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

Good morning. Thank you so much for coming today. I'm Stacy Rasgon. I'm Bernstein's Senior Analyst. I cover the U.S. semiconductor and semi cap space. And I can't express what an honor it is to have our guest here today, Bertrand Loy, the President and CEO of Entegris. Our chat today is going to last about 50 minutes. Bertrand is going to give just a few opening remarks to start us off, and then we will move into the Q&A. If you have questions, you can submit them via the Pigeonhole portal, which hopefully you have. I think it's on the QR code, but you can submit questions there, and we'll have time to get to those to the end. Before we start also, there is maybe a little bit bitter sweet. Bertrand has been coming to SEC for many, many years. It's looking like this may be his last time here, he's going to be retiring as Entegris' CEO in August after 13 years. But I am looking forward to one more. With that, it's my great pleasure to welcome Bertrand. So thank you so much.

Thank you, Stacy. Good morning. Good morning, everyone. Thank you for the opportunity to -- I think it may very well be my last investor conference. I appreciate the opportunity here. As you said, it's a bittersweet, but I'm leaving with actually a lot of optimism. When you look back at what this company has become over the last many years, it's just something that we're all very, very proud of. But we also know that we can do a lot more. So let me give you maybe a few facts and a little bit more context for the company. And then I know I've seen your list of questions, Stacy. So I know you can probably keep us busy for more than 50 minutes. But -- so Entegris was created about 60 years ago in the very -- 60, 6-0, in the very early days of the semiconductor industry. And ever since that point in time, we've been focusing on the semiconductor technology road maps, contributing very unique solutions to enable the advancement of the semiconductor road map. Over time, the platform has evolved. And today, we have essentially 2 major product solutions or platforms. One would be a series of enabling material solutions which are critical to the enablement of the very complex device architectures that many customers are talking about. And then the other side of the house would be a series of enabling technologies to advance purity -- process purity in the semiconductor manufacturing process. They can be advanced filters, purifiers and high-purity fluid handling solutions. All of that enabling the miniaturization that the semiconductor industry has been striving for. And the compounding complexity of miniaturization and device complexity is really the source of significant opportunities for Entegris, opportunities that have enabled us to increase the Entegris content per wafer generation of chips after generation of chips, and that has been the foundation of our outperformance. And outperformance, if you look back over the last 10 years or so, we've been on average, outperforming the industry by about 4 to 5 points. And our commitment, and that's why I was saying...

Is that in terms of like revenue growth or?

In terms of revenue growth, yes. And the reason why I'm leaving with a lot of optimism is when I look ahead at the semiconductor road map, the complexity I was describing, complexity coming from the device complexity as well as the desire for further miniaturization is still intact. And we see incremental opportunities for us to increase our content per wafer, which will be the catalyst for that outperformance. So that's the thesis when it comes to organic growth. That's how we've been able to sustain that top line outperformance. The other thing I want to double-click on is the fact that when you hear a company talk about being a supplier to the semiconductor industry, I'm sure that what first jumps to mind would be large equipment makers. We are not an equipment company. Most of what we do is unit-driven. We supply materials, chemistries, filters that are used in the daily production cycles of the semiconductor manufacturers. And that profile is very unique. There are very, very few publicly traded electronics materials platform, and we are certainly one of the largest. And I think many of you are generalist investors, and I think that's what is probably attractive to all of you is that while the semiconductor industry remains a volatile industry and what we're going through right now is probably a proof point to that, you can actually look that Entegris' business model is fairly resilient on a cross-cycle basis. And that comes from the consumable nature of our products. So that's one thing I wanted to touch on. And the second point is, again, comparing the Entegris platform with the equipment makers, equipment makers are much larger companies. If you look at the material space in the semiconductor industry, it's a much more fragmented part of the ecosystem. And that's a source of opportunity for us. We have positioned Entegris as the consolidator of choice. And M&A has been a big part of our growth story, a big part of our value compounder model. And I'm very proud of the way we've been able to deploy capital and create value for shareholders over the last multiple decades. And again, as I look forward, I can tell you that there are many more opportunities for Entegris to be a consolidator and many more opportunities for us to create value through capital deployment going forward, even though granted, my successor, obviously, will be the one doing that...

Got it. There's a lot there to keep us busy.

I think I'd like to start around the content per wafer argument that you've made. And maybe could you talk a little bit about how that content is actually growing? I mean you talked about outperforming the industry by 400 or 500 bps. But I mean a lot of the -- in fact, all the growth in the industry over the last 5 years has been price. I think units in '24 were effectively flat to pre-COVID to 2019 levels. I guess how -- and so unit growth was 0. How is your revenue growth, I guess, like compared to that? And I guess, how do you think about the drivers of content per wafer? What is that? I mean, is it new materials? Is it more layers? Is it more complexity? And where is Entegris actually like helping to drive those roadmaps?

So it's sort of your comment when you say a lot of the growth in semiconductors came from price. You're talking about semiconductor devices. And I agree that when you look at volumes of production, if you look at wafer starts, it's been essentially flat and arguably down.

By the way, average ASPs in the industry today are 50% higher than they were in 2019, just blended across the board. It's pretty amazing.

So if you look at our pricing, I mean, our pricing has been essentially flat for us over the last several years. So a lot of our growth really comes from volumes. And to your question about that content increase, where is it coming from? It's coming from new materials being used. Those materials are usually better performing materials, but they're also more expensive materials. So for pound per pound, I mean not that we use pounds in semiconductor manufacturing, but pound per pound, it is actually more expensive. And then you have actually more volumes, more layers driving greater consumptions, more volumes of consumptions of chemistries and materials. So those are the 2 drivers on a per wafer. The other thing for us is that we try to get exposure to new applications, applications that maybe we were not serving in the previous generations of chips. And the reason we are able to expand our SAM that way is that our reputation precedes us. And increasingly, customers seek us out on new challenges and give us an opportunity to develop solutions in applications that historically we have not served. So examples of that would be the dry resist chemistry that Lam Research and ASML have been developing in the context of High-NA [ EUV ]. So again, if you think about how we've been able to outperform the industry, it's a combination of more expensive materials, greater volumes of materials, access to new applications. And then finally, it's share gains. We continue to execute really well. We continue to drive innovation, and that translates into share gains as well.

Got it. I don't want to get too technical, but to be honest, I'll get buried in it, like I could dig into that forever. But I mean, you mentioned like dry resist is one driver of this. Are there -- what are the types of technology transitions, I guess, that you're most excited about as you're looking for Entegris? What are the types of material changes or structure changes or anything that Entegris has really benefited and excited about?

So if you think right now, there's really a big inflection point in memory with the introduction of molybdenum in 3D NAND architectures. That's a replacement to tungsten. And the reason that's actually -- it's a very important inflection point for the industry is this is the first time that a solid precursor would be adopted in high-volume manufacturing. And the reason...

Like the gas phase?

Or liquid precursor. So the problems that our customers were trying to solve was they wanted actually a better performing material in thin film deposition. So that would replace tungsten with the right resistivity performance. So tungsten does that -- molybdenum does that. The problem was that molybdenum is a very expensive material, and we also needed to find a solution to the higher cost of molybdenum. And Entegris, we're uniquely positioned to do that. We developed a dispense system that would sublimate the solids into a gas. Molybdenum is a highly corrosive gas. So we needed to develop some proprietary coating on the inside of that sublimation column. We developed some gas purification systems for that as well. And now we were able to have a system solution, providing the industry best film. So that's the moly material itself. But we have also developed the lowest cost of dispensing that material onto the wafer. And that is really what is enabling the adoption of molybdenum in high-volume manufacturing. So this is actually a really good example of what Entegris can do uniquely and better than our competitors.

I guess given all of that, like is there a way to think about your like forward growth formula? Is it some multiple of GDP? Like what's the fall through? Like how do investors think about that?

Yes. So we sell a lot of products. A large product platform for us is a product generating about $50 million of revenue per year, $50, 5-0. And that's why we don't really tell our story on a product basis because it gets really complicated very quickly. So I'm saying that right after having called out moly. But again, we're calling out moly because of the significance to the industry, not so much to us. And then -- so again, we -- I'm sorry, Stacy, the question...

No, I was just asking about the growth formula...

Yes, yes. So we -- so instead of talking about products, we have tried to simplify the growth formula and recognizing that this industry is cyclical and we don't control the industry. But our view is that the industry secular growth potential is probably twice the rate of GDP...

For materials or for semiconductors?

For -- That's the wafer starts. So it's volumes of productions of semiconductors. And then we believe that given the incremental content opportunity that we have and the fact that more wafers are produced at the advanced nodes, we should be able to outperform the industry by about 3 to 6 points. So the formula is twice the rate of GDP plus 3 to 6 points of outperformance. And if you look back, as I said, you will see that over the last 10 years, we've been able to deliver a growth rate -- organic growth rate of about 4 to 5 points of outperformance.

Got it. Maybe to touch on that cyclicality argument. I mean, clearly, people used to say that they were no longer cyclical. I never believe that. It certainly is not. They are cyclical. Since you so you are unit-driven is -- would you say the cyclicality of the materials industry and Entegris is sort of equivalent to semis? Are you more or less are there buffers? Like how do we think about that in the context of industry cyclicality?

Well, I think that the reason why it's -- I believe that our business is less cyclical is that we don't have the amplified magnitude of the pricing cycles, right? So if you look at our business, even in a trough, I think the amplitude of the cycle is probably way less than semiconductors would experience.

Did you guys not take price during COVID? I mean like I said, the rest of the industry, it was pretty -- we've never seen anything quite like that before.

Yes, we did take some, but not to the same extent. And commensurately, we're not bringing price down during downturns. And I think that's a little bit of the quid pro quo that we've had with our customers.

Yes. Got it. You talked about the industry being very fragmented. Like where do you see competition? Like who are you competing with?

So we have many different product platforms. Each of the product platforms have their own set of competitors. So nobody really competes with us across the board. So instead of giving you names, which probably would be foreign to most of you, I would say we compete with 2 different archetypes. There would be small local competitors in China, but in Korea as well in Japan, here in the U.S. or we compete with divisions of large industrial platforms. And the reason we win is that we actually have a culture of execution that is really very customer-centric, and we are fast. And that is actually -- we have an intense application focus, credible scientists, very fast, and that allows us to win against the large industrial platforms. On the other side of the spectrum, we compete with small local competitors with great customer intimacy, but a lack of global footprint. And increasingly, our competitors really want to have a global scale. They want to build their fabs pretty much everywhere in the world. And they want to rely on well-capitalized suppliers that can really provide them the same level of support no matter where they choose to operate. So we are this intriguing hybrid from a, I would say, from a size and capability standpoint. The other thing that makes us very unique is, again, it's the breadth of capabilities. And don't take that as I know sometimes investors will say, you're a hardware store. No, we are everything but a hardware store. We have a very strong focus on enabling the right level of purity. So again, those solutions can take different shapes and forms for sure. But the value proposition is really enabling the purity levels that can be enabling the yields of our customers when they choose to make everything smaller in their fabs. By the way, 1 point of yield for an advanced fab can mean about $0.5 billion to the bottom line. $0.5 billion is about 1 point of yield in advanced logic. So very significant value that we can contribute as a result of using our advanced purity solutions. So that's on the one hand. On the other hand would be the new materials that are enabling those novel architectures. You hear about 3D NAND, you hear about gate-all-around. You hear about all of those new device architectures that will require those solutions. And the reason we are unique is that we can develop those new materials and those new chemistries. And at the same time, as we develop those material solutions, we can develop the best known methods of filtration and purification for those chemistries. And by doing that, we compress the time to solution. In other words, we can go to our customers with a material that performs at the desired levels, but have also the right purity, which will translate into better yields. And having that faster time to solution is really, really key in the semiconductor industry because if you think about what all of the semiconductor manufacturers are trying to do, they're trying to be first to the next generation of chips. Being first 2-nanometer or 18A or whatever you want to call it, is the source of competitive advantage, is a source of pricing power. So Entegris is uniquely enabling our competitors to win that race.

Got it. Maybe I'd like to follow up there to start to drill into the segments a little bit. So you mentioned 2 segments. You used to have 3 segments. I guess there was...

They're 4.

They're 4. Okay. I think last year it was 3. But maybe -- you gave a little bit of the characters you have, I guess, the material solutions and then the purity. Maybe to give a little more color on what's in those -- and actually, the differing economics like I think the margins like in the purity business are higher than in materials, for example. So what can you tell us, I guess, about the specifics of those businesses and the economics and how they work.

So 2 segments. I think I introduced them to you earlier. So one is Advanced Purity Solutions. Then the other one is Material Solutions. So Advanced Purity Solutions, we believe that the potential there is to grow about 3 to 6 points in excess of the industry. And then we have Material Solutions, we expect that part of the business to grow 4 to 6 points. So roughly the same potential for both businesses. The margin is a bit different. APS or Advanced Purity Solutions, operating margin potential is in the high 20s.

Where is it today?

It's in the mid-20s. And then Material Solutions is in the low 20s. And the reason -- the difference is that -- we have -- in the last few years, we have invested extensively in a fairly complete global manufacturing footprint. The Material Solutions manufacturing processes are more capital intensive. And of course, we've been in this very slow industry environment. So as a result, we are not getting the full leverage quite yet on some of those investments. I think if you fast forward long enough, I think that the MS or the Material Solutions platform's potential is probably in the mid-20s and will be at some point, approaching the APS margin potential.

It's just a matter of like utilization scale?

Exactly. That makes sense.

I want to get to that to the -- you've talked about a global footprint a few times. And I want to get to that actually, particularly in the context of everything else that's going on right now. So first of all, just to describe the footprint. I mean, like, I guess, I don't know what the right way, how many plants are there? Like where are they? Like are they close to every customer that you have? Like what's the -- I was to think about your manufacturing footprint like by geography, like how does it work out?

So yes, we have actually manufacturing capabilities in all of the major semiconductor markets, close to the customers. At a high level, 45% of our manufacturing is still U.S.-based. So 55% Asia-based. We have...

I'm assuming it's not like uniformly spread? You're not making everything...

No, you would not like much, if you were to do that. But every time we have enough volumes for a given product line, we're certainly making sure that there is some redundancy in our manufacturing footprint. So if disaster strikes, we can actually activate the other site. And we always try to do that in such a fashion that one of those sites would be in the U.S., the other site would be in Asia. So in Asia, we have manufacturing in Japan, manufacturing in Korea, Taiwan, Malaysia. We have just a little bit of filtration production in China, but that's really the result of an acquisition that we made 5 or 6 years ago, and that's really not for semiconductor applications.

How much of the business today is driven by like indigenous Chinese semiconductor manufacturer?

So China overall is about 20% of our revenue. Of that, 80% would be domestic Chinese customers. So give or take, 16%.

Got it. And I mean, I guess to get to some of the near-term stuff on the back, I mean, the current geopolitical situation, the tariffs and what impact is that actually having on Entegris? Have you seen any impact? I mean, I guess there's revenue impact, there's also cost impact because I mean, again, depending on where your parts are being made or where your materials are being made or where your materials will be made and used. Have you guys quantified any impact? Like what are you seeing? And I guess, how do we think about to the extent that we can, what's coming down the pipe as -- to be fair, like I don't know what the policy is going to be tomorrow versus end of the year. But I mean, how do you guys...

I wish you would have that answer. Look, I mean, yes, I mean, it's -- we operate in a complicated world for sure. I think when it comes to China about -- or tariffs in general, let me say that if you look at the manufacturing footprint that we have in the U.S., we don't really procure a lot of raw materials from China at this point. And when we do, we have actually been able to offset the tariff impact by driving some price increases with our customers. And those are adders that we call out specifically, and we're going to be tracking precisely with our customers. So the margin impact is not going to be...

How much of the BOM of -- the customers' BOM is actually made up by your -- I don't even know.

It's very small. It's very, very small. It's very small.

So there's headroom if you need to take pricing to offset?

Well, yes, within reason. And then -- so the bigger issue for us early April when the U.S. administration introduced punitive tariffs on Chinese imports was the Chinese government retaliating with commensurate tariff increases. And that was actually a big negative for us since 1/3 of our China business is sourced from our U.S. site. So what we are actively doing right now is we are working with our China customers and really asking them to qualify our alternative Asian manufacturing sites. So the good news for you as investors is that you should know that those Asian sites and investments have been made. But we need the customers to qualify the sites and start placing orders on those sites. So I would expect that some of that will be taking place in Q2. More of that will be happening in Q3. And by the end of Q4, I would expect that 90% of our China business will be served from our Asian site. That's the goal. And by the way, that was always the desired end state. That's why we invested so much in Asia. It was really to have a local-for-local strategy. And as a final maybe data point, I would say that every time we have a strong manufacturing capability in a given country, we localize the supply chains as well. So if you think about Japan, 90-plus percent of our suppliers are Japanese. If you look at our large Taiwan manufacturing site, over 90% are regional, not just Taiwanese, but regional suppliers. The same would be true in Korea as well. And of course, this is true here in the U.S. as well. And that's why back to where I started my answer, this is why there's not really a huge tariff impact.

Got it. Where would it show up over the next couple of quarters, just a little bit of gross margin headwind until it's fully qualified or...

Yes. I think we guided our gross margin down modestly going into Q2. I think we should be able to do all of this without any significant impact on margin.

Got it. Got it. Let me ask a broader question. Maybe it's not fair to put it on you, but I'm going to ask. I mean, you sell like everybody, you sell -- do you have like a broad state of the industry that you might want to share to the extent that you have any visibility at all?

No. I mean, I wish I had that crystal ball. I don't. But yes, look, I mean, I think this industry is notoriously difficult to predict, and we've been in this cycle now for some time. So sorry to disappoint, but I don't have that crystal ball. I think like you we've been frustrated with the lack of recovery. This is arguably the longest down cycle that I have experienced and I've been in this industry for 25 years...

We never quite saw an up cycle like the one we had in front of it though so...

That's right. I mean -- but we never see these up cycles when they come. We always get surprised. So as an operator in this environment, what we're doing is we're focused on what we control. And what we control is the engagement with the customers, continuing to develop those very specialized solutions that I was mentioning, making sure that we continue to grow the content opportunity per wafer so that we are really positioned ideally for when the industry turns and it will turn. Likewise, we have continued to make investments in capacity because we believe in the long-term potential of the industry. We believe in the long-term potential of the Entegris platform. And we want to be ready when the industry snaps back. And from my experience, I mean, the longer you stretch that rubber band, the sharper the recovery. And those recoveries are -- I mean, obviously, you print much better numbers, which is something that I know you will appreciate, but those ramps are really, really hard to manage. So you want to be ready for those ramps. And that's what we're trying to do. It's really striking the balance between navigating a lukewarm industry environment right now while getting ready for a potential upturn.

Got it. Is it lukewarm everywhere, though? Or are there pockets? I know industrial has been, a 10-quarter downturn, maybe more, there's been some at least among semi guys, some talk about cyclical bottoms recovery, although I personally don't know if that's a real cyclical recovery or if it's like pull forward in front of all the tariff stuff. Automotive has been, in general, weaker, but more recently, and we've definitely seen some pull forward there. I personally think we're seeing a good amount of pull forward in the PC space. I don't know if there's -- are you just seeing it sort of just like universally across everything or...

I think you're right that we are hearing a lot of pull forwards, which usually means that there will be an implication in the second half outlook for many of those companies. I think the bright spot remains AI-related applications, right? I mean we certainly benefited from that last year. Our largest customer is TSMC. TSMC historically was a 12% customer for Entegris. Last year, that number spiked up to 16%, so very significant growth at TSMC. Again, that's just validating what I was mentioning to you earlier, increasing the content per wafer opportunity and then capitalizing on the increase in wafer production. We have not seen that anywhere else. I mean memory mainstream has been flat to down now for many, many quarters.

Yes. Yes. I mean, where else do you benefit on AI? I mean clearly, there's the wafer content. Do you benefit like on the packaging, on the [ HBM? ]

We are benefiting on the HBM in terms of materials. And we have pretty significant opportunities, slurries in particular, in HBM that has benefited our material solutions platform. HBM, historically, HBM and HBM chip is really essentially a DRAM chips with more IOs. But -- so the DRAM process typically doesn't really require advanced filters. They can really laser repair the chips. So they didn't really need to have a lot of proactive engagement in terms of advanced filtration. But this is changing. I mean HBM are chips that you cannot repair. There are larger chips that cannot be repaired. And then the yield penalty as they stack up those chips on the package is very, very costly. So we are seeing actually -- it is very, very recent. It's literally 6 months old. We're seeing all of the HBM manufacturers coming to us looking for more advanced filtration and purification solutions. So I think that the answer to your question will change if you ask it again in a year from now, which is actually very promising. And that goes back to the high-level theme I was mentioning to you earlier. The reason we are excited at Entegris and the reason we believe we can continue to outperform the industry is really the result of that compounding complexity that comes from miniaturization and then the introduction of new materials.

Got it. That makes sense. You talked about slurries, I want to talk -- maybe it's a good time to talk broadly about your M&A strategy. So slurries would have bought CMC, which does chemical mechanical polishing, but you've also what you buy ATMI and SAES and Sinmat and Global. Maybe could you talk first just a little more broadly about how you guys think about M&A and some of the capabilities that you've picked up over the years inorganically? And then I'd like to dig a little bit more specifically into CMC, given that was the most recent one.

So there were -- I mean, if you -- again, I'm going to try to provide some historical perspective without going too deep into the details. But -- so to compete effectively in this market, we knew years ago, decades ago that we needed to have enough scale to invest locally in Taiwan, in Korea and Japan. And I was -- I'm not just talking about manufacturing capabilities. I'm talking about development capabilities and have tech centers. You cannot do that. And you go back 15 years ago, the company was $300 million in size. Today, we are exceeding $3 billion. But you need scale to afford those investments in tech centers in manufacturing and get the returns that you're all expecting. So M&A was important for us in that context. Now doing M&A just because you want to get bigger, that's not a strategy. So what we were trying to do is to also just choose certain elements of value proposition that we wanted to bulk up. And so originally, it was about purity. It was enabling the purity with the filters and then preserving the purity during transportation with high-purity packaging. So that led us to the merger between Entegris and the spin-off from Millipore Corporation, which brought the filtration platform to Entegris. That's actually how I got to Entegris. I came from that filtration background. And then as the industry road map became more complex, we were realizing that it was really harder, getting harder for us to innovate fast enough on the filtration side. And we concluded that we didn't have enough material science within the company, and we didn't really have enough understanding of the chemical interactions between our separation, our membrane and the various chemistries we were expected to filter out. And that led us to the acquisition of ATMI. As we increased the materials knowledge through that acquisition, we were able to increase our market share in filtration significantly. We were, in the past, the leader with about 40% market share. After the ATMI acquisition in probably the 4 or 5 years after that acquisition, we're able to increase our market share on average to about 60% to 70%. And in the more advanced applications, that market share is even higher than that. And we've done that actually across multiple product lines. With ATMI came again that chemical platform. And then the question became -- and that chemical platform usually enjoys about 30% market share. We are #1 or #2 in the applications we serve with about a 30% share. So the question then became what would need to be true for us to create a catalyst to get from a market share of 30% to something greater. So to do what we did on the Advanced Purity solution platform. And the conclusion was we wanted -- we thought that the best way to differentiate ourselves was to really have the full suite of capabilities from deposition materials, to the recess chemistries, be it etching, polishing, then at the end of all of that, you have a cleaning step. So if you look at the many acquisitions that we've done over the last 5 years, it's really to complete that set of capabilities, so now we can engage with the customers and really tell them that not only can we develop the best material, but we can actually develop that suite of solutions, which ultimately derisk the adoption of the new deposition material. And back to a point I was making earlier in a different context, compresses the time to solution, which is very important for our customers. So that's the context for the acquisitions that we did. And again, all of them have been great contributors to our outperformance algorithm.

And maybe to dig into the latest one, so that was one of the bigger ones you've done and have done some leverage to do it. I guess what is that? What did that actually bring to the table?

So before that, we had deposition materials. We had etching chemistries. We had cleaning chemistries. We didn't have polishing. We needed polishing to be that full solution provider that we aspired to be in. So CMC Materials was bringing the slurries and the pads used in the CMP -- the chemical mechanical planarization process, which is a highly sensitive process. I mean, essentially, it's putting sand on the wafer and you scrub it, and you're supposed to do that at atomic level. So it's a very inefficient process and yet it's been used for decades and requires an extraordinary amount of precision. So CMC actually brought us that. So back to your question about what has worked well. And I would say that the 2 companies were very, very synergistic from a technology standpoint, as you understand, the cultures were very closed. We executed on the integration very rapidly, which is guiding principle of mine, which is when you do those transformational deals, you really want to get the synergies and savings as quickly as we can, get the people impacted by those integration programs out of the organization quickly so that we can really turn to the positive or engage with the customers and then really get everybody's mind on the task. We did just that. Within a year, we converted everyone to the same systems, generated about $125 million of savings. And now we've been -- obviously, now for several years, we've been working on the innovation strategy, on the commercial strategies. And those various products have been doing extremely well, growing very fast last year in spite of a fairly muted industry environment, doing very well again in the first quarter. The challenges that we faced was that they were -- I mean, we took on some debt. That was the only way for us to structure that deal in a way that would be acceptable for the sellers. We made a commitment to bring down the debt to below 4x gross leverage. And we have not been able to achieve that quite yet, simply because our original assumptions were counting on an industry environment that was -- that would be a little bit stronger than what it has been. Having said that, and I'm not looking for excuses, I would say that we've done everything within our control to pay down as much debt as possible. We have paid down $2 billion already as a result of applying every excess cash to debt paydown and also divesting nonstrategic parts of the portfolio. So some work to do still, but very, very happy with the way the integration has proceeded and the value we have been able to get from a technology standpoint and customer engagement standpoint.

Got it. And I guess on the further deleveraging front from here is just the cash flow just go down to pay the debt until the leverage is where it needs to be?

Yes, exactly.

Got it. And I guess beyond that, though, what are your broader like thoughts on capital allocation across -- clearly, M&A is still going to be part of longer-term strategy going forward, but how do you think about use of cash?

Yes. So short-term debt paydown, I mean, we -- I mean, again, the debt structure is rock solid. There's no maturity until 2028. It's fully hedged, but we committed to paying it down, and it's a matter of credibility, and that's what we're going to do. Going forward, yes, we believe that we have been a very capable acquirer. We believe that the material space remains very fragmented and will be the source of many more opportunities for us to act. And we've been engaging with a lot of investors in terms of what do they believe an acceptable level of debt is, and then we're going to continue to have those discussions, and that will inform us in terms of how we finance the next transactions.

We got about 5 minutes left. Should we go to the lightning round. By the way, if you do have other questions, you can feel free to submit them. We will get to them if we have time. First, can you talk a bit more about what sort of competition disruption you're seeing coming from China? How do you compete with them? And are they moving out of China?

Yes. So we've been competing with Chinese competitors for many years. They are making progress, but so are we. And again, I think the base of competition in this industry is technology differentiation. And as long as you can actually create a device performance benefit for your customers as long as you can provide them a yield benefit, you win and they come back to you. And it's true in China. It's true in Korea, Japan and anywhere else. And that's really our strategy, coupled with offering our Chinese customers the ability to procure the Entegris products from our Asian manufacturing sites. To your question about do we see domestic competitors outside of China? Yes, I mean, they are trying to get outside of China. They've been trying to. And the same rule of competition applies outside of China as they do in China.

Got it. How much of your M&A and R&D is customer-driven versus where you think the market is going?

Well, I mean -- Yes. I mean, look, our interactions with the customers inform us on where we think the market is going. So I think it's a little bit of a chicken and the egg question. But yes, I mean, our innovation is very much customer-driven. We have very regular road map discussions with our semiconductor fab customers with our equipment partners. And that's really, again, how we continue to advance our offering, how we maintain the differentiation in everything we do.

Got it. Why have prices been flat? Can you discuss competition and commoditization?

Yes. So I mean, for us, and you could argue maybe there is a better model, but the model that we've been operating under is we have an opportunity to set the price when we introduce a new product. And usually, we introduce a new product when a new node is introduced by our customers. And then with that, and at that time, we usually discuss a price curve over time that ties to volumes. And usually, again, your price trend downwards as volume increase. So the real question for us is really the shape of that curve. So the 2 points is really pricing it right, which usually is a function of really understanding the value you create for your customers. And I think we have become much better at that. We used to have a cost-plus approach to pricing. That's no longer the case. It's really a value-based pricing. And then I think we have become also a lot smarter around managing price over the life cycle of a product.

One more here. I'm going to ask it anyways. Why step down now? And any comments on how David might lead the business going forward?

Look, I mean, I believe in refreshment, I've had that discussion with my teams all the time, and we are in the business of obsoleting ourselves and changing and embracing change. So when I announced me stepping down, actually linked that decision to so many other discussions we've had and saying, look, it applies to me the same way it applies to everything else we do. And that decision is hard at one level because I love this company, I love what I do. But it's also easy because I think Dave is a great guy, and I think he's going to do a phenomenal job. And what makes him great is that he is someone with extensive experience in the semiconductor industry, 20 years, worked in the fab, knows our products, used our products, understand the applications we serve. So a great operator. I like his demeanor. I like what I've seen in the boardroom and the way he has been interacting with my team today, which will become his team. So the culture is right. And then for all of you, another important consideration is I think he's a really great allocator of capital. I mean he knows what shareholder value is. I mean he has been a CEO, he's been a CFO. And I think this is a rare blend to have someone who is an operator, likes to be with the customers, but is also actually a great capital allocator. So I'm sure you will like him very much.

Got it. I can't wait to meet him. With that, I think we're out of time. I think we will close out here. Thank you so much.

Thank you.