Entegris Inc

NASDAQ:ENTG

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the Entegris First Quarter 2020 Earnings Results Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Bill Seymour, VP of Investor Relations. Please go ahead.

[Bill Seymour, executive]

Good morning, everyone. Earlier today, we announced the financial results for our first quarter of 2020. 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 are 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 press release as well as on the Investor Relations page of our website at entegris.com. On the call today are Bertrand Loy, our CEO; and Greg Graves, our CFO.

With that, I'll hand the call over to Bertrand.

[Bertrand Loy, executive]

Thank you, Bill. I will start today with what we have experienced related to COVID-19. I will then comment briefly on our first quarter performance and what we expect for our business going forward. Greg will then follow with more details on our financial results, discuss our liquidity and capital structure. And finally, we'll cover our guidance for the second quarter. We will then open the line for questions.

For the past 2 months, we have been battling hard against the spread of the pandemic with 2 priorities in mind. Our first priority is to ensure the health and safety of our colleagues and their family. The second priority is to keep the business running, so we can continue to serve our customers and protect the jobs of our employees and partners. So far, I am pleased to report that we have been successful on these 2 fronts. Let me expand a little bit on that.

Since the early outbreak in China, we have implemented rigorous safety measures in all our sites to make our facilities amongst the safest places to be for all our employees that need to be physically present on the manufacturing floor or in a lab to perform their work. Everybody else has been instructed to work from home. We implemented temperature check at the entry of our facilities very early on. And these, along with proper social distancing protocols are still in place in all our sites. In addition, we are extensively and frequently disinfecting common areas and providing that for those who want them. Our facilities and health and safety teams have done a fantastic job, making sure our facilities and our coworkers are safe.

Turning to the impact of the pandemic on our business, I would like to focus on 2 dimensions: our supply chain; and the overall demand environment. Despite major supply chain shutdowns across many industries to date, our supply chain and manufacturing operations have only been modestly impacted by COVID-19 as a direct result of the extraordinary efforts of our Entegris teams and extended supply chain partners around the world. In particular, our supply chain team has been proactively managing the pandemic since the early days of the spread in China. The team has moved, mountains, assessing the areas of risk with our suppliers every day and taking appropriate and most importantly, preventive steps to ensure our critical supply lines remain open. To that end, we begun to build additional safety stocks in February, in anticipation of potential constraints elsewhere in the world. This obviously served us well, as the pandemic continue to span to Europe and to the U.S., while our supply chain was largely not impacted, but few of our factories did experience brief interruption, while they worked through new government mandates.

The 2 sites where we saw the most significant disruptions were in San Luis Obispo, California and also in one of our largest manufacturing facilities in Kulim, Malaysia. Both sites are now back up and running.

And while there has been significant reduction in global freight capacity across industries, our logistics teams have worked hard and creatively to identify alternative routes and to deliver products with very minimal interruption to our customers.

From a demand point of view, we have not experienced any visible deterioration in demand since the start of the pandemic. On the contrary, even today, our order book is at a record level. And as Greg will cover, this indicates a strong Q2. Having said that, we believe the strength in bookings is likely the result of customers ensuring they have adequate safety stock levels to protect against the risk of huge supply chain disruptions and the lag between supply and end demand due to the long cycle terms, typical in semiconductor manufacturing.

Let me now turn to the first quarter performance. And I will start by saying that in light of the significant challenges from COVID-19, I am pleased with our results. In the first quarter, sales grew 5% year-on-year and were not materially affected by the impact of the coronavirus. Leading the growth was our SCEM division and its advanced solutions in new nodes, in both logic and memory as well as the positive impact of acquisitions. And despite sales slightly below our expectations because of solid expense management, profitability remained strong in the quarter with EBITDA up 29%, up year-on-year and flat sequentially. Finally, EPS was at the high end of our guidance range and up significantly year-on-year.

Moving on to our outlook. While our order book remain healthy and we remain optimistic about the long-term growth of the industry, with millions of people getting laid off and shelter in place ordinances in various countries, we believe economic realities will catch up to semiconductor demand at some point this year. It's a fluid situation, and it is hard to predict exactly when this will happen. But with that in mind, forecasting beyond Q2 is challenging. Consequently, due to the evolving and uncertain impact of COVID-19 will have on the semiconductor industry, we are withdrawing the 2020 sales and EPS annual guidance, we gave in February. While it's unclear how the market will perform for all of 2020, the 2 other positive growth drivers totaling 400 to 600 basis points of growth are still in place for us in 2020. The first one, as you remember, is the key technology node transitions to logic and memory we expected for 2020. And these are still on track, which means we continue to expect to outperform the market by approximately 200 to 300 basis points in 2020, driven by an increase in our served market and market shares as a result of a number of large customers transitioning to new technology nodes, both in logic and memory.

The second is that we continue to expect that as the acquisition we have already made will add approximately 200 to 300 basis points to our growth in 2020. Clearly, we are in unprecedented times, and we will be facing a high level of uncertainty for the balance of the year. But we feel very optimistic about the long-term fundamentals of the industry. And we feel confident in the things we can control, including our competitive and financial position.

First, we believe that the secular semiconductor demand will continue to be very attractive. Our society will continue to need more and better chips. And in a strange way, COVID-19 could lead to an acceleration of the digitalization and automation of the economy, which will be favorable for the semiconductor industry.

Second, we have confidence in our competitive position. And to further secure this position, we will maintain significant R&D and capital investment levels in 2020 despite the prevailing short-term uncertainty. These investments are essential to a number of critical joint development initiatives with several key customers. As you know, greater materials intensity and greater materials purity will be the primary defining factors of the next-generation of semiconductor performance, and we want to be in a position to capitalize on the many new opportunities in front of us.

Finally, we feel very confident that our experience, disciplined execution and strong balance sheet will allow us to navigate this period of uncertainty, while continuing to invest in the future. Our team has very effectively managed challenging times in the past, and we will take the necessary steps to align our business to market conditions, as they evolve.

Before turning over to Greg, I want to take a minute to thank the Entegris teams and our partners around the world for their dedication and their relentless efforts during this challenging period. And I also want to thank our customers for the trust they place in Entegris.

Now let me turn the call to Greg. Greg?

[Gregory Graves, executive]

Thank you, Bertrand. In my section today, I'm going to cover our first quarter financial performance and our second quarter guidance. I'm also going to discuss how our liquidity and balance sheet strength provides a significant flexibility.

As Bertrand said, in spite of all the challenges brought on by the COVID-19 crisis, the first quarter was solid for Entegris. Q1 sales of $412 million were slightly below the low end of our guidance and were up 5% year-over-year and down 3% sequentially. As Bertrand said, the negative impact of the coronavirus to our supply chain is not material.

Q1 GAAP diluted EPS was $0.45 per share, up 88% year-over-year and up 7% sequentially. And non-GAAP EPS of $0.55 was at the high end of our guidance range, up 10% year-over-year and flat sequentially.

Moving on to gross margin, GAAP and non-GAAP gross margin was approximately 45% in Q1. Gross margin was a bit below our original expectations, driven primarily by the modest manufacturing interruptions related to COVID-19 and lower-than-expected volume. We expect gross margin to be approximately 44%, both on a GAAP and non-GAAP basis in Q2. We expect greater variability in gross margins in the short term as a result of the prevailing supply chain uncertainties and expected higher freight costs.

GAAP operating expenses were approximately $105 million in Q1 and included a total of approximately $19 million of non-GAAP items from amortization of intangible assets, restructuring, deal and transaction costs.

Non-GAAP operating expenses in Q1 were $86 million, down from $93 million in Q4 and well below our guidance. The biggest reason for this is lower compensation costs and reductions in other discretionary spending. We expect GAAP operating expenses to be $102 million to $104 million and non-GAAP operating expenses to be $88 million to $90 million in the second quarter.

Q1 GAAP operating income was $81 million or 19.6% of revenue and non-GAAP operating income was $100 million or 24.2% of revenue. Adjusted EBITDA was approximately $120 million in the quarter or 29.2% of revenue. Our GAAP tax rate was approximately 12%, and our non-GAAP tax rate was 15% for the quarter. As a reminder, the first quarter typically has the lowest tax rate of the year. For 2020, we continue to expect both our GAAP and non-GAAP tax rate to be 19% to 20%, which implies a quarterly rate of 20% to 21% for the balance of the year.

Before I get to the performance by division, I would like to note that the impact of the coronavirus affected all 3 divisions. However, I will not call that out or quantify that in my commentary. In the aggregate, the impact of the virus is not material to our financial results.

Q1 sales of $144 million for SCEM were up 16% year-over-year, primarily driven by advanced deposition materials, cleaning chemistries and the positive impact of the DSC, MPD and Sinmat acquisition. The sequential sales decline was primarily driven by specialty materials. Adjusted operating margin for SCEM of 23% was up sequentially and up almost 300 basis points year-over-year. The year-over-year increase in operating margin was driven primarily by higher volume and good expense control.

Q1 sales of $159 million for MC were up 1% from last year and down 6% sequentially. On a year-over-year basis, growth in liquid filtration, gas filtration and the impact of the Anow acquisition more than offset declines in gas purification. The sequential decline in MC sales is driven by gas purification, which was impacted by the temporary supply chain issues at our California facility, that Bertrand referenced. Adjusted operating margin for MC was 31.7%. The sequential margin decline was driven primarily by the lower volume and manufacturing inefficiency.

Q1 sales for AMH of $116 million were flat versus last year and down slightly sequentially. The sequential sales decline was primarily driven by a Wafer/Reticle Handling and sensing product. Adjusted operating margin for AMH was 17.9%, marking the third quarter in a row of sequential margin increase, driven by solid cost management. Cash flow from operations through the quarter was $11 million. Free cash flow was a negative $11 million. As a reminder, Q1 typically has the lowest cash flow of the year, primarily due to the variable compensation payment that is made during the first quarter.

CapEx for the quarter was $23 million. We continue to expect to spend approximately $120 million in CapEx in 2020, related to ongoing investments in support of our new product introductions as well as capacity expansion. Given the uncertain environment, we will continue to evaluate this spending level.

During Q1, we used approximately $11 million for our quarterly dividend. And just to be clear, we remain committed to our dividend. We also repurchased approximately 600,000 shares for $30 million in Q1 for an average price of $49 per share. We suspended our share repurchases in March, and we have put those on hold until we get a better sense of the economic environment.

Before I cover our guidance for the second quarter, I'd like to discuss our liquidity and capital structure. We've also put a supporting slide, covering this in our earnings slides for your reference.

To start with, we have substantial cash reserves with $335 million total cash at the end of Q1 and $134 million of that in the U.S. We have approximately $950 million of long-term debt in the form of a term loan and a note. The first significant maturity is not till 2025, and none of this debt is the subject of any maintenance covenant. We also have a $300 million revolving credit facility. We have drawn down approximately $140 million of the revolver, with no repayment requirement until November of 2023. Like many other companies, we see drawing the revolver as a relatively inexpensive way to ensure access to liquidity in this uncertain time. The revolver does have a 3.25x secured net debt-to-EBITDA covenant. At quarter end, this ratio was less than 1x, well below the covenant.

Bottom line, our liquidity position and capital structure is extremely solid and provides a significant amount of flexibility to weather a very severe economic downturn scenario.

Turning to our outlook for Q2. We expect sales to range from $410 million to $430 million. We expect GAAP EPS to be $0.37 to $0.43 per share and non-GAAP EPS to be $0.45 to $0.51 per share.

In summary, we were pleased with our Q1 results in light of the COVID-19 challenge. But more importantly, we feel strongly that the secular growth prospects for the semiconductor industry remain intact. Our competitive position has never been stronger. We have a resilient business model. We have an excellent team, experienced in managing during uncertain times and our balance sheet and liquidity are strong.

Operator, before we move to questions, I just want to say we appreciate your flexibility around the timing of our earnings announcement. We've been monitoring recent activity in the debt markets with our financial advisers, and the opportunity arises to refinance some of our existing debt with other nonconvertible debt on attractive terms, we would hope to take advantage of it. Getting our earnings out a few days earlier gives us additional flexibility from a timing perspective.

Operator, we'll now take questions.

[Operator]

[Operator Instructions] We can now take our first question. It comes from Toshi Hari of Goldman Sachs.

[Toshiya Hari, analyst]

Hello, can you hear me?

[Bertrand Loy, executive]

Yes.

[Gregory Graves, executive]

Yes. I can hear you.

[Toshiya Hari, analyst]

And glad to hear that you're all safe and healthy. Bertrand, you mentioned in your prepared remarks that so far, you really hadn't seen any change in customer demand. But I was hoping if you could speak to any sort of discrepancy or differences you're seeing between your CapEx business versus your wafer starts business? And if you could also kind of speak to any discrepancies between logic and foundry, memory and your lagging-edge business, that would be helpful as well. And then I have a quick follow-up.

[Bertrand Loy, executive]

Sure. Well, thank you for the question, Toshiya. We actually have seen strength on both sides of the business. Our CapEx business remained very strong in Q1, and we expect that to continue to be the case in Q2. That was particularly true for our fluid handling solutions as well as our FOUP product lines.

The only area where we saw a contraction in revenue on the CapEx front was in the gas purification systems. But really, it had to do with the inability of a couple of customers to perform final inspection on our systems before we were able to ship them out of California. This is an issue that is about to be solved this week, and we expect those systems to be shipped before the end of the month, and we don't anticipate any similar types of issues as we get into Q2.

The consumable business behaved pretty much in line with what we had expected going into Q1. Remember that Q1 is a seasonally slow quarter, and we saw that, especially across some of our trailing edge customers. But the level of activity on the leading-edge logic and leading-edge memory was very, very strong. And that's something that we would expect to continue to see in Q2 as well. So that's the color around some of the momentum that we saw in the various segments of the business.

[Toshiya Hari, analyst]

That's very helpful. And then as a quick follow-up, again, Bertrand. I wanted to ask you on the competitive landscape, cyclical downturns or recessions in general are obviously painful for everyone. But I think history would suggest that strong companies typically come out of downturn stronger. I realize it's early in the downturn or this correction phase. But have you seen anything on the competitive front that would potentially drive market share higher for your business, either in the near term or the long term?

[Bertrand Loy, executive]

So Toshiya, this is a very important point that you're making, and I absolutely share your view. I would say that in the short term, we -- it's too early, and we have not seen any one of our competitors being in a difficult situation. But as you mentioned, I think, we have an opportunity to put some distance between us and our nearest competitor, if we manage what's ahead of us in an appropriate fashion. And this is one of the reasons why we want to be very, very focused on maintaining timely development of all of the critical solutions that our leading-edge customers expect from us. And we want to be sure, obviously, that we continue to be extremely focused on maintaining the proper stability in our supply lines. We know that it's something that is always difficult to do even under normal circumstances. But certainly, it's a whole different challenge in the current environment that we operate. But as you all know, we have a fantastic team, a very dedicated team, very ingenious. And not only do we have confidence that we can get out of this, but I really do believe that we're going to come out of this pandemic, a much stronger company and a much stronger brand.

[Operator]

We can now move along to our next question. It comes from Amanda Scarnati of Citi.

[Amanda Scarnati, analyst]

Just a question, first, on sort of any hoarding that you've been seeing in the space. I know you commented that you started building up stock in February. Do you see any of that coming from your customers? Any increase in demand that seems somewhat unusual that would be due to the, if there is some hoarding happening? Or was this sort of very strong demand on the leading edge sort of in line with the expectations you are headed into the quarter?

[Bertrand Loy, executive]

Yes, Amanda, this is a fair question. It's a question that is a little bit hard to answer. So we know that there was a little bit of buying ahead by some of our customers. It's really hard to fully quantify the magnitude of that. We don't think that it was much of a factor in Q1. We believe it could be a little bit more of a factor in Q2, and we will be very, very focused on that, obviously. I mean we want to try to the greatest extent possible. We want to try to level -- load our factory and smooth shipments across Q2 and Q3. So it will be a balancing act for all of us over the next few months.

[Amanda Scarnati, analyst]

Okay. And then can you remind us what your split is, that your exposure is to leading edge versus lagging edge? And it could just be general. It doesn't have to be broken out by memory or logic and foundry, but if you have a general number that you can share?

[Bertrand Loy, executive]

I know, the way we have approached that question in the past was to say that about 30% roughly of our top line comes from products that were introduced in the past 5 years. And typically, I think, that's a good approximation for the level of exposure we have to leading edge.

[Operator]

We can now move along to our next question. It comes from Patrick Ho of Stifel.

[Patrick Ho, analyst]

Good to hear that everyone's well. Bertrand, maybe -- I know this has been a very disruptive and chaotic period, particularly in the March quarter. And obviously, things keep changing and they're very fluid at this time. But given some of the issues, particularly in the supply chain and logistics that have occurred, are there already things that you've learned that you can apply for Entegris on a going-forward basis? And it's kind of what I'm getting at there is just different ways of, I guess, building inventory, keeping some for yourself in potential situations like that because, obviously, the entire technology ecosystem has gotten to a more real time and just in time type of manner. Do you -- are you already making changes longer term for the company to adjust for any future disruptions?

[Bertrand Loy, executive]

So the way I would answer your question, Patrick, is we have a management team that has managed several downturns already. And one of the biggest lessons from that is that you prepare for the next downturn in good times. And I think that at Entegris, we have done just that over the past 10 years. We have built a lot of variability in our cost structure. We have constantly looked at optimizing the cost structure of Entegris. And we have also made significant investments in our supply chain management teams. I think, we may have mentioned that about 2 or 3 years ago, when we essentially created a 15 to 20 persons strong team to just help us be smarter about -- and more proactive about managing our supply chains, building alternative supply options and just, again, managing the risk in a more dynamic way. And I'm pleased to tell you that this investment really paid off over the last -- past month. I mean we were quick to assess the risk, when we were battling COVID-19 on the Chinese front. We were quick to make inventory, buying decisions as early as February to build against potential future risks of supply interruptions, not just in China but in Europe and in the U.S. And obviously, as I was saying in my prepared remarks, all of that served us really, really well. So that is not to say that we didn't have some pain points because we did. But I would say that in the scheme of things, I am extremely pleased with the way we were able to manage the risk and with the way we were able to maintain stability in our supply chains and supply lines to our customers.

[Patrick Ho, analyst]

Great, that's helpful. And maybe as my follow-up question for Greg. You gave a great update on the liquidity and balance sheet situation for the company. Is it fair to assume that at least over the next couple of quarters the focus is building cash, especially since it looks like you'll be cash flow positive at least on the June quarter given your revenue outlook? Is that the way we should be looking at, I guess, cash management over at least the next few quarters?

[Gregory Graves, executive]

You know, I think, you're right, Patrick. I mean, at this point, I mean, we're focused on maintaining as much liquidity, as we possibly can. We suspended the buyback, as we mentioned. We're fully committed to the dividend. But in general, we're focused on maintaining liquidity, although we feel very good about the position we're in.

[Operator]

We can now take our next question. This comes from Sidney Ho of Deutsche Bank.

[Sidney Ho, analyst]

My first question is, can you talk about where your customers' factory utilization is at maybe on average? And maybe where do you think that is setting over the next few quarters? Maybe by segment, memory, or logic, or by technology, bringing us choices like leading edge? And are there areas that you are more concerned with?

[Bertrand Loy, executive]

So Patrick (sic) [ Sidney ] I will limit my comment to what we saw in Q1 and what we expect to see in Q2. As we said in the prepared remarks, that there's just too many moving pieces for the back end of the year. So I would not risk any projections there, since we don't really have any unique insight.

But when it comes to Q1 and Q2, advanced logic was and is expected to remain very strong with utilization rates most likely between 90% and 100%, depending on the customer. Trading edge fabs on the logic front was at probably 80% to 90%. We expect that to subside a little bit in Q2. DRAM was very, very strong in Q1, probably close to 100% at most of the leading edge makers, and then putting -- China is back for that particular comment. We expect that to come down a little bit in Q2, probably in the 90% range. But again, a lot of the year-end capacity is currently being shifted away from handset devices and really very focused on high-performance servers, and we believe that the demand for high-performance servers will continue to be strong in Q2 as well. So that should be good for DRAM.

And then for NAND, close to 90% and probably going to 80% in Q2. So still very healthy levels of utilization in Q2, a little bit below Q1, but nonetheless, very healthy. And remember that, we have introduced a number of new products and new technologies that are very critical to all of the new nodes that we expect to see in logic and in memory in the back end of the year. So everything else being equal, I would expect the co-wafer integrates opportunity to continue to grow through the balance of the year. And that's one of the reasons why we expect to outperform the industry, pretty significantly in the first half of the year and why we expect on balance to be able to do that on a full year basis as well.

[Sidney Ho, analyst]

That's great. That's very helpful. My follow-up question is, if you kind of look back in your past experience, how have things unfolded in past cycles, particularly, as it relates to what we're trying to talk about the lag in demand? And what do you think this cycle could look differently? Obviously, these circumstances are different, but just curious, how you think about that lag that you talked about.

[Bertrand Loy, executive]

Well, I think, for any one of us who have been in the industry long enough, we know that the demand at some point will drop. And we won't know until it's just right in front of us. And so most likely, for us, it will be sometime during the summer. So there will be a contraction in fab utilization. There will be a contraction, obviously, to our business. The magnitude of that contraction is unknown. The duration of that contraction is unknown. But we know that at some point, it's going to snap back really strongly, and you want to be sure that you are ready to reaccelerate out of the lull really effectively.

And if you fast forward, we continue to be absolutely confident in the long-term growth prospects of the semiconductor industry. And in a very twisted way, I think that the past COVID-19 era will be very favorable to the semiconductor industry. I would fully expect an acceleration of the digitalization of the economy, digitalization of human interactions, further affirmation of the economy. So all of that will drive significant chip demand. So again, I think that we are certainly a few months ahead of this of softness, that we're going to deal with. But as I said, we have a team that has done that many times before. We know how to do it. We have ample liquidity, as Greg was suggesting. And we will make sure that we tap the brakes effectively, but we keep a foot on the accelerator. So that we can reaccelerate really, really strongly, when the time is right.

[Operator]

We can now move along to our next question, which comes from Chris Kapsch of Loop Capital Markets.

[Christopher Kapsch, analyst]

Yes. Kudos on impressive execution, considering all the challenges. I had a quick follow-up on that question about lag demand. The one end market, where it looks pretty clear that there's going to be softness in automotive. And just wondering, if you could characterize your exposure to that market and what's the -- what might be the lag cycle in terms of your materials that ultimately find their way into a automobile application.

[Bertrand Loy, executive]

So Chris, the automotive industry is driving about 10% of semiconductor demand globally. So we have indirectly, effected that level of exposure, I would say, to the automotive industry. We saw a little bit of weakening in the -- at the end of Q1, especially in Europe from the fabs serving the automotive industry. We expect to see a little bit more weakening in Q2, and that is baked into our guidance for Q2. And as I said, we will not risk any additional speculations on the back end of the year.

[Christopher Kapsch, analyst]

Fair enough. And then the -- in the first quarter, expense reduction was part of the story in terms of at least the earnings upside. I was wondering, if there's a way to elaborate or characterize the benefit on your cost containment efforts. More specifically, are the -- some of the cost reductions, are they temporary discretionary in nature? Or more structural in nature? Is there any examples of how those flows group through, would be appreciated.

[Gregory Graves, executive]

Yes, Chris. This is Greg. I would say most of them, at this point, are around discretionary spending. Obviously, we have a lot lower T&E. We had lower employee benefits cost. In this environment, it's slower to fill open positions. What I would say is, as we work through this, I mean, we're focused on maintaining our levels of investment in the R&D. Obviously, because that's our lifeblood, and that will be important as we come out of this. But any -- all the discretionary things, whether like the T&E, consulting costs, those kinds of things, we're watching very, very closely.

[Christopher Kapsch, analyst]

Okay. And then just finally, normally in the slide deck, there's a slide on sales performance by geography. Can you just provide any color? You sort of did it by logic, foundry, memory. Just wondering if you could have any color, geographically, how the business trended across the globe.

[Bertrand Loy, executive]

Yes, I'm happy to do that. So if you look at China, obviously, we're sequentially down pretty meaningfully, close to 30% reduction, as you would expect, given the pandemic of COVID-19 in Q1. Sequentially, in Europe, I would say, good performance, up by 4%. We saw strength in advanced logic. But as I was mentioning, we also started to experience a little bit of a slowdown in the automotive-related activity. Japan was down sequentially 3%. So it's normal seasonality in Japan. But in Japan, I would like to note, that it was up 16% year-over-year, and that's really more of a function of a number of very significant POR wins in advanced memory in Japan. And it's really advanced deposition materials and new cleaning chemistries, that should actually lift our business in Japan on a more permanent basis. So a really good performance in Japan.

Korea, we saw increased usage of advanced filters and new materials in advanced memory applications. So it was up mostly. And then North America, year-on-year was up 10%. It's a function of new wins in advanced logic as well as really the impact of a number of acquisitions that we completed late last year and early this year.

And then Taiwan was very strong, 6%, sequentially, 13%, year-on-year, and I think you'll understand what is driving that. It's really the high level of activity at the leading edge. And all of the preparation work going on in Taiwan for new node transitions. And that we expect will be a very rich environment for us, for our 3 divisions for the balance of the year.

[Operator]

We can now move along to our next question. It comes from Paretosh Misra of Berenberg.

[Paretosh Misra, analyst]

As customer spending declines, how do you expect that to impact different parts of your business? In other words, which parts of the business are the first to be affected? And which products or material are the most lagging indicator of underlying demand?

[Bertrand Loy, executive]

So I think, typically, our consumable business tends to be less volatile. But in the environment we're in, it's -- we would see exactly what type of a contraction we see in the back end of the year. So I'm not sure that there are a lot of perfect leading indicators for us. I think we're going to continue to be vigilant across all product lines. We have some level of flexibility in our cost structure. We try to maintain 20% of our manufacturing workforce in the form of temporary workers. So we have a way to throttle down a little bit the level of spending. And as Greg was mentioning, we will continue to tap the brakes, if need be. But there are a few things that we want to be sure, we protect. ER&D is one of those areas. It's -- as I was mentioning earlier, I mean, new win rates is in the way you manage the tons. And we're going to try really, really hard to carry our speed in the tons. So that we can accelerate as quickly as we can. So again, there's no perfect way of managing what is ahead of us. The key is to have enough variability in your cost structure, which we have. The key is really to have modeled different scenarios and have clear actionable plans, detailed plans. So that you are ready to act quickly and decisively and we have that. And then you need to have the confidence that you have enough liquidity to afford maintaining adequate levels of spending and what matters and that's the case for ER&D. And more generally speaking, as Greg mentioned, we have a strong balance sheet. So we don't know what is ahead, but we will be ready in any event.

[Paretosh Misra, analyst]

Got it. And is there any impact or any kind of material impact on you because of the lower oil price and whatever it's going to do with [ pricing plus ] many of chemicals?

[Gregory Graves, executive]

Most -- I would say generally not. I mean, typically, when oil prices rise, we don't see a lot of it. And when they decline, we don't see a lot of them. And we have a few of our inputs that are sensitive to it. But in general, we're using highly engineered polymers, many of which are formulated, specifically for us. And so they don't tend to move in a meaningful way with commodity prices.

[Operator]

We can now move along to our next question, and it comes from Mike Harrison of Seaport Global Securities.

[Michael Harrison, analyst]

Bertrand, was wondering if you can talk a little bit about your confidence level in the Q2 guidance. There are a number of companies out there that are just saying, "Hey, we're not going to provide guidance even for the next quarter." What does your visibility look like relative to normal? And I guess just what kind of updates have you gotten from chip producers? I think, we've seen a couple publicly, but are you getting some private or anecdotal evidence that gives you confidence in the outlook?

[Bertrand Loy, executive]

Yes, it's a good question. We -- to tell you the truth, we discussed that extensively with the management team. We would have been easy to just follow the tower, as many companies did. Then, we were looking at our bookings, which are very, very strong. And I'm not here to tell you that we have perfect visibility, we don't. But we have a visibility level that is not very dissimilar to what we would have in a normal quarter. And the order book is very strong. And as of right now, we have not seen any signs of cancellations or push out. So given the backlog that we have, given the order momentum that we are currently seeing, we felt that it could be useful to all of you to give you our Q2 guidance. And we open up the range a little bit. I mean, typically, our guidance range is about $15 million. It's $20 million in Q2, just because we wanted to create a little bit more buffer. And so let's see how that plays out. But again, I think, there are a number of reasons for us to be still optimistic for our Q2 cut back.

[Michael Harrison, analyst]

All right. And then you mentioned a little bit, some of the -- it sounds like logistical issues that were impacting your facility in California. Is that resolved at this point? And can you maybe comment on any other supply chain or logistical issues that could come up, as a result of the COVID situation in that or in other businesses?

[Bertrand Loy, executive]

Well, there are too many little stories that we could bring forward. But the 2 major stories was, one, was the situation in San Luis Obispo. So there was shorter -- the shelter in place order in California and the inability of a couple of customers to come in to complete their inspection. But that's behind us, as I mentioned.

The other big story that we referred to was the situation in Malaysia, and the Malaysian Government. It was a multi-week saga, and it started with a hot lockdown, late March with new exemption really given. And that has evolved to providing essential businesses with the ability to bring on site about 30% of the workforce. And that number has now increased to about 50% of the workforce, which in practical terms, given the fact that all of the office workers are working from home means that, when it comes to the manufacturing floor, we can bring about 70% of the workers. And given the degree of automation that we have in the plant, we are currently running at 80% to 90% capacity, which is sufficient, given the projections that we have. So long answer to your question, but those were the 2 major pain points, when it comes to supply chain and manufacturing and both of them are essentially behind us.

[Operator]

We can now take our last question. It comes from Krish Sankar of Cowen and Company.

[Sreekrishnan Sankarnarayanan, analyst]

Bertrand, thanks for this candid commentary on downstream demand. Just wondering from your vantage point, when the demand slowdown does happen like in a typical recessionary environment, which of your 3 divisions sees it first? Is it advanced materials, first -- who sees it first? And what is the typical cadence of the slowdown between the 3 divisions of yours? And then, I have a follow-up.

[Bertrand Loy, executive]

Well, let's say that, they are, in fact, by nature -- by the very nature of some of the specialty chemical products, it is very difficult for our customers to carry a lot of inventory, right? Especially true for some of the arsine and phosphine gases and some of the other -- highly half of those materials that we sell. So I guess we probably will have -- whether that could be the best leading indicators for us, and we're going to keep an eye on that.

[Sreekrishnan Sankarnarayanan, analyst]

Got it, that's helpful. And then as a follow-up, I think, Bertrand, you kind of gave some color into utilization rate trends. I was kind of curious, it said that both DRAM and NAND would decline in utilization rates in Q2, relative to Q1. From your prior experience, is that typically a precursor to CapEx cuts by the many companies? Or do you need to see a more prolonged period of lower utilization rates?

[Bertrand Loy, executive]

Well, Krish, I don't know. I think, I will leave that to you. I think, you have as much experience in this industry, as I do. And I think that this downturn is somewhat different from what we've done. So I will let you run your own analysis and figure out, what is the most likely outcome.

[Sreekrishnan Sankarnarayanan, analyst]

All right, Bertrand. I know, I'll definitely be wrong on that front part. And just a final question, if I can squeeze it in. Can you give any color into the geographic breakdown in Q2? How do you think, it's going to be? Is it going to be more stronger in China, et cetera?

[Bertrand Loy, executive]

Yes. So we are seeing, certainly, the nice recovery in China already. So we'd expect China to rebound. I would expect Korea and Taiwan to also be very strong for us in Q2. And I would expect, and it probably doesn't come as a surprise, I would expect a little bit of weakness in Europe and some weakness in Japan, given the end customers that many of the fabs in those 2 geographies are serving.

[Bill Seymour, executive]

All right, operator. That was the last call. Thank you very much, everyone.

[Operator]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.