Entegris, Inc. Aktie

Hello, and welcome to the Entegris' First Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Jeffrey Schnell, VP of Investor Relations.

Good morning, everyone. Earlier today, we announced the financial results for the first quarter of 2026.

Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation.

On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in today's news release as well as on the IR page of our website at entegris.com.

Joining me on the call today is Dave Reeder, our CEO. With that, I'll hand the call over to Dave.

Thanks, Jeff, and good morning. The first quarter was a solid start to the year as we continue to execute with focus and discipline against the constructive and improving semiconductor industry environment. We are delivering on our commitments. Revenue increased 5%, slightly above the midpoint of our range, while most other metrics, including adjusted gross margin, EBITDA margin and non-GAAP EPS all exceeded our guidance range. I'm encouraged by these results, and we remain focused on the significant opportunities ahead to fully capitalize on the organization's long-term growth and earnings potential.

As I mentioned, total revenue increased 5% in the first quarter as compared to the prior year, driven by a 7% increase in our APS segment and a 3% improvement in MS. Our unit-driven revenue, which is correlated to MSI, increased approximately 7% year-over-year, driven by growth in liquid filtration, advanced deposition and selective etch, all of which are critical product lines for our customers' new technology nodes. We're pleased to see the continued growth in liquid filtration, which posted its third consecutive record quarter.

CapEx-driven revenue decreased modestly year-over-year in the first quarter, mostly driven by accelerating order patterns in the prior year quarter in response to tariff actions. Given our current bookings patterns, we expect 2026 CapEx revenue to increase throughout the remainder of the year and contribute more meaningfully to our overall growth profile, driven by strong WFE growth and improving fab construction trends, which support not only the latter half of 2026, but also growth expectations in 2027 and beyond.

Our overall results reflect the improving demand landscape across our end markets and regions. This includes double-digit Q1 growth in Taiwan and broader Asia, supported by strong plan of record positions as well as improving demand within advanced logic and memory, driven in part by AI-enabled applications.

Turning to profitability. Gross margins improved in the first quarter of 2026. The key drivers to the strength in margins on both a year-over-year and sequential basis were productivity and efficiency actions across our manufacturing network and supply chain, favorability from the useful life accounting change in the first quarter and product mix. Jeff will provide more details on this later, but we are pleased with the structural improvement in margins and expect to build on this progress in the future.

Additionally, we are continuing our efforts to optimize our manufacturing network. We closed another subscale facility during the quarter in Chandler, Arizona, further advancing our operational initiatives. These actions represent an important proof point in our ongoing efforts to drive scale, optimize our footprint, improve efficiency and better position the business for growth and improved operating leverage as volumes increase.

Free cash flow was also a highlight for the quarter. We delivered $144 million of free cash flow, approximately 18% of sales, despite headwinds from normal working capital seasonality. Our strong free cash flow enabled us to accelerate our deleveraging as we repaid approximately $50 million of our term loan in the quarter. We believe this trend will continue, and now expect to reduce net leverage to approximately 3x by the end of 2026.

Turning our commentary to the semiconductor market. We now expect mid- to high single-digit industry MSI growth for the remainder of 2026, which correlates to approximately 75% of our business. This contemplates an improved DRAM outlook, a similar unit outlook compared to last quarter in advanced logic and NAND, and a continued mixed outlook within mainstream logic. And the outlook for fab spending is also improving, which correlates to the remaining 25% of our business, both fab construction and WFE.

Let me now address the end markets. Advanced logic, which represents approximately 40% of our total revenue, remains well positioned for strong growth in 2026, primarily driven by accelerating demand for leading edge compute. Utilization rates at the most advanced nodes are already operating near effective capacity, and the industry is responding with aggressive capacity investments to support the demand for next-generation nodes. Additionally, as 2 nanometer technology enters a more meaningful production ramp this year, we expect strong growth in 2 nanometer wafer output. Process complexity meaningfully increases with sub-5 nanometer nodes, driving higher Entegris content per wafer and aligning with our strong positions of record.

The memory market, which represents approximately 30% of our revenue, is also structurally strong, underpinned by AI workloads and technology road maps that are reshaping DRAM and NAND architectures. In DRAM, demand continues to accelerate, driven by increased AI consumption. Additionally, and as announced, we expect DRAM capital investments to continue at pace, supporting accelerated DRAM MSI growth beyond 2026.

NAND demand and MSI are also expected to increase in 2026, though it remains more nuanced than DRAM. This view is supported by both leading-edge technology transitions and AI-driven storage requirements. The key short-term growth driver in NAND for Entegris will be layer scaling and the resulting incremental Entegris content, with wafer start activity expected to improve in the latter half of 2026 and into 2027. Vertical scaling materially increases process complexity, elevating the importance of yield, precision manufacturing and advanced process steps and materials. These technology shifts are expected to result in double-digit increases in content per wafer for Entegris.

And lastly, mainstream logic. The recovery and outlook in this end market, which represents approximately 1/3 of our business, remains mixed. We continue to expect tempered MSI growth in mainstream logic through 2026, improving thereafter as new capacity additions, specifically in memory, begin to ease near-term supply concerns, especially with respect to price-sensitive consumer products.

As it relates to CapEx, we are incrementally more positive on the portion of our business related to industry CapEx. The return to growth in fab spending is materializing. This is driven by selective but substantial global capacity additions and pull forwards, primarily in leading-edge logic and memory. Additionally, forecast for WFE spending remains strong as these projects advance. Entegris is well positioned to deliver value for our customers and to capture the multiyear growth opportunities we expect will emerge as we progress through 2026 and into 2027.

To summarize, there are several industry and operational tailwinds fueling Entegris' growth. The industry outlook remains constructive. Semiconductor fundamentals are favorable and support growth in 2026 and beyond. This is driven by advanced logic and DRAM with a more stable near-term outlook for NAND and mainstream logic. Stronger order patterns and increasing backlog provide increased visibility and confidence across our unit and CapEx-driven businesses.

Next, technology transitions will continue to drive upside for Entegris. Materials intensity and process complexity continue to increase. Beyond node transitions, we differentiate by innovating alongside our customers to advance their technology road maps, which is where Entegris creates the most value. And we are driving a stronger operational focus. We are executing with discipline to improve our operational performance, accelerate growth and strengthen our financial profile.

Finally, I want to recognize our employees for their focus, discipline and execution. Their dedication enables all of us to deliver upon our commitments.

Before turning the call over to Jeff, I'd like to highlight that following a rigorous search process, Sukhi Nagesh has been appointed as our new Chief Financial Officer, effective May 18. Welcome to the team, Sukhi. His engineering background, significant semiconductor industry experience, deep financial expertise and strong operational discipline make him the ideal CFO for Entegris. Having previously worked with Sukhi, I am confident that his leadership will be instrumental as we continue to execute our strategy to unlock Entegris' full potential.

With that, let me turn the call over to Jeff to discuss the financials.

Thanks, Dave. Good morning. Q1 sales were $812 million, an increase of 5% year-over-year and above the midpoint of our guidance range. Gross margin on a GAAP and non-GAAP basis was 46.9%, above the high end of our guidance range. These results included approximately 50 basis points of onetime items, which we do not expect to recur at similar levels in subsequent quarters. The sequential improvement in Q1 was driven by productivity and execution across our network, including more consistent performance and ongoing cost controls, favorable product mix and favorability from the useful life accounting change in the first quarter, which was in line with prior guidance.

Operating expenses on a GAAP basis were $239 million in Q1 and were $189 million on a non-GAAP basis. Adjusted EBITDA in Q1 was $226 million or 27.8% of revenue, also above our guidance range. The GAAP tax rate in Q1 was 1% and the non-GAAP tax rate was 8%, which includes an unforecasted release of a tax reserve. GAAP diluted EPS was $0.60 per share in the first quarter and non-GAAP EPS was $0.86 per share, which exceeded our guidance range.

Switching to our segments. Material Solutions delivered Q1 sales of $351 million, up approximately 3% year-over-year. Year-over-year growth was led by double-digit increases in advanced deposition materials and selective etch chemistries, along with continued strength in CMP consumables, underscoring the durability of demand for key technologies. Adjusted operating margin was 22%, in line with the prior year period, and increased by approximately 100 basis points sequentially, reflecting improved performance across the manufacturing network.

Advanced Purity Solutions delivered Q1 sales of $464 million, representing approximately 7% year-over-year growth. Results were driven by continued strong demand across the portfolio, including the third consecutive record quarter in liquid filtration, a 3-year revenue high in FOUPs and growth in gas filtration. Adjusted operating margin was 29.1% for the quarter, expanding both year-over-year and sequentially, reflecting strong operational execution and productivity, favorable product mix and the majority of the favorability from the useful life change.

Switching to cash flow. Free cash flow in the first quarter was strong at $144 million, representing a free cash flow margin of 18%, a continuation of the positive trend from the second half of 2025. The increase in free cash flow compared to the prior year was driven by 3 factors: the improvement in earnings, an increase in cash from operations, primarily due to working capital discipline, and lower CapEx in the period. CapEx is expected to increase as the year progresses, but will remain meaningfully below 2025 levels. We continue to expect strong free cash flow generation in 2026.

Turning to our capital structure. During the first quarter, we reduced our term loan by $50 million, building on the $300 million reduction in 2025. We currently have $400 million remaining on our term loan, which is the only variable rate debt in our capital structure. At quarter end, our net debt was $3.3 billion and net leverage was 3.6x. As Dave articulated, we expect to improve our net leverage ratio to approximately 3x by the end of 2026, underscoring our commitment to deleveraging.

Moving on to the second quarter outlook. We expect 2Q sales to range from $815 million to $845 million, a year-over-year increase of approximately 5% at the midpoint. Gross margin is expected to be between 46.25% and 47.25%, both on a GAAP and non-GAAP basis, a modest improvement at the midpoint from the underlying gross margin level achieved in Q1, but more than 200 basis points of improvement year-over-year.

We expect GAAP operating expenses of approximately $241 million and non-GAAP operating expenses of approximately $194 million, which reflects higher variable comp relative to 2025 and other intentional investments to support the expected growth across our portfolio. EBITDA margin of 27.5% at the midpoint, driven by incremental improvements in gross margins. Net interest expense of approximately $46 million, which accounts for debt paydown to date.

We expect our non-GAAP tax rate to return to a more normalized level of approximately 15% in 2Q. We expect GAAP EPS between $0.53 and $0.61 per share and non-GAAP EPS between $0.76 and $0.84 per share. And we expect depreciation to remain largely stable for the balance of 2026 at approximately $35 million per quarter.

Looking ahead to our third quarter revenue expectations. Historical industry seasonality supports a sequential improvement in the third quarter. With our current visibility, which we'll refine on our second quarter call, we expect revenue to grow by approximately 5% from the midpoint of the second quarter's guidance range.

Finally, I'd like to update a few modeling items for the full year of 2026. We expect net interest expense to be slightly below $190 million, the non-GAAP tax rate to be approximately 15%, diluted share count of approximately 154 million for 2Q and for the full year, CapEx of $250 million, and depreciation of approximately $140 million.

Lastly, we have set a date for our Investor Day in New York City in early November 2026, and will share the save-the-date information soon.

With that, operator, let's open the line for questions.

[Operator Instructions] Our first question will come from Melissa Weathers with Deutsche Bank.

Looking forward to working with Sukhi in the coming months. So I guess for my first question -- thank you for all the color that you gave in the prepared remarks on the market environment that you're seeing. I guess, could you flesh out a little bit more what you're seeing -- it's pretty obvious, AI is very strong. But I think on the consumer electronics side, the demand is -- the jury is still out on where fab utilizations are shaping out for those [indiscernible] products. So is there any more color you can provide on those non-AI markets, would be really helpful.

Sure. Melissa, good to speak to you again. Look, we view the mainstream market as mixed, with memory availability and pricing impacting price-sensitive computer products. And then we view that as being offset, however, by power management, data center-related strength and then other ancillary AI-related strength. So on the one hand, you've got potentially some pressure on the consumer products due to the availability and pricing of memory. But yet on the other hand, you have some strengths still associated in mainstream with kind of the broader build-out of AI.

So we kind of view that as a put and take. We view capacity utilization right now in mainstream as being somewhere between 75% and 80%. There have been some foundries that have reported that have broken that 80% barrier for the first time in several years since 2022 peak. So we view that as positive. We do think that, that market is improving, but we're looking at it right now with the current view of being mixed.

Did you have a follow-up, Melissa?

Yes, I did. On the CapEx side, I think the numbers we're hearing from WFE companies, and you can see all the fab announcements coming on. It seems like we're going to have a pretty historic fab build-out cycle coming. So any more color on how we should think about the CapEx portion of your business, whether it's groups or the subfab system than you guys do. I think presenting that ahead of these things have buildouts, would be really helpful.

Sure. Let me give you a quick refresher on our CapEx portion of our business. So as a reminder, about 25% of our revenue is CapEx related. And of that 25%, about 1/3 is WFE and about 2/3 is fab construction. So when you think about Entegris, we typically benefit from kind of 3 cycles of demand when the market enters an up cycle and starts building out new fabs. So fab construction-related product lines increased first. Then you typically see revenue approximately 12 months, maybe 9 to 12 months after groundbreaking, that tends to be centered more towards gas purification and fluid management products in our portfolio.

Then WFE related product lines and initial filtration during tool qualification start to ramp up. That typically happens somewhere between, call it, 12 and 18 months after groundbreaking. You'll start to see product lines like gas filtration, AMC, LMC bulk filtration start to increase for us. And then finally, you'll start to see the unit-driven product lines, you'll see that demand start to increase, and that's kind of 24 months. So after the fab construction piece, after the tool placement and qualification piece, then you start to get kind of the unit-driven business coming in on the tail end, somewhere around 2 years after groundbreaking. So those are kind of the 3 waves. 75% of our business is unit driven, 25% of our business, CapEx driven.

And then from an end market perspective, we would characterize memory probably being in wave 1 of this cycle. And I'm really referring more to DRAM right now. The NAND, the NAND has not announced a lot of incremental fabs or incremental capacity builds at this stage. They've been a bit more focused on driving incremental layers. We're a bit density. So memory though, I would say, is kind of in the wave 1 of this phase really with DRAM at the forefront. And then advanced logic is going through rolling portions of this phase. So probably in the wave 2 and wave 3 portion, but obviously, with some new fabs that have been announced.

Our next question will come from Elizabeth Sun with Citi.

I guess my first question is on the gross margin side. You -- your Q1 gross margin had a nice improvement quarter-over-quarter and also above your guidance and in Q2, improved a little bit, I guess, more on volume. But I guess, going forward, looking into the second half and maybe in '27, how should we think about gross margin path? Are you going to continue to rationalize some factories and improve [indiscernible] efficiency?

Thank you for the question, Elizabeth. I can't tell you how pleased it actually makes me to field some questions about gross margin, particularly because we believe that we're in a period of sustained structural gross margin expansion. And so as we think about gross margin and what we're trying to drive, as I've mentioned previously, we're simplifying and refining our manufacturing network. We're relentlessly driving higher productivity, higher fixed cost absorption, better yields. There is a tremendous amount of work ahead of us, and it will be lumpy, but we are focused on delivering our full gross margin potential, which we think is significantly higher than where we are today.

So getting directly to your question on Q1 gross margin. First off, our 46.9% that we posted on a non-GAAP and GAAP basis, we did benefit from about 50 bps of onetime items in the first quarter. So if you normalize for that, that would put first quarter at about 46.4%. That's about 240 bps improvement sequentially. Bridging you from fourth quarter, about 100 bps of that 240 bps improvement was related to the useful life change that we made at the beginning of this year, very much in line with what we guided at the beginning of the quarter and as highlighted in our 10-Q. Productivity and other specific efficiency initiatives, including improved plant performance, comprised the remaining 140 bps. So that kind of bridges you from 44% where we exited fourth quarter of '25 to where we delivered first quarter of '26.

And then kind of bridging you for second quarter as well. Again, I'll go back to the fourth quarter simply because that's kind of a fully loaded quarter with respect to KSP as well as Rockrimmon, 2 of our newer facilities. At midpoint for Q2, we guided gross margin at 46.75%. That's about a 275 bps improvement from fourth quarter, which again was 44%. We're expecting about 150 bps to be related to the useful life change, and about 125 bps, driven by improvement in our manufacturing network as well as ongoing productivity and efficiency actions, including the closure of the 2 facilities over the last 2 quarters.

Also included in this guidance, I did want to highlight -- included in this guidance is incremental production staffing and related project costs to enable incremental capacity in the future quarters of 2026 as well as into 2027. So embedded in our second quarter guide are some incremental costs that you have to incur ahead to be able to unlock and enable kind of more capacity in the third quarter, fourth quarter and then the first half of 2027 as well. So we're quite pleased with our gross margin trajectory.

And did you have another question, Elizabeth?

Yes. I guess the next one is on the -- congrats on the CFO appointment. I happen to know this, Sukhi has a lot of experience in M&A and corporate development. So I was just wondering, does this signal you guys are ready to do more M&As once your net leverage is below like 3x, as your -- talk about your target?

It's probably -- one, we are incredibly happy to announce Sukhi. I'm looking forward to getting him on board. I wish he could have started today, actually, but he will be joining us in mid-May, and I can't wait to work with Sukhi again.

Just to kind of recap a little bit about Sukhi, I think many of you probably know him, but to kind of recap Sukhi's background, he started in semiconductors in the mid-90s on the wafer fab equipment side. So we actually started in semis at a similar period in time. He actually started as an engineer, much like myself in semiconductors, he started as an engineer. He actually has a masters in engineering. Unfortunately, it's not in chemical engineering like me, but he does have a strong mechanical engineering degree as a background, and he got to kind of cut his teeth on the WFE side of the business earlier in his career.

You followed that up with an MBA, some sell-side analyst experience, a lot of corporate experience, investor relations, corporate development, corporate strategy. He was an interim CFO. And then finally, I got a chance to work with Sukhi at GlobalFoundries. He was there when I joined the company, and he did a phenomenal job of really leading that IPO. So for all those reasons, after a very extensive process, we had a chance to sit down with Sukhi and convince him to join the team of athletes that we're assembling here at Entegris, and couldn't be happier to have him on board.

Specific to your question on corporate strategy or corporate development. Right now, we're focused on delivering our leverage reduction, our deleveraging plan. And initially, this year, we told you that we thought we would be under 3.5x of net leverage. We're already at 3.6x of net leverage, and we updated you that we thought we would be closer to 3x of net leverage by the end of the year. Very happy with the profitability that we're driving. Very happy with the free cash flow that we're driving. And so as we progress through the year, while we pay off our term loan, which is something that we're planning this year in 2026 now, we feel like with that as well as with increased profitability, we'll be well positioned in 2027 to at least start to consider other alternatives, whether it's shareholder return or other opportunities in the market.

Our next question will come from Timothy Arcuri with UBS.

Dave, can you talk about just some of the puts and takes on gross margin and how to think about incremental margins from here? I know Taiwan has been sort of a 100 basis point headwind. Is that still the case? And when does that go away? And then can you talk about Colorado? I think that was only going to go away next year. So can you sort of walk through how do you sort of roll off?

Sure. So without bridging you again, given the details we've provided, I think the best way to think about gross margin is that as we continue to grow volume from here, we should continue to get gross margin improvement from here. And so that will be both in fixed cost absorption as well as incremental efficiencies that we can drive through our manufacturing network.

Now given the strength in order book that we started seeing in the middle of first quarter, we are still looking to optimize our manufacturing network, but we're balancing that rate and pace with respect to make sure that we can still deliver the demand in what looks like a very constructive semiconductor backdrop. So we're taking a bit probably a more measured approach to that as we kind of continue through this year to make sure that we can satisfy our customers with the lead times that they expect and deserve.

Specific to KSP, KSP is dilutive to our P&L today, as you know, and as you articulated. We think that by the end of this year, with the ramp that's ongoing, which it's quite a good trajectory, with respect to where we were a couple of quarters ago to where we are now. But it is still a work in process. We will have that facility by the time we get to the end of the year, probably breaking even on a P&L basis, plus/minus. And then we'll start to potentially move it into a less dilutive state, will probably still be dilutive in '27, but less dilutive, significantly less dilutive once we're kind of exiting fourth quarter '26 run rate into '27.

Colorado this year is all qualification. And so this year is really -- last year was facilitizing, qualifying the equipment and opening the facility, staffing the facility. This year is further staffing the facility and qualifying products with customers. We're expecting very little revenue out of Colorado Rockrimmon this year, with the hope of ramping Colorado in early 2027. So for that reason, both facilities will be dilutive to us in '26, KSP becoming less so towards the end of the quarter and then improving -- or towards the end of the year, I should say, and then improving in '27; Colorado dilutive -- fully dilutive in '26 and then starting to ramp revenue in '27.

Did you have a follow-up, Tim?

I did, Dave. Yes. So can you talk about China and just what's going on in China? Are you seeing any more competition there? We're hearing about some folks trying to do CNP there and becoming a little more -- becoming a little more of a competition for you. So can you talk about that?

Sure. I'll actually touch on a couple of regions. Since I know the 10-Q is not out yet. It will be filed later today, where you're going to see the full regional breakdown. I'll just give you a little swing around Asia. Strong growth from Taiwan, up 18% on a year-over-year basis in first quarter. Broader Asia, in general, so including all of Asia, up double digits, slightly more than 10% on a year-over-year basis in first quarter and then migrating specifically into China. China modestly down in the first quarter.

So obviously, it does remain a key long-term market for us. But when you look at the first quarter performance, that modest decline was largely driven by some of the CapEx-related businesses that were down double digits, largely reflecting some dislocated order patterns that were in the first half of last year related to tariffs, as Jeff mentioned in his script. And so if you were to exclude those, we feel like it would have been a bit more of a normal quarter in China, but the first half, we do expect to be kind of impacted by some of those order patterns that were pull-ins for the first half of last year related to tariffs.

We feel like we have a strong competitive position in our franchise product lines in China: filtration, food, slurries. Yield and performance matter in China, the same way it does in the rest of the world. At this stage, we view China largely as derisked, and we think we're going to have a solid second half, and we think we're going to have a solid 2026 in China.

Our next question will come from Bhavesh Lodaya with BMO.

Hi, Dave, and welcome Sukhi. Looking forward to our discussions. Following up on your CapEx -- WFE CapEx side of the business day, as we see higher volumes start moving through your system, I would presume it comes with pretty strong incremental margins, perhaps better than your company average. Maybe if you could provide some color on where margins stand in that business today versus historical peaks? And how should we think about that side as volumes coming in?

Sure. Look, let me start with utilization. We articulated in last quarter that we had about $1 billion of incremental upside that we could deliver from our manufacturing network. Now obviously, you have to staff for it. You have to position inventory for it. But that's kind of the physical capacity that we have. And so whether it's unit-driven volume or CapEx-driven volume, incremental volume is tremendously helpful from a fixed cost absorption perspective when you're sitting at the type of utilization rates that we're setting out today.

So without getting kind of too far into the details of unit-driven CapEx, our unit-driven margin versus CapEx-driven margin, incremental volume does help us in a pretty meaningful way with respect to fixed cost absorption as it drives our plant utilization higher. And we do expect our plant utilization to grow higher as we progress through the year in the absence -- even in the absence of any other specific initiatives that we have. So from that perspective, we're very much pleased with what kind of the CapEx order book looks like today. We have been booked kind of through the latter half of 2026, if not into '27 on some of these CapEx items. And we do expect gross margin to grow modestly as we deliver that fixed cost absorption with incremental volume.

Did you have a follow-up, Bhavesh?

Yes, and a different one. So there's been a meaningful amount of inflation in terms of polymers and chemical feedstocks. Are you seeing any challenges in procurement or pricing for your raw materials? And then do your contracts with your customers building just a simple pass-through of these costs? Or is there a lag as you price it through to your customers?

What we have seen, some modest inflation. Actually, let me start with the contracts. We do have, for some key suppliers, we do have some contractual terms with respect to price increases as well as our long-term agreements with them to take a certain amount of volumes. So there are key suppliers to us that have relatively fixed contracts, both from a pricing perspective as well as a volume perspective that we have to abide by and as do they.

For the vast majority of our supply chain, however, we have agreements, but then we will do certain annual negotiations. We feel like those annual negotiations were pretty productive for us. We feel like we're in a good spot, cost-wise from an inflationary perspective, with perhaps one exception, and I'll just -- I'll touch briefly on it.

The Iran Middle East conflict. As you know, it's a fluid situation, one that I'm sure everyone in the industry, including yourselves, are monitoring. It's probably a bit too early to quantify the full cost impact there, but we have seen some early cost pressure on raw materials related to some of the availability coming out of the Middle East. And specifically, that's in the areas of some of the noble gases as well as some of the resins.

It looks like right now, at least our position on this right now is that we think it could be temporary. And so we just absorbed those costs. To the extent that this cost pressure kind of persists, either in logistics cost or raw feedstock cost for us, then we would evaluate increasing pricing in the future. But at this point in time, we view the inflationary pressure as -- largely as expected. Some unexpected that I just mentioned related to the conflict in the Middle East, absorbed in our P&L for now and we'll reserve the ride in the future if it becomes too big of a burden to go back and kind of renegotiate some of the pricing with our customers. So from kind of -- as we sit today, I would say, steady as she goes to continue to be reviewed as we progress through 2026. Thanks, Bhavesh.

Our next question will come from Jim Schneider with Goldman Sachs.

I was wondering if, David, if you could maybe kind of comment on what you think has changed the most in terms of the wafer start outlook for the year? It sounds like that is mainly DRAM, either increasing utilization rates or pull-ins in terms of capacity. But I was wondering if you could give any color on that? And then maybe if you could explicitly address the analog sector, where it seems like we have the stand to improve the most from a utilization perspective this year.

Sure. Thanks, Jim. So what's changed the most from when we spoke to you in February until today, I think in -- at the beginning of February, the forecast for the industry was that fab construction would be up low single digits. And I think when you look at fab construction today, the forecast for the industry is high single digits. So that's a pretty meaningful change.

It doesn't mean that we'll get necessarily that revenue in period in '26. As I mentioned earlier in the call, from groundbreaking to kind of first revenue for us is around 12 months. But that's a big change. Fab construction going from kind of low single digits, essentially flat to high single digits, I think that kind of speaks to the state of the industry, the current utilization, particularly for advanced logic and memory, and I think that bodes well for kind of the setup for 2027. So I think that was a meaningful change, not a big change for us, again, in period for '26, but I think the foreshadowing for '27 and the setup is quite good.

MSI, we were originally forecasting that MSI would be low to mid-single digits. We did update the forecast for MSI to be kind of mid- to high single digits. So I would say modest change there on units. And I would say that was a little bit of a blend between advanced logic, DRAM as well as some incremental NAND, and then I would say we're still kind of expecting flat from our expectation in February with respect to -- with respect to mainstream. So I think those are kind of like the big puts and takes between our February call and our market commentary in February and where we sit today in April.

To get to the second question that you had, which was really around mainstream. And mainstream, I think if you stood back and looked at it objectively, I think you'd say that the first quarter has probably been a little bit better than we originally expected. So I think from that perspective, there were, again, some of our customers that have recently released, not all of them have, but some of them that have released have kind of talked about improving inventory in the channel. They've talked about utilizations.

If they're a manufacturer that have broken kind of the 80% level, which for many of them have not been breached since the peak in '22. And then all of them, I think, have kind of highlighted memory availability. So strength in kind of AI-related and data center-related products, but memory availability potentially being a concern. So I think we view that market, as I mentioned earlier, is kind of mixed. We've kind of included a mixed view. Again, this is 30% of our revenue. We've included a mixed view in our guidance for '26 as well as kind of an initial flash that we gave you for third quarter of '26 as well.

Our next question will come from Charles Shi with Needham.

I'll start with the first question around your exposure in advanced packaging. We know this is one of the growth areas for Materials and probably want the variable between you and your closest peer in terms of some of the near-term performance. We know you probably were going to talk a little bit more about that at the Investor Day, but Investor Day probably still 6 months out. So we still would love to hear some thoughts, early thoughts, any new actions undertaking right now at Entegris? We know you talked about the thermal material, you're talking about some of the carrier stuff. Is there anything more than that right now in your thinking that Entegris can get a little bit more exposure in advanced packaging? For one, we do think that CMP seems to be a very important area, especially with the adoption of a more hybrid funding type of advanced packaging and you do have good amount of a CMP slurry path business, but I want to get some thoughts there first.

Thanks for your question, Charles. And look, we agree with you, we think the advanced packaging market is an attractive market. Unfortunately, our exposure to advanced packaging right now is limited due to just the prior investments that we didn't make necessarily in advanced packaging. That stated, we do have some products that have performed well in this space and that we did. We were able to launch some more minor, I would say, minor spends of products to be able to address this market. So specifically advanced flow control for thick resist, delivery solutions for copper plating and photoresist CMP, as you mentioned, for high-bandwidth memory and TSVs in particular, and then, of course, the carrier offering. So we do have a portfolio of products that we have been able to penetrate the advanced packaging market with.

Our current revenue exceeds $100 million a year run rate. So we're excited about some of the traction that we're getting in this market for the areas where we've been able to kind of make investment and bring products to market. We are excited about some of the products that we have in the pipeline. That's really for the future. However, it's not for today, it's not necessarily for 2026 revenue. The 2026 revenue product, so the areas that I highlighted earlier. But we will have more details for you at Investor Day in November, recognizing the nature of the question that November is still about 6 months away. So -- but that's what I can give you today. And we're excited about the $100 million plus that we're driving from the business.

Did you have a follow-up, Charles?

Yes. Dave, since your 10-K came out intra-quarter over the last couple of months, we looked at some of the customer-specific financials. So we did notice that the largest foundry, which is the #1 customer for you, the revenue from that particular customer last year, I would call probably flat to modestly up, and there was a little bit maybe trailing what I consider as their own growth. Was wondering if you can give us some stuff? What happened last year? Why the growth wasn't keeping up very well with the leading foundry? And any -- about this year, are you able to catch up to their growth? And obviously, we heard you talking about 2 nanometer production ramp that is actually happening later this year, but I want to get some thoughts around that.

Sure. Speaking first to last year, to 2025, there is a pretty significant build-out in '24 that from a CapEx perspective, was meaningful, and that puts some pressure on year-over-year comps. We actually felt pretty good about the unit volume for 2025. But obviously, we had some year-over-year dynamics in '25 versus '24 from a CapEx perspective.

Early results here in 2026, which we'll get in our 10-Q later today. And while I won't talk about specific customers, we can certainly talk about regions. Taiwan was up 18% on a year-over-year basis in the first quarter. A lot of strength across the portfolio there, strength that we're anticipating will continue. So good results from Taiwan, again, up 18% year-over-year in Q1.

And really some good results across -- broadly across Asia. Asia as a whole, was up a little north of 10% on a year-over-year basis. Obviously, that includes Taiwan that was up 18%. It also includes China that was down modestly. So the other regions in Asia performed well as well. And as you know, we have key customers in Korea, we have key customers in Singapore, we have key customers in Japan. So good to see that kind of broad region performed well as well as good to see Taiwan perform well.

Our next question comes from John Roberts with Mizuho.

Welcome, Sukhi. Back to China, are you through with your requalification of sourcing into China? And I think you're actually going to rationalize some products just not requalify, and maybe, is that any headwind to the China sales?

Yes. China, we're -- I think in Q1, I think about 85% of our revenue for China, it was in that ZIP code, was from in region for China. That's about where we exited in terms of regional qualification in 2025. We'll probably pick up another 5% of the product portfolio that we sell there in '26. So we'll probably take that 85% number up to 90% by the end of this year. I don't anticipate that we'll ever get to 100%. I think there'll be some products that just given the volume of sales, it won't justify the expense of relocating their production route. But I do think that we'll go from kind of 85% where we are today to probably more than 90%, but we do expect to get to 90% throughout the course of '26 and then above 90%, we'll work on in '27, just with this kind of upper limit of it, it will probably never get to 100%. So there will always be some amount of products that will be impacted either geopolitically or by tariffs.

Did you have a follow-up, John?

Yes, in Materials Solutions, so are the constraints in the memory market driving any product shifts within the Materials Solutions segment?

Not really product shifts. I think -- if you look at memory total, sorry, let me -- maybe it's best to break it down and be more specific. NAND, there are some shifts in the market with NAND. NAND is very much focused on driving bit density, and bit density is driven by layer count. And as layer count moves from low 200s to 300 or 300-plus layers, it does introduce new materials, for example, moly, which the company has spoken about.

So we do like that trend. Incremental bit density, while it does consume capacity, so you don't get more wafers, you don't get more MSI, but it does consume process steps and capacity. And we feel like that's where the focus on NAND is right now is on driving bit density at least in the first half with potentially incremental wafer starts in the second half. Incremental bit density drives incremental materials for Entegris, particularly in areas like moly and selective etch. And so that's a trend that we would like to see continue. And we'd also like to see them continue to fully utilize those fabs to 100% capacity. So both drive bit density and drive more MSI, but I think first half is more of a bit density story.

For DRAM, DRAM is operating really near capacity at this stage. So even with being fully utilized or near full utilization and even with potentially some technology changes in DRAM, there's not a significant change in the materials there. I think the most significant change was just simply the HBM wants a lot of DRAM kind of migrated into HBM. That is incremental processing. We do have some slurries and some other products in that incremental advanced packaging process steps or in those advanced packaging process steps. And so that's a trend we'd like to see continue as well.

Our next question comes from Chris Parkinson with Wolfe Research.

This is Harris Fein on for Chris. Just given the geopolitical environment, there are some fears about energy availability. You mentioned Noble Gas has some key inputs like helium for fabs located in Asia. Just as you run the business and you have conversations with your customers, how would you characterize the degree of concern around that?

We haven't -- there haven't been kind of semiconductor specific concerns around energy. I think in general, there's concerns around just energy consumption and availability, especially as you think about data centers tapping big parts of the grid. But we haven't really seen anything specific to semiconductors or semiconductor fabs. Obviously, it's a key consideration when you think about building a fab, but most of those fabs secure that energy in advance for -- usually for some pretty long periods of time.

Did you have a follow-up, Chris?

Yes. The other one. On the third quarter -- on the third quarter directional framework, I think you mentioned historical seasonality supporting a sequential improvement. I just want to clarify, does that third quarter guide contemplate any cyclical recovery on the mainstream logic side? Or is this just contemplating normal seasonality and any cyclical recovery would be upside to what you're communicating?

Yes. Our third quarter guide today, we just tried to give you a little bit more visibility based on what we're seeing kind of in our order book. So third quarter includes a little bit of seasonality. It also includes some of the visibility that we've received in our order book, particularly with respect to CapEx. And so we wanted to give you a flash of what we thought that looks like.

Now that 5% sequential guide from second quarter to third quarter from our second quarter midpoint, that would be about 8% year-over-year growth if you were to do that math and then look at third quarter kind of guide '26 versus third quarter '25 actuals. So we feel like that's a pretty good guide at this stage given where we are in 2026. So we're pretty happy about that, and it's really just including some seasonality, some of the current order book that we currently have visibility to, and it really doesn't include anything -- any meaningful recovery with respect to mainstream. Thanks, Harris.

Our next question will come from Edward Yang with Oppenheimer.

Dave, I appreciate the time and good to see the improvement. First question is on R&D, and that's been ticking down every quarter for the last several quarters now. I'm just wondering what's driving that? And related to your R&D engine, how does the pipeline look for POR wins that you could leverage above and beyond cyclical recovery?

Sure. Thanks, Edward. There's certainly no intention to kind of tick down R&D. Obviously, if revenue is growing kind of faster than we originally expect, then you tend to get this phenomenon where you kind of set a budget for about 10% of revenue to be invested back into R&D., and so you get kind of these, let's call them, period gaps. But we do feel good about roughly this 10% level of revenue being reinvested back into R&D. We feel like that's a pretty good benchmark. Again, plus minus, and it's very different by business and where different businesses are in their growth cycle and maturity cycle as well as R&D intensity cycle. But from that perspective, we feel like our model of roughly 10% of revenue invested in R&D is, for a bunch of reasons, is the right one.

Pipeline for PORs. We actually feel pretty good about both our current plans of record, our current market share as well as the PORs that are currently in our pipeline that we are competing for. So as manufacturing becomes more complex, as you move to higher layer counts and memory, as you move to more advanced packaging for DRAM that requires incremental slurries, incremental pads, incremental filtration. And then, of course, as you move advanced logic from kind of 2 nanometer to sub-2 nanometer, the landscape and the precision required and the contamination and material purity required, those requirements all get orders of magnitude harder. And we feel like that plays very well, both to our development cycle as well as to our current product line. So I feel very good about our innovation engine. It's something that we're looking forward to showcase a little bit at our Investor Day in November. So some more to come. Thanks, Edward.

And this does conclude the Q&A portion of today's call. So I'd like to turn it back over to Jeffrey Schnell for any additional or closing remarks.

Yes. Thanks, everybody, for joining our call today, and we look forward to discussing more with you in the coming quarters.

Thank you, ladies and gentlemen. This concludes today's Entegris' First Quarter 2026 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.

Welcome to the Entegris Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeff Schnell, VP of Investor Relations.

Good morning, everyone. Earlier today, we announced the financial results for the fourth quarter of 2025. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC.

Please refer to the information on the disclaimer slide in the presentation.

On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in today's news release as well as on the IR page of our website at entegris.com. On the call today are Dave Reeder, our CEO; and Linda LaGorga, our CFO.

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

Thank you, and good morning. Before we dive into results, I want to take a moment to welcome Jeff to our team. We're excited to have him on board leading our IR efforts as our new Head of Investor Relations. .

Our solid fourth quarter results demonstrate disciplined execution and a consistent focus on delivering on our commitments. Fourth quarter revenue, gross margin, adjusted EBITDA margin and non-GAAP EPS were all at the high end or above our guidance range.

For the full year, total revenue was approximately flat compared to 2024, excluding divestitures. Our unit-driven revenue grew approximately 2% in 2025, in line with wafer starts for the market and was led by CMP consumables liquid filtration and selective etch. Our CapEx-driven revenue declined 7% in 2025, consistent with the decline in industry fab construction CapEx, where we are most highly correlated.

The fab CapEx slowdown was most evident in our FOUP and fluid handling product lines within our APS division. Looking ahead to 2026. The industry backdrop appears more constructive. I'll touch on the semi market in more detail in a bit, but there are a few areas where we expect notable improvement compared to 2025 that should benefit Entegris.

First, we expect to benefit in 2026 from the node transitions in both logic and memory. In logic, increased demand for 2-nanometer devices is expected to meaningfully drive wafer output throughout 2026. In memory, NAND transitions are progressing, migrating from low 250 layers to approximately 300 layers.

Additionally, next-generation DRAM and HBM products are expected to be rolled out this year, and all these transitions create accretive content per wafer opportunities for Entegris.

Next, we expect industry MSI growth to increase in 2026, led by continued strong growth in advanced logic and DRAM, improving demand for NAND and stable demand for mainstream logic.

Finally, we expect industry fab construction spending to grow in 2026, reversing a significant decline in 2025. This is meaningful for Entegris because 2/3 of our CapEx-related revenue is correlated to fab construction. Last quarter, my first as CEO, I shared my initial priorities for Entegris, let me provide an update on those priorities. First is deepening customer intimacy. This includes supporting our customers' technology road maps. Success in this area translates into securing key positions of record PORs in new nodes, which will expand our served available market and increase both revenue and content per wafer.

For logic devices at the most advanced node, we've secured strong POR positions and solid share in key product lines such as CMP consumables, advanced deposition and implant materials, liquid purification and filtration and wafer handling products.

In addition to this, the team is focused on winning incremental share and PORs in subsequent advanced nodes. For advanced memory, we are gaining traction in DRAM and HBM, in particular for products associated with CMP consumables and advanced packaging solutions. And for next-generation NAND devices, we have also achieved strong POR wins with solid share across key NAND specific product lines, including deposition materials, CMP and selective etch applications.

Our second priority is improving utilization by ramping our new facilities in Taiwan and Colorado, while rationalizing our existing manufacturing footprint. Our Taiwan facility continues to ramp production and our Colorado facility is expected to substantially complete key customer product qualifications in 2026. And in the fourth quarter, we exited our Chester, Pennsylvania facility, and we expect to rationalize at least one additional facility in the first half of 2026.

As I discussed last quarter, we have completed the multiyear manufacturing CapEx investment cycle that began in 2022. As a result, we expect 2026 CapEx to decline to $250 million. Longer term, we expect CapEx to return to historical levels of approximately 7% to 8% of sales. The additional manufacturing capacity we've built, combined with our current manufacturing base, enables us to deliver significantly more than $1 billion in incremental revenue with limited further investment. Our third priority is improving free cash flow. Thanks to the team's execution, free cash flow margin, which is free cash flow divided by sales, improved meaningfully, reaching 12.7% in 2025, in line with our target.

Higher operating cash flow in combination with reduced CapEx is expected to increase free cash flow again in 2026. This will support debt reduction and enable us to reduce net leverage to below 3.5x exiting 2026.

Underscoring our commitment, free cash flow is now part of our short-term and long-term incentive plans. Our fourth priority is increasing local-for-local manufacturing, particularly for China. This provides us with critical strategic flexibility and enhanced ability to serve our global customers. We expect approximately 85% of our China revenue in Q1 will be supplied by our Asia facilities with that proportion increasing through 2026.

Turning our thoughts to the semiconductor market. We expect midish single-digit industry MSI where wafer starts growth in 2026. As a reminder, about 75% of our revenue is unit driven and is correlated to MSI.

Looking closer at semi end markets. Advanced Logic is positioned for significant growth again in 2026, driven largely by AI-enabled applications. Fab utilization rates and advanced logic are already near 100%, and our customers are aggressively investing in additional capacity. Beyond the benefits of strong unit growth, as 2-nanometer significantly ramps wafer output this year, this node provides an additional tailwind as it carries both higher content per wafer and strong share for Entegris.

In mainstream logic, feedback suggests inventory levels are now healthy. While we're seeing early signs of improvement and mainstream MSI still remains well below the 2022 peak, the overall end market recovery is slow and mixed. We also note that ongoing memory shortages may weigh on the industry's ability to supply some mainstream end markets.

NAND. NAND continues to benefit from strong AI-driven demand and pricing trends. This is expected to translate into more than 20% bit growth in 2026 driven primarily by the shift to higher layer, higher capacity NAND rather than a significant increase in MSI. While NAND MSI is expected to rise modestly in 2026, we expect to additionally benefit from a double-digit increase in NAND content per wafer as customers move to higher layer count, advanced nodes and introduce new materials such as moly and selective edge. If demand remains robust, flash memory makers will likely need to add significant fab capacity setting the stage for higher NAND MSI growth in 2027.

DRAM is expected to see solid MSI growth in 2026. Pricing trends and underlying demand remained strong in both HBM and DDR5. Tight supply in HBM, DDR5 and in advanced packaging are all expected to drive the need for additional fab capacity heading into 2027.

While 75% of our revenue is related to MSI, 25% is tied to industry CapEx. There are 2 primary drivers of our CapEx revenue. fab construction related spending, which correlates with approximately 2/3 of our CapEx sales and the remaining 1/3 related to WFE. Fab construction CapEx is expected to grow modestly this year after a high single-digit decline last year with a more meaningful acceleration anticipated in 2027 as construction begins on new fabs. Additionally, we expect WFE to deliver strong growth in 2026.

Overall, AI continues to be an important growth driver for the semi market, and we are seeing an increased benefit from this trend. Today, more than 60% of Entegris' revenue comes from advanced logic and advanced memory. AI is, of course, not the majority of these advanced nodes, but it is an important part and the most significant growth driver.

In closing, we ended 2025 with momentum. We are cautiously optimistic about the industry conditions entering 2026. We continue to focus on winning key PORs and new nodes, driving higher Entegris content per wafer and revenue. The growth we expect this year should improve utilization, thus increasing free cash flow and reducing leverage. And as devices become more complex, our expertise in material science and materials purity becomes increasingly critical, helping customers enhance performance and achieve optimal yields.

As a result, we expect to significantly grow our content per wafer and outperform the market, and we will continue to focus on execution and delivering on our commitments. Before handing over to Linda, I wanted to share that given the CFO transition, we are rescheduling our Capital Markets Day from this May to the fall of this year. We'll share more details on this as soon as we can. And finally, I want to thank Linda for her many contributions and lasting impact on Entegris. We wish her all the best in the future.

With that, let me turn the call over to Linda.

Good morning. Q4 sales were $824 million at the high end of guidance, down 3% year-over-year and up 2% sequentially. Gross margin on a GAAP basis was 43.8% and 44% on a non-GAAP basis in the fourth quarter, also at the high end of guidance. The sequential increase in gross margin was primarily driven by increased production volumes across our manufacturing facilities.

Back to the Q4 P&L. Operating expenses on a GAAP basis were $256 million in Q4. Operating expenses on a non-GAAP basis in Q4 were $188 million. Adjusted EBITDA in Q4 was 27.7% of revenue above our guidance. The GAAP tax rate in Q4 was 10%, and the non-GAAP tax rate was 15.4%. GAAP diluted EPS was $0.32 per share in the fourth quarter. Non-GAAP EPS was $0.70 per share above our guidance.

Sales for Materials Solutions in Q4 were $362 million. Sales were flat year-over-year and up 4% sequentially. Sequential growth was driven primarily by advanced deposition materials, supported by demand for moly deposition within NAND. Adjusted operating margin for MS was 20.9% for the quarter. The year-on-year decline in margin was driven by slightly lower production volumes and strategic investments. The strong sequential increase in margin was driven by increased production volumes and product mix. Sales for Advanced Purity Solutions in Q4 were $465 million, down 5% year-on-year and up 1% sequentially. The year-over-year sales decline was driven by fluid handling and soups partially offset by strong growth in liquid filtration, which had another record quarter. Sequential growth in liquid filtration and gas purification was partially offset by lower food sales.

The adjusted operating margin for APS was 24.8% for the quarter. The year-on-year decline in margin was driven by costs related to the ramp of our Taiwan and Colorado manufacturing sites and lower production volumes. The sequential decrease in margin was primarily driven by unfavorable product mix and timing of operating expenses.

Moving on to cash flow. Full year free cash flow was $404 million, representing a free cash flow margin of 12.7% in 2025, nearly a 300 basis point increase year-over-year. This improvement was driven by our team's disciplined focus on working capital, including accounts receivable and decreased year-on-year inventory growth. CapEx for 2025 was $299 million, approximately 9% of sales. A quick overview of our capital structure, during the fourth quarter, we paid down $150 million of the term loan from cash on hand. And for the full year, we paid down $300 million of the term loan. At quarter end, our gross debt was approximately $3.7 billion, and our net debt was $3.4 billion.

Net leverage ended the year at 3.8x. As Dave said, we are targeting net leverage of below 3.5x by the end of 2026.

Moving on to our Q1 outlook. We expect our Q1 sales to range from $785 million to $825 million, reflecting an increase of approximately 4% to the midpoint year-over-year. Gross margin of 44.5% to 45.5%, both on a GAAP and non-GAAP basis.

We recently completed an assessment of the useful lives of our assets. This gross margin guidance includes the positive impact from the useful life accounting change of approximately 100 basis points in Q1 on gross margin. We expect GAAP operating expenses of approximately $229 million and non-GAAP operating expenses of approximately $181 million.

EBITDA margin to range from 26.5% to 27.5%. Net interest expense of approximately $47 million. We expect our non-GAAP Q1 tax rate to be approximately 15%. We expect GAAP EPS between $0.43 to $0.51 per share, non-GAAP EPS between $0.70 and $0.78 per share. And we expect depreciation of approximately $36 million in Q1. Looking slightly further ahead, based on our current visibility, we expect Q2 sales to increase 1% to 3% sequentially from Q1, in line with normal industry seasonality.

I'd like to provide a few modeling items for the full year of 2026. We expect net interest expense will be approximately $190 million, the non-GAAP tax rate to be approximately 15%. Diluted share count of approximately 152 million shares for Q1 and approximately 153 million shares for the full year, CapEx of $250 million and depreciation of approximately $150 million reflecting the recently completed assessment of the useful lives of our assets.

Before we begin Q&A, I would like to thank the finance team, the leadership team and the Board for their partnership over the past 3 years. I am proud of the work we have done to strengthen the foundation of the business and position the company to capitalize on future opportunities. It's been a privilege to be CFO, and I am confident in Entegris' path forward.

With that, operator, let's open the line for questions.

[Operator Instructions] Our first question is coming from Mike Harrison with Seaport Research Partners.

Best wishes to Linda, and welcome Jeff to the team. Dave, I appreciate you walking through your detailed thoughts there on underlying market growth in 2026. It sounds like if we roll that all together, you're looking at something in the mid-single-digit range for growth overall. But I'm curious, historically, Entegris would talk about growing 3 to 6 percentage points faster than the underlying market. As you look at the opportunities that you're seeing, you mentioned the advanced nodes in 2-nanometer as well as growing content per wafer in NAND. I'm just curious, are you expecting an environment in 2026 where you can get back to growing in that 3% to 6% range faster than underlying markets? .

Mike, good to speak to you again. When we think about 2026, we do think the industry backdrop is a little bit more constructive than it was in 2025. And specifically, if you think about kind of the areas in which we grow revenue, we do about 40% of our revenue is from advanced logic, about 30% from mainstream logic and then the remainder from memory. And so when you look at 2026, it feels like advanced logic is pretty fully utilized as we add capacity there. We get the benefit of both additional growth plus more content Mainstream looks kind of mixed. So we think we're performing on a cylinder for advanced logic. We think mainstream looks mixed but stable. And then we think memory can perform. So think of it as kind of performing on 3 of our 4 cylinders.

The additional piece to then layer on top of it is CapEx, and CapEx was not terribly constructive in '25, but we do think that CapEx could be more constructive in '26, particularly the portion related to fab CapEx. So when you look at that industry backdrop and you think about outperformance, I'll just add a couple of more points to that. One, we typically get the most outperformance when we have node transitions, because that drives additional content per wafer. So that's our -- typically our biggest driver of outperformance. And so while both logic and NAND node transitions look solid, we don't really control the timing and pace of that.

And so -- and then, of course, as I mentioned, the CapEx piece is particularly fab CapEx is relatively volatile. So when we look at '26, we look at our first quarter guide, plus 4% at midpoint, slightly greater than 6% at the high end of our guidance range. And of course, we gave you a little bit of color for Q2. We feel like the setup is constructive. To the extent the node transitions, both logic and memory happen. We feel like we can get back to outperformance and then the CapEx piece looks to be a little bit more second half weighted. So I gave you a lot of details there for content, Mike. But did you have a follow-up?

Yes. That's very helpful. The follow-up is this kind of on the margin trajectory for the year? Your guidance for Q1 calls for a little bit of sequential contraction in EBITDA margin. I assume that's just seasonality, but anything you can share in terms of how we should think about margin trajectory in '26? Presumably, you're getting back to more normal production rates yourselves and seen some benefits from ramping the Taiwan facility. So I appreciate some details there. .

Yes. So thanks, Mike. Thanks for that question. Let me bring it up to gross margin. I know you mentioned EBITDA, but I think it's important to go back to when we think about our gross margin, first, it's really stabilized in the current range. We had mentioned we called a trough at the second half of last year. And you could see based on the Q1 guidance that stabilization. The key as we drive margins, and this will drive through to the bottom into EBITDA is the volume leverage. And so as we said, there's a constructive environment going into this year. As we see more production going through our facilities, that's going to go into our gross margin and see that improvement. That includes ramping Taiwan this year and continuing to ramp. And then as Dave mentioned in his remarks, we did rationalize one facility, and we plan to rationalize another one in this first half of the year. So again, all those dynamics, volume leverage, combined with Taiwan ramping combined with some rationalization is going to help us improve gross margin with that increased production and drive down to EBITDA?

we'll move next to Timothy Arcuri with UBS.

Dave, for the full year, you said CapEx is going to be up modestly. We know WFE is going to be up low to mid-20s, probably even than that. What about MSI for the year? I don't think I heard you give a target for [indiscernible] for the year. .

Tim, MSI, we think is mid-ish-single digits. Still early days, and obviously, we've got Chinese New Year that's happening next week in Q1 versus the end of January. But when you look at MSI, so there's some Q1 dynamics in there. But when you look at MSI overall for the year, our current estimates are kind of mid-ish single digits, agree with your commentary on WFE, that looks like it's going to be strong this year. That's about 1/3 of our CapEx related revenue. And then 2/3 of our CapEx-related revenue is tied to fab construction CapEx. And when you think about that portion, it looks like there's probably not a lot of that in the first half with it picking up perhaps even significantly in the second half and then, of course, setting up well for 2027. Did you have a follow-up, Tim?

I do, Dave. Yes. So if I just add that all together and I run the ratios, you're probably I mean your market is probably up more [indiscernible], probably high single digits at least. So do you think you can outgrow that by a significant margin. I mean a good -- is that a good level to say that you should grow revenue at least high singles, probably even low doubles to get to your outperformance metrics for the year. .

Tim, I think I've given you a lot of the elements here. I think we'll probably stand pat for guiding 1 quarter at a time. We gave you a little visibility with respect to second quarter normally imply kind of sequential growth of 1% to 3% from first quarter based on order patterns, we feel pretty good about that range right now. And so we'll continue to give you more visibility as we see it. I think the wildcard that we kind of see right now is how does that fab CapEx kind of layer in throughout the course of the year? And then how do we kind of participate in that portion of the revenue, that's the piece that we're really watching right now. And it's moved pretty significantly month-to-month. So that's the hesitancy or perhaps the conservatism that you're hearing in my voice. I want to see how that plays out a little bit.

We'll take our next question from Christopher Parkinson with Wolfe Research.

You mentioned last quarter more of a concerted selling effort directed to mainstream customers. And I was wondering if you could give us a quick update on what's underway there.

Thanks, Chris. We look at our customers in quite a lot of detail, particularly kind of our top 50-ish customers. And so when we look at that customer list and we look at mainstream, we then kind of break them down into their corresponding portions of mainstream. And so you get kind of mainstream logic. You've got some mainstream in there that's associated with some specialty manufacturing, for example, silicon carbide as well as some other nodes. And so when we look at that universe, I'll start with kind of the latter silicon carbide was a headwind for us in 2025, I'm talking on a year-over-year basis from '24 to '25. We think that is now stable and perhaps even improving slightly, albeit slowly in '26. So we think the silicon carbide headwind, where we have a very nice solution for the CMP process, we feel like that will not be a headwind for us, at least expectation-wise in 2026. So we think that will be constructive and helpful. And we continue to gain even more share in that process.

When we look at the other mainstream and I'm referring to mainstream logic, mainstream logic has a number of needs across our entire product portfolio. And so our efforts in mainstream logic become more about providing all of those solutions, not just individual product lines to each of those mainstream customers. So when we look across those customers, we're trying to more deeply penetrate their wallet across our complete product portfolio, whereas in some of those mainstream logic customers, we're only selling individual product lines. Did you have a follow-up, Chris? .

Yes. And then sorry, I should have said this is Harris Fein on for Chris. For the second question, I mean, for a while now, there's been a lot of headlines on China competition. I guess, it would be helpful to hear if you're seeing anything in terms of changing behaviors or any sort of step-up in competitive intensity? And if so, where are you seeing it? .

Good question. When we look at the China market, we think the fundamentals of the China market are very similar to the rest of the world. In other words, they care about yield and performance. And so when you think through products in our space that improve yield and performance, you think of the Entegris products that do both. It's, one, continuing to deliver purity both at point of use and a source, and then, of course, having high purity materials that enter the process pure. And so those 2 products, which is really product portfolios that Entegris is built upon, that improves yield and performance. And that's competitive, irrespective of kind of where you are around the world.

Now then when you kind of hone in specifically in China, because they compete fiercely in China, our biggest obstacle in China is being able to guarantee to those customers that we can assure supply. So can we guarantee supply to those customers. And when we can guarantee supply to those customers, we find that they revert back to yield and performance being important.

And so what you saw us do in 2025 was you saw us put a really concentrated effort into qualifying more manufacturing overseas, specifically for the China market as well as the rest of Asia. We got up to about 85% of products, at least in first quarter, about 85% of our revenue for China, we're expecting to supply from region. And so we're able to guarantee that supply. We're going to continue to work on that throughout 2026, probably getting to a number around or even greater than 90%.

And so I think as we continue to be able to qualify more products for Asia manufacturing, we then get to guarantee supply to those customers, then we get to compete in that market like we do around the world. And when we can compete fairly in those markets, we tend to do pretty well.

We'll move next to Charles Shi with Needham.

Dave, good results. I want to ask you about NAND. I think we've spoken about this for a while, NAND sentiment-wise, pricing-wise, business-wise for a customers have inflected. But it doesn't appear that it's inflecting for you yet. Wondering what's the best prediction as of today? When do you think that business is going to pick up. And by the way, I did notice in your prepared remarks, double-digit content gain for this year on the back of pretty flattish or maybe single-digit MSI should do well for the NAND. But I just don't really feel like I see that in your March quarter guide or June quarter guide, is it like more of a second half driver? And why it's so delayed versus our customers?

Charles, thank you for the question. With respect to NAND, we think the underlying demand, like you remains very strong. In fact, you started to see pricing kind of firm for NAND in the early second to mid-second half of 2025. You saw the pricing continue to perform well throughout the latter half then of '25 and then continue to grow through '26. We actually think that increased wafer starts on NAND has actually been very, let's call it, measured. And so we think incremental wafer starts for NAND will remain measured because what we're actually starting to see is we're starting to see some node transitions on NAND, where you get a premium or the NAND producers get a premium pricing for bit density.

And so we're finally starting to see some of those node migrations that we expected on NAND going from kind of, call it, 250-ish layer count to roughly 300-ish layer count. So as you kind of grow that layer count kind of 20% bit density growth on a year-over-year basis. It's a premium product for them. We get benefit from those incremental layers, but it effectively consumes capacity.

And so I think what you're hearing from us is we like the incremental layers, incremental layers brings higher content per wafer for Entegris, but the actual increased wafer starts, we're waiting for the NAND producers to effectively drive those wafer starts. So this is the trade-off and environment right now that when we look at Q1, we think we've got a solid guide for Q1. We've got an indication kind of for second quarter that we feel quite comfortable with. And then we'll leave it for the NAND producers to determine the rate and pace, both of the layer count as well as incremental wafer growth. Did you have a follow-up, Charles?

Dave, yes, I do. The second question, thanks for the China color, the amount of supply supporting the China market. But I wonder if you have a view your China business is going to grow in '26. And if you can, what was the China growth number for 2025?

Sure. So in terms of the China business growth in '26, I'll let Linda in a moment talk about the '25 growth. But the areas that we expect to grow in '26 for China. One, we think some of the CapEx-related areas will grow in 2026, specifically FM and perhaps FOUPs. We expect LMC or liquid filtration to perform in 2026 in the China market as well as some of the CMP products. There's probably a couple of others in there, but we expect the China market to have growth in '26, and we think it's kind of underpinned by the areas that I mentioned. Linda, do you have the China growth number for '25?

Yes. So China has remained '24 and '25, approximately 21% of actual dollars are down slightly. But as we've talked about before, and Dave highlighted some of the reasons why our China customers like our products, we've been able to maintain very solid performance in China.

We'll take our next question from Melissa Weathers with Deutsche Bank.

I wanted to touch on something you flagged in the prepared remarks, the potential impact of memory shortages and pricing on the electronics market and any decreased production we could see from that? So I know you're calling for mid-ish single-digit growth, which mid-ish, that's a new word for me that I learned today, but -- could you help us -- what are you embedding in that outlook with respect to like any demand destruction from the memory shortages?

Yes. I think when we think about our first quarter guide, obviously, we didn't factor anything into the first quarter. We didn't really factor anything into kind of our at least indication for second quarter at this stage. I think really what we were doing was we were just flagging it as potential, we're expecting mainstream to be stable this year, perhaps even slightly improving versus 2025. But a lot of the mainstream logic, a lot of that production is reliant on some form of memory. And so we're really just, at this stage, calling it out as a flag to watch for the second half of 2026. I think that's where the impact would be, if there was any. Did you have a follow-up, Melissa?

Yes, I did. On the capacity shutdowns that you've done in the fourth quarter and that you might do in the first half of this year? I'm sorry if I missed it, but have you given any timing on when we could expect those closures to impact gross margins?

Yes. Let me broaden the question out to gross margin, and then I'll answer your question specifically. In the third quarter, which was my first as CEO, we guided kind of a trough for gross margin between 43% and 44%. Third quarter gross margin was $43.6 million. We were able to increase that to 44% in fourth quarter. In first quarter, on slightly lower volume, we're still guiding you on a normalized basis to kind of 44%. And so we feel like, at this point, incremental volume growth for us will drive incremental gross margin from these levels. So from that perspective, we feel quite good about it.

We were able to rationalize on facility in the fourth quarter of this year -- excuse me, of 2025. As we go forward into 2026, we'll get some modest benefit from that in terms of utilization. When we think about what I mentioned in the script, which was we're expecting to rationalize another facility, in the first half of 2026, then you would expect to get some minor benefit on a go-forward basis through the remainder of '26. And we'll continue to go. We'll continue to both ramp our facilities in Taiwan. We'll qualify our facility in Rock Reman and we'll continue to look at our manufacturing footprint and the rate and pace, at which utilization is improving and make the decisions that you would expect us to make.

So for all those reasons, we feel quite good about the trajectory that we're on, and we feel like the execution is in front of us to perform.

We'll move next to Elizabeth Sun with Citi.

The first one, I guess it's maybe you previously talked about AI is 5% of the wafer starts market, but I believe your content is much higher for AI-related products. So I'm just wondering if you had looked from the perspective like how much is AI as a percentage of total revenue?

What we tried to give you some -- at least some indication and some color in the prepared commentary. We mentioned that about 60% of our revenue in 2025 was driven by advanced nodes, so advanced manufacturing. That's both logic and memory. And then as you think about going forward, AI is a big part of that growth in advanced manufacturing. And for example, advanced logic we designate that as 7 nanometers and below. And then the last kind of 2 generations of memory, the newest 1 plus current manufacturing, that's how we define advanced manufacturing nodes. So from that perspective, it's about 60% of our total revenue as a company. We expect that to grow going forward because we expect both incremental capacity to come online, mostly to satisfy AI. And then, of course, we expect memory to continue to grow as AI drives more growth through memory. Did you have a follow-up, Elizabeth?

Yes, I do. And advanced packaging, I understood this has been a smaller part of your total revenue, but I think I heard in your prepared remarks that you are expecting some wins and you are doing some efforts on HPM side. So I was wondering what's your expectation for advanced packaging revenue this year? .

Yes. Advanced packaging is an area that grew nicely for us in 2025, representing roughly $100 million plus/minus. We expect that to continue to grow nicely in 2026. And this is an area where we've made a little bit more concerted effort to grow across a number of product lines. So those product lines are sampling now, and we have some others that will sample later in the year for the advanced packaging market. So we're not expecting as much benefit in '26 as perhaps we could get in '27 and beyond. But it is a growing part of the market. It is starting to look more and more like some of the more advanced nodes in terms of its complexity and the challenges that our customers face, and it's an area that ultimately will play well with some of our product portfolio. So you're going to see a little bit more of a focused effort from us in the space, and we're cautiously optimistic.

We'll take our next question from Edward Yang with Oppenheimer.

Just wanted to touch again your leverage to memory market trends. Obviously, a lot of excitement there. Can you just first remind us your ballpark total revenue exposure to memory overall, and where it could go in enough cycle? And maybe also clarify the trade-off between when you were talking about later count benefit versus wafer counts, like with CMP, I would think that you'd be relatively indifferent, but perhaps in other parts of the business, you can get more or less revenue. .

Sure. So Memory is about 30% of our total revenue. It's roughly split equally, and I'm standing back in squinting on an approximate basis. So say about half of it is NAND, about half of it is DRAM. As you know, DRAM has performed very well in 2025, very high utilization rates across DRAM, more of DRAM moving from kind of individual sales of DDR5 into HBM. And so as that migration happens, there's some incremental content associated with that, but it's not the same as what you would get, for example, from an incremental wafer.

And so there is incremental content when you go from stand-alone DDR5 to HBM, but there would be more total benefit if you would start and generate more total wafer starts. But the technology capacity for DRAM is pretty fully utilized exiting '25 and we see it remaining that way through 2026. The other half roughly of this 30% of revenue is NAND. NAND is probably around 85% utilization. That's down a bit from where it was in peak in the 2022 type time frame, but what you're seeing in NAND is you're seeing that 15% available capacity, you're starting to see it get absorbed by incremental wafer count -- or excuse me, by incremental layer count.

And so as those incremental layers happen, we're relatively indifferent on whether you're absorbing that capacity on an incremental layer basis or on a wafer basis, I think on a general statement, we would say we would be relatively indifferent I think the reality is we would probably get slightly more incremental benefit from a wafer, from a full wafer start. But we do get benefit from both. Did you have a follow-up, Edward?

Yes, I do. So Dave, you mentioned focusing on winning new PORs. And I was just wondering as your go-to-market approach change there is -- are you cross-selling more intra division between -- and also interdivision between Material Solutions and Advanced Purity Solutions. .

Yes. I think you've seen us really continue a lot of the good sales focus that was in place before I joined where we've kind of continued that momentum since I've joined the company. I think what perhaps we've been able to focus a bit more on now is we have been able to focus a bit more on selling the complete portfolio of products. We've always engaged very well on a technology road map basis. So that's something we don't want to change. We want to continue those best efforts where we're focused on our customers' node transitions and technology road map, many of which are kind of several years out. But then as we do that, we also want to layer that in that road map and that engagement on road map, we want to layer in our other product lines where we bring best-in-class filtration, best-in-class purification, best-in-class wafer handling and fluid management and bring that together with some of these longer technology road maps such as the CMP process, the deposition process, the etch process.

So you've seen us try to make a concerted effort with not only continuing the good engagement on the technology road map, many times of which it's looking at several years, but then also bring more of the other product lines along in that engagement and discussion for today.

We'll move next to Bhavesh Lodaya with BMO.

Congrats on the nice quarter. And certainly all the best to Linda, and welcome Jeff as well. you set a lot of color for the short term. So maybe a longer-term question. If I look at where MSI -- overall MSI stands today, we are still under prior peaks around 13% lower, it seems -- and we don't see a weak go by without news of higher and higher CapEx spend in AI, data centers. If end market growth kind of hangs in there, I'm curious on your view as to how that plays for MSI over the next 3 years -- next 3 to 4 years, as these capacities have brought online?

Thanks, Bhavesh. Well, you're right, it is somewhat of a bifurcated market where we're talking about maybe we need to start new fabs, but yet you're looking at MSI and you're looking at some underutilization in some areas of the market. where you're not fully utilized as of yet. So let me -- maybe the best way to answer this question is to kind of break it down into its constituent parts.

If you think about advanced logic, which we define as 7 nanometers and below, Advanced logic is pretty fully utilized, particularly advanced logic below 5 nanometers. And so you're seeing a lot of incremental capacity and focus on incremental capacity for the most advanced nodes. And that's growing total capacity for the 7-nanometer and below advanced logic category. But it's slow and it takes time to grow 2-nanometer base, and it takes time to then also transition to new nodes, for example, like 1.4 nanometer. But that space is pretty fully utilized on that category, 7 nanometers and below is pretty fully utilized. And so what you need is you need more capacity to grow MSI. DRAM is also very highly utilized.

So if you want to grow a lot of MSI and DRAM, you need incremental capacity. And I think you're starting to see some of the producers of DRAM think through where and how do you add that incremental capacity and over what time frame, and so I think you're seeing the market kind of recognize that DRAM is very tight. There's not a lot of incremental available capacity and how do you best drive incremental capacity. Is it through incremental tools and perhaps efficiencies? Is it through groundbreaking? I think you'll see the market kind of make some moves on this front through 2026.

NAND, there is some available utilization. My best guess is that the utilization that's available for NAND will be consumed by layer count, some combination of layer count and MSI growth, but I think it's more layer count than MSI. I think ultimately, you get some of both. But I would say, at least at this point in time, I think it's more layers with less lesser amounts of incremental wafer growth or MSI growth. And then I think, ultimately, that market perhaps will have to look at adding capacity, but I think that's probably the second half, perhaps even latter part of second half type of decision before we see what's happening there.

And then we're now kind of on to the crux of your question, which is mainstream. Mainstream is the bulk of the logic market in terms of and mainstream has been slow to recover and mixed. The good news is that feedback on mainstream inventory, it looks like inventory levels are relatively healthy, but the rate and pace of growth on the mainstream part or MSI growth on the mainstream part of the market, that's a bit unclear right now. And that is the bulk of MSI for logic. I'm talking total logic. The bulk of the capacity sits in mainstream. And I think that's the part that people are looking at and wondering what's the rate and pace of growth in mainstream, because it's such a big part of logic MSI. Did you have a follow-up, Bhavesh.

Yes. In your equation here, so 1 side of growth comes from utilization, the other side comes from, I would say, content gains are a mix benefit as more layers come in. Where do you put outperformance metrics in this? Do you count the content gains and outperformance? Or would outperformance be over and above these 2 things? .

Yes. We think of outperformance really from a revenue perspective. And so to the extent that you grow layer count, it actually increases content per wafer. And so from that perspective, that incremental content per wafer would show up in revenue and we would count that as outperformance to the market because it would be incremental kind of to what the normal market would see. So that's how we would think about that.

We'll take our next question from John Roberts with Mizuho.

Linda Best wishes, and welcome again, Jeff is also here. Could you talk about the weaker parts of the business. So it looks like, again, FOUPs were probably down, gas filtration was probably down. Is that all related just to the new fab construction activity being down and do they continue down in the first quarter?

Yes. So when you look at 2025 fab construction CapEx was down high single digits, call it, 7-ish percent. Our CapEx-related business was down about the same amount, and it was really driven by 2 product lines, both within APS, one being fluid management and the other 1 being FOUP. So those were the 2 that were down the most and very much in line with that fab construction CapEx.

So when we think about 2026, and you think about perhaps fab construction CapEx being at least flat and perhaps at this point up slightly though to be determined how much through the course of '26. You're seeing a corresponding recovery both in both those 2 businesses. So our expectations for the year is that Fluid Management and FOUPs will have a better year versus 2025 on the basis of fab construction CapEx at a minimum being flat and most likely being up, but to be determined how that kind of layers in throughout the year. Did you have a follow-up, John?

Well, I'll follow up with how about the March quarter.

So sorry, you cut out on me what the question was what again?

Will they be down in the March quarter or more flattish in the March quarter?

I think at this point, and I'll speak a little bit on a sequential basis. We'll see ultimately how much kind of revenue for that -- those specific product lines fall in first quarter versus second quarter. But I think it's fair to say that we're already starting to see some recovery in those product lines from an order pattern perspective for 2026. And then ultimately, the timing of whether it's first quarter or second quarter, that will be determined by delivery in our customers, but I do think that we've seen order patterns improve for those product lines as we're very early here in 2026.

This does conclude the Q&A portion of today's call. I would now like to hand it back to Jeff Schnell for any additional or closing remarks.

Great. Thank you for joining the call today and your continued interest in Entegris. Please reach out if you have any follow-ups.

This concludes today's Entegris Fourth Quarter 2025 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.

Welcome to the Entegris Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Bill Seymour. Please go ahead.

Good morning, everyone. Earlier today, we announced the financial results for the third quarter of 2025. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report, subsequent quarterly reports that we file with the SEC. Please refer to the information on the disclaimer slide in the presentation.

On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in today's news release as well as on the IR page of our website at entegris.com.

On the call today are Dave Reeder, our CEO; and Linda LaGorga, our CFO. With that, I'll hand the call over to Dave.

Thank you, Bill, and good morning. As this is my first earnings call as the CEO of Entegris, I want to begin by expressing how honored and excited I am to lead this exceptional company. Throughout my long career in the semiconductor industry and during nearly 2 years on the Entegris Board, I've developed a deep appreciation for the company's culture, its commitment to innovation and its consistent track record of delivering value to both customers and shareholders.

In the 2 months since I started as CEO, I've met with many of our customers around the world in their home country. And during that process, I also visited many of our local manufacturing sites and technology centers, engaging with hundreds of our team members. These interactions have only deepened my conviction in the strength of Entegris, our people and culture, our capabilities and the tremendous opportunities ahead. In my conversations with customers, one message came through loud and clear. Entegris is a trusted, highly engaged and indispensable partner. Our customers rely on us, not only to support their technology road maps and node transitions, but also to help solve complex challenges. To continue earning their trust, we must consistently engage, innovate and execute at the highest level.

Starting with our Asia facilities and continuing throughout the U.S., I've had the opportunity to visit many of our manufacturing sites, seeing firsthand the capability and capacity that we've built. Our existing manufacturing base, including our new facilities in Taiwan and Colorado are valuable and strategic assets. Assets that when fully ramped, will enable us to capture more of the demand that we were unable to support during the last industry upturn and better serve our customers.

Finally, over the past few months, I've also had the opportunity to meet with many of you, our investors. The feedback has been clear. There's strong appreciation for our business model, our historical outperformance and the compelling opportunities ahead. I've also heard and noted some of the candid feedback regarding growth, capital intensity and leverage, all of which we have plans to address over time and which are reflected in my top initial priorities.

I have 3 initial priorities, all based upon my observations over the last 10 weeks. First and most fundamental to our success is customer intimacy. We will continue to support our customers' technology road maps with our deep application expertise, strong organic innovation and accelerated product development. Execution in these areas will continue to translate into winning critical positions of record PORs, which will increase our SAM and accelerate our revenue and content per wafer growth. We're already seeing encouraging momentum in liquid filters, liquid purification, deposition materials like moly and CMP consumables at the most advanced nodes and within the most complicated processes. In addition to these efforts, we are extending our customer engagement model to more customers and more ecosystem partners than ever before. While these efforts are nascent today, we believe they'll help us drive long-term incremental growth.

Our second priority is accelerating the qualification and ramp of our new facilities in Taiwan and Colorado. Ramping these sites is critical to meeting future demand and offsetting the margin pressure driven by the cost of these investments, including incremental depreciation and foregone fixed cost leverage. Our Taiwan facility is expected to increase volume in 2026 and our Colorado facility, which has just been put into service, is expected to substantially complete customer product qualifications next year. Exiting this quarter, we will have largely worked through the majority of the significant manufacturing investment cycle that began in 2022. We subsequently expect CapEx to materially decrease on a year-over-year basis. At our current mix, we believe that our existing manufacturing footprint, when fully ramped, will enable us to support meaningfully more revenue with limited incremental investment.

Third, we're committed to improving free cash flow. Thanks to our team's efforts, we've already seen excellent progress, delivering record operating cash flow in the third quarter, which Linda will discuss more in her section. Looking forward, operating cash flow improvements in combination with reduced CapEx are expected to enhance free cash flow, enabling us to accelerate debt reduction and reduce leverage.

Turning to the third quarter. Third quarter revenue, EBITDA and non-GAAP EPS were all approximately at the midpoint of our guidance ranges, while gross margin percent was roughly 100 bps below guidance, directly driven by the underutilization of our manufacturing assets. Though these assets are underutilized in the current semiconductor environment, I am confident that longer term, our expanded global footprint will enable us to capture share during the next market up cycle, enable peak-to-peak gross margin expansion and enable us to better manage a dynamic international trade environment.

With respect to the semi market, Advanced logic continues to show strong growth, largely driven by AI-enabled applications. In mainstream logic, while inventories have normalized, end demand is still mixed and well below prior peak levels. In memory, pricing trends in recent months have firmed with HBM benefiting from the same AI trends as logic, a continuation of strong growth. And more recently, we've seen a notable shift in sentiment regarding 3D NAND. After a prolonged period of weakness, our NAND customers are now expressing renewed optimism. This renewed optimism is fueled by the potential of accelerating AI-driven demand for 3D NAND as the industry shifts from training large language models to inference workloads.

From an industry wafer starts and CapEx perspective, trends remain consistent with what they've been all year. Wafer starts are modestly higher this year, led by advanced logic, but other markets, as referenced, have remained muted. From an industry CapEx perspective, WFE continues to grow solidly, but industry facilities-related spending, where Entegris has the most exposure, remains muted, down approximately 10% this year due to slower year-over-year fab construction.

These industry trends correlated well with our third quarter performance. Overall, our year-on-year unit-driven revenue grew, led by CMP slurries, pads, cleans and liquid filtration. Notably, liquid filtration achieved record quarterly sales in Q3. Conversely, our CapEx-driven revenue declined high single digits year-on-year in the third quarter, reflecting the slowdown in industry fab construction. This year-over-year slowdown has continued to impact FOUP and fluid handling revenue in our APS division.

Looking into next year, AI-driven growth, both advanced logic and memory is expected to remain strong. And despite pockets of optimism for the rest of the semi market, like others, we are prudently taking a wait-and-see approach, diligently managing our costs while operationally and commercially preparing ourselves for the optimism to translate into orders. In closing, I'm truly excited to lead Entegris into its next chapter. Over the past several weeks, I've gained an even deeper appreciation for the unique and indispensable role we play with our customers and across the semiconductor industry.

As devices become more complex, our expertise in material science and materials purity becomes increasingly critical, helping customers enhance performance and achieve optimal yields. Because of the uniqueness of our value proposition and the quality of our execution, we expect to significantly grow our content per wafer and outperform the market in the coming years. I look forward to connecting with many of you in the coming weeks and months as we close out 2025. Let me now turn the call over to Linda. Linda?

Good morning, and thank you, Dave. Our sales in the third quarter of $807 million were flat year-over-year and up 2% sequentially, in line with guidance. Gross margin on a GAAP basis was 43.5% and 43.6% on a non-GAAP basis in the third quarter, below guidance. The sequential decline in gross margin was primarily driven by the underutilization in our manufacturing facilities, including our new facilities. I want to provide a little more color and clarity on our gross margin. Today, our facilities are underutilized, including our new Taiwan and Colorado facilities, reflecting the current muted industry growth environment and our decision to add new capacity to support our local-for-local strategy.

In addition, we have made short-term decisions to lower production volumes at some of our manufacturing sites to reduce inventory to maximize free cash flow. Based on our current visibility and inventory plan, we believe that gross margin has stabilized in the current range and expect it to increase as we continue to normalize production levels. Back to the Q3 P&L. Operating expenses on a GAAP basis were $229 million in Q3. Operating expenses on a non-GAAP basis in Q3 were $181 million. The reduction in our operating expenses in the second half of 2025 reflects our continued focus on cost management.

Adjusted EBITDA in Q3 was 27.3% of revenue, in line with our guidance. The GAAP tax rate in Q3 was 2%, and the non-GAAP tax rate was 9%, in line with our guidance. As a reminder, our tax rate was lower in Q3 due to the expiration of a tax reserve. GAAP diluted EPS was $0.46 per share in the third quarter. Non-GAAP EPS was $0.72 per share, in line with guidance. Sales for our Materials Solutions in Q3 were $349 million. Sales were up 1% year-on-year and down 2% sequentially. The modest growth year-on-year was driven primarily by CMP consumables and cleaning chemistries. The sequential sales decline was driven primarily by demand shifts between quarters driven by the evolving trade environment. Adjusted operating margin for MS was 18.9% for the quarter, down both year-over-year and sequentially, driven by lower production volumes and product mix.

Sales for Advanced Purity Solutions in Q3 were $461 million, essentially flat year-on-year and up 5% sequentially. The sales increase sequentially was driven by the strength of our liquid filtration business, which had a record quarter in Q3. Adjusted operating margin for APS was 25.9% for the quarter. The year-on-year decline in margin was driven by underutilization of our manufacturing facilities and incremental fixed costs as we ramp Taiwan and Colorado. The sequential increase in margin was driven by sales leverage.

Moving on to cash flow. Our free cash flow of $191 million was our highest in 6 years. The significant improvement in cash flow was driven by our team's focus on working capital, most notably reductions of approximately $50 million in our inventory levels in the third quarter. Free cash flow margin was 11% year-to-date. And as expected, this is a significant improvement from our first half of 2025 free cash flow margin. We continue to expect our free cash flow margin to be in the low double digits for the full year of 2025.

A quick overview of our capital structure. During the third quarter, we paid down $150 million of the term loan from cash on hand. At quarter end, our gross debt was approximately $3.9 billion, and our net debt was $3.5 billion. Gross leverage was 4.3x and net leverage was 3.9x. From a capital allocation standpoint, our single priority remains paying down our debt and reducing our gross leverage to below 4x.

Moving on to our Q4 outlook. We expect our Q4 sales to range from $790 million to $830 million. Gross margin of 43% to 44%, both on a GAAP and non-GAAP basis. GAAP operating expenses of $232 million to $236 million and non-GAAP operating expenses of $184 million to $188 million. We expect EBITDA margin to range from 26.5% to 27.5%. Net interest expense of approximately $47 million. We expect our non-GAAP tax rate to return to a more normalized tax rate of approximately 15% in the fourth quarter. As I mentioned earlier, the increase in Q4 from our lower Q3 tax rate was driven by the expiration of a tax reserve that benefited Q3.

GAAP EPS between $0.35 to $0.42 per share and non-GAAP EPS between $0.62 and $0.69 per share. And we expect depreciation of approximately $53 million in Q4. The incremental depreciation is primarily driven by our Colorado facility being placed into service in October. Before I hand the call over to the operator for Q&A, 2026 is our 60th anniversary as a company, and we plan to host an Investor Day on May 11 next year in New York. We will share more details on this in the coming weeks.

With that, operator, let's open the line for questions.

[Operator Instructions] Our first question comes from Jim Schneider with Goldman Sachs.

Dave, realized you've been part of the Entegris management structure for a little while now as a member of the Board, but I appreciate also the strategic priorities laid out. But maybe you could focus on a couple of differences in terms of maybe one strategic or commercial difference you hope to implement and maybe something operationally that you hope to improve.

Jim, it was good to reconnect, and it was good seeing you at SEMICON West. Starting with the first one, from a commercial perspective, we're going to continue to do the good things that Entegris has always done, which is engage directly with the fabs, the foundries, the IDMs as well as the broader ecosystem and help work with them on their technology road maps and bring our innovation in both purity and materials to their technology road maps and capture those plan of records that we've always spoken about. So we will continue those activities.

New activities, we're looking to bring the model that we have worked with our largest customers and the most advanced manufacturing technology, that customer engagement model, we're looking to expand that out. We're looking to expand that upstream into the ecosystem partners as well as bring some of those advanced capabilities into the mainstream logic as well. So those are the 2 big differences that we're looking to bring. They're nascent today. We're working on them. We have been working on them for the last 10 weeks. But in terms of what would be different, it would be to focus on the ecosystem partners, both upstream as well as the OEMs and then additionally expand that out into the mainstream logic partners.

Operationally, we need to -- we've invested a lot of capital into Rockrimmon more recently, which we plan to open this quarter as well as Southern Taiwan in Kaohsiung, KSP South. And so we need to qualify those facilities, get them fully ramped. We have migrated through a large portion of the qualification process with KSP South. So we're looking to ramp that more meaningfully in volume in 2026 versus '25. And then for Rockrimmon, we're looking to put that facility into production this quarter, complete qualifications largely in '26 and then start to ramp volume towards the end of '26 into '27. Did you have a follow-up, Jim?

Yes, please. That was helpful. And then in terms of broadening the customer base in terms of more mainstream, to what -- how far do you intend to take that? And specifically, can you address whether you'd be willing to use price as a lever there, even if it means growing the top line faster at the expense of gross margin percentage?

So let me start with the broader ecosystem for just a moment. As you think about the most advanced nodes, one thing that we've learned working with the most advanced manufacturers for semiconductors on the planet is that as you start getting into the sub 5-nanometer technologies, the materials that go into the manufacturing process not only have to be more pure at origination, but they also have to be delivered at point of use in a much more pure way. And so those are 2 areas where we've actually started migrating upstream from the fabs and from the IDMs into the broader ecosystem so that the actual input materials into those process start more pure and then ultimately are pure at point of use with our filtration technology. So that would be an example of moving into the ecosystem.

With respect to moving into the mainstream logic, mainstream logic cares deeply about performance and yield, just like the most advanced nodes care about performance and yield. And we've actually learned a lot at the most advanced nodes with respect to how we can continue to deliver yield and performance at the mainstream nodes. So I won't necessarily get into pricing discussions on this call. But what I can tell you is that we have a lot of value to bring not only upstream into the broader ecosystem, but also across the mainstream logic portfolio.

Our next question will come from Tim Arcuri with UBS.

Dave, can you speak to whether the BIS bands, the affiliate band, did that cost you any revenue in September? And how much are you accounting for that in your December guidance? And can you just speak generally, will it -- if it didn't hit you in December, is it going to hit you next year?

No, it didn't contribute this quarter. It didn't hit us this quarter, and we're not expecting it to really impact us in 2026. Did you have a follow-up, Tim?

Yes. Yes, I do. So I guess I'm still trying to understand where utilization is across all the sites. I know that you're ramping up the new sites, but I guess I'm sort of a little wondering why you wouldn't just fill those sites up as quickly as you could. And it sounds like you made the short-term decision to lower production. And I don't know if that was in those locations or in other locations. So can you speak to that and just speak to where utilization is across your whole network?

Sure. In my prepared commentary, one of the things I included in the script was that we had the capability to significantly increase revenue from current levels with the capacity that we have. I didn't necessarily quantify what significant means, but it certainly means more than $1 billion from these levels. So we have a lot of capacity that we've invested in. Starting in 2022, we've been in a pretty intensive capital investment cycle for manufacturing capacity given that we were unable to really satisfy the demand during the last upturn. We've also added to that with some of our local-for-local manufacturing given some of the decoupling that's occurred geopolitically with trade.

And so those 2 things have combined to really create an incredibly strategic manufacturing footprint, but yet one that's underutilized today. So when we think about utilization from here, when we looked at the third quarter specifically, we had the opportunity in the third quarter to really focus on cash from operations, free cash flow. Those are 2 areas that have been highlighted from the investment community, particularly with respect to reducing our leverage. And so we took the opportunity in the third quarter to reduce the inventory, deliver that to the bottom line or the cash line, I should say, with record cash from operations and the highest free cash flow for the last 6 years.

We'll continue to kind of balance inventory build with utilization and free cash flow. We'll continue to balance that going forward. And then as we look into 2026, we expect to expand profitability levels from here, increase utilization levels from here. And as we do that, we'll be able to do it with very limited incremental capacity investments. So CapEx will be down in '26 versus '25, and we'll still be able to deliver incremental revenue growth, utilization and profitability. Linda, anything you'd add to that?

No. I would just say, Tim, to your point or your question, the decisions on reducing inventory were very selective. And the one thing I would add is we will continue to do that a bit more in Q4, but I don't expect the inventory impact to be as much in Q4 as it was in Q3.

Our next question will come from Melissa Weathers with Deutsche Bank.

I wanted to touch on, Dave, some of your commentary on wafer starts and your wait-and-see approach as we go into 2026. It seems like we're pretty -- I mean, hopefully, we're pretty close to the bottom of the cycle, especially in the NAND business. And you guys obviously benefit as soon as utilization start to expand at those fabs. So any incremental color on why you're taking this wait-and-see approach? What are you seeing on wafer starts? And maybe any color on the linearity of orders in the quarter given that it seems like recent weeks have been a lot stronger than the beginning of the quarter.

Thanks, Melissa. First, 10 weeks in still. So forgive me if I'm not quite ready to make a definitive call on 2026 yet. And the commentary with respect to wait-and-see approach, obviously, we're preparing internally for multiple scenarios. We're obviously preparing qualifications and capacity for orders so that we can ramp. We're also continuing to work on the innovation that I spoke about earlier. And that stated and referencing some of the commentary really from the script, all of which have been informed over the last 10 weeks.

Advanced logic, it will continue to be strong. We expect it to remain strong, really driven by the AI trends that we've seen all year this year as well as last year. Mainstream logic, we believe those inventories have largely normalized. In demand still seems a bit mixed. The recovery, we think, continues, but the pace seems pretty slow at this point. I think you've heard very similar stories from most of the early reporting over the last couple of weeks. HBM, obviously, that remains strong. That's continuing to be driven by AI.

Memory in general, I would say, we started seeing some renewed optimism around the time of SEMICON West, you started to see pricing really kind of firm up across all memory DDR as well as NAND. 3D NAND, in particular, there's renewed optimism for really accelerating AI demand, largely on the basis of migrating AI workloads from large language model development to really inference workloads, which, as you know, requires a different type of memory. And so given all of that, what we've positioned the company to do is we've positioned the company to be ready, both with raw materials inventory, work in process, finished goods inventory, though obviously, we're managing that a bit more aggressively for free cash flow.

And we've continued to work with our customers on their plans for ramp. I think there was some good news out from the major memory providers or manufacturers, I should say, this week, in fact, over the last couple of days. That news does seem to be a bit more optimistic than things that we've heard 2 months ago when I first joined. But we'll be ready irrespective of the environment. Did you have a follow-up, Melissa?

Maybe as my follow-up, just on the December quarter guidance, you're guiding about flattish sequentially on revenues. I was a bit surprised to see that, especially because we have certain gate-all-around and 2-nanometer nodes ramping in high volume in the December quarter. I thought that, that would maybe be an uplift to your MS business, maybe a little bit of the microcontamination control as well. So when it comes to gate-all-around and 2-nanometer, can you help us size how much of a growth driver that could be in December and then maybe into 2026 as well? What is that content uplift when you go to gate-all-around?

Great. Let me start maybe at a higher level. The way we thought about fourth quarter let me put it in the context of the way we thought about third. In third quarter, we guided $780 million to $820 million, midpoint of $800 million of revenue, we delivered $807 million. In fourth quarter, we're guiding $790 million of revenue to $830 million of revenue, so midpoint of $810 million. So obviously, we're feeling a bit better going into fourth quarter, given where we are with backlog, where we are in the quarter, where we are with our engagement with customers. We're feeling better in the fourth quarter versus third quarter.

But I'd like to remind you that 75% of our business is driven by wafer starts and about 25% of our business is driven by CapEx. And so wafer starts, we have seen kind of continuing to improve, albeit slowly. Yes, AI is doing well, but that's only about 5% of the volume. And so the other kind of 95% of the volume has been very modest in terms of growth. So that's the 75% portion of our business.

The 25% portion of our business, which is CapEx, is pretty heavily levered towards fab and facilities construction and build-outs. And that has been down, call it, low teens, very high single digits on a year-over-year basis. That continues to create a little bit of a drag in terms of our top line revenue growth. And so really for the fourth quarter, you saw us kind of give guidance related, one, to the broader market and two, specific to our mix of business.

Our next question comes from John Roberts with Mizuho.

In the Material Solutions segment, you talked about the demand shift between quarters. Did the September quarter benefit more from customer inventory build? Or is it the December quarter is going to have more destock that you're anticipating? Or maybe just talk about maybe the month-to-month volatility that you're seeing around this demand shift.

Yes, John, I'll go ahead and take that question. When we were referring to the demand shift around Material Solutions, it was more in relation to the Q2, Q3. It's starting to seem like it was a while ago, but as we remember, Q2 there was a lot going on in the trade environment, and it was difficult at that point to know exactly how demand was shifting between that Q2 and Q3. So as you just look at that growth on MS across those quarters, that's what we were referring to.

Okay. And then, Dave, I think you expect some product rationalization as part of the requalification of your U.S. produced products into China. Is that -- will that be a material sales drag in 2026?

Really, with our sales into China, let me -- maybe it would be helpful if I just kind of outline that broader strategy a bit more fully. We'll be about -- so we'll be greater than 80% local-for-local manufacturing for our Chinese customers by the end of this year. And when I say local for local, I mean that we're satisfying from the region into China without some of the restrictions that you get when it originates from the United States. We expect that number to be greater than 90% in 2026.

We don't believe that number will get to 100% just simply because there are small volume, small running products that from a capital perspective, it would not make sense to kind of move some of that production overseas, local-for-local manufacturing. So that -- those types of products will either satisfy through paying a tariff on those products or obviously, we work with our customers to find a different source, neither of which we believe will materially impact our revenue in '26. We believe the vast majority of our products will be local-for-local manufacturing in 2026.

And our China market, we've actually been quite pleased with. If you were to look at our China markets, we're up about 8% sequentially. We're up 3.5% year-over-year for the quarter. In fact, Asia in general, if you exclude China, is up 7.5% year-over-year in the third quarter, up 8.5% year-to-date. So we're quite pleased with all of our Asia sales, with all of our Asia teams. And then specific to China, we think we have a very capable team in China that has enabled us to manage a pretty complex environment quite well. And the internal teams continue to execute well with respect to local-for-local manufacturing.

Our next question will come from Elizabeth Sun with Citi.

I guess first question for Dave. As a follow-up to an earlier question. As we think about the ramp of 2 nanometers going into next year, maybe you could help a little bit or quantify a little bit about your content growth opportunities going into next year from 3 nanometers to 2 nanometers.

Sure. Look, I'll start again with -- this is my 10th week in. And so I probably won't give too much commentary on 2026 at this stage. Obviously, we're entering the fourth quarter, I would say, with a bit more optimism from both advanced logic as well as from memory. So I think those are 2 things that we're entering the fourth quarter, and we'll most likely be entering 2026 with. Mainstream will continue to most likely have a muted recovery as it kind of continues to work through its demand cycle.

With respect to node transitions, we actually feel quite good about the node transitions. As the manufacturing becomes more complex, you need more products from Entegris, both products with higher purity as well as products that at point of use and at source have to have the same purity as origination. So for liquid filtration, we feel good about our plan of records for advanced logic, photo bulk as well as point of use. We've talked about some of the advanced nodes with respect to memory, particularly 3D NAND with moly and some of the PORs in that space.

CMP slurries, we have 2x more plan of record wins at N2 versus N5. So we feel quite good about our wins there at Advanced Logic. We also have some significant growth plan of records in HBM as well for CMP solutions. And then, of course, we just talked about setting a record quarter for liquid filtration. So I think as you think about these node transitions, node transitions will drag higher content per wafer from Entegris. It hits a lot of the core assets of the company. So as that becomes a larger portion of total volume, then you would expect that portion of our business to grow accordingly.

I think the only caveat I would add to this perhaps would be just keep in mind that the advanced nodes still represent a very small amount of total wafers. You're talking about AI-driven wafers of something like 5% of the total wafers that will be started in 2025. And so while we're excited about the node transitions and we're excited about the content that it pulls from Entegris as we transition through these nodes, they still today represent a small portion of total wafer starts. Did you have a follow-up?

Yes, please. So as a follow-up for Linda, for the KSP and Colorado fabs, is there any incremental headwind on gross margin? Are you expecting with the two are still ramping?

Yes. So overall, with Taiwan and Rockrimmon, again, just stepping back to -- these are amazing facilities for us, very strategic assets, really critical to our local for local. To your question, Elizabeth, we did put Rockrimmon into service in October. And in our Q4 guide, you do see that incremental depreciation. The way I think about it going forward, you will see depreciation in 2026 for the full year. But I'd frame it like this, the Colorado facility is smaller than the Taiwan facility and that incremental depreciation, I view as very manageable. Really right now, going back, as we said, all of our facilities are underutilized. As the volumes ramp across our facilities, we're going to see that benefit to gross margin for the company.

Our next question will come from Bhavesh Lodaya with BMO Capital Markets.

Maybe following up on the capacity utilization question, just one more angle to it. I appreciate that CapEx is moving lower from here, and you have also moved some capacity or some production across regions. As you look at your global footprint today, do you see opportunities to perhaps reduce some capacity, increase utilization at the newer plants? Or do you see yourselves as a rightsized and just waiting for volumes to grow from here?

Bhavesh, it's David. I think it really depends on rate and pace of ramp from here. We have a lot of strategic assets now from a manufacturing perspective. We believe that we're well positioned with some additional qualifications to satisfy kind of local for local in region based upon where the demand is located, we can source from local production. We also believe that we have ample capacity to capture demand in an up cycle, which would generate significantly more revenue from here with very limited incremental additional manufacturing CapEx. So we feel good about all of those things. Would we rationalize our manufacturing footprint at this stage? I think I would just take a step back, I would say, well, what's the rate and pace of industry growth from here? And I think we'll look at that rate and pace and then make real-time decisions based upon what's happening in the broader semiconductor market. Did you have a follow-up, Bhavesh?

Yes. And maybe a question around your priorities as you look forward to capital allocation. Clearly, leverage reduction is top of mind here. Lower CapEx should help with that. But after that is achieved, how do you see capital allocation for Entegris going ahead?

Sure. It's probably worth just commenting again on the big priorities. So the big priorities, again, kind of 10 weeks in and informed by being on the Board for a couple of years as well as 10 weeks at the company. I would start with the customer. It all starts with the customer and technology in semiconductors, as you know. So it starts with the customer and capturing those node transitions and those technology road maps and having the innovation to be relevant in the industry, all areas where the company has excelled. And what we want to do is we want to take that now and we want to expand it out to more of the semiconductor market than perhaps we focused on in the past. So I would start with customers.

From an operations perspective, obviously, we've got a very large and strategic manufacturing footprint. And so now it's the blocking and tackling that you expect from operations, which is the qualification and the efficient production site by site such that we can squeeze the most out of our manufacturing assets. And we believe that we can significantly increase revenue with limited incremental CapEx. So that's why you'll see that CapEx come down on a year-over-year basis.

And then finally, it's using that good customer intimacy with excellent operational focus that will result in more of cash from operations and free cash flow that then is necessary and required for us to reduce our leverage. So that's kind of the high-level framework from a priority perspective. Now to get to the basis of your question is our near-term priority for capital allocation is to continue to pay down debt. You saw us in the third quarter, we were able to generate meaningful free cash flow. We paid down the debt an incremental $150 million in the third quarter. We expect to generate more free cash flow in the fourth quarter, use that free cash flow subsequently to then reduce the debt load further.

That will be the near-term focus will be to reduce our leverage. Obviously, once we get to our leverage to a place that's less than 3x, and I would prefer closer to 2 than 3, then we'll be able to start looking at other perhaps more interesting and strategic capital allocation strategies. And I'll just save that kind of commentary perhaps for Capital Markets Day in the second quarter that Linda mentioned as well as for conversations in the future.

Our next question will come from Chris Parkinson with Wolfe Research.

Could we just dig in a little bit more into what you're seeing in APS and just how we should -- I understand you don't want to talk too much about 2026. But just in terms of the trends in the second half, have they been surprising to you, better or worse? And how do you see things through at least the balance of the year?

Specific to APS Obviously, we're seeing good trends in liquid filtration. We commented that we had a record quarter in the third quarter for liquid filtration. That's driven from some of the ecosystem that I spoke about earlier, needing higher purity as well as from direct engagement with some of the most advanced manufacturers. And we're looking to kind of extend some of those learnings to the broader market. So all of those comments kind of fit and tie together with what we saw in the third quarter.

Fluid management in FOUPs, those are a bit more CapEx driven, as you know. So they've been challenged with respect to when you see facilities and fab build-outs on a year-over-year basis, a number of something like high single digit, low teens depending on which service you're looking at. Obviously, that CapEx-related portion of our business, fluid management and FOUPs has been impacted by that. It's been impacted by that all year. It was impacted by it in the third quarter.

We expect it to be impacted and our guidance includes the fact that it would be impacted continuing into the fourth quarter. We'll see what happens with that trend in 2026. The good news is that the base has come down in '25, and then we'll see how it develops further into 2026. I think that's probably the best high-level color I can give you for APS. Did you have a follow-up, Chris?

Yes. Just in your initial conversations with shareholders, and obviously, I'm sure you already had some familiarity. But just what was the most surprising thing that you heard in terms of broad-based feedback from the position you were in to the one you're in now in terms of was there anything surprising? Is there anything you thought that perhaps the organization needs to do a little bit better in terms of communication? Just -- what was that -- you mentioned some blunt feedback. I'd love it if you could expand on that.

Yes. I think when I spoke to shareholders, and I had the opportunity to meet with shareholders on 4 different occasions in the last 10 weeks as a member of the company, the feedback from shareholders were really related to the growth, the profitability and the leverage. I think those were the -- and I know I'm kind of grouping those into high-level categories. But those were the 3 categories that almost all of the commentary fit in. There was a lot of feedback with respect to how long will it take you to generate more free cash flow to get through the investment cycle to help reduce this leverage. I think that was probably the category that had the most commentary given the understanding of the current state of the semiconductor market.

But I wouldn't discount the commentary on growth. So as you think about those as direct feedback from investors delivered in multiple forums, and then you look at from a company perspective, what can we do to kind of address all 3 of those. The growth perspective or the growth category, I should say, that really starts with the customer. It starts with the customers that we tend to spend the most time with historically, which are the most advanced manufacturing customers. And then what we want to do is we want to extend that further up into the ecosystem. These are the suppliers to those customers.

And then we also want to extend more of those learnings to the mainstream logic customers given that those are not opportunities that we've historically focused on. So that would address largely the growth. Obviously, we're continuing to invest in innovation. We're continuing to invest in node transitions, all those things the company has always done, but really just kind of expanding our lens with respect to where our products can play into the market so that we can start to drive not only top line growth, but then also start to fill some of these facilities that we have invested in that have significant available capacity.

And then as we do that, not only obviously, do we get the utilization, start to get some of that fixed cost absorption that you'd like to get out of these facilities, but then that would also then translate into cash flow. And so that's how the priorities hang together. That was the feedback from investors. It was also the observations in my 10 weeks kind of on the ground here at Entegris.

And to address the second part of your question, I'll address it 2 ways. You asked what could we do better? Let me just talk briefly on what I think we do well. I have been very impressed with the quality of the teams. And when I say the quality of the teams, I'm specifically talking about the technical expertise as well as the quality of the teams in region. We have some amazing employees around the world, and I had the chance to start in Asia. and the quality of our teams in Asia is very impressive, both technically as well as commercially. And so that's an area that was incredibly -- I had high expectations, and it's exceeded my expectation on that front.

Things that we could do better. We do great work in region -- in all the regions. So whether it's Europe, the U.S. or Asia, we do great work in region. Sometimes we're a little slow in communicating across regions. So that's an area that we've already worked to improve. And so that's an area that we focused a bit more on. And then, of course, we're focusing on ramping these facilities. I think that's an area getting through the qualifications, getting the volume and release to manufacturing done so that we can start to produce more out of these facilities that we've invested in. That's another area that we want to continue to work on through 2026.

Our next question will come from Alexky with KeyBanc Capital Markets.

I wanted to ask you about qualification of the KSP site. Where are you in that process relative to your goals? And once you fully qualify that site, do you expect that to have a positive effect on your margins? Or is this neutral because you're replacing production of one site with the other?

We're happy with our qualifications in KSP, though I would say that we're behind schedule. We have worked diligently to qualify some of the highest runners. We still have some more products that are in call, but we do have some of the higher runners now qualified. We do believe we're going to be able to materially increase our volume in '26 versus what we were able to deliver in '25. But we still have some qualifications to go, and we are a little behind schedule with respect to where we thought we would be at this point in time.

And so that's an area that has gotten renewed focus from us. We have put additional and incremental leadership into Taiwan to help facilitate this process. We're getting very frequent updates with respect to how we're performing not only on production, but also on incremental qualifications of products, so this is very much a top-of-mind process for us. In terms of positive impacts, Linda, do you want to comment on that?

Yes. Alex, let me help you a bit as you think about the margins and how it might relate to Taiwan. I step back and think about our ecosystem, our facilities. And as we mentioned, we're underutilized across the facilities. And then with our new facilities, Taiwan and Colorado, we have some incremental fixed costs. We also have state-of-the-art processes. These are state-of-the-art manufacturing facilities. So there is some marginal benefit to there to margin. But think about it as the whole ecosystem. And again, as we start to see the volume, and we mentioned we do expect to see some volume uplift and some growth in 2026, that's going to then help us see that improvement in the margins overall.

I think you already answered 2 questions so I'll let somebody else ask.

I think we have time for one more question.

Our last question today will come from Edward Yang with Oppenheimer.

My question is on AI. The 5% exposure that you referenced, is that for Entegris specifically or the industry? One of your competitors talked about getting closer to 15%. And related to that, one of the HBM manufacturers announced a long-term CMP agreement with a peer of yours. Do you have something similar? And is your CMP positioning within HBM, is that an area where you over-index or under-index relative to the rest of your business?

Thanks, Edward. The 5% that we're referencing for AI, that's a percentage of total wafer starts. And so while those 5% wafers represent about 30% of the revenue, they're only 5% of the wafer volume. And so when you look at the total wafer volume that will be shipped and started in 2025, 5% of those wafers will be AI. That portion of the market is doing incredibly well. The other 95% of the market is probably still something like 15% down from peak. Obviously, it's slightly different by technology. Mainstream is probably close to that 15%. NAND is probably closer to 25-ish percent down from peak, although that's a layer discussion with respect to how much capacity is actually absorbed based on how many layers.

But in terms of total industry, it's still down pretty meaningfully from peak. So the 5%, again, that's really just a reference with respect to how -- what percentage of the wafers are driven by AI. Obviously, our business, especially on the most advanced nodes, which commands -- tends to command premiums, that portion of the business is doing quite well across the board. And so much higher than the type of growth rates that we're reporting from unit volume, but it's being offset by the rest of the market as well as by CapEx.

With respect to HBM and CMP, let's just talk -- maybe it's worthwhile talking briefly about advanced packaging. Advanced packaging in general is a portion of the market from a CapEx perspective is growing something like 25%. I don't have a number for you from a unit perspective, but advanced packaging is a portion of the market is growing quite rapidly. And the reason it's growing rapidly, obviously, is because it's connected both to the AI logic as well as to the high-bandwidth memory. And so advanced packaging is a portion of the market where historically, we've not played in a significant way. We are going to generate about $100 million of revenue from advanced packaging this year.

We do have some strategic initiatives for some SAM expansion into the space, which will develop over time that we look forward to talking about at Capital Markets Day. But as it sits today, that's a portion of the market where we're playing a bit more narrowly because we tend to just, in general, be focused more on the front end. On the CMP process that you referenced, we do have some CMP wins in the HBM space. I think that portion of the business, albeit off a small base, is up 100%, I believe, on a year-over-year basis. So we've been quite pleased with that, but obviously, it's starting from a small base. Edward, did you have a follow-up?

Yes. And I'm looking forward to the upcoming Analyst Day. Last year's Analyst Day talked about outperforming the market long term by a pretty significant amount. Do you think that growth formula still holds? And in the context of the industry looking for about 5% MSI growth next year, where would you sit in the level of outperformance within that? I think you referenced like plus 3% to 6% range outperformance.

Let me broaden the question out. And then at the end, I'll come back to it. We are doing quite well in the markets where we compete and where we do focus and participate. For example, slurries and pads are up 15% over the last 12 months. Selective etch is up 40%. Cleans are up more than 10%. And as we mentioned earlier, we just had a record quarter for liquid filtration. So if you look at the areas where we compete, we actually feel very good about how those areas are performing, and we feel quite good about our plan of record.

On the CapEx side, we've spoken about it, but CapEx, and we're particularly tied to facilities, build-outs and construction, that portion of the market is down about 10%, and we're not that different. We're a little bit better than that. But we're down in a very similar vein and of a similar magnitude in that portion of our business, which is creating a drag, if you will, on our top line. The advanced packaging portion of the business, which is growing quite well. That's an area where our exposure is fairly small today.

Obviously, we're expecting about $100 million in 2025, but that represents a big opportunity for us in '26 and beyond. So to come back to your question, with respect to the 3 to 6 points outperformance, 10 weeks in, I do believe that we have the opportunities to significantly outperform the market. And I do think that I look forward to talking to you about that at Capital Markets Day.

I'll now turn the call back over to Bill Seymour for any additional or closing remarks.

Yes. Thank you for joining our call today. Please reach out to me directly if you would like to follow up. Have a good day, and you can now disconnect the call.

Thank you. This concludes today's Entegris Third Quarter 2025 Earnings Conference Call. Please disconnect the lines at this time, and have a wonderful day.

Welcome to the Entegris Second Quarter 2025 Earnings Conference Call. [Operator Instructions].

I would now like to turn the call over to Bill Seymour.

Good morning, everyone. Earlier today, we announced the financial results for the second quarter of 2025. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements.

Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation.

On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in today's news release as well as on our IR page of our website at entegris.com.

On the call today are Bertrand Loy, our CEO; and Linda LaGorga, our CFO. With that, I will turn call over to Bertrand.

Thank you, Bill, and good morning, everyone. I am pleased with our performance in the second quarter. Revenue was above our guidance range and was up 2% sequentially. Gross margin and EBITDA margin were within guidance and non-GAAP EPS was at the high end of guidance.

Taking a closer look at our quarterly performance by division. Materials Solutions sales were up 4% year-on-year, led by CMP slurries and pads, selective etch and deposition materials, which all delivered double-digit year-on-year growth. This was driven by strong growth in China, strength in HBM and the early positive impact from upcoming node transitions in logic and 3D NAND. Advanced purity solutions sales were down 7% year-on-year, this was largely driven by the anticipated decline in facilities-based CapEx investments, which we spoke about last quarter. This particularly impacted our FOUPs and fluid handling revenue. The year-on-year sales decline was partially offset by modest growth in photoresist and CMP liquid filtration.

Next, let me provide an update on our global manufacturing and supply chain strategy and related investments. Our facility in Kaohsiung Taiwan continues to progress. We are on track to complete most of the critical product qualifications by the end of the year and expect to meaningfully ramp volumes in the fourth quarter.

Our new Colorado manufacturing site is also on track, with construction and tool installation largely complete. We are planning the grand opening of this facility in November, and we plan to start customer product qualifications and initial volumes later this year.

Over the past decade, we have invested in a broad global manufacturing footprint, offering the convenience of redundant manufacturing sites to our customers for all our major strategic product lines. In addition, we have developed well integrated supply chain clusters around our largest regional manufacturing centers. This expanded localization of our production and supply lines close to our global customers, will serve us particularly well during this time of increased trade policy volatility and uncertainty.

And over time, will drive several business and financial benefits, including shorter lead times, lower working capital requirements and more secure supply lines. Currently, our Asia customers represent approximately 70% of our total revenue. And as we exit the year, we expect to have approximately 70% of this demand served by our non-U.S. manufacturing sites. And that number will continue to increase as we capitalize on the ramp of the investments recently made in Taiwan, Korea, Japan and Malaysia.

On July 17, we opened our new state-of-the-art Korea Technology Center, an opening that also coincided with our 35th year of doing business in Korea. This investment, along with our 3 existing manufacturing sites in Korea will supplement our capabilities and strengthen our engagements with the local DRAM and NAND technology leaders. So we can help them and their ecosystem address yield, reliability and performance challenges.

Looking ahead, overall for the industry, the trends are largely unchanged. AI-enabled applications for driving significant growth in advanced logic and HBM even though AI demand only represents a very modest proportion of wafer stops. Elsewhere, fab activity levels remain subdued, especially at many of our mainstream logic and 3D NAND customers.

In addition, the uncertainty and volatility around trade policies are expected to continue to have direct and indirect impacts on semiconductor demand and levels of capital spending by the industry at least in the short term. As a result, we expect the semi market will continue to be dynamic and the visibility to a broad-based recovery remains tenuous. That said, we fully expect a stronger second half performance from our business.

And looking further ahead, nothing has changed in our long-term view of the industry, we remain very optimistic and continue to have high confidence in our strong long-term growth outlook.

Let me now turn the call over to Linda. Linda?

Good morning, and thank you, Bertrand. Our sales in the second quarter of $792 million were down 3% year-over-year and up 2% sequentially. As a reminder, we have now fully lapped the impact of the CMC divestitures.

Foreign exchange positively impacted revenue by $5 million year-over-year and $6 million sequentially in Q2. Gross margin on a GAAP basis was 44.4% and 44.6% on a non-GAAP basis in the second quarter, generally in line with our guidance. The sequential decline in gross margin was driven by the anticipated impact from tariffs, our focus on balancing production volumes with inventory management and some operational inefficiencies.

Operating expenses on a GAAP basis were $245 million in Q2. Operating expenses on a non-GAAP basis in Q2 were $188 million. Adjusted EBITDA in Q2 was 27.3% of revenue, in line with our guidance. The GAAP tax rate in Q2 was 5% and the non-GAAP tax rate was 13%. GAAP diluted EPS was $0.35 per share in the second quarter. Non-GAAP EPS was $0.66 per share at the high end of our guidance.

Sales for Materials Solutions in Q2 were $355 million. Sales were up 4% year-on-year and sequentially, both driven by CMP slurries and pads, selective etch and deposition materials. Adjusted operating margin for MS was 21.3% for the quarter, up year-on-year. Sequentially, the adjusted operating margin decline was primarily due to some operational inefficiencies.

Sales for Advanced Purity Solutions in Q2 were $440 million, down 7% year-on-year and up 1% sequentially. The year-on-year sales decrease was driven by the impact of the decline in facilities-based CapEx investments. The modest sales increase sequentially was driven by liquid and gas filtration and FOUPs. Adjusted operating margin for APS was 24.1% for the quarter. The year-on-year and sequential decline in margin was primarily driven by lower volumes.

We are continuously looking for ways to optimize our business model and drive further efficiencies in our cost structure. In the second quarter, we implemented cost reduction initiatives, which will deliver $15 million in annual cost savings.

Moving on to cash flow. Free cash flow was $79 million in the first half of the year yielding a free cash flow margin of 5%. We continue to expect our free cash flow margin to be in the low double digits in 2025, driven by our stronger second half business performance and our intense focus on optimizing working capital and capital expenditures.

A quick overview of our capital structure. Shortly after the end of the second quarter, we paid down $50 million of the term loan from cash on hand. As a result, at the beginning of July, our gross debt was approximately $4 billion and our net debt was approximately $3.7 billion. Gross leverage was 4.3x and net leverage was 4x. Our debt is well structured and derisked. The blended interest rate on the debt portfolio is approximately 5% and currently approximately 95% of our debt is fixed. And there are no maturities on the debt until 2028. And no maintenance covenants on the debt.

From a capital allocation standpoint, our single priority remains paying down our debt. And we will use all levers at our disposal to reduce our gross leverage to below 4x.

Moving on to our Q3 outlook. We expect our Q3 sales to range from $780 million to $820 million. We expect our gross margin percent to be approximately in line with Q2, both on a GAAP and non-GAAP basis. GAAP operating expenses of $228 million to $232 million, and non-GAAP operating expenses of $182 million to $186 million. We expect EBITDA margin of approximately 27.5%.

Net interest expense of approximately $48 million. We expect our non-GAAP tax rate to be approximately 9% in Q3 due to the expiration of a tax reserve. GAAP EPS between $0.43 and $0.50 per share; non-GAAP EPS between $0.68 and $0.75 per share. And we expect depreciation of approximately $51 million.

I'll now hand it back over to Bertrand for some closing remarks.

Thank you, Linda. In closing, in this dynamic environment, you can expect us to remain focused on what we control, engaging with our customers and winning critical POR positions in future technology nodes, actively managing our cost structure while making investments critical for our future and improving free cash flow to reduce our debt levels and lower our leverage.

Finally, as I step back and reflect on my years as the CEO of Entegris, I could not be prouder of what we have accomplished. Entegris is now one of the most recognized and trusted electronics materials companies in the world, known for its world-class innovation, its unwavering commitment to operational excellence and thoughtful capital deployment. But as much as I am proud of what we have accomplished, I am even more excited about where the company is headed, as Entegris fully capitalizes on the powerful platform we have built.

Our expertise in material science and materials purity is increasingly valuable for our customers, to help them improve device performance and achieve optimal yields. The R&D investments we have made in material science and materials purity will be critical to the industry in enabling new device architectures and in reaching new levels of miniaturization.

Because of the uniqueness of our value proposition and the quality of our execution, we expect to grow and outperform the market in the coming years. And of course, I am very excited that Dave Reeder will become the next CEO of Entegris. I could not think of a better leader to take Entegris to the next level of excellence. Dave has strong experience in our industry from years as a process engineer working in fabs around the world to his more recent leadership roles at Global Foundaries.

Dave knows what shareholder value creation means from the various CEO and CFO positions he has held in different industries. And finally, there's a strong cultural fit which will ease its transition into his new role at Entegris. As Executive Chairman for the next year, my sole purpose is to support Dave. Together, we'll be visiting customers, our major sites and global teams, and I will be providing context today to Dave, as it develops a deeper understanding of our business.

I know that Dave is eager to meet with all of you, and you will get that chance in the coming weeks.

With that, operator, let's open the line for questions.

[Operator Instructions]. Our first question is coming from Melissa Weathers with Deutsche Bank.

Bertrand, if this is your last Entegris earnings call, I wanted to say thank you for all the help, and congrats on the great career and well-deserved retirement.

So first, I wanted to touch on the industry conditions that you're seeing in semis. It sounds like it's a pretty mixed environment, where some parts are good and some parts are still pretty weak. You called out weaker utilization in NAND and mainstream logic. So can you just give us a little more color on what you're seeing cyclically? And how should we be thinking about where we are in the cycle and what that could mean for growth in the second half?

Yes, I think your words are correct, Melissa, in describing the current industry conditions, there are mix and the conditions are very similar to what we described at the end of Q1. We cited strong AI-related demand that impacted production levels in advanced logic and HBM fabs.

But as I mentioned in my prepared remarks, I need you to remember that AI-related logic and HBM only represents less than 5% of wafer starts. So while those trends are exciting, from a volume of production, which is the primary driver for our business, that remains actually fairly small. So elsewhere, the fab utilization levels remain subdued, and that includes mainstream logic, traditional DRAM and NAND.

So the end demand for these devices have been weak in the first half of the year. The only positive news on that front is that inventory levels have been trending back to levels approaching the pre-pandemic levels. And that means that we expect to see a sequential improvement in wafer starts through the balance of the year.

So I'm not going to provide any quantification of those statements, but at high level, qualitatively for the year, we expect wafer starts to grow very modestly at best. As you referenced we believe that fab utilization rates are still currently in the mid-80%. So again, it's a slow improvement and we expect wafer start again to be modestly up at best for the full year. And then CapEx, we believe that will be flattish at best for the year, and that's a function of fab construction related CapEx that we expect to be down mid-single digit for the year and WFE, which will be up modestly for the year.

Perfect. And then really quick on the China side, just because it was a pretty big topic on the last earnings call. Can you help us level set our models. Did your Chinese customers resume orders in the quarter? Did you see any pull-in activity? And how should we think about the trajectory of that China business going into the second half?

Yes. So the China business certainly started slow in the first part of Q2 shipments and orders were essentially on hold. And then when the doors reopen, when tariffs were put on hold in May, then things started to accelerate. And we are pleased with what we saw in the second part of Q2. I mean, obviously, we generated a quarter that was up sequentially 8% in China, which is very good.

Year-to-date, the China business is flat. And that's really a reflection of some of the higher-level trends I was mentioning. So some positive on the wafer start front, offset by some softness in the levels of CapEx spend in China in 2025.

And going forward, we expect the -- again, assuming no new development in the trade policies, we expect a stronger second half in our China business.

Our next question comes from Bhavesh Lodaya with BMO.

Solid quarter, but first of all, thank you for the leadership at Entegris you are not going far, but you will certainly be missed. And then certainly, congratulations and welcome to Dave as well.

With respect to your guide for the third quarter, can you call out what scenarios you're building in for the lower or the higher end of the guide. I remember last quarter, there was some tariff-related impacts that you had built in. Are you building those in currently? Or are these just volume and industry-based assumptions.

Yes. I think it's a mix of all of that, right? At a high level, it's a guidance at the midpoint that is up 1% sequentially, mostly driven by the more favorable wafer start environment that we expect going into Q3. The business momentum going into Q3 is strong but there are a number of realities that we need to take into account, right? I mean we mentioned the green shoots that we are seeing in mainstream, but let's recognize that we are in the very early stages of that recovery.

We also recognize that the tariff uncertainty led to fairly erratic buying patents by many of our customers in the second quarter. And it's really hard to predict if it will have an impact or not on our Q3 revenue. And then more generally speaking, I think we are encouraged by the recent developments in the trade negotiations, but it's fair to assume that the tariff and the export policies will likely continue to be a factor in the second half of the year.

And it's -- again, it's an impact that is very hard for us to quantify. So in that highly volatile environment, I think we are choosing to be prudent, and that's probably what you want us to be given the prevailing volatility around us.

Got it. And then a follow-up on the China business discussion. How is the progress so far on the requalification process. Do you have a number to share as to how much of the U.S. to China business have been transitioned or maybe a time line that you're targeting to move that business to maybe Taiwan or Japan or some other regions?

Yes. So we're making a lot of progress. It's been a very high priority within the organization, will continue to be a very high priority in the second half of the year. Our Asian customers agree with that strategy and they are already actively qualifying the various Asian manufacturing sites that we have, helping us again, leverage all of the investments we've made in local capacity in Taiwan, in Japan, in Korea and in Malaysia.

So specifically, when it comes to China, we expect to end the year with about 85% of the China demand served from Asia manufacturing sites, and we expect to reach some number closer to 95% sometime next year. A lot of focus and a lot of work going into that, obviously, to try to make that happen as quickly as possible.

We'll go next to Jim Schneider with Goldman Sachs.

I was wondering if you could maybe speak to the some of the margin headwinds that you talked about in the prepared script. Maybe quantify for us whether there was a significant impact on the reserve inventory, it sounds like you built in the quarter as well as maybe talk a little bit about the operational efficiencies that you noted in the script and to what extent are those going to kind of go away over the next couple of quarters? And when should we see those gross margin pressures abate?

Thanks, Jim. I appreciate the question. So in the context of Q2 and some of the commentary, as we've talked about broadly in the context of this trade environment, Q2 was a quarter of change uncertainty and demand shifts from the customer.

We started out the quarter with a higher tariff environment in China that then shifted and there are other examples of that. In this backdrop, it's just not truly conducive to optimizing gross margin perfectly. So on your question, we did make some decisions to optimize manufacturing production to manage inventory levels. This contributes to our free cash flow, and we'll continue to do this as we go into Q3 and Q4, but it does impact gross margin in the near term as we make those decisions.

I think also importantly is to think about our business priorities. We remain very focused on our business priorities, and this leads to some of the inefficiencies of moving production to Asia to localize with our customers. We're ramping 2 manufacturing facilities, Taiwan and Colorado. Colorado is going to be coming online. And in the context of all this, we're balancing gross margin and inventory.

Where I really want everyone to focus is longer term, our path to higher gross margins remains intact with more volume growth the ramping of the 2 large facilities in Taiwan and Colorado and our highly differentiated products, which we are very proud of, position us very well for higher gross margins going forward. So it's a very good story for the future.

Understand. And then, Bertrand, relative to some of the end market commentary you made earlier on lagging edge and things like memory. Could you maybe give us some color on over the next few quarters and heading into 2026, some of the areas that have been under pressure in terms of volume such as man flash, such as drilling edge logic and analog. Can you maybe talk about which of those you think has the best chance of inflicting first of those 3?

Yes. So I think this is something, obviously, that we're going to be watching very carefully in the quarters -- in the upcoming quarters. We are encouraged by the discussions we've been having with our mainstream customers.

So I would expect that to be probably the areas where we start seeing the earlier signs of recovery, as I mentioned. And then I would expect that to start expanding to NAND probably not until next year and then DRAM as well, traditional DRAM.

And we'll take our next question from Charles Shi with Needham.

Bertrand, once again, congrats on a very successful leadership at Entegris that you will be missed. Maybe I want to ask a little bit more about Q4. In your press release, prepared remarks, you talked about second half will be better than the first half. But from my view, it doesn't really set a very high bar for Q4. Directionally, may I ask, based on your current visibility, is Q4 going to be higher sequentially as in, let's say, typical seasonality or it can be lower.

The reason why I asked this is that your largest customer in Taiwan is right now assuming kind of like a 10% Q-on-Q decline, just to be conservative ahead of the macro uncertainties such as Section 232 semi tariffs that which may come very shortly and want to gather some of your thoughts, given there seems to be a little bit of fog between now and Q4?

Charles, so all good questions. I promised Dave Reeder, my successor to not provide Q4 guidance, so I need to honor that promise. But -- and you're right that one of the reasons it wasn't an easy commitment for me to make is that there is a lot of uncertainty ahead of us indeed.

Having said that, as I mentioned, we expect to see strength in wafer starts. And then some level of recovery in certain segments of the industry that have been very, very soft for long periods of time. So that's number one.

Number two, we also expect to see a number of node transitions in Q4 in NAND, with the adoption of moly and then in advanced logic, obviously. And that will have a positive impact on our materials platform as well as on our liquid filtration platform. So if you factor all of that in, I think that -- and again, well, I'm not going to risk a guess on what may be ahead of us in terms of trade policies, et cetera. But I think that in all likelihood, the second half of the year will be stronger for us in spite of the volatility and the external factors that you mentioned.

Thanks, Bertrand. We definitely look forward to hear more about Q4 from David a little bit down the road. So maybe a I want to ask you a little bit of a high-level question. One, I think one very interesting. Maybe I wouldn't necessarily call it by versions, but some differential between your commentary about your mainstream customers versus what their comments are so far into this earnings cycle, especially from the analog companies is that you seem to be more seeing subdued non-AI market demand, but your customers, especially some of the analog companies are more and more confident or have, I would say, much higher conviction a cyclical recovery, they think is underway.

So what could be causing a little bit differential, I mean, in between the terms of yours and theirs. And is it just a matter of conservatism? Is it just a matter of timing? They're seeing that you will see it a little bit down the road? Or do you not quite believe the cyclical recovery at this point of the time. Just want to have some high levels -- get some high-level thoughts from you?

I think you're hearing very, very similar narrative. But the one thing that you -- and I know you appreciate is that some of those mainstream customers still have high levels of inventory. Some of them have gone through that digestion phase and are back already today at normal levels of inventory, but some are not. And -- but I expect that to continue to improve.

And I think that customers are getting closer to building and shipping in line with the actual end demand. And I think that's positive. And I think we're going to see positive trends to our business as it relates to that. So I think there's a little bit of a disconnect between their revenue story. And what is actually happening in their fabs. And I know you know that what is driving our business is really the volume of productions.

We'll take our next question from Timothy Arcuri with UBS.

Bertrand, I've known you for, I think, 25 years. So congratulations. I think you've done a great job over the years. So yes. So I guess on -- just on China, Bertrand, so my understanding was that there was a $50 million headwind and you were going to get, I thought, about half of that back. So can you just update that? Did you, in fact, get half of it back? And I think you expected to have the remediation of all of it by the end of the year. So is it all gone by December? Can you just give us some numbers on that?

Yes. So I think we -- when it comes to Q2 specifically, we got most of it back. In terms of the remediation strategy, which is really largely having our China customers qualify a number of alternative Asian manufacturing sites. Going back to the answer I provided to an earlier question, we are making a lot of really good progress. We expect to be able to serve 85% of the China demand from those Asian manufacturing sites. Our goal was never to be at 100% by the end of the year, but we've made a lot of progress, and we expect that number to get to 95% next year.

And I'm going to defer to Dave and Linda to provide more clarity. Needless to say that we're trying to get to that point as quickly as we can. And that has engendered a number of inefficiencies on the margin front, which is something that Linda has been flagging as well. So pleased with the progress. I think the team is very focused on it, and we're getting a lot of positive support from our customers.

Okay. So you got almost all the 50 back. So basically, there is no more China headwind between June and September. Is that the right way to think about it?

Based on what we know today, yes, I would say, yes.

Got it. Okay. And then, Linda, just on gross margin. I mean, if I take the $800 million midpoint, it's still like 100 to 150 basis points below where gross margin was in the first half of 2024, yet in the interim, you've had selective actual debt chemistries and CMP slurries. These are definitely much, much better over that period, and these are quite high-margin products.

So why are gross margins still under so much pressure? You keep talking about these inefficiencies and I mean, is this all Taiwan and Colorado? And will we get out from under this once these facilities are fully ramped. You keep talking about this long-term target, but it continues to be sort of under pressure every quarter. So if you can talk about that.

Yes. I mean some of it is similar to what I have said, but let me add a bit more context for you, Tim, to help here. Again, as we went through the Q2 and some of this is going to continue in Q3 with the trade uncertainties and the uncertainties in the environment.

Secondly, we are going to continue to work on the balance between our gross margin and our inventory levels. And so therefore, we're going to make some select decisions to reduce production in order to help bring down our inventory levels. And I do want to see the dollars of inventory progress downward as we go through the remainder of the year. And as you and I know, that does impact gross margins.

And then as Bertrand and I both talked about, it has been a priority. Look, it's a part of the long-term strategy but it's a priority to continue to move more of our manufacturing to locally serve our customers. And as we do that in this context, there are some inefficiencies that come out until we get things moved over there. So those are some of the factors that we're seeing around gross margin right now.

I think on the positive side, as we balance gross margin and inventory, it's a positive story for free cash flow, which is an extraordinarily important goal for us. And then longer term, volume is going to be key, ramping our facilities as we ramp up. And as we move into '26 as planned, we're going to see some mitigation of some of those inefficiencies and it's a very good long-term gross margin story as that all comes together.

And we'll go next to John Roberts with Mizuho.

Yes. Thank you as well, Bertrand, and welcome, also, Dave. Could you discuss any significant differences in sales direct to fabs versus your sales to equipment makers or chemical suppliers or via distributors? I mean, how are the different channels?

Yes. So the fab revenue was up sequentially in the low single digits. As you would expect, the driving force was our logic business. Sales to equipment makers and engineering companies were down modestly quarter-over-quarter, which is in line with the narrative and the commentary I was giving on the soft industry CapEx environment.

And I would just finally tell you that the sales to our chemicals and materials companies were also down mid-single digits, mostly a reflection of the weak demand from our wafer grower customers.

And then as you move more local for local in your manufacturing, what are the products that you can't really move into Asia for the Asia customers? What are you going to have to sell from the U.S. into Asia?

I'm not really going to provide product specific detail around that strategy, John. But your question is actually a good one, an important one. I think that for us to justify investment in redundant manufacturing sites, we need to have enough volumes, right? And as you know, we produce and market a very, very broad number of SKUs.

So in some cases, we're going to choose not to localize production and have the production either only in Asia or only in the U.S., and that may have an impact on the long-term potential of those product lines.

Having said that, as you would expect, those products are not strategic and are not the products that we're counting on to continue to outperform the industry.

And our last question comes from Aleksey Yefremov with KeyBanc.

Bertrand, wishing you all the best and Dave, congrats and best of luck. I actually have first question for Linda. What's your best guess when this inventory adjustment process would be over? And any number that you could put on the actual impact on gross margins that this process is having right now?

Thanks Aleksey for the question. So I'm not going to quantify it because it's a balancing act. It's about optimizing gross margin and inventory. This is a very important working cap optimization, is a very important lever for free cash flow. We've talked about free cash flow this year. It's a real goal for us as an organization. We want to continue to improve our free cash flow. We want our free cash flow margin and what we're targeting this year is in the low double digits in 2025.

And then over the next several years, we do expect our free cash flow margin to return even to the mid- to high teens percent to the prepandemic levels. So this inventory management is an important lever for that, and we'll continue to balance it this year.

Okay. And Bertrand, do you see any specific signs of pull forward of demand among your customers? I mean it sounds like it's hard to really call what's pulled forward or not, but do you have any strong suspicions as to how much that could be in Q2?

We've -- it's very hard to quantify and track Aleksey, we've been obviously asking that question repeatedly to our sales team. I'm sure that has been a factor, but I don't think it was a material -- a material impact to our Q2 results.

This does conclude today's question-and-answer session. I will now turn the call back to Bill Seymour for closing remarks.

Thank you for joining our call today. Please reach out to me directly if you need anything else, you may disconnect. Thank you.

Thank you. This concludes today's Entegris Second Quarter 2025 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.

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.