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Entegris Inc
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Good day, everyone, and welcome to the Entegris’ First Quarter 2018 Earnings Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Steven 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, www.entegris.com.
Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, which are outlined in detail in our reports and filings with the SEC. On this call, we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. You can find a reconciliation table in today's press release 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 our outlook for the reminder 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. Successful transition to 64-layer 3D NAND chips by all leading memory producers spurred demand for our newly introduced Advanced Positioned Materials in our filtration and purification solutions.
In addition, new fab construction helps drive sales of our fluid handling solutions and wafer carriers. Our leading edge Logic and foundry businesses was soft this quarter, in-line with our expectations, as our customers experienced more muted end-demand for PC's 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 benefited 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 we're up strongly from the prior year. We continue to expand our market opportunities for advanced filtration and ultra pure fluid containers as the chemical industry diligently works to increase the stability and the cleanliness of their chemistry's during manufacturing and through transportation.
By geography, sales strength in North America, reflected robust demand from OEM’s 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 main 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 the path to achieve this goal once again in 2018. Let we 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 in 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 a $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’s unique technology to our portfolio, 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 admission of PSS, our current target is to grow our top line in excess of 10% in 2018. I will now turn to call to Greg for the financial detail. Greg?
Thank you, Bertrand. We are 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 a 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 or 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 was 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 we’re 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 in 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 we’re 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.
Thank you, sir. [Operator Instructions] We'll take our first question from Toshiya Hari with Goldman Sachs.
Great, thanks very much and congrats on the strong results. Bertrand, you talked a little bit about weakness in the leading edge logic and foundry business and I think your revenue – the sales number 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, potentially a pick up in the smartphone business. And when you think about no 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 leading edge logic and foundry business today?
Yes. So Toshi, let me try to maybe break your long question in two pieces and you're right, if you think about the 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 no transition taking place in Taiwan. And remember that sales of a number of our products can be lumpy when fab customers prepare for those fab transitions and during the first six months following a no transition. So this is what we experienced in Q1 and Q2 of 2017 in Taiwan with record sales of FOUPs and filtration products.
So for 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 the major ramp. So if you think about, 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 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 margin in the business yet you guys did very, 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 we’ll continue to – we’ll execute better and better but I also at the same time have always had a view that I think the customers that is not going to let us have a margin up in the 50% range and 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 anything else?
It's entirely the FX, I mean I would expect – we'd expect mix to be similar, we'd expect 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.
Okay, understood. Thank you so much.
We’ll take our next question from Edwin Mok with Needham and Company.
Great, thanks for taking my question guys. So first question I guess cost – sticking on the financials, kind of there’s a pretty big step up in OpEx sequentially, how much of that come from PSS and if you can give us some color in terms of how much revenue PSS contribute in the first quarter?
So order of magnitude PSS is kind of is low single-digits in terms of revenue and we’re not going to give more specifics in that. From an OpEx perspective, in $1 million or $2 million per quarter, I would say the other big impact on OpEx though is our increases in variable compensation as we deliver higher and higher levels of operating margin, our variable comp is largely tied to that margin percentage. Those would be the two largest.
Is this fair to say that this got higher level of OpEx is how we should think about model comp going forward?
I'm sorry, Edwin, I didn't catch the follow-up.
Yes, just quick follow on that, so is it fair to say that given that you mentioned it’s a high variable comp and you guys are quite profitable out now so we should assume the 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 the current profitability level, that’s true.
Okay, great. That's helpful. And then on the product side, Bertrand, I noticed that you mentioned in the call that the [indiscernible] just sells to the chemicals company is up quite strongly year-over-year it seems like you’re making some good progress in that end. I think I’ve seen all that about that option in the longer term. Do you see a lot more growth out there, is that something that you guys are already have – there any comment you can make around that growth opportunity for the company.
Yes, Edwin. If you 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 to semiconductor industry is requiring there are chemical suppliers to supply ever increasing levels of purity much tighter specs and quality levels and to achieve that those electronic grades chemical manufacturers will have to improve their manufacturing processes and to a great extent it means that they would have to increase many more point 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 their manufacturing process all the way through the very inefficient supply chains that are very customary in our industry. So I think that this is a huge opportunity for us, we've mentioned a few opportunity around advance resist but that's also true for a number of electronic wage chemistries.
Okay, great. That's helpful color. And then lastly just on NAND or membrane in general right. You mentioned that NAND has been a big driver for at least for this past quarter definitely we have seen a lot increase in NAND production there. Is that what you think about how that makes of your business that are shifting at least from your mix with the foundry, sorry, with fab customers are shifting from a logic to memory where was that – where is it right now. How do you kind of see that progressing through year or through next year any kind of color on that?
So we certainly, we are a big beneficiary of the transition to 64 layers in advance 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 advance memory makers have it 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 silicon channels. We're working on selective etch materials as well because you obviously need to etch those very, very narrow yet the 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 benefited 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 advance project is not there but we haven't seen any meaningful, no transition in advance logic in some time. When that happens I think that we will be able to demonstrate our exposure to advance 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.
Great, that’s all I have. Thank you.
We’ll take our next question from Duffy Fischer with Barclays.
Yes, good morning. Just want to go back to the incremental margin if I could. Obviously, generally there's three parts to that there's just improving the profitability, the ongoing sales the way we would calculate it from the outside gets rolled up into that, mix shift gets rolled into that. And then there's kind of what we think about the academic incremental in our 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 – we 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 I mean our target model is for up $0.40 flow through to the EBITDA line for each incremental dollar revenues. Now as one of the earlier gentleman questioners pointed out, if you look year-over-year to Q1 2018, our flow through was about 57%.
Correct.
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 business has and we've seen it really over the last six quarters, I mean there are significant operating leverage in that business of the gross margin structure.
Fair enough, thank you guys.
Our next question comes from Sidney Ho with Deutsche Bank.
Thanks for taking my question. I think you guys have 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% from each of them and if you can comment on Q2 specifically about those two drivers that would be great? Thanks.
Right, so you're correct, Sidney. We have increased slightly the guidance and – 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 assumptions that MSI would 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 surety 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 sum up those four components to 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 slowdown in the back end of the year. And that's really the big difference between the guidance that we have for Q2 versus what we – 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 and then the rest remains the same, we continue to expect to outpace the industry by about 200 basis point 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 point from the addition of PSS. And then for the first half, we have the lingering positive impact of 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 effective.
Got it, great. And then my follow-up question is if you can look at your segment profitability, I guess congratulations on having AMH is now in your target range for – it seems like its going to be at least for this quarter. But all three segments and all 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 benefit 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 in terms of – when I say high level I mean really the performance of the team.
Okay, that’s all I have. Thank you.
We’ll take our next question from Mike Harrison with Seaport Global Securities.
Good morning, this is Jacob on for Mike. My question on do you get the sense that China may be look to accelerate investments in domestic semiconductor capabilities, given some of the U.S. commentary suggesting maybe a more protective stance on IP and that sort of flow of information from China to U.S.
I mean, we're not really thinking that the recent tension between U.S. and China would have any imminent short-term impact on our business. I think said that China overall continues to be a big area of focus for us. It would present 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.
Alright, 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 in buckets how much of that was from PSS, how much was from the FX benefits you mentioned and then how much was mix related.
I would say, broadly it would be relatively even among the three.
Okay, got it. Thank you guys.
[Operator Instructions] Our next question from Christopher Kapsch with Loop Capital Markets.
Yeah, good morning. 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 or at least relative maybe to expectations. I'm just wondering, if you could further characterize what's driving the main stream strength. First of all, is it? I don't know if you have visibility, but any sense on which end-market is it skewed towards automotive, or is it just 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 in 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 we have benefited from just the sheer volume of demand for some of those lesser advanced devices and then that benefited 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 focus on automotive applications. There are adopting advanced filtration solutions to reduce latent defects. So that's a real trend, it's the very beginning of a trend and we expect that there would 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 new transition of second half of 2018. 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 SCEM or is it across all three segments? Thanks.
I won't talk specifically about any customer, but I would only say that we are, I mean first it's more than one customer considering no transition in Logic this year. And, we are in all cases very well positioned on the technology roadmap and I believe that as we transition to those new nodes we will see new opportunities in deposition materials and in advanced filtrations in particular.
Thank you for the additional color.
Our next question comes from Patrick Ho with Stifel.
Thank you very much. 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 above average growth, as well as into the future, you talked about stuff like advanced step is used in material 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 is real for Advanced Logic, it's real for Advanced Memory. As I mentioned, our SCEM business is there, well positioned to capitalize on that. If you recall, during the analyst day we discussed about newborn mixtures, we discussed newly positioned materials, selective edge, specialty coatings all of those products will play a big role in 2018.
And then the net, there was a big theme that we developed during the Analyst Day is the team of purity. And the purity requirements are becoming more stringent in 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 2018. 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.
Right that's helpful. And my follow-up question for Greg in terms of the capital allocation strategy, obviously this past quarter you have 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 either repaying down more debt near term, either reprising debt versus potential share repurchases or things of that nature.
So, I think as it relates to debt reduction, I think you will see us continue on kind of our $25 million quarter cadence. We've only got about $100 million of floating rate debt, the balance of our debt is four and five eighth notes that we issued last fall, which right now is proving to have been a, I’ll call it a stroke of brilliance.
As it relates to thinking more broadly about buybacks, 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.
Great, thanks a lot guys.
Thank you.
Let's take our next question from David Silver with Morningstar. Please go ahead.
Yeah, hi thank you. 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 a very global sales spread. So, I'm just wondering if there are any of the number of trade in tariff related issues that are swirling around right now that 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 lead a pre-comprehensive analysis of what could be the potential impact of those new trade areas. 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 on to the other part of your question, is do we, do we expect any impediment to our ability to do business in China and based on everything what 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'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 RD 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 RD 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 RD 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.
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 would expect, when we talk about those higher OpEx levels, we would expect to see incremental spending in ER&D. I wouldn't expect 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 a net 7.5% to 8% range.
Yes. So, 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 we 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 assume that on a year-over-year basis, the 16% top line growth, was maybe a couple percent 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 a 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. This year is no different than most years like it is that ones 1% to 2% has been where we've run pretty consistently over the last four to five years.
So, I just assume your sales growth is pretty much equal to your volume
Pretty much.
Very good. Okay, just wanted to clarify. Thanks very much
We'll take our next question from Amanda Scarnati with Citi
Hi guys, just a quick question on kind of China. We’ve seen some news articles recently that at one of the Mainland China manufacturer just received its first order of 3D 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 accounting 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 benefited from all of the fab constructions that took place in China, many of which were funded by Chinese capital. So that benefited our fluid handling product lines, that benefited 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 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 and customer qualifications are about to be completed this quarter in Q2. So, we will be in a position to bring this capacity online and then shorten our lead time.
So that's going to be actually very timely as we start to seeing those Chinese fabs ramp-up their production. And a 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 that the last question I have is, if there's any share shift between TSMT and Intel whether it's on smartphone devices, or just in terms of load shifts, there is any sort of shifting there. How would that impact the revenue i.e. if Intel because larger this year than TSMT.
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 roadmaps of every player in the industry be it a fab or logic fab participant, a memory fab participant, OEMs chemical manufacturers and that's what I think what makes Entegris very unique. We're not dependent on any customer. We are not dependent on any market statement. And I think that that's really what is important I think, for the investment community to remember.
But then you would have kind of similar exposure in both Intel and TSMT. So for you it wouldn't matter who is winning versus the other, is that the way to look at it.
That would be a good simpler way to summarize my statement.
Thank you.
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 want to note that we will be at the Barclays Electronic Chemicals Conference in New York 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.