?

Yes, Edwin. If you'll recall, I mean, this has been one of the market segments that we have flagged as one of the, probably, largest opportunities for our bulk filtration products, as well as our high-purity packaging solutions. As you know, increasingly, the semiconductor industry is requiring their chemical suppliers to supply ever-increasing levels of purity, much tighter specs and quality levels. And to achieve that, those electronic-grade-chemical manufacturers will have to improve their manufacturing processes, and to a great extent, it means that they will have to increase many more points of filtration in their manufacturing processes. And then they will have to migrate to much cleaner packaging solutions in order to maintain the purity levels that they have achieved in the manufacturing process all the way through the very inefficient supply chains that are fairly customary in our industry. So I think that this is a huge opportunity for us. We've mentioned the opportunity around advanced resist, but that's also true for a number of electronic-grade chemistries.

Okay, great, that's helpful color. And then lastly, just on NAND or memory in general, right? You mentioned that NAND has been a big driver of -- at least for this past quarter, and definitely we have seen a lot of increase in NAND production there. Is that where you think about how that mix of your business is shifting, at least from your mix with the foundry -- sorry, with the fab customer is shifting from logic to memory? Where was it, where is it right now, how do you kind of see that progressing through this year or through next year? Have any kind of color around that?

So we certainly were a big beneficiary of the transition to 64 layers in advanced NAND. We expect to see another step increase as the industry transitions to 90-plus layers down the road. And the reason for that is that, again, think about those very high-aspect ratio of features, and think about the difficulty that the advanced memory makers have to maintain the fundamental structure of the materials in those very complex features. So we are developing all sorts of different deposition materials with better electrical properties for those very, very thin films. We are also developing new doping materials that could actually help increase the velocity of the electrons in those very high-aspect-ratio silicone channels. We are working on selective etch materials as well, because you obviously need to etch those very, very, very narrow, yet very deep trenches and holes. So all sorts of new materials opportunities for us. And then of course, as we mentioned, all sorts of new opportunities around purification and filtration to help maintain the conformity of those structures. So I think that this is something that benefitted greatly our business across all divisions in the first quarter. We expect those trends to continue to be beneficial throughout the year. It doesn't mean that our opportunities in advanced logic is not there, but we haven't seen any meaningful node transition in advanced logic in some time. When that happens, I think that we will be able to demonstrate our exposure to advanced logic as well. I think the key takeaway for you is that we have a very broad portfolio of products, we have a very broad portfolio of customers, and to a great extent, we are agnostic to any single device.

We'll take our next question from Duffy Fischer with Barclays.

Just wanted to go back to the incremental margin, if I could. Obviously, generally, there's three parts to that. There's just improving the profitability of the ongoing sales. The way we would calculate it from the outside gets rolled up into that, mix shift gets rolled in that, and then there's kind of what we think about the academic incremental earnings, which is just how much more leverage do you get on a new dollar of sales versus your existing base. So by segment, can you walk through just what that new dollar of sales should do on an incremental margin that way, and then we can back-calculate the rest of it?

We actually look at the flow-through really more on a consolidated basis, and we haven't gone to the level of talking about flow-through on a segment basis. But if you think about our target model is for a $0.40 flow-through to the EBITDA line for each incremental dollar of revenue. Now, as one of the earlier gentleman questioners pointed out, if you look year-over-year at Q1 2018, our flow-through was about 57%, and on a sequential basis, it was about 48%. We continue to hold the view, though, that 40% or slightly above that is the right number over the long term.

Okay, fair enough. And then, if you did that same thing by segment, micro came in at 70% versus the other two at 50%. Was there something special this quarter in a year-over-year in Microcontamination that led to that huge jump relative to the other two segments?

I would just say that that business has -- and we've seen it, really, over the last 6 quarters. I mean, there's significant operating leverage in that business, of the gross margin structure.

Our next question comes from Sidney Ho with Deutsche Bank.

I think you guys raised the full year revenue guidance from 8% to 10% to, now, I think you said, above 10%. What are the changes in your expectations in terms of MSI and CapEx? I think last time you mentioned 6% for each of them. And if you can comment on Q2 specifically about those two drivers, it would be great. Thanks.

Right. So you're correct, Sidney. We have increased slightly the guidance, in other words, we have kind of reaffirmed it. We think we're going to be operating towards the high end of the guidance. So the assumption is that MSI will be in the 6% to 7% range for the year. We also expect the industry CapEx to be slightly in excess of 10% on a full year basis, and then of course we continue to expect to outperform the industry by about 200 basis points as we capitalize on the new purity requirements across the industry ecosystem and as we capitalize on the greater material intensity in advanced memory in the first half of the year and in advanced logic in the back end of the year. And then the final component to the annual guidance is the additional 1% to account for the expected contribution of PSS on a full year basis. So if you just sum up those four components, you get an annual growth objective of about 10% for the year.

Any particular comments on Q2 in terms of MSI and CapEx?

So if you think about the first half of the year, we expect CapEx to continue to be very robust in the first half of the year. It will slow down in the back end of the year. And that's really the big difference between the guidance that we have for Q2 versus the balance of the year. So in other words, the blended index of reference for the first half of the year is pointing at about 10%, and that's really the big difference. I mean, the rest remains the same. We continue to expect to outpace the industry by about 200 basis points. Again, that's going to come from served market expansion and share gains as we capitalize on the trends I was mentioning around purity and material intensity, and then 100 basis points from the addition of PSS. And then for the first half, we have the lingering positive impact of the foreign exchange that we recorded in the first quarter. We don't expect that foreign exchange benefit to continue on a full year basis, but certainly on the first half, that's going to be a factor.

Got it, great. And then my follow-up question is, if you kind of look at your segment profitability, I guess, congratulations on having AMH is now in your target range for -- it seems like it's going to be at least for this quarter. But all three segments are now above the midpoint of your new target. Is there any reason why it won't go higher? In other words, are there any one-time benefits in 1Q that you think will reverse in the future?

No, there's really not anything specific in terms of one-time benefits. I would just say, I mean, we're performing and executing at a very high level, and when I say high level, I mean really the performance of the team.

We'll take our next question from Mike Harrison with Seaport Global Securities.

This is Jacob, on for Mike. My question: Do you get the sense that China may be -- look to accelerate investments in domestic semiconductor capabilities given some of this U.S. commentary suggesting, maybe, a more protective stance on IT and that sort of flow of information from China to U.S.?

I mean, no. We're not really thinking that the recent tension between U.S. and China will have any imminent short-term impact on our business. Having said that, China overall continues to be a big area of focus for us, and it represents a little over 10% of our revenue. We've been growing in China very fast, in excess of 25%, for the last couple of years. We have high growth expectations in China for this year again. And we're continuing to invest in China to be ready to capture all of the opportunities that we believe will be available to us. We added a number of sales offices last year. We just announced the investment in a new tech center in China. All of that, I think, will put us in a great position to support the existing plans of our customers, and if they have more aggressive investment plans going forward, I think we'll be ready to address that as well.

All right. And then, I wanted to get a little more detail on the AMH margin. Could you maybe bridge the 300 basis points of sequential margin expansion from Q4 to Q1, maybe put it in buckets, how much of that was from PSS, how much was from the FX benefit you mentioned, and then how much was mix-related?

I would say, broadly, it would be relatively even among the three.

(Operator Instructions)

We'll take our next question from Christopher Kapsch with Loop Capital Markets.

My question is sort of follow-up to some of the formal comments about the calling out of mainstream-fab business being sort of disproportionately strong, at least relative maybe to expectations. I'm just wondering if you could further characterize the -- what's driving the mainstream strength? First of all, is it -- I don't know if you have visibility, but any sense on which end markets? Is it skewed towards automotive? Is it -- or is it more generally, like, this proliferation of devices and the Internet of Things phenomenon? And then, at those legacy nodes, is it just a general strength and demand for those chips, or are you seeing any increase either in share or materials intensity associated with producing those chips? Thank you.

Yes, so I think, again, we have benefitted from just the sheer volume of demand for some of those lesser advanced devices, and then that benefitted many of our long-tail product lines such as specialty gases and our formulated clean chemistries. But we have certainly seen new opportunities arising as a lot of those fabs are starting to serve new applications such as automotive and medical applications where reliability is becoming increasingly important. And we have seen a number of new opportunities in particular for our filtration and purification solutions. If you look at our European business, which was up 6% versus last year, this is actually a perfect illustration of some of those trends. We are seeing very, very strong filtration sales in Europe, and that is really driven by mainstream fabs focused on automotive applications that are adopting advanced filtration solutions to reduce latent effects. So that's a real trend. It's the very beginning of the trend, and we expect that there will be more opportunities of that nature available to us going forward.

Thanks, that's helpful. And then to follow up on your comments to expect better demand for advanced logic, I guess a node transition in the second half of '18, are you talking specifically about Intel, or just the industry more generally? And where do you expect to see benefit from that node transition and ramp? Is it most acutely in the SCEM business, or is it across all three segments? Thanks.

I won't talk specifically about any customer, but I will only say that we are -- I mean, first, it's more than one customer considering node transition in logic this year. And we are in all cases very well positioned on their technology road map, and I believe that as they transition to those new nodes, we will see new opportunities in deposition materials and in advanced filtrations in particular.

Our next question comes from Patrick Ho with Stifel.

Bertrand, maybe as a follow-up to some of your prepared remarks and some of the answers you've already addressed, you've talked about your new products being a key driver for 2018's above-average growth, as well as into the future. You talked about stuff like advanced deposition materials and other purification products. Are there any other types of new products as the year progresses that you expect to be contributors in 2018?

I think that for 2018, those would be the two major drivers. Again, material intensity is one big trend that we want to capitalize on. Material intensity is a real -- it's real for advanced logic, it's real for advanced memory. As I mentioned, our SCEM business is very well positioned to capitalize on that. If you recall, during the Analyst Day, we discussed about new boron mixtures. We discussed the new deposition materials, selective etch, specialty coating. All of those products will play a big role in '18. And then the other big thing that we developed during the Analyst Day is the theme of purity, and the purity requirements are becoming more stringent in the fab environment, upstream in the supply chain, as we're discussing, and that's going to open up all sorts of new opportunities for fab-based solutions, as well as bulk filtration solutions. So those will be the drivers in '18. We have a number of new products that will be introduced later in the year that I would expect will help our growth trajectory in 2019, but it's a little early to talk about those.

Great, that's helpful. And my follow-up question for Greg, in terms of the capital allocation strategy, obviously, this past quarter you've shown a lot of balance in how you reallocate the cash. Given the volatilities in the market, and even with some of the changes in the interest rates from the broader markets, does that potentially change how you look at the capital allocation strategy of either repaying down more debt near term, either repricing debt, versus potential share repurchases or things of that nature?

So yes, I think as it relates to debt reduction, I think you'll see us continue on kind of our $25-million-a-quarter cadence. We've only got about $100 million of floating-rate debt. The balance of our debt is the four-and-five-eighths notes that we issued last fall, which right now is proving to have been a -- I'll call it a stroke of brilliance. And as it relates to thinking more broadly about buyback, dividends, M&A, we still continue to believe that M&A is our best opportunity in terms of capital allocation, but we're certainly in a position that we can think more broadly about buybacks if we were to be in an environment where the industry would weaken significantly.

We'll take our next question from David Silver with Morningstar.

I did not hear any discussion of trade issues, so I just want to kind of cover that off, but the Chinese market is a very large -- one of your largest country markets, and you have the very global sales spread. So I'm just wondering if there are any of the number of trade- and tariff-related issues that are swirling around right now, that, from your perspective, might impact your ability to either market your products effectively or secure any key raw materials. Thank you.

That's a good question, and as you would expect, we have led a pretty comprehensive analysis of what could be the potential impact of those new trade tariffs. And if those higher duties were to be implemented, and that remains a big "if," the impact would be actually very small for us. And financially, it would be less than $1 million of additional import duties on a full year basis. And then the other part of your question is, do we expect any impediment to our ability to do business in China, and based on everything we know so far, the short answer to that question is "no."

Okay. And then I had a question about maybe the trend in your R&D spending. So I don't -- I'm a little bit taken by the significant volume leverage that your results show in terms of growth in sales and growth in operating margin, but only a modest portion of that incremental margin expansion is on the gross margin line, and when I look at R&D, I mean, the R&D relationship to sales has been trending lower for quite a while. And for a lot of companies, I wouldn't necessarily consider that unusual, but I consider your business, even within the semiconductor industry, to be much more R&D intensive. So from your perspective, can that trend continue, or is this the case where, since your company is kind of a play on complexity, that the R&D budget is going to have to match, or maybe even catch up to the recent growth in sales, for you to maintain your competitive position? Thanks.

Yes, go ahead, Greg.

Yes, so our R&D, if you think about it sequentially, was up about $1 million. It was 7.5% of revenue versus 7.6% of revenue in Q4. So we when we talk about those higher OpEx levels, we would expect to see incremental spending in ER&D. I wouldn't expect that you're going to see us go back to the plus-8% days, but we would like to invest more in ER&D this year, so think about it as in that 7.5% to 8% range.

Yes, I think I would echo that. Again, I don't think that we are constrained as of right now, but we certainly have a number of open headcounts that need to be filled, and will be filled later in the year. So expect that number, as a percentage of sales, to trend back to about 8% of revenue.

And if I could just add a quick one: Your company does not really discuss sales growth in terms of the percentage from price versus volume, but would I be accurate if I assumed that on a year-over-year basis, the 16% top line growth was maybe 2% FX and the balance, or even slightly more than the balance, was due to volume, or might there have been some level of price increase or notable mix shift as well?

It would be largely volume. I mean, we don't talk about it like a specialty chem company, as you point out, in terms of volume and units, but we do talk about historically our ASP erosion has run kind of 1% to 2% across the portfolio. And those trends are sort of ongoing, and this year is no different than most years. And like I said, that 1% to 2% has been where we've run pretty consistently over the last 4 to 5 years.

Yes. So I should just assume your volume growth is pretty much -- sorry, your sales growth is pretty much equal to your volume growth.

Pretty much, yes.

We'll take our next question from Amanda Scarnati with Citi.

Just a quick question on, kind of, China. We've seen some news articles recently that one of the mainland China manufacturers just received its first order for 3-D NAND and that they're expecting to start volume production towards the end of 2018. Have you started seeing any sort of revenue from these mainland -- these new upcoming mainland manufacturers, or is that something that you expect to see later on in the year as they start volume production?

Yes, so, Amanda, we have actually benefitted from all of the fab constructions that took place in China, many of which were funded by Chinese capital, so that benefitted our fluid-handling product lines, that benefitted our FOUP platform late last year, early this year. And you're correct in your statement that we would expect to start seeing the benefit of the production that we expect to see later in the year or early next year to benefit our filtration and SCEM product lines later on in the year and early next year. Remember also that we are in the final stages of qualifications of the two partnerships that we have in China, so Spectrum for specialty gases. The customer qualifications are about to be completed this quarter, in Q2, so we will be in a position to bring this capacity online and shorten our lead time, so that's going to be actually very timely as we start seeing those Chinese fabs ramp up their production. And the second partnership with Jingxing, we expect the qualifications to be completed later in the year, in Q4 of this year. So again, perfect timing for us.

And then the last question I have is, if there's any share shift between TSMC and Intel, whether it's on smartphone devices or just in terms of node shifts, if there's any sort of shifting there, how would that impact the revenue? I.e., if Intel becomes larger this year than TSMC.

I mean, in terms of share shift, I mean, you should be asking the question to those two customers. What I would tell you again is, remember, we have a very broad customer base. We have exposure to the technology road maps of every player in the industry, be it a fab, a logic fab participant, a memory fab participant, OEMs, chemical manufacturers. And that's, I think, what makes Entegris very unique. We're not dependent on any customer. We're not dependent on any market statement. And I think that's really what is important, I think, for the investment community to remember.

And so then you would have kind of similar exposure, then, at both Intel and TSMC, so for you it wouldn't matter who's winning versus the other? Is that the way to look at it?

That would be a good, simple way to summarize my statement.

And that concludes the question-and-answer portion of today's conference. I'd like to turn the call back over to Steven Cantor for any additional or closing remarks.

Thank you. Before concluding, I do want to note that we will be at the Barclays Electronic Chemicals Conference in New York on May 14, and you can contact me for more information. Thanks again for joining the call. Have a great day.

And that concludes today's presentation. Thank you for your participation, and you may now disconnect.