Entegris Inc

NASDAQ:ENTG

Earnings Call Analysis

Entegris Reports Strong Q4, Optimistic Outlook

Entegris ended the fiscal year with robust Q4 sales and EPS, surpassing their guidance. Recapping the year, Entegris demonstrated resilience through an industry downturn, with a focus on unit-driven revenue, constituting 75% of total turnover, primarily in logic and foundry sectors. The remaining 25% came from CapEx-driven products, largely memory-related. Entegris stresses their unique position in material science and purity for semiconductor manufacturing—key to customers' yield improvements. They project a CAGR of 11% to achieve an approximate 31% EBITDA margin by 2026, through market share gains, new product revenue streams, and high-value solutions. EBITDA growth is powered by an assumption of a paid off $1.4 billion term loan, leading to an interest expense of $160 million and continued debt reduction, underpinning accelerated EPS growth.

Entegris Displays Resilience and Confidence Amid Industry Downturn

Entegris concluded 2023 on a high note with robust fourth-quarter sales and earnings per share (EPS), both exceeding their own guidance. The company outperformed the market by 6% thanks to a strong position in leading-edge technology nodes and a significant backlog from the previous year. For 2024, they have provided guidance that anticipates a conservative short-term outlook but are strategically poised for a rebound in the semiconductor market.

Unique Customer Base Ensuring Cross-Cycle Stability

Entegris has a unique foot in the market, with 70% revenue coming from logic and foundry and 30% from memory, granting the company resilience and stability, unlike any other in the industry, a key point for any investor considering long-term investment prospects.

Competitive Advantages Fueling Customer Trust

Entegris' trifecta of competitive advantages—creating value via customer collaboration, ramping solutions to high volumes with top quality, and offering end-to-end material science solutions—has cemented strong consumer trust and sets them apart within the semiconductor marketplace.

Strategic Positioning for Future Material Science and Purity Needs

Amid the digital transformation, Entegris remains bullish, pointing at the global semiconductor revenue expected to reach $1 trillion by 2030. Their advanced materials and purity solutions are seen as increasingly critical to meet the customer demands for high-performing, efficient, and reliable semiconductors.

Prudent Financial Management with a Focus on Debt Reduction

Entegris made significant progress in improving its financial health, paying off $1.3 billion of debt by divesting noncore businesses and prioritizing free cash flow. The company's deleveraging efforts are set to continue, aiming for gross leverage to drop below 4x and net leverage below 3.5x by the end of 2024, which will serve as a powerful earnings booster.

Operational Efficiencies and Capital Discipline to Support Growth

With a focus on working capital improvements and strategic cash management, Entegris is set to maximize debt repayment and minimize cash reserves, emphasizing discipline in operations and long-term strategic planning. Acquisitions will be carefully timed to augment organic growth, and while share repurchases are on hold, dividends will continue, reflecting a balance of shareholder value creation and financial prudence.

Targeting Substantial Margin and EPS Growth

Entegris projects extensive gross margin improvements, driven by higher volumes, especially with ramping up facilities in Taiwan and Colorado, and an advantageous product mix. These efforts are part of a broader strategy to attain EPS greater than $5 by 2026, supported by an EBITDA margin of approximately 31% and debt paydown leading to a significant drop in annual interest expense.

Earnings Call Transcript 2023-Q4

[Bill Seymour, executive]

Good morning, and welcome to Entegris' Fourth Quarter Earnings and Analyst Update Webcast. Last night, we released our fourth quarter earnings and we posted the earnings slides and earnings prepared remarks on the IR site. We will not be presenting the prepared remarks for Q4 live in today's session. So please refer to those online if you already have it. In today's session, we will present a brief analyst update presentation, and then we will take Q&A on both the presentation and Q4 earnings.

We expect the webcast today will be approximately 1 hour and 15 minutes, including the Q&A. Some webcast related housekeeping items. If you're experiencing any technical problems, please click on the little i on the left-hand bar of the screen to troubleshoot or chat with tech support. You can minimize or enlarge your slide window at any time by clicking on the top right corner of the box. The slides will advance automatically throughout the webcast. The Q&A session will be at the end of the presentation. Please submit your questions in the Q&A box located in the bottom left corner of the screen. You can also e-mail questions to Beth and me directly. In the resource box, you will find a copy of today's presentation slides and a few other items of interest.

One other item of note, in the appendix of today's presentation, we have included for your reference, consolidated results and divisional results for 2023 that exclude last year's divestitures and the PIM business for the full year and by quarter.

The speakers today are Bertrand Loy, President and CEO; and Linda LaGorga, our CFO. 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 those 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 reconciliation tables in the presentation, which is posted on our IR page of our website.

With that, I'll hand over to Bertrand.

[Bertrand Loy, executive]

Good morning, and thank you for joining us. Today's analyst update will be brief. The main purpose is to provide you with a refreshed financial model focused on our core business, and excluding all completed and planned divestitures. Before I move on to the update, a quick recap of our results we posted last night. We are very pleased with the quality of our execution in 2023. Our unit-driven model displayed resilience during the current industry downturn. And we closed 2023 with strong fourth quarter sales and EPS results, both above our guidance.

For the year, we outperformed the market by 6 points, driven in large parts by our strong position at the leading-edge technology nodes and the backlog we had entering the year. In addition, we divested 3 noncore businesses and used the proceeds and free cash flow to pay off $1.3 billion of debt.

In terms of our guidance for 2024, we believe we have taken a prudent view of the industry in the short term while being fully prepared for what we believe is likely to be a significant snapback in the market.

On to the agenda for the briefing today. I will talk about Entegris' business model, our sales growth, algorithm and provide an overview of our 3 divisions. Linda will cover our capital structure, capital allocation, priorities, our updated target model and our updated 3-year financial targets. Then we will take questions on both the analyst update presentation and our fourth quarter earnings.

Here is what I would like to impress upon you today. Entegris' unit-driven business model is unique, highly differentiated and has strong competitive moats. While 2023 was a challenging year, we remain as optimistic as ever about the long-term growth prospects for the semiconductor industry. The industry is entering a period of unprecedented technology change and device complexity. Our core value proposition in material science, materials purity and end-to-end solutions has become increasingly enabling and critical for our customers. All of this means the market is moving toward Entegris. And this ultimately translates into a rapidly expanding Entegris content per wafer and strong outperformance for the years to come, reinforcing Entegris as a value compounder with attractive organic sales growth, leading to significant EBITDA and EPS expansion, especially given our commitment to lower our debt.

For the past decades, our mission has not changed. We help our customers improve their productivity, performance and technology by providing enhanced materials and process solutions for the most advanced manufacturing environments. Our platform is now comprised of 3 divisions, and I will provide more detail on each of them in a moment. 75% of our revenue is unit-driven or recurring. These unit-driven products can be chemistries and materials that are used daily in semiconductor manufacturing fabs or there can be advanced filters and other consumable products that are single-use and are replaced frequently. The remaining 25% of our revenue is CapEx-driven products. They can be gas filters, dispense systems and other components that we sell to equipment makers or there can also be wafer carriers, gas purification systems or fluid handling solutions that we sell when new fabs are built.

You can see in the middle of the slide that our customer base is unique as our solutions are widely used across the broad industry ecosystem. And as you can see, further to the right, when it comes to our fab customers, we have greater exposure to logic and foundry, representing about 70% of our fab revenues, while memory customers represent the rest, approximately 30%. This profile, unique in the industry, provides greater resilience and stability to our business model and financial performance on a cross-cycle basis.

On the next slide, I want to touch on the 3 dimensions of our competitive advantage that we have built over decades. No one in the industry comes close to these combined capabilities, especially while being almost exclusively focused on SEMI. First, on the left, the customer value creation flywheel. I am sure that you've read Jim Collins book, Good to Great. So you will recognize the flywheel concept, which is meant to call out the major steps the organization needs to go through to create and compound customer value over time. It starts up to 5 years ahead of new node transitions when a customer asks us to help them solve key challenges they are expecting to face. We then start our development work, share samples and ultimately provide them with a new enabling solution.

Finally, we must quickly ramp production to high volumes at extremely high levels of quality. The point is it is hard to do. And doing it right, time and again, creates customer trust, and this is the virtuous cycle depicted here. The next dimension of our competitive advantage is our commitment to industry leadership in the areas of technology, global infrastructure and operational excellence. On the technology front, we have a very strong foothold but we steadily continue to invest in research and product development to effectively partner with our customers on incrementally more complex challenges requiring earlier involvement.

On the global infrastructure front, our customers are increasingly expecting us to be close to them. So we have ramped our investments in local manufacturing and local tech centers in all major markets. These investments are proving to be a great source of differentiation for us, accelerating learnings and customer engagement. The last ring of this graphic is operational excellence. Our customers continue to expect tighter process windows, more process stability and process control, which we achieved with greater automation, process cleanliness and greater control of our supply lines.

The final dimension is our end-to-end offering, which obviously has been greatly strengthened by our combination with CMC materials. No other materials companies serving the semiconductor industry comes close to our breadth of technology capabilities. And we believe this brings huge value to our customers and ultimately means better device performance, lower cost of ownership and faster time to solution.

Despite the recent downturn, our views have not changed. And we continue to expect global semiconductor revenue to reach $1 trillion by 2030. The digitalization of our lives is accelerating. It is reshaping in very fundamental ways, everything around us, which will drive exponential demand for faster, more energy-efficient and more reliable semiconductors. These themes are all well understood, and I do not believe I need to belabor them today.

My message here is simply that the semiconductor industry is a great place to be. And this is particularly true for Entegris, as you will see on the next slide. Our customers have a major overarching goal, and that is to improve chip performance. And to do this, they have 2 major tools in their toolbox, more complex chip architectures and miniaturization of the critical dimensions on the wafer. To enable this, our customers' technology road maps are calling for new materials and ever-greater process purity to achieve optimal yields and optimal cost. At Entegris, we operate at the intersection of material science and materials purity. And this is precisely what our customers need right now. This is what we mean when we say the market is moving to Entegris.

From a material science perspective, these more complex structures mean more layers, more process steps and more novel materials. This translates into more material spend per wafer and greater content per wafer for Entegris, particularly in new leading-edge logic and 3D NAND nodes. From a materials purity perspective, greater miniaturization is making yield management exponentially more challenging and more expensive for our customers. The point here is our solutions help our customers improve their yields. And for example, using our advanced filters can positively impact yields in a fab by several points. The punchline of this slide is that the compounding process complexity of our customers' technology roadmaps is making our solutions increasingly valuable to our customers and this is expected to translate into expanding Entegris content per wafer, expanding served market, and ultimately, it is expected to fuel our market outperformance.

These more complex chip architectures and demanding applications like AI are requiring new enabling solutions, solutions like the ones listed on this slide. This is great for Entegris because we are engaged on all these fronts, deploying our unique breadth of capabilities in material science and material's purity to develop enabling solutions, unique solutions, which will result in new revenue streams for Entegris.

So what does that all mean for Entegris? Well, let me summarize this and introduce, in fact, reaffirm our organic growth algorithm. First, we expect our core market, the semiconductor industry to grow at twice GDP growth. And then we continue to expect to outperform the industry by 3 to 6 points. This outperformance will be driven by greater Entegris content per wafer as we have discussed, and market share gains as we continue to capitalize on our unique portfolio of capabilities to create highly differentiated mission-critical solutions for our customers.

We have made and will continue to make significant investments to realize these growth opportunities. Our R&D investments reflect our commitment to support our customers' technology road maps and are critical to winning positions in new nodes. This is why our R&D spending was up last year, even in a challenging industry environment. And going forward, we expect our R&D spending to be approximately 9% of sales. Our investments in production capacity are also vital for us to fully realize our long-term growth. In the last 2 years, our CapEx has been elevated as we invested in 2 new facilities in Taiwan and Colorado. And going forward, we expect our CapEx to come back down to 10% of sales. And, by the way, we should be close to 10% this year in 2024.

Moving on to our 3 divisions, and let's start with our newest materials solution. MS is the combination of the SCM and APS divisions to form a single, almost 100% unit-driven platform. With MS, our customers will benefit from a more robust end-to-end solution set, critical to their road maps, a solution set that improves device performance, reduces time to yield and provides superior cost of ownership for our customers.

Some of the major product lines include advanced deposition materials, CMP, slurries and pads, etching and cleaning chemistries and other specialty materials and gases. All 3 of last year's divestitures came out of this division. We believe we can achieve 4 to 6 points of growth in excess of the industry as we unlock the full potential of our platform and execute on some very exciting opportunities in new materials like molybdenum, etching chemistries and CMP slurries.

With this growth and a highly differentiated solution set, we believe we can steadily improve MS margins from 16% last year to 22% to 24% over time. The Advanced Materials Handling division, manufactures, fluid and wafer handling products that ensure higher purity levels and ultimately drives higher yields both within our customers' ecosystems as well as within their fab environment. 60% of AMH revenue is related to new fab construction projects and wafer fab equipment. These capital-driven products include wafer carriers, also known as FOUPs, EUV pods, sensing and control solutions and high-purity valves and tubing. 40% of the business is unit-driven and comprised of products such as chemical containers and finished wafer packaging.

Going forward, we expect top line growth of 2 to 4 points in excess of the industry and operating margins in the low to mid-20s. The Microcontamination Control division provides products that address a rapidly growing need in the semiconductor industry for purity and consistency of chemicals and materials. These solutions have become essential for our customers in their quest for yield optimization and long-term device reliability. As feature sizes continue to shrink and as new materials are adopted, the permissible sizing and classes of contaminants as well as their concentration levels are becoming exponentially more stringent. As a result, the push to achieve ever greater process purity translates into the need for more advanced filters, greater frequency of replacement of these filters and also includes the introduction of more points of filtration deeper upstream in the fab supply lines. All of this is expected to drive an outperformance of 5 to 7 points for MC. And given the growing value of these solutions for our customers, we expect operating margins to reach 35% to 37%.

I will now hand it over to Linda.

[Linda LaGorga, executive]

Thank you, Bertrand, and good morning. Today, I plan to cover a few key topics. First, I will focus on our debt structure and our capital allocation priorities. Then I will turn to the forward-looking financial opportunity for Entegris. The punchline of this slide is that our debt structure is rock solid. We ended 2023 with total debt of $4.7 billion after paying down $1.3 billion last year, a tremendous accomplishment. Debt paydown in 2023 was driven by proceeds from the divestitures of QED and Electronic Chemicals, the business we sold to Element Solutions and free cash flow.

The blended interest rate on the portfolio is a very attractive 5.1%. Our debt is comprised of both fixed rate notes and what remains of the term loan after last year's paydown. While the term loan is technically variable, we have hedged almost the entire $1.4 billion. So we currently have close to 0% variable rate debt. Other important points to note, we have no maturities until 2028 and no maintenance covenants on the debt. So again, our current debt is well structured and derisked.

Looking at our capital allocation priorities going forward, our clear near-term priority is to further reduce our debt with a focus on the term loan. We expect gross leverage to be below 4x by the end of 2024 and net leverage to be below 3.5x. Debt paydown is a powerful contributor to our earnings. Each $100 million of debt paydown equals approximately $0.04 of EPS. The focus on debt paydown will continue to be balanced with making critical investments in our future.

As Bertrand mentioned earlier, we plan to invest approximately 9% of revenue in R&D and approximately 10% of revenue in capital expenditures. Also, to maximize our debt repayment, we will drive further working capital improvements and continue what we started in 2023. This is an area of particular focus for me. We will also maximize cash repatriations and, in general, minimize our cash levels. This will be another major focus area for us. We also expect to average about $450 million of global cash on our balance sheet over the course of the year.

Moving past the near term, we will seek to complement our organic growth with strategic acquisitions. We have a track record of creating shareholder value through M&A. So expect us to remain active on that front at the appropriate time. We will, of course, continue to pay a dividend, and we may consider share repurchases in the future. But for now, share repurchases remain on hold. So next, I want to spend some time on the future earnings power of the company. Not only have we shared this target model externally, but we also use this framework to plan and more importantly, to run our business. It's pretty straightforward.

As you can see, the model shows margin and EPS outcomes at different revenue levels. Core to the model is the assumption of 40% flow-through to EBITDA line over time. That flow-through will be driven by gross margin expansion and SG&A leverage over the next several years. A few other critical assumptions in this model. First, we assume an annual interest expense of approximately $230 million that remains constant in all revenue cases. This implies no additional debt paydown going forward. Of course, we do expect to continue to pay down the term loan, but as this is an illustrative model, we simplified the interest assumption by holding it constant. The model also assumes a tax rate of approximately 16%, depreciation of 5.5% and share count of 152 million shares, again, for all scenarios.

Now focusing on our 3-year financial targets. Bertrand spoke earlier about our sales growth algorithm and our demonstrated performance is a value compounder. So what does this mean in numbers? Starting from the left, we expect an approximately 11% sales growth CAGR from 2023 to 2026. The 2023 baseline excludes last year's divestitures and the business we sold to Element Solutions. In addition, we have excluded PIM from the 2023 baseline as we intend to sell the PIM business. That 11% growth rate assumption is essentially the midpoint of the range Bertrand laid out.

This top line CAGR, coupled with the 40% EBITDA flow-through leads to an EBITDA margin of approximately 31% by 2026, which amounts to a CAGR of 15%. Key drivers of this, as I mentioned on the previous slide, are gross margin expansion and SG&A leverage. Taking a closer look at the gross margin improvement opportunity. The drivers of this are expected to be volume growth overall, ramping volumes in our Taiwan and Colorado facilities and the benefits of product mix. For your reference, the 2023 gross margin headwind from our Taiwan facility was approximately 70 basis points. We expect that this headwind will start to alleviate as we ramp volume shipments in the second half of this year.

Next, we expect EPS to be greater than $5 by 2026. This growth is driven by the EBITDA expansion and a few other key assumptions. First, we are assuming that the $1.4 billion term loan is paid off completely and only the existing bonds remain outstanding. This leads to an annual interest expense of approximately $160 million by 2026. This is different than our target model slide I just showed, where we assumed no additional debt paydown. And as I mentioned on the previous slide, we have assumed a tax rate of approximately 16% and a share count of approximately 152 million.

Wrapping things up, we believe our model is highly differentiated. We remain very optimistic about the long-term secular growth of the semiconductor industry. The market is moving to us meaning our unique position and value add is leading to higher Entegris content per wafer and outperformance. Our capital structure is very solid and rapidly improving, which gives us a lot of optionality moving forward.

Finally, the market growth and our outperformance leads to attractive sales growth and with the leverage in our model and our commitment to pay down our debt, accelerated EPS growth. Thank you. This concludes our presentation, and I will turn it back to you, Bill, to moderate the Q&A.

[Bill Seymour, executive]

Thank you, Linda. [Operator Instructions] This is a question that came in different forms from different people. So Bertrand, talk about the drivers of the Q4 results above guidance and then the 6 points of outperformance for 2023, what are the drivers?

[Bertrand Loy, executive]

Obviously, we were very pleased with the way we finished 2023. All 3 divisions performed very well. MC and AMH were in line or slightly above forecast in Q4 and MS had a very strong finish. Remember that the MS division has the most exposure to memory, which was a headwind earlier in the year, but of course, converted into a tailwind as the memory segment started to recover late 2023.

Another factor impacting the MS performance in Q4 was the existence of some pull-ins, customer pull-ins, customers trying to get or take advantage of rebates available to them during calendar 2023. But overall, very strong finish to what was a very good year for Entegris. To put that in context, remember that we were very busy in 2023. We completed the acquisition of CMC materials, leading a very aggressive integration project, completing this integration within 13 months post-close. As part of this integration, we successfully divested 3 large businesses generating $1.3 billion of proceeds in the process, which we applied to our debt as we had promised to do.

We also managed very effectively the slow industry environment while maintaining strong investments into our future. As you saw, we increased R&D spending in 2023, we largely completed the KSP investment in Taiwan, and we initiated a new investment in Colorado. And as you know, all of those significant projects can be the source of a lot of distraction, a lot of defocus in the organization, and that was not the case. We outperformed the industry by 6 points. We also delivered very healthy levels of EBITDA in 2023, 27%, which is in line with our commitment. So we are exiting 2023 with a very strong platform, a platform that obviously we expect to build upon as we presented today. So it bodes well for 2024 and for the years to come.

[Bill Seymour, executive]

Okay. So Chris Kapsch from Loop has a little bit of a double down on that question. So looking at the MC performance, MC performed really well last year in a down market. What are the drivers of that? Is it leading edge? Is it mainstream? What are the major drivers of that?

[Bertrand Loy, executive]

So thank you for asking that follow-on question. I mean, obviously, if the MS division was the start of our Q4 results, the start of the full year 2023 was our MC division. MC benefited from a strong backlog getting into 2023, but that's really not the full story. The demand for product solutions continue to be very strong through the year. And I want to maybe highlight a few of them. Our gas purification system, for example, continues to perform at very elevated level. As a matter of fact, our Q4 revenue for gas purification systems was at a record level. And that is a function of steady fab construction activity and the fact that those systems have become mostly industry standards now for several years.

The other part of the Microcontamination division that went -- that performed really strongly in 2023 was the Liquid Filtration platform. You heard me, the quest for materials purity is unabated in this industry. Our customers are really trying to chase higher yields and long-term reliability of their devices. And to do that, they need to continue to increase the purity requirements, chasing ever smaller contaminants and making the permissible concentration levels more stringent. So these forces were at work in 2023. And that's the reason why MC essentially outperformed the industry by close to 16 points. So a massive outperformance level in 2023. And that's a trend that we expect to continue going forward. And that's actually the basis for the level of outperformance we expect to see for the next 2 to 3 years, an outperformed level of 5 to 7 points, as I presented earlier.

[Bill Seymour, executive]

Okay. Next question from Toshiya from Goldman. So if you can break down the 4% industry growth for 2024, MSI versus CapEx end markets?

[Bertrand Loy, executive]

So remember that 2024 will be a recovery year for the industry. And by that, I mean that different segments of the industry will be recovering at different times and at different rates. The recovery will be led by Advanced logic and DRAM. 3D NAND is expected to stay relatively muted, especially early in the year. And of course, mainstream fabs have just entered the downturn just a few months ago, and we expect fairly significant wafer start reductions and utilization rates, compression, especially in the first quarter of this year.

So that's the lay of the land, and that's what we took into account when quantifying our expectation for the industry.

So we expect MSI in that context to be up about 5%. And here again, I'm talking about 2024 compared to 2023. And we expect the industry CapEx to be essentially flat. And here again, remember then talking about the total industry CapEx, not just WFE. So if you blend those 2 numbers, you get to that 4% industry growth in 2024.

[Bill Seymour, executive]

And then I'll ask a follow-up from Atif from Citi, which would be, okay, that's the market growth, and we talked about our level of our performance for 2024, what are the drivers of that outperformance in 2024?

[Bertrand Loy, executive]

Well, the drivers are essentially the drivers we called out in the presentation, right? We expect to continue to benefit from greater Entegris content per wafer. We expect some node transitions in 3D NAND, in particular, in 2024. And we also expect a number of advanced logic manufacturers to start getting ready for significant node transitions late in the year and preparing for 2025. So all of that will contribute to that 4 to 5 points of outperformance in 2024.

[Bill Seymour, executive]

Next question, John Roberts, Mizuho. So AMH revenue margin decline in Q4. Can you maybe provide some color around the drivers of that? And then maybe put into context how the AMH performance last year.

[Bertrand Loy, executive]

Maybe I can start with the performance, Linda, and then you can add on the margin. So if you think about AMH, as we have mentioned multiple times, AMH had actually a very significant backlog entering 2024. And that really helped them sustain elevated revenue levels in the first half of the year. That backlog disappeared in Q3 of 2023. And that's really the impact that you are seeing in Q4 of 2023. Going forward, we would expect AMH to steadily recover through the year in 2024.

[Linda LaGorga, executive]

Yes. And regarding margins for AMH in Q4, a couple of drivers I'd call out. First, there was some volume deleveraging with -- based on the revenue. And secondly, some onetime impacts, including our rebalancing between our divisions of the variable compensation. So as Bertrand said, very much expecting a recovery of those margins as we go into Q1 and the rest of 2024.

[Bill Seymour, executive]

Okay. This will be a combined question. So Chris Kapsch from Loop and David Silver. So first on the Chris Kapsch sort of item number 1 is Bertrand, can you talk a little bit about the progress of the sales synergies from CMC? And then David Silver asked a little bit about some examples from the products that we got from that acquisition and how are those doing in the end-to-end solution.

[Bertrand Loy, executive]

Okay. So we're very pleased with the way the combination with CMC Materials is shaping out. I talked about a few different metrics. But more importantly, the way the 2 teams have come together is extremely gratifying. And I'm also very, very pleased with the quality of the customer engagements that we've seen in the last 18 months. So all of that contributed to actively seeking new opportunities, different ways to combine and co-optimize solutions across our various platforms, ways to optimize our post-CMP cleaning chemistries based on the better understanding of the salary blends and mix. Ways of optimizing our slurry filtration platform based on the better understanding of the slurry. So all of that has been taking place, as you would expect.

You should know that as a matter of fact, we had a compensable goal last year looking at the opportunity pipeline and the funnel. And you should know that actually, we not only met that particular objective, but we far exceeded that objective. And that is what is giving us confidence when we talk about the potential of the MS platform going forward. And this is why actually we are committed to outperforming the market by 4 to 6 points in MS for the years to come.

[Bill Seymour, executive]

Okay. Next question for Linda. So Mike Harrison from Seaport. EBITDA margins, 26% in Q4. How do you see the cadence of EBITDA margins as we go into Q1 and then throughout next year? And what are the drivers?

[Linda LaGorga, executive]

So as we go into next year, as we said, the guidance for EBITDA margin is approximately 29%. In Q1, the guidance is approximately 27%. Bertrand mentioned, we're expecting a gradual recovery throughout the year. So you'll see a gradual uptick also in our EBITDA margins. As we look at the drivers, first, there's some volume leverage as an aspect of a driver, there's mix. We always are and will remain very focused on productivity, helping with our margins across the board. And one other item I will mention is last year, I talked a bit about the impact of our inventory reductions on margins. This year, we're absolutely still focused on working capital. But that impact as we continue to reduce inventory will not be as great as it was.

Now, all that the positives, we will still have headwinds in 2024 from the ramp of KSP. I mentioned in the comments that in 2023, those headwinds were approximately 70 basis points. You should think of those headwinds in '24 is about the same to slightly more. Now what will happen in 2024 with KSP is the impact will be heavier in the first half, and then we'll start to alleviate that in the second half. Pulling this all together, we're going to continue to balance between investment and cost. And as we talked about, we are going to manage to that 40% EBITDA flow-through. So that gives you the context of how I see 2024 EBITDA margins coming together.

[Bill Seymour, executive]

Okay. Another question for you, Linda, from Bhavesh from BMO is, can you update us, we've obviously presented some information in the presentation, how are you looking at leverage going forward?

[Linda LaGorga, executive]

Yes. So I mentioned in the presentation that by the end of 2024, we expect gross leverage to be less than 4x and we expect our net leverage to be less than 3.5x. As we continue to go forward beyond 2024, we will continue to focus on deleveraging, but we will also retain some optionality. The great news is, as I talked about in the presentation, is we have a rock-solid capital structure. And so as we move forward, we want to balance between the deleveraging and some of the optionality we'll have going forward. The most important thing is we will continue, as we've demonstrated, to be prudent in our capital allocation strategies.

[Bill Seymour, executive]

Bertrand, this comes from Aleksey from KeyBanc. Guiding to 9% R&D as a percentage of sales. Is this -- why is this critical? And is this part of -- is this a driver for the outperformance? Maybe just put that -- some color around that.

[Bertrand Loy, executive]

Multiple different noise to actually think about that number and what -- why that number has been growing over time. And the first one is the complexity of the challenges our customers are inviting us to collaborate on is, as I mentioned, growing. You should also know that because of that, we are invited to collaborate with our customers earlier in their technology process development cycle. So all of that contributes to that greater spend. And then there's just the number of new opportunities ahead of us. The fact that we expect the Entegris content per wafer to continue to grow. It's just indicative of the fact that our customers see the value that Entegris can provide, see the value of that end-to-end solution capability that we are marketing.

They understand that it's going to be key to not only device performance, but also time to yield and ultimately, time to node transition, all of which are extremely important for our customers. But to do that and to really realize the opportunities ahead of us, we have to be willing to invest in R&D. And that's something that we did in the current downturn in 2023, and that's the level of investment that we are committed to maintaining an increase for the years to come.

[Bill Seymour, executive]

Okay. Charles Shi, can you talk about the market and revenue progression as we go through '24? And then I'll add a little flavor on that, and he asked about -- okay, so we talked about MSI and CapEx for this year. How do you see that kind of going forward as well?

[Bertrand Loy, executive]

Yes. So first, let's start with the first quarter, right? I mean we are guiding sequentially down 4%, which is in line with normal seasonal cycles. And again, a reflection of the fact that many of our customers in Advanced Logic and of course, in mainstream logic have indicated a sequential compression in fab utilization. From there on, we expect actually steady sequential increase in revenue as again, we expect growth in advanced logic. We expect further recovery in memory and we expect also more stable conditions at some point in the year from our mainstream customers.

[Bill Seymour, executive]

Excellent. Question from Aleksey on Taiwan, the facility there, the volumes ramping in the second half, what does that mean for the first half? And where are we at with that facility?

[Bertrand Loy, executive]

Maybe I can take the first part. Linda, if you want to maybe elaborate a little bit on the margin impact. But let me just say that we are very pleased with the progress we have made in the construction phase of our KSP investment. Today, we have about 200 employees on site. Our internal qualifications are progressing rapidly and progressing well. And in a few cases, customer qualifications have already started. So we expect revenue to be generated out of that facility in the second half of the year. I mean, we are already taking some orders, customer orders, but they are actually very small right now. We would expect the level of revenue from the KSP facility to reach somewhere between $40 million to $50 million for the year in 2024.

[Linda LaGorga, executive]

Right. So taking that to the margin side, think about it across the 4 quarters, in the first couple of quarters, we have cost. And then as Bertrand said, the revenues will start ramping up, that will start to offset some of that cost. So we still have a headwind from KSP in 2024, but we're starting to alleviate that as we progress through 2024, and that will continue into 2025.

[Bill Seymour, executive]

And then I will ask a similar question, and you talked a little bit about this Linda already from Toshiya. You talked about EBITDA drivers and trends. So how would you position gross margin trends and improvement opportunities going forward?

[Linda LaGorga, executive]

Well, a lot of the trends that improved EBITDA I mentioned -- that I mentioned really are around the gross margin aspect. So I mentioned, for example, productivity. A lot of the productivity will come around gross margin. In addition, some of the volume ramps really impact the gross margin. Now volume ramps also, when it comes to EBITDA, give us SG&A leverage. So it's both. But as we grow in that volume ramps, we will get more plant utilization. So those are some of the big drivers that come to my mind as we think about that evolution of gross margin throughout 2024.

[Bill Seymour, executive]

Bertrand a word from Aleksey, here from KeyBanc. And what's -- how would you qualify the opportunity and gate-all-around?

[Bertrand Loy, executive]

So during the presentation, we highlighted a number of new opportunities, gate-all-around being one of them. And this is just another flavor of those 3D architectures that we expect to proliferate in the industry in the years to come. So specifically around gate-all-around, we expect to see opportunities around, new precursor materials, slurries and other polishing solutions as well as etching chemistries and solutions for ion implant as well. So we believe that we are in the very early innings of the adoption of that particular architecture. And as you saw on the analysis in terms of wafer content, we expect that to be a big driver for the increase we expect to see from 5-nanometer all the way to 1.4 nanometer in Advanced logic.

[Bill Seymour, executive]

A little bit of a follow-up there in terms of applications, silicon carbide, slurry and pads, what -- obviously, for us, silicon carbide did really well this year, slurries, any updates? Any color you can provide there?

[Bertrand Loy, executive]

Yes. So this is a great area of focus for the company. We mentioned that today, it is still a fairly small part of our business. Think about revenue levels in the $40 million to $50 million range on an annual basis. But that business did double from 2022 to 2023. And we expect that business to continue to do extremely well. And here, I'm talking really about slurries, but remember that there are a lot of other opportunities for us around power electronics. So beyond slurries, we have great opportunity for the pad solutions that really work hand in glove with the slurries that we are providing our customers in power electronics. There are also great opportunities in terms of gas purification systems and in terms of post-CMP cleans. So I think this is a market segment that is emerging and that is growing very fast and an area where we are very focused.

[Bill Seymour, executive]

Okay. Next question, Linda, Tim Arcuri from UBS. How would you compare the 3-year target from September '22 to the one we provided today, EPS target, how do you compare those on a like-for-like basis?

[Linda LaGorga, executive]

Absolutely. Good question. So our current 3-year target, if you look out to 2026, we do have less revenue. It's driven by 2 key factors: Number one, divestitures. So as we said, we had the 2023 divestitures, which we all know about. Also, we exclude PIM as we look at this 3-year target model. Secondly, the 2023 downturn has been longer than expected. So that does impact the long-term revenue number. Now on the good news front, our divestiture program has been ahead of schedule. That's really important here. So got the divestitures done faster, paid down debt faster and have a lower interest rate as a result of that. So that's really critical as we think about where we are when we look at 2026. There's a couple of other key positives. The tax rate is a bit lower and the divestitures give us a bit of EBITDA accretion. So you factor that all in and you look at 2026 and the 3-year target and the punchline is at the same revenue levels, we are delivering more EPS. So it's a very good outcome when we look at this 3-year target model.

[Bill Seymour, executive]

Okay, Bertrand. So David Silver has a question about with these -- we addressed this in the presentation a little bit, but with these more complicated technology road maps, how is our interactions with our customers changing in the leading edge and what do we need to do more with them?

[Bertrand Loy, executive]

So first of all, with the technology road maps becoming more challenging with our customers, in fact, trying to accelerate the transition to new process technology opportunity is really a bond for Entegris. So the level of engagement has increased, as they see Entegris as a very unique partner and, frankly, in many cases, an indispensable partner for them to achieve new levels of device performance, acceptable yields and again compress time to solution. So as I mentioned, we're investing more in R&D. We are more specifically investing a lot in regional tech centers. We already have a very significant investment in Taiwan. We announced late 2023 a similar investment in Korea in order to, again, engage more effectively locally with all of the technology leaders in the space.

Those local investments in tech centers are, in fact, a great differentiator, very few, if any, of our competitors really provide those capabilities and those options for our customers. And I think it really reinforces the quality of the customer interaction. It also speeds up the cycles of learning, both for our customers as well as for Entegris. So we are very focused on continuing to improve the quality of this very symbiotic relation that we have developed with our customers for many years now.

[Bill Seymour, executive]

Okay. So this is probably for Linda. So Bhavesh from BMO, and I'm going to combine something to this as well. So he's talking about Materials Solutions, down sequentially in the margins post divestiture? And how do you see Materials Solutions margins going forward? Obviously, we presented a pretty significant improvement in the model, so provide some color around that.

[Linda LaGorga, executive]

Yes, of course. So first of all, I think Bhavesh what you're referring to is from Q3 to Q4, we have somewhat flat margins. This first piece comes back to the divestitures. If you remember, Bertrand mentioned that the divestitures that took place in 2023 were all in the MS division. These divestitures had low OpEx. So while we have gross margin accretion, particularly when you look at MS on its own, with these low OpEx businesses, you don't see the accretion on the division profit line. But as we go forward, MS, as we spoke about earlier, and as Bertrand mentioned, has tremendous opportunity. First, it's a unit-driven business. We are going to see volumes ramp up. We're going to see the benefits of that across the MS portfolio.

In addition, we will continue to invest R&D is critical, but we will get SG&A leverage. This applies to the company as well as MS, if you think about the ramp, as sales goes up, something like sales and marketing is not going to increase at the same rate as our sales are increasing, so with all the opportunities around the solution set, really the core of why we brought the divisions together, we really see this opportunity and are comfortable with how we're thinking about the longer-term margin potential for MS.

[Bill Seymour, executive]

Okay. And then a little bit on this -- on a divisional basis, the progression of MC margins going forward, what are the improvement drivers for MC margins going forward?

[Linda LaGorga, executive]

Well, so MC, there's a lot of similarities across the various divisions. As we said, 2024, gradual recovery, but our long-term view on the market, we've talked about it, and it's very positive. So there's MC will -- again, we have the benefit of the portfolio. And as our customers do need more filtration products, this is a very attractive portfolio, attractive from a mix perspective. And so therefore, we will get that benefit. We'll get the volume leverage. And as KSP ramps, some of that's happening in the second half of '24, more into '25, that's really going to help us from a margin perspective on MC also.

[Bill Seymour, executive]

So in terms of -- maybe there's a couple of questions around the Chips Act, Bertrand. So maybe you can provide a couple of updates on the progress there and what people should expect.

[Bertrand Loy, executive]

Yes. So as you'll remember, we made a big announcement last year around an investment in a new facility in Colorado. Multiple phases to this investment. Phase 1 is the one that we initiated last year. Phase 1 is about $280 million. And we believe that this project is very much in line with the overall objectives of the U.S. Chips Act, which, as you know, is trying to promote the development of a domestic supply chain or resilient domestic supply chain and derisk supply chain risks for the many new fabs that are expected to be built here in the U.S. So we've been in dialogue, active dialogue with the Chips program office. We believe that those discussions have been very constructive and very positive, and we will update you when we have more specifics to share.

[Bill Seymour, executive]

Okay. Going a little bit on some of the end markets and some of the products here, Bhavesh from BMO. We talk a lot about molybdenum. Anything -- any color you can add around why is that important? And what does it look like going forward?

[Bertrand Loy, executive]

Yes, we have been talking a lot about molybdenum as an example of the new class of precursor materials that we expect the industry to turn to as they look for thinner film materials with similar or better electrical performance. We expect those materials to be first introduced in the 3D NAND architectures and then at some point, in Advanced logic as well. So we have been spending a lot of time positioning our solution offering with the leading 3D NAND players. Remember that we believe that we have a very unique capabilities around those solid precursors, not just the ability to provide the material, but also to provide an industry-leading delivery system that can very effectively deliver the material onto the wafer at a very attractive total cost of ownership.

So we believe that the 3D NAND players will likely adopt molybdenum, whether they adopt this new molecule at 200 layers or we have to wait until 300 layers remains a question mark. But I think we are very, very close. And I think our confidence level has increased significantly in the last several years. So again, this is exciting. This is one of the reasons why you see the increase in SAM in terms of Entegris content per-wafer opportunity in 3D NAND, essentially double from what it is today at 176 layers. And when we think about what it could be tomorrow at 500 layers.

[Bill Seymour, executive]

Yes. And a little -- a follow-up and a few questions that came through. In last Analyst Day, we talked about the filtration benefits or in the content per wafer, similar to what you were just talking about. Is that the same story where the content per wafer in filtration is still very positive going forward? And what are the drivers?

[Bertrand Loy, executive]

Yes. I mean the story remains the same, and you can actually see evidence of that in the level of outperformance we expect to see in our Microcontamination division. The only reason we have not normalized that opportunity on a per-wafer basis is simply that it's just getting harder to do because the opportunity for us in terms of advanced filtration usage is not just in the fab environment, which is something that we can track fairly precisely. But that opportunity is really expanding upstream in the supply lines, and that gets actually a lot harder to track and to link precisely to a particular device architectures.

As you know, in order to achieve atomic levels of purity, our fab customers are increasingly asking their bulk chemical manufacturers to achieve significantly higher levels of purity. And as a result of that, we are seeing greater introduction of new points of filtrations, upstream in the supply lines. Those new points of filtrations are using more advanced filters and the frequency of change out is also increasing. So all of that are the fundamental drivers for our Microcontamination business. So nothing has changed. It's just hard for us to pin that to a particular technology node and to normalize that to a wafer number.

[Bill Seymour, executive]

Okay. This will be the final question from Toshiya from Goldman. Obviously, debt paydown is a priority in the near term. M&A historically has been a big driver of growth for the company. So the question Bertrand is what are we looking for when we start to do M&A again, what are the characteristics that we're looking for in a potential target?

[Bertrand Loy, executive]

Look, I think we are blessed at Entegris with a very exciting platform, a platform that provides a lot of optionality. I mean, obviously, the organic growth story is very compelling. But on top of that, I think that we can certainly create additional long-term shareholder value by very selectively go after M&A targets. This is what we've done in the past 10 years. This is what you should expect us to continue to do. And we have demonstrated that we are a really good integrator of businesses. And I think what I was mentioning earlier around how well the integration of CMC has gone is probably the latest proof point to that statement.

Having said all of that, I will go back to what Linda said, our first order of priority right now is to bring the debt down. So expect us to do that and to be focused on that. But keep in mind that there are a lot of options available to us to deploy our capital and to create additional value for our shareholders going forward.

[Bill Seymour, executive]

Great. Well, thank you very much for joining us on the webcast today. We will provide -- a recording will go up on our website by the end of the day. If you have any further questions, please reach out to me. We really look forward to seeing many of you in the coming weeks. Thank you again, and have a great day.