Entegris Inc (ENTG) 2022 Q4 法說會逐字稿

Good day, everyone, and welcome to the Entegris Q4 2022 Earnings Release Call. Today's call is being recorded. And at this time, for opening remarks and introductions, I would like to turn the call over to Bill Seymour, Entegris' VP of Investor Relations. Please go ahead, sir.

Good morning, everyone. Earlier today, we announced the financial results for our fourth quarter and full year of 2022. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation.

On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find a reconciliation table in today's news release as well as on our IR page of our website at entegris.com. To help you in your modeling, we have provided in our earnings slides a pro forma P&L for all the quarters and full year of 2022. On the call today are Bertrand Loy, CEO; and Greg Graves, our CFO. With that, I'll hand the call over to Bertrand.

Thank you, Bill. Good morning to all. I will start by saying that our results in the fourth quarter were solid especially in light of the recent decline in the semi market. For the quarter, on a pro forma basis, sales were within our guidance, up 1% year-on-year and down 5% sequentially. On a reported basis, sales were up 49% year-on-year. EBITDA margins were 28% in the quarter, and non-GAAP EPS was $0.83.

Looking at the full year 2022, pro forma sales of $3.9 billion, were up 13% and EBITDA exceeded 29% of sales. We estimate our sales growth was approximately 800 basis points above the market growth for the year on a pro forma basis. This above-market growth was driven in large part by a strong position at the leading-edge technology node, led by solutions like liquid filtration, selective -- gas purification systems and advanced deposition materials, solutions which are of growing importance to our customer technology road map.

Other highlights of 2022 included the announcement of the strategic collaboration with land research to develop (inaudible) for EUV lithography to be used in production of next-generation logic and DRAM semiconductors. Another was a very good progress made in the construction of our new manufacturing facility in Taiwan, which is expected to start initial production by the end of the third quarter of this year.

And in December, we announced a plan to build a new manufacturing center in Colorado Springs, which is targeted to begin initial commercial operations in the second half of 2024. Moving on to an update on the CMC integration. We've been making excellent progress on many critical fronts. We are on track to deliver the $75 million run rate cost synergy target by the second half of this year.

The major milestone for this will be the migration to a common ERP platform, which is to be completed this summer. I'm also pleased to report that the first of our ERP conversions was successfully completed earlier this month. And for the revenue synergies, we have a dedicated team in place focused on driving plans for the realization of these synergies. Customers see the value in our unique capabilities in and around the CMP module, which with delay will translate into improved process performance and faster talent solutions for these customers and ultimately higher share for Entegris.

Next, on the planned divestitures tied to the CMC Materials portfolio, we terminated the same transaction effective February 10. Given the current regulatory environment, we were concerned about the protracted regulatory process and uncertainty around closing the deal. And you also saw a few weeks ago the announcement of the sale of QED Technologies. QED's annual revenue is around $35 million with EBITDA of $13 million and the purchase price is approximately $135 million. This transaction is expected to close this quarter.

Looking ahead to 2023. Frankly, forecasting the industry this year is challenging. There still is a lot of uncertainty about how this year will play out, particularly regarding the shape and magnitude of the downturn in the semiconductor industry. To start, for the full year of 2023, relying largely on discussions with our customers and using third-party estimates, we expect the market based on our combination of our units and CapEx mix to be down approximately 13%. While visibility is limited, we currently expect that the industry will bottom in the second quarter of the year.

As I think about 2023, there are 3 factors that we believe will play in our favor. First, as it relates to the industry, we're much more exposed to logic and memory. Second, of the 20% of our sales that is linked to CapEx, a significant portion of that is for fab construction, which is currently looking more resilient compared to WFE.

And third, the new logic and memory node transitions appear to be largely on track for this year. Given our strong position and wins in these nodes, we expect to outperform the market on a pro forma basis by approximately 5 points, which is at the high end of the 3 to 6 points outperformance target we discussed in our recent Analyst Day.

Finally, as you recall, our fourth quarter guidance included a $40 million to $50 million impact from the U.S. government new export controls in China. The actual impact in the fourth quarter was closer to $40 million, and we expect that our sales will continue to be impacted in 2023 by these restrictions, but to a significant lesser degree at approximately $20 million per quarter.

The impact of these restrictions is already factored into our expectations for 2023. Putting it all together, we expect our sales in 2023 to be down percentage-wise in the high single digits on a pro forma basis. Wrapping our outlook for 2023, we expect EBITDA to be approximately 27% to 28% of revenue.

Given the challenging industry backdrop, you can expect this to manage our business dynamically this year, keeping a close eye on cost. As an organization, we will be giving priority to cash flow and debt repayment in 2023. In fact, we have made improving inventory levels, a compensable target for the entire company this year. While this will be a challenging year for the industry, the positive secular growth drivers of our business remain intact.

The semiconductor industry is poised for long-term growth on the way to doubling in size to $1 trillion by 2030. In addition, the pace of node transitions for both logic and memory continues to be strong and device architectures are becoming much more complex. And with the acquisition of CMC, Entegris' breadth of capabilities in material science and contamination control will enable us to offer unique solutions to help our customers improve device performance and shorten their time to yield.

This trend and our increasingly mission-critical solutions are translating into rapidly expanding content per wafer and market share growth for Entegris. In addition, with approximately 80% of our revenue now unit driven, we expect our platform will prove to be resilient relative to other industry participants.

As we closed what was a challenging yet a gratifying year, I want to take a moment to thank our customers for the trust and confidence they place in Entegris. And I would like also to thank the Entegris teams around the world for their incredible commitment and (inaudible), delivering solid performance while navigating a dynamic industry environment, complex supply chain challenges and the fast-paced integration of CMC. Before I hand over to Greg, I want to congratulate him on his upcoming retirement and thank him for his immense contributions to Entegris over the last 3 decades. He headed 17 years as CFO. Greg has been the [strong] advocate for shareholders and a great partner to me, and we have grown this company into what it is today. So now let me turn the call to Greg. Greg?

Good morning, everyone, and thank you, Bertrand, for the nice comments. It has been an absolute privilege to lead the finance and IT organizations all these years. And it has been gratifying to partner with you. We are a good team. I look forward to working with our team to achieve a smooth transition after my successor is selected.

Onto our results for Q4. Our sales in the fourth quarter were $946 million, up 1% year-over-year on a pro forma basis and down 5% sequentially. FX negatively impacted revenue by $38 million year-over-year on a pro forma basis and 6% sequentially. GAAP and non-GAAP gross margin was 42.8% in Q4, slightly above our guidance. We expect gross margin to be approximately 43% both on a GAAP and non-GAAP basis in Q1.

GAAP operating expenses were $261 million in Q4. This included $76 million of non-GAAP items, $53 million of amortization of intangible assets and $22 million of integration and other costs. Non-GAAP operating expenses in Q4 were $185 million. The higher-than-expected OpEx was driven by higher ER&D spending.

We expect GAAP operating expenses to be approximately $285 million to $290 million in Q1 and non-GAAP operating expenses to be approximately $200 million to $205 million. The sequential increase in non-GAAP OpEx from Q4 to Q1 is driven by a $15 million increase in noncash equity compensation expense, resulting from the alignment of CMC's and Entegris' equity benefit plans.

We expect Q1 OpEx to be the high watermark for the year and expect OpEx to be down $15 million to $18 million sequentially in Q2 as noncash equity compensation returns to more normalized quarterly levels.

Q4 GAAP operating income was $144 million. Non-GAAP operating income was $219 million or 23% of revenue. Adjusted EBITDA was $261 million or 28% of revenue. Looking below the line, the GAAP and non-GAAP tax rate was approximately 12% in Q4. The low rate reflected several favorable discrete items. Q4 GAAP diluted EPS was $0.38 per share. Non-GAAP EPS was $0.83 per share.

Turning to our performance by division. For ease of analysis, the year-on-year comparisons I'm referencing here are on a pro forma basis for the SCEM and APS divisions. Q4 sales of $285 million for MC were a record and were up 10% from last year and up 1% sequentially. The growth year-over-year was strong in gas purification and liquid filtration.

Adjusted operating margin for MC was approximately 38% for the quarter, up year-on-year and up slightly sequentially. The margin increase was driven primarily by higher volumes and solid execution, offset in part by higher ER&D investments.

Q4 sales of $214 million for AMH, were up 8% versus last year and up 2% sequentially. Year-on-year sales growth was strongest in wafer and fluid handling and liquid packaging solutions. Adjusted operating margin for AMH was 22%, down year-over-year and up sequentially. The modest margin decline year-on-year was driven by additional ER&D investment.

The sequential margin increase was primarily the result of certain inventory charges in Q3 not recurring and favorable product mix. Q4 sales of $204 million for SCEM were down 1% year-over-year and down 9% sequentially. The sales decline was seen across most product lines and was primarily driven by the softening in the semi market and the impact from the export restrictions in China.

Adjusted operating margin for SCEM was 7% for the quarter, down significantly both year-on-year and sequentially. The margin decline was driven by greater investment in ER&D, lower volumes and unfavorable mix. We expect better execution and improved operating margins for SCEM going forward.

Q4 sales of $254 million for APS, were down 11% year-over-year and down 14% sequentially. The sales decline in APS was also driven by the impact of the softening semi market. Adjusted operating margin for APS was approximately 22% for the quarter, down year-on-year and sequentially. The margin decline was primarily driven by lower volumes and unfavorable product mix.

Moving on to cash flow and the balance sheet. Fourth quarter cash flow from operations was $32 million and was $352 million for the full year on an as-reported basis. CapEx for the quarter was $147 million and $466 million on an as-reported basis for the full year. We expect to spend approximately $500 million in total CapEx in 2023, a significant portion of which will be for our new facility in Taiwan and Colorado Springs.

We also continue to expect CapEx will decline to a longer-term run rate of approximately 10% of sales starting in 2024. As Bertrand said, we are highly focused on improving our cash flow and especially inventory turns. We expect inventory turns to improve to approximately 3 turns by the end of this year.

With this improvement in turns, we expect to free up over $100 million in cash this year. A bit on our capital structure. At the end of the year, our gross debt was $5.9 billion, and our net debt was $5.4 billion. This equates to a gross leverage ratio of 4.9x and net leverage ratio of 4.4x pro forma for the announced cost synergies.

As a reminder, going forward, after taking into account the hedge we put in place, our variable rate debt is expected to be approximately 10% of total debt outstanding. The blended interest rate on the debt portfolio is approximately 5.5%. As Bertrand said, we are very focused on deleveraging. On that note, we expect to steadily lower our leverage toward our target of 3.5x gross leverage by the end of 2023, consistent with what we presented at our Analyst Day.

Our liquidity position continues to be solid. As of the end of the year, we had over $500 million in cash on hand and over $1.1 billion of total liquidity, including our $575 million undrawn revolving credit facility. Before I discuss our Q1 guidance, I would like to reiterate that our business model is very flexible. We will be watching our business trends closely and are prepared to adjust our cost structure as needed.

Now for our Q1 outlook. We expect sales to range from $880 million to $910 million. We expect the EBITDA margin to be approximately 25% to 26%. We expect GAAP EPS to be $0.05 to $0.10 per share and non-GAAP EPS to be $0.50 to $0.55 per share. A few additional notes on our Q1 and 2023 guidance. As I referenced before, Q1 non-GAAP guidance includes a noncash compensation expense with a total of approximately $20 million or $0.11 of EPS resulting from the alignment of CMC and Entegris equity benefit plans.

And again, Q1 OpEx is expected to be the high watermark for the year. We expect interest expense of approximately $85 million in Q1. We expect our tax rate to be approximately 17% on a GAAP basis and 20% on a non-GAAP basis for the full year of 2023.

On a sequential quarterly basis, the higher tax rate as approximately $0.05 per share impact on non-GAAP EPS. Amortization is expected to be $65 million per quarter, and depreciation is expected to be $40 million to $45 million in Q1, increasing to over $55 million in Q4.

In closing, we are pleased with our execution and our team's relentless focus on our customers, especially given a challenging industry environment. The team is doing an excellent job driving a fast-paced integration of CMC and we are well on track to deliver on our key milestones. We have a strong conviction in the long-term secular growth of our industry and our highly differentiated, unit-driven business model. And we are focused on dynamically managing our cost structure while making the investments that are crucial to supporting our customers' node transitions in 2023 and preparing for our long-term growth. Operator, we'll now open up for questions.

(Operator Instructions) We'll hear first from the line of Toshiya Hari at Goldman Sachs.

Big congrats to Greg on an amazing run. I had 2 questions. First one for Bertrand. I was hoping you could talk a little bit about the overall industry dynamics? How you're thinking about the year. You did give quite a bit of color in your prepared remarks, but you called Q2 as sort of the potential bottom for the industry. I guess as we model your business, should we be thinking your business bottoms in Q2 as well. And more importantly, the recovery into the second half, can you speak to some of the drivers that you're focused on, both on the CapEx side as well as the wafer start side of your business?

Yes. Toshiya, thank you for the question. As I said in my prepared remarks, it's a bit difficult to forecast 2023 at this point, the product visibility is limited. But as of today, based on direct discussions with customers, we expect the blended industry index for us to be down 13%. And beyond that number, we are assuming MSI down approximately 10 points with Q2 likely to bottom. And remember that about 80% of our business is unit driven. For CapEx, we expect the contraction close to 20% for the year and we currently expect the second half lower than the first half as our OEM customers will be working through their current backlog in the first part of the year. But remember that the CapEx business only represents approximately 20% of our total revenue.

And then finally, maybe a quick comment on the node transitions that we expect in 2023. And that can probably help you understand how we're thinking about the shape of the year for us. As you know, our customers, node transitions are key factors to our ability to achieve top line outperformance and in particular, that 5-point outperformance target that we have. And as of right now, these node transitions appear to be mostly on schedule with a number of very important transitions expected in second half of the year in NAND and logic in particular. So the net of all of this is we expect the full year to be down approximately 8% and we expect the back half of the year for us to be a little bit better than the first half of the year.

That's great color. And then one for Greg. You talked about gross leverage coming down from 4.9 to I think you said 3.5 by the end of '23. It would be really helpful if you can kind of provide a bridge how you guys get there again from 4.9 to 3.5, the PIM deal not closing was obviously a disappointment. But what are your thoughts on DRA and QED and anything else that you guys have planned as you look to delever the balance sheet?

Toshiya. Yes, I'm not going to provide a specific bridge. I mean, that continues to be our target. We do continue to look at various asset sales. We continue to look at the cost structure. We continue -- we'll have some benefit as we move through the year on synergies. We expect that we'll bring working capital down. So while 2023, from a performance perspective, is not what we've seen in the prior years, as we move forward, we expect the company will come back to be the strong cash generator that it's always been. And with regard to asset sales, I mean, we've been -- obviously, we're quite confident that the QED transaction will close, and we will review our option -- continue to review our options with regard to the rest of the portfolio.

Our next question will come from Kieran De Brun at Mizuho.

Congratulations again, Greg. I think maybe if you can just help us parse out how to think about the first half versus second half following up on those questions. But specifically, when we think about SCEM and Microcontamination Control, it seems like MC still remains pretty resilient and should kind of, I guess, be that bright spot as we kind of move through the year. But SCEM, I think, was a little bit weaker than maybe we were expecting on the margin. So if you can just expect -- help us bridge how you're thinking about that improving throughout the year and trending, that would be helpful?

Yes. So if you think about SCEM, certainly, the -- we've seen some significant sequential decline. I remember 2 things, right? One is that, this is the division with the most exposure to Memory. And this is also the division with the most exposure to advanced nodes in China. So there was a double negative impact on this business for the last couple of quarters. So I think things will stabilize, and we expect a number of new products linked to some of the node transitions in the back half of the year to help both in terms of growth and in terms of margin potential for the business.

If you think about SCEM for 2022, the division actually performed -- on a full year basis performed actually pretty well and very much in line with our expectation, and outpacing the industry by about 6 points. And we would expect a similar level of outperformance in 2023 as a result of the opportunities that we have in some of the new nodes in the back half of the year. On MC, you're right, I think we are seeing a very resilient business. We know that purity is increasingly important to our customers. Purity in the manufacturing processes translates into yield optimization, translates to faster time to yield and also translates to long-term device reliability. And we have an incredible franchise when it comes to advanced purification. So we do believe that this business will prove to be very resilient in 2023. And we think that this is probably going to be the best performing division for Entegris in 2023.

Great. And then maybe just a really quick follow-up. I think on the revenue synergy side, you mentioned having the dedicated team in place. It seems like there's more visibility and traction into the potential for those revenue synergies going forward. I'm just curious, are there any kind of preliminary thoughts on things that you've seen based on what that team has already achieved that are giving you optimism towards some of those synergies in the back half of this year maybe and into 2024?

Yes. Obviously, the team is very focused on short-term cross-selling opportunities. This is something that we started to aggressively pursue in 2022. This will remain a big area of focus in 2023 as well. The development teams have been hard at work in 2022, also trying to co-optimize the complementary solution sets around the CMP module. I would not expect any new products coming out of those efforts to hit the marketplace until probably late in '23, early 2024. And then, of course, we've been very actively engaged with our customers telling them about the value that we can create for them is that end-to-end solution selling from full development to polishing solutions all the way to post CMP cleaning capabilities. And it's fair to say that you see the value of our offering. They are eager to engage more fully with us. And frankly, a downturn environment provides a lot of opportunities for us to accelerate these engagements. So we're going to be very focused on those in 2023. But it will take time to unlock those revenue synergies, as we said during the Analyst Day.

Our next question will come from Sidney Ho at Deutsche Bank.

Greg, congrats on your retirement. It was very nice working with you. So my question is just a follow-up to an earlier question on the market outlook. Bertrand, you talked about MSI down about 10%. I'm hoping you can double-click on that a little bit. Can you talk about the trends you see between memory versus logic and foundry. Are you expecting both segments to bottom in the second quarter this year? Or are they have different cadence? And maybe remind us your revenue exposure to those 2 different segments? And then I have a follow-up question.

Yes. So when it comes to our fab revenues and our fab revenues represent about 50% of our total revenue. We have about a 70-30 ratio between logic and memory. So this is the fact. When it comes to exactly when we will see the bottom in memory versus logic, I'm not going to answer that question quite yet. Sidney, I think, as I said, it's -- there's a lot -- I mean there's a lack of visibility right now in the industry. I think that we are engaged with our customers. We are mostly focused, frankly, on the ramps for the new nodes and we're keeping the pulp of the industry. But I'm not going to comment very precisely on the question.

Okay. Maybe a follow-up question. On the gross margin side, you guys printed Q4 42.8%, guiding up a little bit in Q1. Going forward, is the biggest leverage coming from volume and what kind of incremental growth and operating margin should we be thinking about? I'm just trying to figure out your path to go back to the 46%, 47% range that it used to be. Maybe that's not realistic given the inclusion of the CMP products.

Yes. So I'll take that, Sidney. So as it relates to gross margin, if you look at gross margin over really the last 8 quarters, pro forma basis, it's been right between 42% and 44%. I mean the outlook for Q1, we said slightly higher. When you think about sort of the headwinds and tailwinds, the headwinds are obviously lower volumes and then we'll be bringing additional assets, particularly the KSP facility online, some point in the middle of this year. And then the tailwinds continue to be -- I mean, our highest -- our fastest-growing business continues to be our MC business, which is -- also happens to be our most profitable business. When I think about margins generically, when you talk about that the 46-ish range, it would -- to get back there, I mean short of very large increase in volumes.

It would also -- there are a number of things, as you point out in the CMC portfolio that have relatively low gross margins. And I think we've commented including the PIM business, which is a business that we worked -- attempted that we -- thought we were going to dispose of. So I mean -- so I would say it's higher volumes, it's improving mix. And then it's potential adjustments to the portfolio or what drive the margins higher longer term.

(Operator Instructions) We'll hear next from John Roberts at Credit Suisse.

Thanks, Greg, for all your help. And could you comment, are you seeing any additional pricing pressure in light of the severe volume weakness that you have?

I can take that, Greg, if you want.

Yes, go ahead.

Yes. Just to say that as you would expect, we're watching very carefully the evolution of our input costs. And we will continue to take appropriate steps as needed as we have in the past couple of years. So -- and we will continue to raise prices as necessary. But we're not going to go into a lot of detailed descriptions of our pricing strategy.

Okay. Could I ask how deep was the pool of potential buyers for PIM? And how would you characterize the potential buyers as strategic versus financial outside of Infineum?

Yes. What I would just say, again, is we decided to terminate the transaction concerned about the certainty of the deal. So at this point, we are in the process of regrouping, assessing our options. As we said a few months back, we continue to believe that we are not the best owner for this business. This is a product platform that is noncore to the rest of Entegris. That's probably as far as we'll go on this call today, and we will update you when appropriate.

Mike Harrison with Seaport Research Partners.

I was wondering if you can talk a little bit about the China export restrictions and how you see the impact there going forward? It sounds like for Q4, it was towards the lower end of your expectations, and you're expecting it to be about $20 million a quarter going forward. Is that going to be kind of the number for the full year? Or is it declining during the year? And I guess just from a segment perspective, it seems like SCEM saw the biggest impact. Is that the case? Or can you maybe give some more detail on how those restrictions impacted other segments?

Yes. So let me start maybe with the last part of your question there. Every division did see an impact -- a negative impact on the restrictions. But as I said earlier, SCEM was the division seeing -- or being the most affected by those restrictions simply because we have uncovered many new opportunities at the leading edge in China and the new restrictions obviously are preventing us from serving those applications and these customers. So back to the first part of your question, as many other companies in the industry, we spend the better part of the fourth quarter to engage very closely with our Chinese domestic customers.

We performed very extensive due diligence to assess whether these Chinese customers would be committed to operate within the new principal guidelines. We completed the assessment. And based on that, we can now quantify the more permanent impact, which is as I said on the call about $20 million per quarter. I'm not going to speculate on how it's going to evolve during the year, but assume for modeling purpose, a negative impact of about $20 million per quarter. And that's already reflected into the overall annual guidance that we provided.

Understood. All right. And then we discussed this a little bit on the last call, but it seems like you're still talking about good growth that you're seeing in advanced nodes or more advanced applications. Yet in a couple of your segments, including advanced planarization solutions, you're talking about a negative mix impact. So I just want to understand why is mix getting worse if your highest value applications are still strong?

Greg, do you want to take that? Do you want me to take that?

Yes, why don't you go ahead, Bertrand?

Well, I think that if you look at margins on new products. Typically, those margins are higher than all the technologies. The -- I think that the reason we've been seeing some pressure on gross margin really has to do with the lack of leverage due to reduced volumes. But I'm not sure I want to go beyond that.

Okay. So it sounds like you just don't even really want to comment on mix? Or is mix depressed right now?

No, I'll -- I guess I'll comment on it. Yes, I mean, I think mix is depressed right now. I mean, if you look at our -- some of our higher-margin products, they tend to be, as Bertrand said, so in the more advanced nodes, I mean we have a lot of activity in the memory sector. The memory sector has been weaker. I'm not saying that our margins are higher in the memory sector than in other sectors, but the weakness in the memory sector has impacted some of our most advanced products. And so I could go division by division, but that's not what we don't disclose sort of margins by product line or division.

But broadly speaking, some of our higher -- we've seen weakness in some of our higher-margin products. And it's not -- and I will say it is not a secular thing. It's just -- it's the nature of what's happening in the market right now. When I look at our new products, I mean, we've got as much confidence as we've ever had in terms of our position in the marketplace and where we're going, but we can't swim against the current.

And it would -- you would expect mix to improve with some of the advanced node transitions going on and the better performance in the second half. Is that fair?

I think that's fair.

Our next question will come today from Charles Shi at Needham & Company.

Maybe the first one, can you guys give us a sense how the business will trend into first quarter '23, I mean a little bit segment details. And as a second part to the same question, I mean, looking into the full year '23, I think Bertrand, you mentioned the Q2 potentially be the bottom for MSI. But if I look at your historical performance, let's say, 2019 different segment, kind of trough at slightly different quarters, SCEM -- in 2019, SCEM (inaudible) compared to MC and AMH kind of (inaudible) a quarter later, I mean, obviously, '23 downturn seems to be -- is going to be a lot more specific year than 2019. Can you kind of give us some sense by segment? Will the same pattern in terms of timing of the (inaudible)? Could that repeat? And that's my first question.

Okay. So on the Q1 guidance, we expect -- if you look at the midpoint of the guidance, it's a sequential decline of about 5 points. It's driven by further deterioration in wafer starts, both in memory and advanced logic as well as a further decline in our OEM business. On the positive side, as we think about Q1, we expect mainstream fab to remain relatively steady. And the same would be true for new fab construction projects, which have been steady in Q4, and we expect to continue to be steady in Q1. So if you think about -- the other part of the question about will the 4 divisions bottom at different time? I would say, most likely.

I'm not going to give you a specific breakdown simply because, as I said, the visibility is not very, very clear right now. But in general terms, think about SCEM and APS being really terms dismissive with very short lead times and think about MC and AMH with -- I mean businesses that have a little more exposure to CapEx, but also have traditionally longer lead times. So I think that I would expect APS and SCEM to bottom a little bit earlier than an MC and AMH, but I won't give you exactly which quarter because we don't have that degree of precision quite yet.

So maybe my second question, I want to ask you a bit more about the potential further divestiture after your CMC acquisition. I don't know if you have further plans. But here's my question, I think some part of the CMC portfolio doesn't seem to fit with your strategic model, I mean, you want to be in -- I mean, sticky product categories. I'm thinking some of the more industrial gases and chemical-like business that you inherited from CMC doesn't seem to fit.

Is there a potential further divestiture possible in that area? Or -- but I also see like the reshoring -- fab reshoring, localization of semiconductor manufacturing may provide you some tactical opportunities for revenue growth or share gains in those more, I mean, I would say less sticky product categories there. Can you provide us some comments there?

Yes, I'll go back to what we said during the recent Analyst Day in 2022, which is -- we've spent a lot of time asking ourselves that very question, are we the right owners of the various thoughts of the CMC Materials portfolio. We have reached conclusions. And now we're left with a question of finding the right timing for us to act on those decisions. But I've been not going through a more specifics at this point. I think we have a clear view of what we believe belong to long term in the portfolio of Entegris. And as I said, we'll keep you updated when the time is right.

Next, we'll hear from the line of Aleksey Yefremov at KeyBanc Capital Markets.

Bertrand, your comments about node transitions largely being on track. Is this related to 2023 or also looking out to 2024, things are also on track?

My comment was really on 2023.

And would you care to comment beyond that if you have any more or less visibility into node transitions?

I think that those node transitions always fluctuate and we will not control the timing of those node transitions. So when customers change their plans. So I don't think it would be prudent for me to comment on 2024 node transitions. I would just say that if indeed, our NAND and logic customers stick to their 2023 node transitions, that would be a great start, and we'll be very, very happy with that outcome. And then later in 2023, I'll be happy to answer your question and try to provide some color on what to expect in 2024 because it's just too early for me to comment right now on 2024.

Understood. And on the short term, you mentioned 2Q is likely the bottom for the industry. Does this also imply that your second quarter is likely weaker than first quarter in terms of sales and EBITDA? Or that's not necessarily the case?

We will provide Q2 guidance when we report our first quarter results. But directionally, I would say that we expect some level of sequential decline, but we will provide some more details around that in a few months.

Our next question comes from Timothy Arcuri at UBS.

Greg, there's assets being held on the balance sheet. I think it's $247 million being held on the balance sheet. The sale price of the PIM business was $240 million and I think the QED was $135 million. So to clarify, does the guidance for March still include PIM, I assume it does. And I think that was running at $25 million per quarter?

Yes. The guidance for the full year includes the entirety of the portfolio with the exception of QED.

With the exception of QED...

And $247 million you're seeing is the -- QED is not there because we did not have -- we had not executed the transaction prior to year-end-PIM at year-end, which is the date of the balance sheet, the expectation is that business is going to be sold. The $240 million is the PIM business.

That's PIM. Okay. Okay. Got it. Okay. And then, Bertrand, just a question for you, and I ask you this a lot, but sort of the question is more around your visibility into the amount of inventory that your customers have of your stuff. You have service people on site at all these different customers, but we've just come through the sort of the mother of all inventory building cycles during the past 1 year, 1.5 years, where people couldn't get product and they were just stockpiling what they could get. So how much visibility do you have in terms of inventory of your materials at your customer side? And how would you characterize it versus sort of normal inventory?

Yes, Tim, it's a good question. Look, we have some level of visibility. It's not perfect visibility. I would say that at this point, we have no reason to believe there is a significant inventory of Entegris' products in the channel. And the reason for that belief is that we have not seen any unusual amount of order cancellations or pushout. So that's something that we are obviously watching very, very carefully. But as of right now we have no reason to believe there's a ballooning inventory situation.

Christian Schwab at Craig-Hallum Capital Group.

Congratulations, Greg, it's been great working with you. On the China exposure, can you clarify that between domestic and multinational mix?

Yes. So we think that it's about 60% domestic and about 40% international when it comes to the revenue that you are seeing in our financial reports in China prior to the export restrictions, not regarding the numbers.

Okay. Okay. Is there a Chinese alternative to your different products that you're selling into domestic carriers, domestic manufacturers. The reason I ask that is a lot of our checks are suggesting that they're done buying from U.S. vendors, if they can at all help it and move to somebody in the China supply chain? Is that part of the reason for the revenue? Or is it just purely they can't get advanced manufacturing equipment?

So when it comes to competitive alternatives to our products, I think they are limited. And there are a few older generation materials that are available from China, manufactured by Chinese suppliers, but this is really a minority. For the most part, there are no current alternatives to what we do in China. And again -- so for us, part of the exercise was really to validate which customers we would still be able to serve going forward. And we had to do that in the context of the new restrictions, and we completed the assessment, as I said. And we believe that the negative impact would be about $80 million per year. So $20 million per quarter.

Okay. Great. And then my last question, I know we talked about earlier the long-term growth drivers and $1 trillion worth of revenue, which has been talked about for years, but we did probably $600 million last year. And obviously, this is going to be a big downturn. I guess if you have conviction in that $1 trillion, when do you see -- what would you anticipate a material improvement in the entire business to have confidence that, that number is still directionally accurate?

Look, I mean, I think for all of you who have been in this industry long enough, you remember that this industry can contract quickly and can rebound very quickly. So today, we're still trying to figure out exactly when the bottom will be. Once we know that, then I think it's going to be fair for you to ask the next questions, which will be the rate of recovery. But I'm not going to speculate quite yet today. We just don't have enough visibility. But if you look at previous cycles, I don't think that the industry conditions that we are currently experiencing are putting at risk the possibility of reaching $1 trillion in semiconductor revenue or even exceeding that in 2030.

I mean this industry has demonstrated time and time again that it can really accelerate in an exponential way. And frankly, that's what I would expect as a result of the emergence of a number of new drivers for semiconductors, which is going to be changing every part of our lives going forward from transportation systems to health care to the way we relate and interact with one another. So my conviction in secular growth potential in this industry remains absolutely intact.

The only question we have to deal with right now is how much of the downturn are we going to be seeing and the timing of the recovery. But none of what we're seeing today is putting a question that -- I mean the secular growth potential of this industry or the secular growth potential of our business.

Ladies and gentlemen, our final question today comes from the line of Chris Kapsch at Loop Capital Markets.

Yes. So 1 question was with respect to your comments about the prospective outperformance relative to the market, I think you said 50 bps. Just curious if given the node transitions that you see and you anticipate in the second half of this year, is it fair to think about your outperformance relative to the market expanding given that was kind of an average. So it's higher than that exiting 2023 into '24, given those node transitions and you're presumable over-indexing to those nodes?

So Chris, if your question is, should we expect a little bit more outperformance in the back half of the year as compared to the first half of the year? The answer is yes.

Okay. And then -- so the other question I had related to the CMC portfolio. So back in late 2021, that company won what I thought it was an important patent infringement litigation. And the DOJ gave the customer involved a pretty healthy period to transition given the challenges of requalifying and process of records. And so curious if you're now seeing any benefit from that. Is that something that could buttress the -- your demand in your advanced oxide slurries. I'm curious if you can comment on any similar litigation in other jurisdictions around the world?

So Chris, good question. But as you understand, I can't comment really on any ongoing litigations. But what I can share with you is that, obviously, we were very pleased with the ITC ruling. And what I can also say is that we've been working very, very closely with customers to help them transition away from the infringing products. And we are seeing today positive revenues coming from this work. But I won't go into quantifying this for you. But it's positive and it's playing out the way we were hoping it was.

At this time, we have no further questions. I'll turn it back to you, Mr. Seymour.

Thank you very much for joining the call today. Please follow up with me if you have any additional questions. Have a good day.

This does conclude today's teleconference, and we thank you all for your participation. You may now disconnect your lines, and we hope that you enjoy the rest of your day.