Entegris, Inc. (ENTG) Earnings Call Transcript & Summary

I guess we can get started. Thank you all for coming today. Good afternoon. I'm Stacy Rasgon. I cover the U.S. semiconductor and semiconductor capital equipment space here at Bernstein. And it's my honor to have our guest today, Bertrand Loy, the President and CEO of Entegris. Bill, I don't think you're up on stage today, are you? No. Awesome. Okay. Entegris. Our session is going to last about 50 minutes today. If you want to ask a question, there should be -- maybe they'll throw it up there. There is an online pigeonhole. They should put up a QR where you can access it, where you can ask questions so we can have time to ask at the end. They may also be circulating question cards as well, so you may be able to fill those out as well. And we'll have time to answer those when we end. With that, it gives me great pleasure to welcome Bertrand. Thank you so much for being here today. I really appreciate it. I've been looking forward to this.

Thank you, Stacy. Good morning or good afternoon, everyone. Pleasure to be here to talk to you about Entegris. Some of you are very familiar with our story, many of you are not. So I'll give you a brief intro to our platform. And then I know you have many, many, many questions, Stacy, so hopefully we'll have time to cover a bunch of them. So I'll keep my introduction brief. So Entegris is a company that was created about 50 years ago in the very early days of the semiconductor industry. The company has changed a lot over the last 50 years, but one thing that has remained constant is our mission statement, which is really to develop very unique process solutions to help our customers improve the performance of their product and the cost of their product. And we focus on all of the most demanding manufacturing environments in the world. So when you have a mission like that, a couple of things that actually turn out to be true. The first one is that, naturally, you will spend a lot of time focusing on the semiconductor ecosystem because this is, arguably, where there is the greatest level of manufacturing complexity, which in turn translates into the greatest amount of opportunities for us. And I'll talk a little bit about that in a moment. The other implication of that is that we have an intense focus on our customers and our customers' road maps. So what we do is essentially developing solutions to emerging problems that we expect our customers will be facing 3, 4, 5 years from now. So we work through very close partnerships, joint development agreements with our customers. The duration of those development efforts can be anywhere between 5 to 6 years. And the result of that would be a series of process solutions that are very unique to the customer integration scheme, to the customer process recipe. So that means from an investment standpoint, that means a lot of stickiness and a lot of resiliencies in our model. We sell over 15,000 products, highly customized across a very broad base of customers, not just the fabs, obviously, but also the equipment makers, the chemical manufacturers, the wafer growers. So I would argue that -- and maybe as a preface to my statement, I would say that usually, investors thinking about semiconductor suppliers, we think about large equipment makers. I would argue that our business model is extremely more resilient than that of the equipment makers. What we sell is mostly consumable products, high diversity in our product portfolio, sticky solutions and again, a very broad-based customer base. So highly resilient business model. So another reason for us to be very excited about the future is that our value proposition that is centered around materials and purification solutions is increasingly important to our customers. If you think about what the semiconductor makers are trying to accomplish, they're trying to improve the performance of their chips. And 2 big levers that they have at their disposal to do that are the chip architectures and the miniaturization of the features on the wafer. Well, in order to enable those very complex structures, whether you're thinking about additional layers in 3D NAND or gate-all-around in logic architectures, they will need new materials, materials that perform better, materials that can be deposited in thinner films and that's where we are focusing. So we are essentially enabling those new chip architectures through the development of new metals and new dielectric materials. So the other lever, as I was mentioning, is miniaturization. And when you try to shrink the critical dimensions on the wafer, you will soon be facing increasingly challenging contamination problems. And you're going to be chasing ever smaller contaminants. Well, Entegris has been now for decades the leader in terms of contamination control and purification. And the combination of those 2 factors, the material science, the material cleanliness is actually very unique in the world. We are the only 2 -- the only company having endorsed 2 core capabilities in our portfolio. And what it means for our customers is that we are able to come to a solution in a shorter time frame. And that shorter time to solution is an extremely important value to our semiconductor customers who are all trying to get to the next node, to that next level of performance for their chips faster than their nearest competitors. Increasingly, Entegris has been viewed as a must-have technology partner. And that's one of the reasons you've been seeing our growth rate now steadily above the growth rate of the industry, the underlying industry that we serve. So I promised I would be short. I'll just make one final comment, and then I'll turn to you, Stacy. But the final comment is that I think we have also earned the reputation of being thoughtful capital allocators. M&A has been a big part of our strategy. When you think about materials companies, you will quickly realize that this is a much more fragmented part of the ecosystem in the semiconductor ecosystem as compared to the high degree of consolidation that exists in the equipment space. So I think we have an opportunity to very selectively act as a consolidator. We've done that with, I think, a great degree of discipline. And recently, a few months ago, we announced the combination with CMC Materials, and we are in the process of getting all the regulatory approval and working obviously diligently in the integration plan so that we can combine those 2 companies to the greatest effect. So I'll stop here, and I'll turn to you, Stacy, I guess.

Jumping up in a bit here. I want to talk a little bit about the business model, specifically the drivers. And I typically think about the drivers -- I think you've talked about this in the past in terms of like CapEx driven versus unit driven. You also just mentioned sort of thinking about it in terms of like architecture versus shrink. And I don't know if that's a different way to think or just a different way to parse it? Or like how is it that you actually guys -- you guys actually do think about the driving of the business? Is it CapEx and units are still the right way to think about this or?

I mean, honestly, this nomenclature is something that we use to explain to the investment community what are the underlying drivers for our business. I mean internally, we don't really look at it that precisely. So from a definition standpoint, for us, anything that requires a change out or is consumed within 18 months is a consumable product. I think that has not changed as frequently is viewed as a CapEx product. So obviously, chemistries and materials are almost one-to-one correlated to wafer starts; filtration, the correlation is also strong, but not one. Filtration get replaced when they get changed out every week, every month, depending on where they are in process. And then when it comes to CapEx, we have actually some products that get replaced. A good example of that would be our process carriers. We call them FOUPs. Those FOUPs usually have a lifetime of about 3 to 4 years. So they get replaced, but not as -- not nearly as frequent or sufficiently frequently to be deemed consumable products.

Those of you that don't know, FOUPs are the overhead carriers that carry the wafers from tool to tool when you're making, it's a box.

That's right. Thank you for that.

Got it. What does the growth formula look like, I guess, in the context of all of that? How do you think about growth for Entegris versus SEMIs, whether it's -- I don't know if it's WFE or like fab spending that drives it. Like, what drives the growth formula? How do you think about it?

So the way we have cast our growth formula is relative to the industry, recognizing that we don't really control what the industry does. So we are very bullish about...

Do you have a point of view on the industry?

I do. And we want to learn more about that at some point. But from a secular standpoint, I think that this is a great place to be. I think that the demand for semiconductors is expanding. I think we see much greater degree of diversity in the demand drivers. So certainly, the traditional consumer electronics like PCs and cell phones are big drivers, but we're seeing the emergence in industrial applications, automotive applications and many more. So I think that this is going to continue. And I think that there is a case to be made that semiconductor demand will be growing at about twice the rate of GDP for the years to come. So that's our point of view. And then we believe that we have an opportunity to outpace that by about 3 to 5 points, and that's directly a function of the growing importance of what we do. And we've tried to normalize that to a per wafer metric. And in November, December last year, we actually did share our views on how the Entegris content per wafer is rapidly expanding as our customers migrate from older nodes to newer nodes, both in memory and in logic. So that's a very important tailwind for us. The other thing that is happening in the industry is you have constantly a push towards the leading edge, so you have more and more wafers being produced at the leading edge where we have greater wafer content.

What are the drivers of that content because is it more layers? Is it like more materials? Is it smaller structure? All of the above?

It's the 2 fundamental trends I was describing. So it's the desire by our customers to migrate to those very complex architectures, so more layers for 3D NAND, gate-all-around, architectures in logic. All of those architectures are very material intensive. They are not litho intensive, they are material intensive. So they're looking for materials that have as good or better electrical properties that can be deposited in very, very thin layers, thinner layers than the historical materials that we've been using for decades. So great opportunity for us there. And again, as they push for further miniaturization, there is a need for higher levels of purity, which translates into greater consumption of filtration solutions set.

Are these like discontinuous kind of advances like, as you go to gate all around or as you go I know 3D DRAM in a few years, or -- are there specific discontinuities that are actually driving the TAMs actually higher for you?

So I would say that the shrink is relatively steady and then you have step function changes. I think I would expect gate all around to be one such thing. The same was true for 3D NAND architectures as they transition to 128 layers, where the aspect ratios became really challenging, which actually led to the rapid introduction of some of those new materials and enabling chemistries, selective etch chemistries to be able to very precisely and uniformly etch our way up and down those very narrow and tall holes and trenches. So a lot of different opportunities. And I think that's what you probably need to think about when you think about Entegris. It's -- remember, we sell 15,000 products. So our success is not gated by the success of 1 or 2 product platform. It's really a lot of incremental enabling solutions that we are constantly bringing to the market, and that compounds itself. And then again, remember that each of those solutions have very long tails because of the stickiness of those solutions. They're going to be used in the fab for as long as the fab is in operation. So memory fab, give or take, 5, 6 years, logic and foundry, a lot longer, obviously.

What are your thoughts on, I guess, trailing node? I mean, one of the biggest areas of tightness right now is trailing node. And it sounds like your intensity such as a business -- obviously, I believe it would be higher. What does it mean for you? Like, do you feel like the industry actually needs to structurally build more trailing -- I mean, this is obviously a bigger -- big controversy for some of the trailing node foundries. And -- but what does that mean for you as the industry maybe structurally has to add more greenfield trailing node capacity? And does that -- do you benefit from that as well?

So I mean, we certainly prefer more volume production at the leading edge because we have higher content per wafer opportunity. But of course, all of -- every fab is important. We have obviously great market share in the older generation fabs. I mean those fabs were leading edge not too long ago, and...

Well, that's the thing. They add leading edge, and then they become trailing node tomorrow, right?

So I think that it's always good for us to have every segment that we serve, operating in high gear. And that's what we're seeing today. There's another element to my answer that I want to make, which is not necessarily an industry-wide comment but really more of Entegris specific comment. But if you think about the trailing edge fabs, many of them are serving industrial applications, medical applications, automotive applications. All of those new applications are increasingly seeking another attribute of chip performance, and that is reliability. Long-term reliability of a chip when used in a cell phone doesn't really matter because if your cell phone stops performing, you're just going to get another one. If something happens to a critical optical sensor in a car, that's bad. So increasingly, those trailing edge fabs are focused on enabling that higher level of reliability. And guess what? We have established that there is a strong correlation between long-term reliability of a chip and the absence of latent defects. Those latent defects are created by very small contaminants that will not kill your die, that will not cause a loss in yield but that over time will degrade the performance of the chip. So what we're seeing, in fact, in all the fabs is our SAM is expanding not just because they are producing more wafer but also because the Entegris content is growing as they migrate to more advanced filters as well.

Got it. Got it. So I guess on that note, let's maybe talk about some of the segments. So you got Specialty Materials, you've got Microcontamination Filtration and Materials Handling, Wafer Handling. I guess if you're talking about an overall growth algorithm, it sounds like it's almost like 3x GDP, semis is 2x GDP, and then you guys are 500 bps above that. It could be 3x or more. How do you think about how that growth sort of splits out across those three? Which do you think is the highest growth? Which is -- how do the margin structures, like, vary between the three of them? Like, how do you think about those 3 businesses?

So for us, the fastest-growing division has been, and I expect them to -- in terms of relative to the industry, will be microcontamination. And that's the division that also happens to be the most profitable of the 3 divisions. So it's a good combination, fastest growing, most profitable. So the mix obviously will help as we seek to continue to expand our gross margin on a consolidated basis. And I think that's a function of the growing importance of what we do, the technology leadership that we have achieved and the limited amount of competitors that we're facing in this particular division. The next fastest-growing will be, again, relative to the industry will be SCEM. And that's a function of, what I was describing, the adoption of deposition materials, the need for highly engineered chemistries. And I think that as we see those new products representing a higher part of the revenue for this division, I would expect the margins to continue to expand as we displace some of the more commodity grade products. And then last one, AMH, has been growing very fast on an absolute basis, but it's really mostly because this is the division that has the greatest exposure to the industry CapEx.

In terms of just like new fabs?

New fabs. Exactly.

That should be good.

That's good. That's good, but in terms of growth in excess of the industry, I think that's the division that I expect to grow probably more in line with the industry. And the margin profile is a little bit less than the other two, simply because we compete mostly with Japanese competitors for that division, companies that historically have accepted lower margins for the solutions they develop.

Got it. Got it. Let's talk about microcontamination. So just for our audience, were these -- these are filtration systems, it's gases, it's liquids. It's all like -- what exactly are you selling in this business here?

So we have 3 major categories. The largest by far are liquid filters. So for liquid chemistries, could be etching chemistries, could be photoresist chemistries, but again, aqueous and liquid chemistries. The other that -- and that's about 75% of the division. About 20% would be gas purification and gas filtration products. So gas filters or components that will go into the tools, so etch tools, CBD tools. And the gas systems or large systems used in the subfabs to purify high volumes of processed gases used in the fabs. So those are CapEx products, obviously. The liquid filters are consumable products. And the final small business unit would be on airborne molecular contaminants. So it would be filters that you put on top of the tools for scanners and metrology equipment, in particular, to really protect them from any -- even within a clean room, for traces of contaminants that could impact the exposure during the litho process or the metrology joint...

So you kind of half answered my next question, which was, what do you do in lithography, if anything? It does sound like -- especially in the photo -- I got to imagine as people are moving more to EV, the purity and like a lack of contamination in that resist has to be going up by -- the need for it has to be going up orders of magnitude.

Exactly. Exactly. So then what does that mean? What it means is that it means that the final point of filtration on the track, dispensing the drop of photoresist on the wafer has to be extremely, extremely pure. So we have very advanced filters for that, but all the way back to the bulk manufacturing of photoresist. Now there is a need for much higher level of purity across the ecosystem. And the opportunity for us has been maybe on a relative basis, growing the fastest in bulk chemical manufacturing because the fabs now are holding their photoresist suppliers to much greater purity standards. And that translates into 2 opportunities for us. One is obviously the filters that they need to use to make the resist and then the high-purity packaging that they need to transport the resist from where they produce the resist all the way to the fab.

So kind of stuff leaching into it from the packaging...

The worst thing we want to do is to purify the resist and then let contaminants creep back in during transportation.

Okay. Got it. And I guess in the materials business, do you do any commodity stuff there? Is it right to think about it in terms of like commodity gases versus proprietary chemistries? I don't know how that mix of your business looks.

So we don't do high-volume commodity gases. I mean if you think about Entegris across the board, not just materials, but across everything we do, it's a series of small niches that we select very carefully where we believe that our core competencies would allow us to grab 50% market share or more. And those individual niches are relatively small by any standards. It can be as small as $50 million of SAM all the way to a few hundred million dollars of SAM. And because of the R&D intensity and because of the importance of that very symbiotic relation, during the innovation process with our customers, we are able to build very, very compelling barriers to entry. So if you think about our business model, it's really about identifying new niches, getting in early, build very significant barriers to entry and then let it grow and enjoy the growth that comes with it. And that's the essence of our business model.

I guess on that note, you're doubling down at this point on CMP slurries with CMC. And I think you've done some maybe some other stuff in that space in the past. But I mean how big is CMC for the folks who don't know relative to Entegris as a whole, like what's it going to do to your materials business? And like what kind of position do you have in slurries like once you're done? And I guess, like more strategic, why slurries? Like, why is this the area to double down on?

So we made a few small acquisitions in slurries, but really targeting emerging applications in power electronics. We didn't feel we -- I mean, we were interested in slurries for traditional semiconductor processes, but we felt that we -- the only real credible way to enter that would be by acquiring an existing leader in the space. So when you have an objective like that, obviously, CMC materials is your number one pick because they are the leader, the market leader. So very pleased with the fact that they were interested in working on this combination. So what do we get with that? What we get are a few different things. One is, I mean, go back to one big driver for our growth and our success will be the adoption of those new materials. And I understand that for those materials to be adopted by the semiconductor manufacturers, you then need the right polishing solution. And then after the polishing step, you need the cleaning solution. So you need to develop that suite of products in a timely fashion so they can actually choose to introduce it next time they transition to a node. So with the combination of CMC material, we will be the only company having that end-to-end capability. And it matters because it will allow us to shorten the time to solution. And shorter time to solution means shorter time to market for our customers, and that translates for them into pricing power, market share, et cetera. So this combination, I think, will make -- in fact, we are already a very strategic partner for all of the technology leaders. But I think this combination will make us a must-have partner. And that's why many of our customers are so excited about the combination. So the other part of your question is the relative size, I would say that CMC Materials is a little bit more than half of Entegris, revenue-wise.

It's bigger than some of the other deals you've done like in over the past...

It is. It is. But I mean, we have always said that we -- it's about the deal flow. I mean so we have a very clear view of what we want to add to the platform and what we do not want to add to the platform. And -- so I think we've been very disciplined about that, knowing that transformational acquisitions usually don't come by very often. So we did a large one in 2005. That was Entegris and Mykrolis; one in '14, that was ATMI; and then 8 years later, we do -- we are working on this discussion...

Number one, you had Sinmat, did they say yes...

Right. So again, I think the bread and butter of our M&A activity will be small to mid size deals. There are still a few larger acquisition targets that hopefully one day we can add. But I think it's fair to say that over the next couple of years, the focus will be to integrate CMC materials, to do it well, to do it quickly, do deliver the synergies, both on the revenue side and then on the company side...

And why don't we talk about in terms of the synergies from the deal?

So we said $75 million in terms of the cost synergies. We have not quantified the revenue synergies. We will actually provide a little bit more clarity around that in an Analyst Day that we intend to have a couple of months after close.

Okay. Got it. And I guess to talk about materials handling. I mean, presumably, obviously, there's a lot of folks out there who want to build a lot of fabs in a lot of places. So presumably, that ought to be good. And I get what you say in terms of it's tough to outgrow the industry. It's going to just be driven by this. But there's a lot of talk in terms of subsidies and everything in terms of like building up. Do you guys benefit -- like I don't know if it's maybe more indirect versus direct, but how do you guys think about benefiting from potential subsidization or like localization of semiconductor manufacturing?

So the more fabs we built, obviously, the better. I mean, even though the CapEx part of our business is only 30% of our revenue, and it's going to be less than that, we have CMC combination.

CMC should be all sold units...

So the combined platform would be 80% unit, 20% CapEx, which, again, will add to the resilience of the platform, which is good. But this being said, I think higher CapEx is always good. It's -- we have a lot of opportunities as the new fabs are being built, in AMH, but in MC as well. And then, of course, that new capacity at some point comes online, and that means more wafers are being produced, which will drive usage of our consumable products. So it is exciting right now, obviously, at many levels. And we are very focused on supporting our customers as they build their fabs. And I think the other element, I think, to your question was whether or not we expect to benefit from those incentives. So material companies do qualify for those incentives in the U.S. So I think at some point, we're going to have to decide if there is some benefit in adding new capacity in the U.S. and...

I mean, one thing I've just been sort of topically thinking about there's been a lot of talks about building fabs. And I don't know if Congress realizes this, but I mean you can't just like build a fab and plop it down in the middle of nowhere. I'm like there's a massive ecosystem that needs to grow up around materials and everything else around that. I don't know if have you guys been part of any of those discussions? I just worry that a lot of what's being talked about in terms of these investments is not being as well thought through as maybe it ought to be. And I don't know, can you be a little more encouraging on.

I think -- right. So first of all, I think we all have come to realize how little understanding there is about this industry in the public opinion and among policymakers. So we have taken upon us as an industry to educate them. And we've done that independently. We've done that as part of SEMI and other associations. And I think we've done that with good effect. I mean, we were able, in fact, to make sure that equipment makers and materials companies will be eligible to those incentives, and that's good. And the reason we got there is by pointing to policymakers the importance of having a vibrant ecosystem around those fabs. And you're right, that's something that I don't think they really fully understood, but I think they'll understated it now.

Okay. I guess post the CMC deal, you would be what, 4x levered? Something like that?

I think that the -- yes, we expect by the end of the year to get about that, yes.

Okay. Like is there any -- again, just -- I know people are worried about the economy and they're worried about any issues with that? Are your -- I know how you general like -- maybe the better question is how do you generally think about leverage, just on a broad basis?

So what we said is that we recognize that we will be at a leverage level that is higher than what we've said would be for you to expect of us. So that means that you have a commitment from us that we will be very focused on deleveraging the balance sheet as quickly as possible. We're going to do that by growing the business, generating healthy levels of cash flows. And also, we have mentioned that we are taking a hard look at the portfolio of CMC Materials and deciding if there are assets that we may want to divest. So if you combine all of those factors, expect us to delever rapidly.

Okay. And maybe a good segue in this sort of environment, I don't like to talk a ton about short-term stuff, but it's hard to ignore it and I will address it briefly now. Can you just talk about like what is going on out there? Like, what are you seeing? What's going on in China? I know you talked a little bit about some impact of -- I don't think you've been very impacted hugely from COVID lockdowns or anything like that. But what are you seeing in terms of China? What are you seeing in terms of like shortages and supply constraints, and just what is going on?

Yes, we live in an interesting world, that's for sure. There's never a dull moment. So I mean, I think in China, when we reported Q1, what we said is that there was some impact in the first quarter results. We were expecting more of an impact in the second quarter. We assumed that the lockdown in Shanghai, in particular, would last for some time. And we didn't know exactly when, but we took that into account in...

Does that -- do you have infrastructure in Shanghai? Or is that just more around your customers?

No. No, we have a technical center. We have a large sales office and we have very critical warehouses. So this is really the entry point for many, many of our products. So -- yes, so we were very, very focused on that situation, obviously, for some period of time. So that's happening, that seems to be -- no, I think we are on an improvement -- improving trend, which is good. Hopefully, it's sustained. And then for all of the other supply chain issues, I think we've mentioned that we have -- like many others, we have faced different types of challenges. I think in all cases, we have a great team that has been very focused on working with our suppliers on recovery plans. I think we're making good progress. I continue to expect to see -- to have and to face supply chain issues as we end the year, but I would expect to see some progress in the back half of the year.

Got it. Like, obviously, a lot of the semi-fab guys have been complaining about shortages of key components and key subsystems. And I think AMAT and Lam, those guys have probably cut numbers 3 times in 3 quarters now. What do you say -- doesn't -- I don't think you guys have been impacted quite to that degree. Is that just a matter of where you're playing? Is it a matter of how you've been managing your channel? You control more of it on your own. Like, relatively, you seem to be have done a little better than some of the others.

Look, I mean I don't know. We have seen a fair amount of pain in our own channels. I think we made early decisions to allow our teams to build safety stocks. I don't know what other companies have done or not done. It's hard for me to...

I'm not asking you to speculate, but yes.

But as I said, I think we have a very good team. And I'm pleased with the actions that they have taken proactively to manage some of the risks.

Got it. Got it. I guess at a higher level, just you're looking at the drivers of the business, do you have any sort of preference, is there any differentiation between like logic and memory and how that impacts your business? And which one is stronger or weaker like at any different time? Or is it the same drivers that are across both of them?

So we have more exposure today to logic and foundry. And frankly, I think that it's probably going to remain the same. I think -- and simply because we see how aggressive all of the technology leaders are, I think the gate all around and the tradition to gate all around will be a huge opportunity for us. So I think it's good. But we are equally excited with what's happening in memory. I think memory is today a very rich opportunity area for us, 3D NAND in particular, but even DRAM, I think DRAM...

We're not through, through the 3D NAND cycle at this point? Is it still...

I don't think so. I mean, our job -- in fact, if you think about -- again, go back to the very part of the -- very first part of our discussion, what we are trying to do is to enable our customers to dream about 300, 400, 500 layers, 1,000 layers. And that would be success from our standpoint. That would be success what obviously because ultimately it means that they will have to adopt many of the materials that we're developing for them. And so far, I think the road map seems credible. I mean remember that 3 years ago, everybody felt that at 128, that would be the end of it. And here we are now way past 200, and frankly, with a very credible path to 300 plus. So this is really what I always find the most fascinating in this industry is that the degree of innovativeness that is apparent not just in memory but in logic and memory.

And you talked a little -- you mentioned passing a little bit on 3D DRAM. Are there any differences there? What we've seen recently is a discontinuation of the kind of trends that we see.

I think DRAM is changing. I think it's a relatively recent development as you get to 1Z and then that discussion about 3D architecture on the back end of it. I mean, all of that would represent great opportunities. I think we are a few years away from that. But again, I think no matter which way you want to look on in the industry, whether that's in DRAM, NAND, trailing edge logic, leading-edge logic, you have those same very favorable tailwinds calling for the adoption of new materials, calling for higher level security, which is really the core of our value proposition. So that's why we're excited and that's why we expect to continue to be able to sustain that level of outperformance in the years to come.

Got it. You mentioned something about your customers that I found interesting. You talked about it when we talked on lithos side. You were talking about working with the litho manufacturers back all the way at the manufacturing point. I always thought about your customers as being the fabs themselves, but it sounds like it's a lot broader than that. Can you talk a little bit about what your customer makeup looks like, whether it's the tool vendors or the fabs or the bulk chemical manufacturers? Like how does that -- what does that look like?

So fabs would represent about 50% of what we do, equipment makers would be about 15%, 1-5, and then about 25% would be wafer growers and chemical manufacturers, and it's about half and half roughly between those 2, and then 10% would be non-semi.

Okay. Got it. Got it. I think beyond M&A, and I get the M&A strategy, but how do you generally think about capital allocation, whether it's M&A, whether it's R&D, whether it's cash return or like what is the general model that the Entegris follows around capital allocation?

So the model -- so putting aside CMC materials, right, but the model has always been reinvest in the business you know best in the form of sufficient R&D and CapEx. And it's driven by the conviction we have of our ability to outpace the industry. So we want to fuel this growth. Once that is done, then we believe that we have a role to play to be a consolidator. So M&A is our next priority. But when it comes to M&A, I'd like to say that we are a patient acquirer. I think it's very important when you want to be active on M&A to know what you do not want. And I think that we are saying no more often than we are saying yes to new M&A candidate IDs. So we have that and we have the discipline, and we have that funnel. And then after that, it's really about returning cash to shareholders in the form of buybacks and dividends. So we have suspended the buybacks upon announcement of CMC Materials. We are maintaining the dividend and we intend to maintain the dividend.

Got it. Got it. Now there was a deal -- I hope I'm not remembering this wrong, but there was another deal you were involved in that didn't quite happen. Was it Versum?

That's right.

Can you talk a little bit about what happened there?

Well, what happened is -- so again, I think it's a small industry. There are a few large-scale platforms that would be of interest to us. So you have dialogues all the time and sometimes you just draw the line. So we managed to agree to merge. And there was a competing bid that top-dollar offer, and the Board of Versum decided to choose the other bidder over us. So what would they have brought to the table? They would have brought -- so there were 2 parts of the platform that we were particularly interested in. One was deposition materials. We had lab scale and pilot scale synthesis capabilities. But as we were seeing the adoption of those new materials, we needed high-volume synthesis capabilities. We didn't have that. And then Versum was a well-known supplier of advanced -- the legacy advanced deposition materials. So it was -- that was the number one attraction. So when that deal fell apart, we pivoted our attention to 2 small acquisitions that we did, called DSC and MPD, to give us access to those missing capabilities. So we've completed those acquisitions. We have what we need for the next new generation of materials. And then the other element was the slurries. And of course, we are now bridging that gap. So I think that -- so again, I think if you think about our M&A strategy is, we know the areas that we would like to add to the portfolio. We have different options in terms of how to get there, and I'm glad that did do it.

What areas of the portfolio now do you think -- it's a loaded question. I know, but...

No, it's a great question. I would have been disappointed if you were not asking it. I will not answer it simply because I think that our success has been noted. A lot of our competitors are trying to copy what we're doing. So I won't tell you where we are. But again, as I said, I mean, right now, it's about digesting CMC Materials. I think there's a lot of value to be created, we got to unlock it. We need to make it visible to all of you that we are a very capable consolidator. So we earn the right to do more of those deals. So we'll talk about it at some point.

Who do you compete with, by the way? Who do you compete with across your segments?

So we -- nobody competes across the 3 divisions, which in itself is actually a huge differentiation. But we have -- we complete with large chemical companies in SCM. We compete with a number of midsized Japanese companies in AMH. And then we have essentially one competitor left with in microcontamination.

Got it. Got a couple of minutes. Should we go to the lightning around, see if there's any -- we just got competitors actually. How would you -- how would a sustained period of high inflation, what would that do to your top line and margins? Maybe that's a good question. How you guys been fighting off input cost increases and everything else?

Yes, actually, we had an interesting discussion not a long ago in one of the group session today about somebody was saying, well, this industry is becoming less deflationary and maybe there is some advantage. So I think the industry is changing for sure. And so I think we are seeing some increase in our raw materials, something that we have chosen to pass on to our customers as an offset. We made that decision in Q3 of last year. But the fundamental change is really about the pricing power and whether or not we're going to be able to sustain the price increases and potentially considerably increase price on an annual basis. We're seeing our customers do that now, and they've been doing it for a few years. So will they be able to continue to do that, which will actually probably embolden us to do the same. So I think it's interesting. And that maybe actually the silver lining in the inflationary world that we're facing.

Yes. Semi so far have been -- I don't think I've had a single company in my coverage, who has missed margins or anything because of input costs going up. They've been able to buy margins off. What's Entegris' exposure to newer semi materials like silicon carbide? And how does content per wafer vary on those materials?

So we are -- again, as I was mentioning, we are always focused on the next thing. What will be the next challenge for our customers and how can we help. So for Power Electronics, the adoption of silicon carbide or gallium nitride as substrates presented a challenge with the polishing. So we acquired 2 small companies that actually gives us a great leadership position to be the supplier of choice for polishing solutions for those substrates. So I think it's going to be, hopefully, a part of the business that will be growing at a very attractive rate. We all expect that to be the case.

Got it. Can you talk about visibility into your customers' demand in their own end markets? I think that's more asking, like, how much actual visibility does Entegris have in the end demand, I think, is the question here?

It's never perfect. And sometimes -- but I think it's probably as good as it has ever been. And in our discussion with our customers, we hear the same answer repeatedly, which is fabs are fully loaded. And that is not just until the end of the year, but in several cases, actually extends into next year. And then again, they are running with relatively low levels of safety stock for our products. So I think it's a good environment for us to operate into. And if the question behind the question is, do you see any sign of slowdown or contraction? I mean, as of right now, we don't. It doesn't mean that it's not coming, but we are not seeing any evidence of it.

Got it. So we've got like we're almost at the end here. I will give you your soap box, 30 seconds of why should investors buy your stock?

Well, hopefully, what we just went through already answered some of it. But I would say that I think we are a very unique investment option for you. This is probably one of the most resilient business model in the space. We are a supplier to the semiconductor industry, selling consumable products. So very little exposure to the highly cyclical WFE cycles. Our value proposition is becoming increasingly important to our customers. And I think that's something I would really encourage you to test if you have access to some of those customers because it's real. And yet, that is probably not fully understood simply because you remain small and relatively subscale as compared to the large equipment makers. So my hypothesis is that if the last 3 decades were the decades led by the equipment makers in terms of the importance to the road map of the semiconductor industry. I'm convinced that the next decade will be the decade of the materials companies. If you think about the road map, it's all about materials. Listen to what Intel, TSMC, Samsung are talking about. It's about materials, intensity, and it's about miniaturization, which means contamination control. So I think we are in a very, very sweet spot right now and hopefully, more and more chapters to be written on this story.

That's fantastic. I think we'll leave it there.

Thank you.

Thank you very much for joining us today.