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Entegris Inc
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Good day, everyone. And welcome to Entegris Third Quarter 2021 Earnings Release 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, Entegris VP, Investor Relations. Please go ahead, sir.
Good morning, everyone. Earlier today, we announced the financial results for our third quarter of 2021.
Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements.
Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation.
On this call, we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. You can find a reconciliation table on today’s news release, as well as on our IR page of our website in -- at entegris.com.
On the call today are Bertrand Loy, our CEO; and Greg Graves our CFO.
With that, I will hand the call over to Bertrand.
Thank you, Bill, and good morning to all. In the third quarter, we continued to deliver on our growth strategy. In spite of a very dynamic supply chain environment, I am proud that we have been able to deliver 23% organic sales growth year-to-date.
During the third quarter, sales grew 20% year-on-year and 1% sequentially. Our growth year-on-year was strong across all three divisions, as we benefited from a robust industry growth and record demand for our products and solutions.
Lower operating expenses did offset the decline in gross margins and this resulted in 30% EBITDA margins in line with expectations up over 20% year-on-year and up slightly sequentially. Non-GAAP EPS was up 37% year-over-year and 8% sequentially.
Let me now provide more color on our operating performance. From a product standpoint, we continue to benefit from strong demand for both our unit-driven products and CapEx-driven solutions.
Within the unit-driven products growth has been especially strong in strategic areas such as liquid filtration up 21% year-to-date and in advanced deposition materials up 26% year-to-date. In addition, we recorded another strong quarter of revenue for our Aramus high purity bags, which are used for the bulk transportation of COVID-19 vaccines worldwide.
As I just mentioned, the supply chain environment across the industry continues to be very dynamic. On balance, our teams executed well keeping our factories running at full utilization even in regions that experienced government mandated shutdowns.
We have also addressed some of the key capacity bottlenecks we discussed in the last few quarters, including adding production headcount and moving many of our operations to a 24x7 work schedule. However, our operations were impacted by a few nagging supply chain issues which have been pervasive across the industry.
The two most significant areas of constraint during the quarter were availability of raw materials and freight. These constraints negatively impacted gross margin and prevented us from getting key materials in and in some cases from shipping finished products out of factories in a timely fashion. We expect some of these challenges to linger and we have taken this into account in our fourth quarter guidance.
Having said all that, demand for our products and solutions continues to be at a record level and we continue to have a high degree of conviction in the positive secular growth of the semiconductor market, driven by accelerated digitalization, 5G and high performance computing, to name just a few.
In addition, the pace of node transitions for both logic and memory has accelerated and device architectures are becoming much more complex. This is great news for Entegris, because the unique set of capabilities we have built around processed materials and materials purity will be the key enablers of these new chip architectures and this will translate into a rapidly expanding Entegris content or wafer.
Looking at the full year, we are reaffirming our revenue guidance of up 21% to 22%. We also expect EPS to be in line with our target model and expect the full year 2021 non-GAAP EPS to exceed $3.30 per share, which as we referenced last quarter is starting to approach the 2023 EPS target of greater than $3.55, which we communicated in our Analyst Day last year.
Before I turn the call to Greg, I would like to highlight a couple of additional items. Last week, we published our first Corporate Social Responsibility Annual Report. This report highlights our CSR strategy, the ambitious goals we set for 2030 and the progress we have made to-date.
Establishing our CSR program has allowed us to more fully embed these efforts into both our business strategy and in our operations, which enhances our ability to measure our progress and the impact of our efforts. Going forward, we expect to provide annual updates and we look forward to your feedback as we continue this important journey.
Next, I would like to ask you to please hold your calendars for a Virtual Analyst Meeting on December 1st. We would not necessarily do an Analyst Meeting every year. However, given the growth we are delivering in 2021, the three-year financial model we provided last year needs updating. In addition, we look forward to highlight our strategy to sustain attractive growth rates for the years to come.
Finally, I want to take a moment to thank our customers for the trust and confidence they place in Entegris, and once again, thank the Entegris teams around the world for their incredible work and resourcefulness.
Now, let me turn the call to Greg. Greg?
Thank you, Bertrand, and good morning, everyone. Our sales in Q3 were $579 million, up 20% year-over-year and 1% sequentially. GAAP and non-GAAP gross margin were both 45.6%. Gross margins were lower than expected, driven by manufacturing inefficiencies and higher input and freight costs, challenges that have been well-documented across the industry. We expect gross margin to be approximately 46% both on a GAAP and non-GAAP basis in Q4.
GAAP operating expenses were $125 million in Q3 and included $13 million of non-GAAP items from amortization of intangible assets, integration and other costs. Non-GAAP operating expenses in Q3 were $112 million.
We expect GAAP operating expenses to be approximately $128 million to $130 million in Q4. We expect non-GAAP operating expenses to be approximately $116 million to $118 million. Q3 GAAP operating income was $139 million. Non-GAAP operating income was $153 million or 26% of revenue, up 26% year-on-year and up slightly sequentially. Adjusted EBITDA was approximately a $176 million and 30% of revenue.
Moving to below the operating line, our GAAP tax rate was 8% and our non-GAAP tax rate was 11% for the quarter. The lower than expected rate in Q3 related primarily to a planning initiative that resulted in a discrete foreign tax credit benefit. For Q4, we expect both our GAAP and non-GAAP tax rates will be approximately 18.5%. Q3 GAAP diluted EPS was $0.86 per share. Non-GAAP EPS of $0.92 per share was up 37% year-over-year and 8% sequentially.
Turning to our performance by division, Q3 sales of $176 million for SCEM were up 17% year-over-year and down 2% sequentially. Year-on-year growth was primarily driven by advanced deposition materials and specialty gases. As Bertrand mentioned, the shortages of key raw materials in the quarter were the primary driver in the modest sequential sales decline. Adjusted operating margin for SCEM was 23% for the quarter, up year-on-year and down sequentially. The sequential margin decline was primarily driven by one-time benefit from a sale of intellectual property that occurred in the second quarter.
Q3 sales of $226 million for MC were up 17% from last year and down slightly sequentially. Growth has been strong across all product lines in MC so far this year, especially in liquid filtration. The freight availability issues, Bertrand referenced, negatively impacted shipments of large gas purification systems in MC during the quarter. Adjusted operating margin for MC was 35% for the quarter, up slightly from Q2.
Q3 sales of a $186 million for AMH were up 29% last year and up 8% sequentially. Year-on-year growth was strongest in wafer handling and fluid handling and measurement as both product lines benefited from the strong industry CapEx environment.
Sales of our Aramus high purity bags also continued to be very strong. Adjusted operating margin for AMH was 22%, down both year-over-year and sequentially. The margin decline was primarily driven by the supply chain inefficiencies discussed earlier.
Third quarter cash flow from operations was $150 million and free cash flow was $101 million. CapEx for the quarter was $49 million. We continue to expect to spend approximately $225 million in CapEx for the full year. During Q3, we paid $11 million in quarterly dividends and we repurchased $20 million of our shares.
Now for the Q4 outlook, we expect sales to range from $580 million to $600 million. We expect GAAP EPS to be $0.80 per share to $0.85 per share and non-GAAP EPS to be $0.87 per share to $0.92 per share.
In summary, we are very optimistic about the secular demand trends in the semiconductor industry and our ability to outperform the market.
And finally, we look forward to updating you on our longer term outlook and the Entegris story at our Virtual Analyst Meeting on December 1st.
Operator, we will now open up for questions.
Thank you. [Operator Instructions] We will take our first question from the Toshiya Hari with Goldman Sachs.
Hi. Good morning. Thank you so much for taking my questions. Bertrand, I was hoping you could provide maybe a little bit more color on some of the supply chain issues that you are experiencing. You talked about raw materials and freight. But what was -- how meaningful was the impact on revenue and gross margin in Q3 and what sort of impact are you embedding in your Q4 guidance, again as it relates to supply chain issues? And at what point would you expect the environment to normalize, is it sometime in early 2021, 2022 or could it be in the second half of 2022 and then I have got a quick follow-up?
Yes. Good morning, Toshiya. Let me take maybe the part on the topline and then I will refer to Greg on the question on margin. But if you think about Q3, think about that in the context of record level of demand for products and solutions, and as we said, that was offset by some supply and trade constraints.
More specifically, if you look at the difference between what we are reporting today for Q3 and the high end of our Q3 guidance, it points down to two major factors. The first one was the availability of substrates for our coating solutions and that impacted our SCN division. And then the other one was the lack of container availability, which impacted the timing of shipment of several large gas purification systems out of San Luis Obispo site in Southern California.
We expect the first supplier issue, so the availability of substrate to be partially resolved in Q4 and with respect to the freight availability, it’s a little bit harder to comment. At one level, we are obviously encouraged by the latest developments in the ports of [inaudible] California, but on another level, obviously, we expect to see continued pressure throughout the holiday season. So it’s a little bit harder for us to opine on this one. I will refer to Greg on the margin question and then we will take your next question, Toshiya.
Yeah. So, Toshiya, on the margin side, where the supply chain issues really sort of emanate themselves are in, I’d call it, to the labor inefficiencies where we have put labor in place and then we don’t have the inputs to build a product.
So it’s really not any more complicated than that as it relates to the gross margin. I can comment more on the gross margin broadly at some point, if you would like. But as it relates to the supply chain, it’s emanates itself really in labor and efficiency.
Right. So, Greg, I guess, as a quick follow up on your on your comment, the, I guess, 140 basis points missing gross margin in Q3, is that primarily supply chain/labor and efficiency related or were there…
Yeah. Yeah. So I would, yeah, I guess, it worked. So I would say, really, we broke it down in three pieces. We said manufacturing inefficiencies, inputs and freight costs. On the manufacturing inefficiencies, you have really got three pieces to that. You have got labor. I mean, we have hired over a 1000 people this year. So training and ramping new employees and inexperienced employees, I mean, they impact their quality. They -- it impacts their scrap.
The material shortages, which I commented on, and you have got material shortages, you are obviously more inefficient. I mean, if you have staffed and planned for certain volumes and you can’t do the volumes because of materials. And then the lastly is manufacturing inefficiencies have emanated themselves as we have got a couple of ramps going on. We have a facility ramp going in life sciences in Minnesota and we are ramping up a drone facility in Korea.
Then on the input side, it’s been nothing specific -- it’s not any one thing. I think, where we have seen probably the -- most impact has been probably around resins and chemistries, and then freight costs in general, whether it’s, inbound freight moving, moving product around between our facilities or the like.
And I would say, when you take all of those things, it’s probably equal weight, maybe a little bit more biased toward manufacturing and efficiencies, and import pricing, in terms of the overall impact on the margin.
Got it. And the 46% guide for Q4, I am guessing embeds some of these risks and maybe persist into Q4?
Yeah. That’s exactly right. I mean, we certainly expect the logistics costs and the materials costs to persist into Q4. We do expect some improvement in our plant performance and manufacturing efficiencies.
Okay. Got it. And then as my follow up, Bertrand, back to you. I was hoping to ask you a little bit about the out year and given your scheduled Analyst Day, I doubt you would share too much on this call. But I was hoping if you could comment qualitatively, your hopes and expectations into next year. Obviously, you are operating in a very dynamic environment, but you did talk about how a customer node transition seemed to be accelerating and I am guessing across logic foundry and also the memory side as well. So I feel like the setup for you guys specifically is very positive given the content growth potential. But, yeah, if you can kind of share your preliminary thoughts and views on the out year, that would be super helpful? Thank you.
Sure. I think you mostly answered the question, Toshiya. But, as you said, there are many reasons for us to be optimistic about 2022. We expect a lot of new capacity to come online after the surge in CapEx that we have seen for the last couple of years.
And as of today, we expect also a number of important node transitions next year, both in logic and memory, where we have higher Entegris content to wafer. So I would not quantify those qualitative statements today, but we are generally optimistic about 2022 and beyond.
Thank you.
Thank you. We will take our next question from Sidney Ho with Deutsche Bank.
Great. Thanks for taking my question. Let me follow up with the previous question on calendar 2022. I understand you don’t have a perfect visibility. But based on your order book and lead times, how are you thinking about first half of next year versus second half of this year? And if I look back to your past five years, six years, seems like first half total revenue grows mid-to-high single-digit over second half of the previous year with the exception of 2018, just curious if you have -- if you are willing to on this call to talk about it if you see anything different than previous years?
Look, Sidney, as I said in my previous answer, I am not going to try to quantify 2022 in general, let alone trying to talk about first half versus second half. As I said, I think, there are many reasons for us to be optimistic about 2022, optimistic about the momentum going into 2022. As we have said in the prepared remarks, we see an acceleration in the demand for our solutions and products. So all of that is positive but I won’t quantify that.
Okay. It’s worth to try. My follow up question is, so what we learned over the past few months, you said, a lot of times supply constraints are not just your supply, it’s just -- not your supply chain, but also your customer supply chain. Are there any particular end market segment that you are worried that your customers may not be able to get all of the parts they need, such that you will get impacted even though your sales to that may not be constrained? Thinking broadly like maybe that construction versus equipment suppliers may wait for starts, any color would be helpful?
Yes. Well, I think that, we are obviously in very close contact with our customers trying to understand the instantaneous speed of their business, both in terms of new fab construction projects, as well as the level of fab activity.
To put that in context, I mean, going into Q4, we expect in fact sequential decline in the industry. We expect that MSI will be down. We expect that CapEx will be sequentially down modestly and in spite of that, we expect demand for products to continue to accelerate and we expect to outperform the industry as a result of that, in spite of some of the supply chain issues that we expect to encounter in Q4.
So it is a very dynamic environment. There are also certain issues coming from our supply partners. And you are right that we are also increasingly watching supply chain constraints that could impact the output from --for our customers and then, obviously, have an impact on the demand for our products and we are trying to factor all of that into our Q4 guidance.
Okay. Thanks.
Thank you. We will take our next question from Patrick Ho with Stifel.
Thank you very much. Bertrand, maybe just following up on the supply chain issues, as the quarter progressed, you still actually did pretty well on the revenue front. Did you have to qualify new investors to get resin or materials of that front or was it simply just the timing and things kind of improved as the quarter went where you were able to procure the necessary materials to at least get through the year your revenue guidance line?
Yes. Patrick, so it is, as you know, very difficult for us to substitute supplies and to qualified suppliers. It requires a lot of work both by us and by our end customers, and right now, we frankly collectively do not have the time to do that.
So the solution usually is to work with the existing qualified suppliers and to help them increase the output, or as Greg was mentioning earlier in some cases really incur premium trade in order to accelerate the shipment of incoming material.
So I think what has been very difficult, not just for us, but I think for the industry in general over the next three months to six months is the fact that it -- every week there seems to be another crisis that emerges. I think our teams have done an amazing job with many, many diving catches. If I can put it this way, I know you are a baseball fan, so you can put your energy.
But I think what we are worried about all the unknowns, right? And we know that when those unknowns all become invisible to us, we know that our teams are joint teams between our manufacturing support teams and our existing supply chain partners will find solutions, but it always takes a little bit of time.
Great. That’s really helpful. Maybe as a follow up question and maybe more of a qualitative outlook, obviously, now we are starting to see in the U.S. a third shot for the COVID of vaccines for people. How do you look at the Aramus business, going forward, does this provide one, A, incremental boost to that business opportunity, particularly look into 2022?
Sure. As we have said, I think, the demand for our Aramus product continues to accelerate. We expect the revenue to exceed $50 million this year. I am very pleased, in fact, by the work of our life science teams, the capacity additions are progressing well. The capacity is coming online as scheduled. So in other words, we do not expect constraints on that front, which is good.
And I also like the greater diversity and the new opportunity pipeline. So, clearly, the current demand and the demand for the bag next year will be driven by COVID-19, but I would expect that to start shifting further down the road.
And frankly, beyond the business success, I think, it’s been very, very gratifying for everyone at Entegris to contribute to the global fight against COVID-19 in such a meaningful way. So, many reasons for us to be very pleased with that business and that investment.
Great. Thank you very much.
Thank you. The next question comes from Amanda Scarnati with Citi.
Good morning. Can you talk a little bit about the pricing environment? I know you have mentioned in the past that you have been working on taking steps to improve pricing and how it’s that been into this environment of under shipping to demand, supply constraints, et cetera? Have you seen any increased benefit in pricing?
So I can take that Greg if you want. But I would say that, as Greg was mentioning earlier, we are right now very carefully assessing the input costs, trying to assess what is permanent versus what is transitory and when and where it makes sense, we are increasing prices, and that’s something that we just started literally in the last few weeks.
And then the other question I have is just sort of on shipments versus demand, can you talk about what percentage are sort of under shipping? Are you able to meet full demand in certain product areas or sort of is it more of a broad based issue with the raw materials than the shipping?
No. As we said, in many different ways already on the call, the demand far exceeds our ability to meet it. I think that it’s fair to say that the chip demand is very strong right now, and as I have said before, the demand for products is even stronger. So the -- and the singular focus that we have as an organization is really to maximize output to meet the customer demand.
And as Greg was mentioning in his comment around margin, in some cases, this focus has come at the expense of margin optimization at least short-term. So if you think about the business today, it’s really a tale of two city, extremely strong demand for products, offset by supply chain inefficiencies and margin inefficiencies.
Okay. And if I could just make sure I heard something right earlier, you said that MSI was you are expecting it to be down in the fourth quarter.
Sequentially. Yes.
All right. Great. Thank you.
Thank you. We will take our next question from Mike Harrison with Seaport Research Partners.
Hi. Good morning.
Good morning.
I was wondering, Bertrand, if you can talk a little bit about what you are seeing with some of your trailing edge or legacy customers, as they work to get additional product into the auto OEM and other industries that are struggling with the chip shortage? Are you seeing some of these fabs at lines or look for other ways to improve production, any insight on when they might make sort of progress on that would be helpful?
Yes. It is a good question. And as a matter of fact, if you look at some of the markets where those mainstream fabs are operating, be it Japan or Europe, we are seeing record levels of revenue in those two regions. Europe is growing at 25% year-to-date for us, Japan is growing at about the same level and it’s partially due to the high level of activity that we are seeing in those mainstream fabs. So that has been a nice driver to our business in 2021, and we frankly, expect that to continue going into 2022 as well.
All right. And then on the supply chain disruptions, you mentioned that due to freight, you had some equipment that maybe didn’t ship during the quarter and I am just wondering a little bit about the impact on customer node transitions, if there are seeing delays in getting equipment or getting materials. Have you seen any delays in the pace of those transition either from supply chain impact or ability to get equipment or anything else, I guess?
Look, I think, this is a general industry phenomena. We do have supply chain issues. I think that on balance we are managing them well. I am not aware of being the one supplier being the cause of delays in the industry and I hope it stays that way.
Having said that, we know that some projects have been delayed due to lack of equipment or materials availability, but to the best of my knowledge, we have never been the one reason for those delays.
All right. Thank you very much.
Thank you. The next question comes from Kieran de Brun with Mizuho.
Hi. Good morning. I was just wondering, it’s a little bit of a longer term question, but when we think about the current uptick in CapEx spending and what that means for future NAND both from memory and logic perspective. Are there any areas where you currently feel maybe underrepresented or where you would like to increase your exposure and whether you see that from an organic perspective or even inorganic perspective on a go-forward basis? I know you might address that a little bit more during the Investor Day, but do you have any color you can give us at this time that would be really helpful?
I think that, in general sense, we have said that historically we have had a lot of exposure to the logic and foundry technology roadmaps, and we had been behind in terms of opportunities in memory.
We have been able to bridge that with the migration from 2D to 3D architectures and we talked at length in previous calls about why that was the case. It was really the introduction of those higher spec ratios, architectures, triggering the need for new materials and triggering the needs for higher purity levels in the processes.
We expect to see similar trends at work with DRAM with the introduction of EUV, which will be enabling greater miniaturization, which in due time will actually make those contamination challenges more significant for the DRAM roadmaps and that will actually create opportunities for us to increase our content per wafers.
So, again, I think that, we are seeing a shift in where we see the opportunities for us in the industry. We used to have almost a singular opportunity in logic and we are seeing now a much broader, much more diverse opportunity pipeline for us with great opportunities in 3D NAND, and I think, in a few years in DRAM as well.
Great. And then, I guess, just -- then this is more of a near-term focus question, if we think about this supply chain kind of logistical raw material environment persisting longer into 2022. Are there any levers that you can pull to maybe, whether it’s plant optimization, or just in general, investing in the overall business of returning capital to shareholders in the near-term that you think could supplement some of those headwinds if they were to persist longer or how should we think about that? Thank you.
Could you -- I am not sure I am capturing your question, will it be possible for you to rephrase it?
Yeah. I was just saying. if this headwind -- if this environment where we are seeing supply chain challenges, raw material impacts, et cetera, persist longer than we expect, are there any internal initiatives that you can take maybe to improve gross margins to help offset that over the near-term?
Well, I think, we are obviously a very focused.
Yeah.
I mean if you think about the supply chain issues, right? You have three big buckets right now and that we have been taking in the previous three quarters and each of those buckets have been the source of constraints at one point or another so far this year.
Early in the year, it was really around our own manufacturing capacity. I think we have made a lot of progress there. As Greg mentioned, we have hired a lot of new headcount close to 1,100 manufacturing and manufacturing support positions and more than half of those positions were created during the summer. And I am pleased to say that the training is mostly complete and which means that as we are entering Q4 now most of our manufacturing sites are running 24x7 operations.
We have also invested in new equipment, completed the qualifications for that and so new capacity will be coming online in Q4. That would be good for liquid filters, good for high purity Aramus out of Korea.
So, again, a good focus on our internal capacity. We have enough capacity, internal capacity to meet the expected demand in 2021. We are going to continue to make investments in 2022 and 2023 in the U.S., in Taiwan and in Japan in order to sustain the growth levers that we expect for the years to come.
And then when it comes to the other two, whether that’s supply chain and freight. I mean we are working with our partners and we hope that they make similar types of investments. And that’s we have our Supplier Day coming up in a few weeks and that will be one of my major ask or reaffirming the need for similar types of investments by our supply chain partners, because we expect the secular growth in this industry and the secular demand for products to remain very attractive and very strong for the years to come. So a lot of focus at all levels internally and externally with our partners.
Great. Thank you so much.
Thank you. The next question comes from Chris Kapsch with Loop Capital Markets.
Yeah. Hi. Good morning. Just following up on the factors that were influencing the slight margin pressure, I get the optics of degradation maybe on a sequential basis or relative to some models that were out there. But on a year-over-year basis, it looks like it’s only the AMH segment that’s degradation. So you called out a number of the issues there, I am just also wondering if there’s any mix effect that influence your weight on the year-over-year margin degradation in AMH?
Yeah. So, broadly just talking about gross margins, I just want to say, I mean, the margin that we experienced in the most recent quarter, I mean, it’s not really -- it’s not a natural margin. I mean, that’s not the margin power of the business, because of all that was going on in the supply chain, some of the headwinds on material costs that we are not sure will be permanent or transitory, like you said, the labor inefficiencies. So I don’t like where the margin was in the quarter, but I don’t -- I certainly don’t view it as sort of the margin power of the business.
If you think about the margins across the company, in the most recent quarter, you asked the question on mix. I mean, mix was certainly a minor factor. We -- when we have given our guidance coming into Q3, we expect an improving mix and we didn’t see that.
You commented on AMH specifically, I would say, that’s the division that probably saw the most impact related to freight expediting in particular and also headwinds related to ramping facilities, both of the facilities I referred to, the JangAn facility, as well as the life sciences facility reside in that business.
So when I think about the margins overall, I guess, I would say, I am comfortable to say that, I think we will be on an improving trend. I am not predicting when these supply chain issues are going to go away. But actually -- ultimately that will improve and we will continue to see an improving trend on our margin, which in our current guidance is pretty modest for Q4.
Okay. That’s helpful. Thanks, Greg. And just as a follow-up sort of to a prior question, despite the margin sort of headwinds, I guess, the sales growth in AMH, which is the equipment-oriented was strong and may have been stronger if not for some of these constraints. But I was just curious, if you have visibility regarding demand there, is that skewed mostly to customers that are adding capacity at leading edge nodes or is it really spread across all technology nodes? So is it skewed towards leading edge or is it more balanced?
Let’s say in AMH in particular…
Go ahead Bertrand.
Your question is around AMH. Chris, correct?
Yeah.
Okay. Yeah. I think we are seeing capacity additions in logic and we are seeing technology upgrades in memory. So it’s a little bit of both.
Okay. And just one last one since you teed up the December 1st analyst event and referenced the three-year modeling would need some updating. If you could just remind us the $3.55 EPS bogey that was referenced, how much if any share repurchase activity was factored into that or maybe you could just talk about the latest thinking in terms of share repurchases that as a capital allocation lever? Thank you.
The $3.55 number was an organic number. We had laid out in the Analyst Meeting last November sort of and I don’t have it right in front of me the impact that we could have from certain capital allocation scenarios, including more aggressive share repurchases.
And right now, in terms of our strategy around share repurchases, I don’t want to comment specifically. I mean, other than to say that we will stand by our capital allocation framework that we have laid out, which suggests that M&A would be our top priority. But that over time it’s our goal to return 60% of free cash flow to shareholders in the form of buybacks and dividends.
Fair enough. Thank you.
Thank you. The next question comes from Timothy Arcuri with UBS.
Thanks a lot. Bertrand, I heard you say, you were talking about Q4 and talking about MSI and CapEx both being down, which I think is kind of interesting and so my question is sort of around customer behavior. How are they changing their behavior if at all given the shortages? I mean they have seen the equipment companies they are getting pretty flat in December and the chip guys are generally guiding up. So I guess, I am wondering, are you seeing orders deferred because of the supply issues? I guess, I would think it would probably go the other way that if you can’t get what you need you might order more not less. So I guess, I wanted to kind of double click on your comment that CapEx and MSI will be down in Q4?
Yeah. So as I said, we expect MSI and CapEx to be down mid -- so MSI down mid-single digits and CapEx down low-single digits sequentially. To your point, Tim, I think that, some customers may not slow down demand for products, simply because they are running at fairly low level of safety stocks. But we know that in some of the cases they may actually choose to slow down demand for products. So it’s a mixed bag, and obviously, I won’t go into customer specific comments really here.
Okay. But I guess just on that, so you are seeing some business deferred as a result of the shortages?
I think nothing really meaningful, and frankly, that’s one of the reasons why we expect to outpace the industry by 4 basis points to 5 basis points sequentially.
Okay. I guess maybe just on that point. Can you just give an idea of what unconstrained demand is? There was a question before that was trying to get at this maybe to ask it a different way. If you didn’t have any constraints, what would revenue have been, it sounds like maybe you would have been at the high end or maybe even above the high end were it not for these issues, can you just talk about that?
Yes. It would have been at the high end if it wasn’t for those issues. Absolutely yes.
Okay.
And if you fast forward until, I would say, let’s project forward to the end of the year, all of those constraint issues have a snowballing effect. So if you fast forward to December, I would expect the difference between the unconstrained demand and what we expect to be able to ship this year to be around $50 million. So couple of points of the planned growth on an annual basis.
$50 million, that’s on a quarterly basis or that’s an annual basis?
Annual, annual, annual basis.
Annual basis. Okay. Thank you. Thank you for your time.
Thank you. We will take the next question from Josh Silverstein with Wolfe Research.
Hey. Thanks. Good morning, guys. I just wanted to follow-up on the prior comments around the cash return profile and maybe just thinking about what else you may want to do with the cash, you have got your long-term debt down about $150 million kind of year-over-year, the cash is building. Just want to see what the gross debt reductions that you want to undertake or maybe think about the other way, like, what’s the capacity for buybacks that you guys may have going forward or is there some sort of limiting factor on leverage profile that you want to stick to?
So I think we have consistently said that, like keep our ongoing leverage around 2 times on a gross basis. We are a little bit below that today. But the debt that we have in place today is largely permanent debt. So other than $100 million or so on the term loan, you are not -- there’s really -- there’s no intent to reduce the debt levels from where they are.
As we think about returning cash to shareholders, I think, it’s a function of two things and so reinvestment in the business and we have said previously, we have got some relatively significant investments coming up in the next several years, the Taiwan facility specifically will comment on that more in December.
And then it’s a function of the M&A environment. We have said M&A is a priority. And so it’s sort of, I guess, it’s a bit of a Rubik’s Cube, but I mean, like, I said, our intent over time is to return a meaningful amount of cash to shareholders.
And we…
And then…
If you look at the last year or so it hasn’t been great, but if you look at the three prior years, we were just short of that 60% in aggregate, we are just sort of that 60% target that we talked about.
Great. And then just following up on the M&A comments, is there -- there are one or two things that you guys wish you had in the portfolio today and that’s what you are trying to target or these smaller bolt-on transactions that are just kind of complementary to what you guys already have or just an extension of what you already have within the portfolio?
Yeah. So as Greg said, I think, M&A continues to be an important part of our growth strategy, where you have strong balance sheet and liquidity. But so expect us to be active, but selective. And what it means is that, our teams are very, very busy right now. So expect us to be active on targets that are really a perfect strategic fit with our platform and we are really focused on a few areas right now, small to mid-sized deals would be the type of things you should expect us to focus on at this point.
Yeah. I would just stick with the multiple that you guys have in the balance sheet, maybe there are some bigger opportunities out there. That’s why I wondered if those big or small and would you be willing to issue some -- use that currency for potential acquisition?
I think we have said that often, but for the right deal, we would be willing to use this currency indeed. I mean, we talked about that in the context of the Versum discussions several years ago and our position remains the same.
Great. Thanks guys.
Thank you. The last question comes from Paretosh Misra with Berenberg.
Thank you and good morning. Can you provide some more color on growth drivers in your specialty chemicals segment? I guess, Greg flagged deposition of specialty gas for high growth. So, maybe if you could quantify that and any color on the cleaning chemistries and graphite business that would be great?
So -- yeah. So the big driver for SCEM this year and in this past quarter has been advanced the position, for two years it’s up 26% year-to-date, it was up sequentially nicely as well. Other parts of the business are doing well, but not going as fast, specialty gases, specialty coatings up about 22% year-to-date.
So significantly higher than MSI, in spite of some of the supply issues that we were mentioning, so it was down sequentially, but year-to-date still very strong performance for those product platforms. And the others be it cleaning or some of the other product lines or more in the low- to mid-teens, so more in line with wafer starts.
Got it. Thanks. And then so just, I guess, big picture in terms of memory and logic growth. How is it looking on a year-to-date basis so far?
So logic is doing well. I mean, it’s certainly led by our performance in leading edge foundry. This is where we see the biggest growth in logic for us and then memory continues to be the one big driver for us. That segment is really in the mid-20%.
And that’s a function of the node transitions that I was referencing earlier, which are driving the steady expansion of our served market as we see greater opportunity on a per wafer basis for materials, for selective edge chemistries and for some of the coating solutions that are used in the chamber components of the edge towards memory applications.
Thanks, Bertrand. Maybe if I could ask just one last one probably for Greg. I realize you want to save your detailed comments on the Taiwan facility for December, but maybe just in terms of timing, is that the plan still set to start the end of next year and how much of this year’s CapEx is towards that facility?
So the CapEx for that facility this year will be less than $50 million. And then as it relates to timing late 2022, early 2023, depending on which division you are talking about. But, overall, yeah, I think, the end of next year, is the right way to think about it.
Got it. Thanks, guys.
Thank you. This concludes today’s call. Thank you for your participation. You may now disconnect.