Entegris, Inc.
Q2 2017 Earnings Call Transcript

Published: 27 Jul 2017

[Operator:]

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.

[Steve Cantor:]

Great. Thank you, Camara 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 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?

[Bertrand Loy:]

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'll then open the line to our questions. 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 three 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 multi-year period of expansion for the semiconductor industry, driven by a broadening of IC demand 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 has put us in an ideal position to expand our served market 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, these collaborations are centering on new comprehensive solutions and 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 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 a record quarter 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 our 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. 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 [indiscernible] in the fab as well as upstream with the broad chemical manufacturers. In addition, our gas filtration products reflected continued strength from OEM customers while they add new etch tools. Finally, I am pleased to report that 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 improvement 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 a leased facility in Colorado that had been literally dedicated to 450 millimeter wafer handling solution. We expect the closure of this Colorado site to be completed during the first quarter of 2018. This past quarter, we also discontinued our investment in the Evolve [ph] program. Evolve is a process technology using organic chemistry 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 re-deploy some of the funding to other rapidly growing areas of the 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 top line in excess of 10% in 2017 and to continue to outperform our market in 2018 and beyond. I will now turn the call to Greg for the financial detail. Greg?

[Greg Graves:]

Thank you, Bertrand. The 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 continued to decline, reflecting our debt repayments. Our GAAP tax rate for the quarter was 22%. Our core tax rate of 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 are 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 six 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 it's 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 of their manufacturing facilities. Q2 sales for Microcontamination Control or MC of 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 was in line with our expectations. Second quarter sales for advanced material 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 reflects a 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, relating to the closing of an AMH facility and discontinuing the Evolve initiative. The quarterly growth savings related to these two actions is approximately 1.5 million. Cash flow from operations for the quarter was 85million and free cash flow, 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 US. 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 0.4 times. 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, driving 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:]

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

[Toshiya Hari:]

Bertrand, you delivered a 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?

[Bertrand Loy:]

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 and we saw a 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, the Microcontamination division year-to-date is growing at about 21% over 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 the number of all these new product lines as we continued to enjoy the strong level of activity in the legacy flats. 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.

[Greg Graves:]

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 initiatives. So overall, great performance by our supply chain team.

[Toshiya Hari:]

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?

[Bertrand Loy:]

Well, if you recall Toshiya, during our recent Analyst Day in March of this year, we stated our multi-year objective of outpacing the industry by about 100 to 200 basis point and behind that strong conviction in our ability to do that year after year after year 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 top line, 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 to be a big growth driver for our SCEM division in the back half of this year and certainly will be a big growth contributor going into next year. Likewise, we have a heightened degree of confidence in the glass forming opportunity. We announced recently that we are in fact increasing capacity for our graphite material to be in a position to truly 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 opportunities, we are serving many different spectrums 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.

[Toshiya Hari:]

Great. And if I can squeeze in just one last one on AMH and the profitability in the 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're working on today, what do you think is kind of a steady state EBIT margin or OP margin structure of this business relative to SCEM and MC.

[Bertrand Loy:]

So, Toshiya, I can take the first cut at 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 the 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.

[Operator:]

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

[Patrick Ho:]

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 to come from market expansion opportunities versus share gains and in particular in the share gains, where do you believe you're seeing the greatest momentum on that front.

[Bertrand Loy:]

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 increased surety requirements upstream in the ecosystem. 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 requirements are new as the industry transitioned to the 1x nodes and I would characterize that as really as an 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 continued 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 main technology leaders in the history 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% or well in excess of the overall WSC 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 in all of those various segments.

[Patrick Ho:]

And maybe question for you, Greg, in terms of the model improvements we've seen this quarter, you talked about at your Analyst Day some of the internal improvements you're trying to make in the AMH business segment and we've seen it today. Can you talk about the other two whether those are just more product mix and things of that nature or can you also make internal improvements in the special chemicals and engineer materials business as well as on the micro contamination control front as well?

[Greg Graves:]

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

[Operator:]

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

[Edwin Mok:]

So first I guess you talk about this year you expect revenue growth of 10% this year. In light of the strong result and guidance, maybe a better way to ask that is that's kind of implies to something not in the fourth quarter. I didn't see seasonal decline in the fourth quarter. Do you think that is still what you are baking into that or we're going to be better than seasonal given the strength of your business.

[Bertrand Loy:]

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 risk going to Q3 especially around CapEx. We obviously would have a little bit more visibility as we progress through the year and will provide more clarity as we release our Q3 earnings and guide for Q4. But overall again, our expectation 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 top line to grow in excess of 10%.

[Edwin Mok:]

One question I have is, we often get this as investors, how much exposure you guys have for foundry, logic, DRAM, NAND, and specifically for 3D NAND because we've seen 3D big ramp up in capacity there and therefore many investors think that amount of demand for consumables such as the software you provide right, it's going to come pretty aggressively as we go forward. Is there ways you can kind of talk about how much exposure you have to 3D NAND and maybe get some examples on where you are gaining shares, gaining foot print in the 3D NAND supply chain?

[Bertrand Loy:]

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, its 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 of food business, benefits of fluid handling business. But more importantly I think we're really excited about what it will mean going forward at those fab starts running their processes using the materials from the chemistry 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 and 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.

[Edwin Mok:]

And last question I have is, before on answering one of your questions, you mentioned that your sales to the OEM is growing at roughly around 40% year-to-date that's really impressive number and much bigger than the WFE model that I think most of us know. Just curious what's driving that growth is it because of this new coating material that you guys have talked about before, was that a big driver for that or is it generally just demand greater from those OEM or share gained in certain areas.

[Bertrand Loy:]

So it's really share gain at this point. Remember that coating materials, we have actually not even started selling those solutions yet. So that growth story is yet to materialize and I would expect that to contribute to grow 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, flow controllers, dispense systems and all sorts of high value components that we sell to our OEM customers. So I'm 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:]

[Operator Instructions] We'll go next to Chris Kapsch with Aegis Capital.

[Chris Kapsch:]

Question I guess sort of big picture for Bertrand, the framework that you laid out in terms of the overall backdrop for the end markets that you address over three to five years you talked about your GDP growth of two to three, the semiconductor growing up maybe a percentage point above that GDP and then Entegris specific initiatives adding another one to two percentage points. So four to six 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 overwhelming consensus is that for the semiconductor industry 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 credit and investment and allocation of capital.

[Bertrand Loy:]

Yes Chris, I think this is a great question. The model that you're referring to is a model that we introduced in fact a year and a half ago. And you're right at that point in time we may not have had as much information as we do have today. So when you suggesting there may be an upside potential or an upside scenario to what we presented. That may be the case. I mean something we're going to be looking obviously into. And when we already we can present those numbers to you probably this quarter in our next analyst day. But remember that that 4% to 6% growth target was a three to five year compounded average growth rate. And you're right that today we feel really good about our performance, we grew 9% in '16, we expect to grow in excess of 10% '17. So as we've said again, as we have a little bit more information, you know, we may decide to provide longer term guidance, but we're [indiscernible].

[Chris Kapsch:]

I mean just wanted, I mean I understand it's a longer term framework. I'm just wondering is, you know, the feedback that you get from all your interactions with key customers is it enough to feel that that the semiconductor industry strength is over a long period of time, it's a little bit better than say 100 basis points about GDP. But what we can…

[Bertrand Loy:]

So at this point, 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 point above and beyond the industry growth rate. So I hope you like and if you have enough conviction that this is the case we would recast our underlying market assumptions and add to that 100 to 200 basis point.

[Chris Kapsch:]

And then just a follow up on some of the discussion around the margin drivers and improvement, very impressive obviously the variances there. And Greg you highlighted the SCEM and AMH segment is showing the most market growth. So just wondering if really what's going on is this 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.

[Greg Graves:]

I would say, I mean to your first point, I mean clearly I mean volume is going to play a role in that right. We have a fixed cost structure and as volume moves up that obviously helps us on the gross margin. I didn't say that in my formal remarks but that kind of goes without saying. And I would just say from a mix perspective in the SCEM business for instance I mean margins, there is wide - there is a disruption 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 for instance. But it's really hard to pinpoint two or three things, I could say just sort of fundamental focus on the execution at our manufacturing facilities it's the higher volumes. It's not any one thing specific or even - if I were to give you a list of what was driving the margin it would be ten things for every division.

[Chris Kapsch:]

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 our a foundry versus logic virus 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?

[Greg Graves:]

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 memory customers. We were pleased to see a little bit of an improvement in our logic and foundry customers in Q2 after very soft start of the year. But again most of the growth year to date came from memory, came from OEM and if a few non-semi market.

[Operator:]

We'll go next to Amanda Scarnati with Citi.

[Amanda Scarnati:]

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

[Greg Graves:]

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

[Amanda Scarnati:]

So still paying down debt at similar level.

[Greg Graves:]

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

[Amanda Scarnati:]

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

[Bertrand Loy:]

So Amanda, it was really about the strength in number for 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 strong performance again in deposition materials, very strong performance in a number of new filtration solutions. And those products again continued to set new records after records. So again very, very pleased to see that level of performance and success in Q2. And as I mentioned we - and I think what is 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 try 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 the midpoint of our guidance represents an increase of 12% 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.

[Operator:]

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

[Sidney Ho:]

I want to go back to Q2 in terms of revenue by segment. You are growing exactly what you think you'll growing the fastest which the specialty materials and 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, which I think is like 45% highly wafer fab equipment. Is this an area that we should see a more outside growth in the second half of the year.

[Bertrand Loy:]

It's a great question Sidney. And I think that if you think about our CapEx business, you have three components to that. So one would be high value components we sell to the OEM and I said those components are doing extremely well. The other two components really have a different demand pattern and they relate to components we sell in the sub-fab environment. So our customers will buy those components when they build new fabs. And the buildup phase for those fabs was a little softer in Q2 then they were in Q1 and even at some level last year. So I think for that actually didn't go as fast, but was in line with our expectations. Likewise the third component to a CapEx business is what we call our [indiscernible] products or 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 food 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 go as fast as our OEM business. So think about again those three I would feel different segments of CapEx business following very different demand patterns.

[Sidney Ho:]

My second question is a follow-up to earlier questions on the longer term sense. There seems to be a lot of tailwinds in terms of like process steps are going up quite a bit from ten to seven to five. And a number of layers in 3D NANDs just keep going up. At the same time your peers in the equipment space also talk a lot about material driven scaling. Following in that comment on that 4% to 6% growth CAGR or something that maybe you restate. I'm just curious, are there any offsets that we should consider that like ASP or have headwind, is it certain things that we should consider that makes it not growing as fast as some of these things that I mentioned earlier.

[Bertrand Loy:]

No, it was, first of all remember that 5% to 6% growth objective is based on 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 will have to wait a 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 grow in excess of 10% this year. And feeling really, really good about the adoption of a number of new products. So stayed tune, when the time is right, we'll talk about '18, but we won't do that today.

[Sidney Ho:]

Maybe one 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 and shortage of wafers.

[Bertrand Loy:]

No, I think wafer growers are currently adding capacity, I think that they are managing the capacity really well in order to make sure that they are in position of strength when they negotiate pricing. I mean that's their strategy and that's their position. As it relates to us, I mean it really doesn't really change our competitive position with any one of those players. We have a very strong market share at [indiscernible]. As you know our market share at 300 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.

[Operator:]

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.

[Steve Cantor:]

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 good day.

[Operator:]

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