Q2 2021 Entegris Inc Earnings Call

Good day, everyone and welcome to Integra and second quarter 'twenty 'twenty 1 earnings release call today's call is being recorded.

At this time for opening remarks, and introductions I would like to turn the call over to Bill Seymour VP of Investor Relations.

Please go ahead Sir.

Good morning, everyone earlier today, we announced the financial results for our second quarter of 'twenty 'twenty 1.

Before we begin I would like to remind listeners that our comments today will include some forward looking statements.

These statements involve.

And as a number of risks and uncertainties and actual results could differ materially from those projected and the forward looking statements.

Additional information regarding these risks and uncertainties is contained and our most recent annual report and subsequent quarterly reports that we filed with the SEC.

Please refer to the information.

And involvement on the disclaimer slide and the presentation.

On this call. We will also refer to non-GAAP financial measures as defined by the SEC regulation G. You can find a reconciliation table in today's news release as well as other on our IR page of our website and Integra is dot com.

And the.

The call today are Bertrand Loy, our CEO and Greg Graves, our CFO with that I'll hand, the call over to Bertrand.

Thank you Bill and good morning to all.

We are very pleased with our second quarter performance and I want to start by recognizing the phenomenal job done by our manufacturing and supply chain teams.

During the quarter sales grew 27% year on year and 11% sequentially.

Our growth was strong across all 3 divisions.

As we benefited from a robust industry conditions and increasing demand for our products and solutions.

We experienced strong.

Flow through on our sales and margins to improve nicely leading to record operating income and EBITDA for the quarter.

In addition, non-GAAP EPS was up 42% year over year and 21% sequentially.

Let me provide a little bit more color on our revenue.

And your performance.

From a product standpoint, we continue to benefit from the growing demand for our leading.

Unit, driven solutions, especially in strategic areas like liquid filtration, which is up 24% year to date and advanced deposition materials.

Which is up 28% year to date and.

Other highlights of the quarter was obviously, our capex driven product lines, which are following the trend of a robust industry capex.

Growth was especially strong in the fluid handling wafer handling and gas.

<unk> purification product lines, which in the aggregate grew 37% in the first half.

In addition, our autonomous high purity bags, which are used for COVID-19 vaccines worldwide recorded stronger sales than planned.

We.

I would expect that item as sales will reach approximately $50 million this year.

It is also worth noting that the unique characteristics of the RMS bag.

Specifically high purity and high structural integrity.

Our of increasing interest for use in.

Now non Covid biologics.

I am also very pleased to share that during the quarter, we made an additional $3 million contribution to the integrity Foundation.

Each fund's stem scholarships for women and individuals on the represented communities.

The first round of these scholarships were awarded for the upcoming school year.

During the first half of this year, we achieved organic growth of approximately 25% impressive considering the various production and supply chain constraints the industry and Integra is have faced.

Our manufacturing and supply chain teams have done an amazing job and have been instrumental in delivering these great results.

However, and this constrained industry environment every day as a bathroom and likely will be for wide.

That said, we remain confident about our execution.

<unk> going forward.

And on that note last quarter, we outlined 3 main issues, we've been addressing and I am pleased to report that we've made solid progress.

The first area was labor constraints and some of our U S manufacturing locations joined.

During Q2.

And we were able to allocate most of that pressure.

Adding production head count and by moving many of our operations to a 24.7 work schedule.

In addition, we expect to bring new production equipment online and Q3, which will bring additional capacity for certain.

And critical product lines.

The last area relates to industry freight capacity and component availability and we expect these constraints to ease as we progress through the second half of this year.

Looking at the full year, our outlook for the industry.

And Integrous has improved again.

The semi market looks increasingly strong across the logic memory and mainstream segments, driven by improving demand trends and areas like mobile phones high performance computing Iot and alto.

For the full year 2021, we now expect the market based on our unit Capex mix will be approximately up 17.

Per cent compared to our previous expectation of up 13% to 14%.

Demand for our solutions.

Solution set is very good.

And our order book continues to be at a record level as a result, we expect to outperform the market and now expect our sales growth for the full year 2021 to range from 21% to 22%.

Compared to our previous expectation.

It's up 17% to 19%.

Finally, we expect the EBITDA flow through to be in line with our target model and now expect full year 2021, non-GAAP EPS to exceed $3.30.

Which is starting to approach the 2020.3 EPS.

Sure enough of greater than $3.55, which.

Which we communicated and it is day last year.

Looking further ahead, the long term fundamentals of the semiconductor market.

Encouraging positive secular demand trends have become increasingly.

Recently evident driven by accelerated digitalization and <unk> and high performance computing to name just a few.

In addition to pace of node transitions for both logic and memory has quickened in recent years and device architectures, all becoming much more complex.

Targets.

This is great news for Integra is because the unique set of capabilities, we have built around process materials and materials purity.

Will be the key enablers of these new chip architectures and this will translate into a rapid.

Expanding served market and increasing integrity content per wafer.

And with 70% of our revenue.

Net driven or recurring in nature, we expect our business model to be more resilient across cycles as it has proven.

To be the case over the past decade.

Finally, I want to take a moment to thank our customers for the trust and confidence they place and Integra is.

And once again.

Thank the integrity teams around the world for.

Incredible work.

Now.

I turn the call to Greg Greg.

Thank you Bertrand and good morning, everyone. I also want to recognize the great work of the broader integrity team for delivering a record quarter and what continues to be a dynamic environment.

Our sales and Q2 were $571 million up.

Up 27% year over year and up 11% sequentially.

GAAP and non-GAAP gross margin were both 46, 4% gross margin was essentially in line with our guidance as higher volumes were slightly offset by the negative impact of mix, we expect gross margin to be.

Now, let me only 47% both on a GAAP and non-GAAP basis in Q3.

And we continue to expect gross margin will be approximately 46, 5% for all of 2021.

GAAP operating expenses were $126 million and Q2 and included 13 million.

Approximate GAAP items from amortization of intangible assets integration and other costs.

Non-GAAP operating expenses in Q2 were $114 million Opex was above our guidance range, but lower as a percentage of sales both year over year and sequentially.

Opex.

For the quarter included the $3 million discretionary contribution made to the integrity Foundation that Bertrand previously referenced.

We expect GAAP operating expenses to be approximately 129% to $131 million and Q3, we expect non-GAAP operating expenses.

And of non proximately $116 million to $118 million.

Q2, GAAP operating income was $139 million non-GAAP operating income was 152 million for 27% of revenue up significantly both year on year and sequentially.

Has to be adjusted EBITDA was approximately $174 million and exceeded 30% of revenue.

Moving to below the operating line, our GAAP tax rate was 15% and our non-GAAP tax rate was 17% for the quarter.

For Q3, we expect.

Both our GAAP and non-GAAP tax rate to be approximately 19%.

For the full year 2021, we continue to expect both our GAAP and non-GAAP tax rate to be approximately 18%.

Q2, GAAP diluted EPS was <unk> 65 per share.

Non-GAAP EPS of <unk> 85 per share was up 42% year over year and 21% sequentially.

Turning to our performance by Division.

Q2 sales of $180 million for SCE.

We're up 23% year over year and up.

8% sequentially.

Growth was primarily driven by specialty gases advanced deposition materials and advanced coatings.

Adjusted operating margin for <unk> was 25% for the quarter up 400 basis points sequentially the increase and.

Operating margin was primarily related to higher sales volume and a benefit from the sale of some non core intellectual property.

Q2 sales of $228 million for AMC were up 24% from last year and up 10% sequentially.

<unk> has performed.

And very well across all product lines, so far this year with growth, especially strong and liquid filtration and gas micro contamination.

Adjusted operating margin for MMC was 34% for the quarter.

Q2 sales of $173 million for <unk>.

We're up 36% versus last year and up 16% sequentially it's worth.

Noting that <unk> has the greatest exposure to industry capital spending and this was evident and very strong sales of wafer handling and fluid handling products.

As Bertrand referenced.

Sales of our <unk> high purity bags continued to be very strong.

Adjusted operating margin for <unk> was 24%.

Up significantly both year over year and sequentially. The margin increase was primarily driven by the higher sales volume.

Second quarter cash flow from operations was $82 million and free cash flow was $40 million.

Capex for the quarter was $42 million, we continue to expect to spend approximately $225 million in capex. This year.

Consistent with our capital allocation strategy.

During Q2, we used approximately $11 million for our quarterly dividend and we repurchased $15 million of our shares.

Now for our Q3 outlook.

We expect sales to range from $575 million to $590 million, we expect GAAP EPS.

To be 76 to 81 per share and non-GAAP EPS to be 84.

To <unk> 89 per share.

In summary, we continue to execute very well even in the midst of a dynamic supply chain environment.

The industry outlook.

<unk> has become incrementally more positive for this year and beyond our.

Our solution set is increasingly more critical to industry roadmaps as evidenced by our top line outperformance and finally, we continue to demonstrate the leverage and our unit driven business model.

Operator, we'll now open up for questions.

Thank you. Thank you I would like to ask a question. Please signal by pressing star 1 on your telephone keypad.

You are using a speaker phone. Please make sure your mute function is turned off to allow your signal to each share of equipment.

And Thats Star 1 to ask a question we will now take our first question from Toshi Hari from Goldman Sachs. Please go ahead.

Hi, guys. Good morning, and thanks, so much for taking the question.

And congrats on the strong results.

Bertrand and I had I guess 2 questions.

Clarification for for Greg.

First of all in terms of the big revenue beat and Q2, obviously it was it was and <unk>.

Very strong beat within the context of your company's history, I feel like you've come in toward the high and sometimes above the high end, but this was.

Above and beyond what many of us.

And so was this kind of conservatism and hindsight or was it better supply better operations internally what drove the significant revenue beat in Q2, and then for the full year.

You're raising your market forecast from 13 to 14 to 17 it would be helpful. If you could differentiate between how you're thinking about capex versus wafer starts and then.

A quick follow up thank you.

Sure. Good morning, So she and let me start with your question on Q2.

I mean, the short answer to your question is that we were indeed, probably a bit.

Too conservative and our Q2 guidance and <unk>.

Respect I mean, we.

<unk>.

Very strong demand for our products going into Q2, and we saw just that across the board so no real surprise here.

But on the flip side of that.

We experienced a very severe supply issues in Q1, and we were probably a little bit.

Too conservative as a result of that and our forecast for Q2 and as I mentioned and my.

Preliminary remarks, our supply chain and manufacturing teams have done a phenomenal job and in Q2 <unk>.

Exceeding our expectations you know moving Montanes, just secure supply lines to increase output.

Put in Q2, and and now resides and Q2 really show that.

When it comes to your second question on on the annual guidance.

You know I think.

The industry has continued to strengthen through the quarter right and it is.

Clear that you know we all expect.

<unk> at this point.

Old Fabs to operate at full.

Capacity for for the balance of the year.

And and do the capacity plans or photo for customers I've also firmed up and and being confirmed so.

And now you know.

The way, you'll get to that blend of 17% for the full year is.

Wafer starts up about 14% and capex slightly in excess of 25 per cent and again capex for US is really the food industry capex as opposed to for Wi Fi.

And you said you had you had a follow up question Yeah. Yeah I do thank you I guess around <unk> <unk>.

Clearly there seems to be very strong momentum and in terms of adoption of the technology.

The Big Logic company here and the U S seems to be.

<unk> and its efforts all 3 DRAM companies at this point seem to be on board.

It relates to the technology. So I guess my question is you know.

If you can kind of rewind, the clock and sort of speak to what you've seen and in the foundry space as it relates to <unk>, how that's benefited your business and what your expectations are.

Going forward as it relates to the UV ecosystem.

That would be Super helpful. And then 1 last quick clarification for Greg you talked about.

Selling non core IP and see if you can quantify the positive impact from that and the quarter from a EBITDA perspective that would be helpful.

Thank you.

Yes.

On <unk>, we are indeed, very very excited to see the adoption broadly of this technology. As you know this is an enabling technology to find those features and.

And more complex architectures.

And our solution set is really.

Really thriving on greater process complexity.

And finally the features.

And the greater the need for <unk>.

Very advanced surety and the material used in their chemistries used and to process.

So all of that is going to create the conditions for greater integrity content per wafer.

It's great to see.

Across you know memory and logic much more ambitious technology Roadmaps now with with fine and features.

Integrity, we will benefit from so I think again, great news and certainly 2021 is a breakthrough year for for U V.

And that's very positive for us.

I'll turn to Greg to talk a bit more about the impact of this set of IP, which relates to some cleaning chemistries.

And so go go ahead Greg.

And so she had it actually relates to some cleaning chemistries that we.

And why are the IP for when we are that we acquired as part of the Atms and transaction, we retained the right to use the IP, but it is not IP that.

We view as needing on an absolute exclusive basis. So we sold it to another industry participant.

And that showed up as a believe it or not as a credit in the.

And the accounting mandated that show up as a credit and our SG&A line and it benefited the SCM division it was low single digit millions.

Helpful. Thank you so much.

Well now move to our next question from Sidney Ho from Deutsche Bank. Please go ahead. Your line is open.

Thanks for taking my questions and congratulations and a good quarter.

And they are trying and you addressed some of this and your prepared remarks, but is there any chance you can quantify what the impact on revenue was for the first half.

From the supply constrained and perhaps what you would expect and the second half, but do those missed revenue go to a competitor or do you think they will come back to you at a later time.

Yeah. So, let's just say that you know and when did this supply constraint.

The issue is really the challenge that the entire ecosystem is it's it's it's facing.

And that that includes all of our competitors as well and so the real solution for us and for our customers is a day.

No debt, we increase our capacity as quickly as possible.

And that's really what our customers want and need from from from US and this is really what we've been very very focused on.

On.

You know I will not be quantifying the delta between supply and demand. It is true that we were supply constrained and Q2.

I expect some additional supply limitation going into Q3, and I would expect most of that to be alleviated as we get into into Q4, So again and the teams.

Very focused on rich.

And reducing debt GAAP to the minimum possible. So ask me the question again.

And at the end of the year and I would tell you. If there is a GAAP left but but again, it's fair to say that zone right now in Q2 and going into Q3 demand is exceeding supply.

And supply for us.

Okay, Great I'll I'll ask that question and again in 3 months.

My second question.

Again a day.

And I noticed you don't disclose revenue by region and your slide deck anymore.

And the SEC filing and so just.

Just curious how your revenue into China has been and can you double click on that and give us a sense debt.

The revenue split between domestic versus multinationals as well as memory.

Memory versus foundry versus mainstream and do you guys see any signs that your customers maybe building up some buffer buffer stocks.

Yeah, So I mean, if you.

If you think about the regions first of all regions had a record revenue with growth year on year.

And and sequential growth as well.

I think specifically on China, we had a big quota in China and exceeding 60%.

Growth and just a function of for a number of different factors them and first remember the first half of last year it wasn't easy.

Compile.

And autopart customers worry and.

And in a very significant slowdown early in the year last year and then as you recall, we had a number of shipments that have been on hold pending and getting them.

The required export licenses and I'm pleased to say that we.

And Q2 of this year, we've been able to.

To get approval on all the necessary licenses.

To release the holds on our U S made.

Products. So so again.

And so those.

And those are 2 important factors driving the China revenue and then the last 1 is that.

And a lot of investment in China.

Over the last 2 or 3 years and a lot of new capacity has been coming on line and that has been driving obviously.

Greater consumption of our consumable products.

Great. Thank you.

Sure.

And well now move to our next question from Patrick Ho from Stifel. Please go ahead.

Thank you very much and congrats on the nice quarter and outlook.

Virtual and maybe first qualitatively I know you don't want to give guidance over future quarters, but given some of the industry dynamics that we're seeing today as you mentioned and the school.

And demand environment, some of the supply constraint and so they're still there.

And what's your visibility and the light.

I guess and both of your units as well as Capex driven products are you getting visibility.

Longer than you typically would and how does that help you in terms of quote alleviating some of the supply.

And issues that you have.

So so far so Patrick I.

And I think we commented on the visibility and the last couple of quarters and I would say that the visibility remains very good and and probably better than than normal.

So that's.

<unk> checks important obviously as we make.

Capacity decisions as we make them.

Procurement, and and and and and planning decisions.

Well.

And and and that's really what the team has been very focused on.

And we'll continue to be focused on which is and all.

Making sure that we are.

Secure access to the right level of supplies and and we've been working very very closely with our supply chain partners.

And then making sure that internally we.

And lock as much.

The new capacity adds as we can and we talked about how we were intending to do that and Q2 and it was really mostly about hiring and training new operators. So I think we've made a lot of good progress and Q2, and we are exiting Q2 with.

Much greater capacity and then we started.

The quarter and then in Q3, we are counting on a number of.

You know new levers with.

New.

Membrane surface treatment equipment coming online new cleaning capacity for our liquid filters coming online and that's.

It's going to benefit our liquid filtration product lines as we get into the second half weighted year and we are also expecting to get a new high purity drums capacity.

And in a in Q3, and that's going to help Oh and image Division and so we're very focused on.

Short term.

Capacity additions.

Capacity additions and then of course, we've talked about our longer term capacity plans with this big investment and Taiwan as well. So we're very very focused on debt and as you said, it's because we have a high degree of confidence.

And in our growth strategy for.

Water, but also for many years to come.

Great that's helpful and as my follow up question you gave a good description on some of the opportunities on EV and the industry is also progressing for towards gate, all around or formats of that nature are your 1 of your large.

And we just talked about it yesterday.

How do you see the opportunities for gate all around because that is quite materials intensive does that provide another impetus for both.

The the SCC group and micro contamination control what are some of the incremental opportunities you see there and you start working with your customer.

Large customer on that architecture.

Thank you. Your your question is is its right on Patrick I mean, we we are very excited about what we see on the road map and those new architectures will be required.

Wiring.

Highly engineered materials.

And I'm not used by the industry today.

And that we are very very focused on developing with our with our customers.

And as you know doors gate all around structures or features will be introduced at.

<unk> atomic level in terms of dimension and and that's going to require much greater levels of purity throughout the process.

So again, a lot of reasons for us to be.

I'm extremely.

And they don't excited and bullish about about all.

Thanks, and and about the roadmap and what it will mean in terms of integrity content per wafer for years to come.

Great. Thank you.

Okay.

And now move to our next question from Amanda Sky and I see from.

And from Citi. Please go ahead.

Hi, good morning.

The first question I have and it's sort of on the component constraints and she said maybe you think towards the end of the year are you seeing any specific issues with sourcing materials, you've been hearing about the chemical supply chain is getting increasingly more tight across the board and are you seeing any shift there or do you expect that to be.

And nicely throughout the rest.

Yeah.

Yeah, and it's a good question and I think that that's 1 of the reason why we are we want to remain fairly cautious and it and our outlook simply because I think we have control and.

The various initiatives that we can take and.

Internally too.

Increase our own manufacturing capacity and an hour.

But but we have for lesser for control on what our supply chain partners.

And we'll be able to do and.

And again they are.

Making a.

And not a very promising commitments, but again, that's not something that we control directly. So I think that there are many reasons for us to believe that the situation will ease as we progress throughout the year, but that's something that we're going to be obviously very focused on and we're trying to help our supply partners and any way we can.

And I think again as I was saying I think that's that's that's the reality that is.

And all across the ecosystem.

Great.

And the <unk> Division you mentioned that you expected to reach about $50 million this year.

All of that Covid related are you starting to see any.

And generation outside the called the backseat.

So and I would say that the revenue, we expect to generate and 2021 will be mostly COVID-19 related the good news. However is that the opportunity pipeline is starting to.

Do you have a slightly different shape with with the.

A lot more non COVID-19 related.

Opportunities so.

You take that statement and the context of the.

The recent investment in new capacity I would say that this capacity will be filled with COVID-19 related opportunities probably for the next 18 to 24 months.

And then I would expect a.

Moving to transition to non COVID-19 opportunities and India out years.

Great. Thank you.

Sure.

And now move to our next question from David Silver from CL King. Please go ahead.

Yeah.

Yeah, Hi, Thank you I had a question my first question would be kind of on the capacity constraints, either for yourselves or or for your customers.

But firstly and your opening remarks, you did talk about new capacity additions coming on and the.

Quarter, maybe to relieve some bottlenecks I was wondering if you might.

Be able to.

Detail Bad and then maybe.

Bertrand from a broader perspective, I mean, we.

There's a number of stories, obviously for a long time now about.

Shortage conditions or chip production being limited by various constraints.

From your planning perspective, I mean, do you believe that the quote unquote shortage conditions or the nears a full out operating conditions and the industry is that going to last well into.

<unk> 'twenty to 2020.2 beyond that maybe be over by the end of the year. How are you kind of planning for <unk>.

Duration of what some people say it would be.

Sold out industry conditions amongst chipmakers. Thank you.

Yeah. So.

Those are all really good questions broad questions. We could we could probably spend a lot of time discussing that and I'm going to try to be to be succinct and my answer I think when it comes to our.

Capacity improvement plans.

And I decided a few.

New initiatives as we get into Q3.

Impacting positively impacting our.

Our liquid filtration output and positively impacting our high purity drums, and output and and that's what we're going to be very focused on working with our customers.

To to qualify those new.

Pieces of equipment for doors, and new production lines and.

As I was mentioning we're continuing to hire and out of new operators and train them.

Move aggressively most of our work centers to 24, 7 work schedules and all.

All of that will have.

A nice positive impact on our on our capacity.

When it comes to visibility as I was saying I think we have a good.

Visibility.

For the balance of the year I think.

It never really extends.

Far beyond.

Beyond that.

<unk> said that if and when we think about 2022 I think all indications are that it should be another positive year for for your industry I mean, we expect.

A lot of new capacity to come online.

We expect our fab customers to run more wafers at the leading edge where we.

We have higher integrity content per wafer.

I would not quantified those statements are we will do that in a into January February timeframe, as we always do and we reported earnings for.

A year and when we guide for for the next year, but as we sit.

Today.

Based on what we are hearing from our customers.

And we expect 2020 to be another good year for for the industry and for Integra and <unk>.

Okay.

Okay, and I'm going to follow up that overly broad question with kind of a more targeted 1 but I wanted.

And so on your A&H segment, that's your smallest segment, but yeah.

Year year over year or sequentially that was the segment that has shown the strongest growth.

And and there's certainly some elements and there I consider the wait for handling element maybe.

More capex driven potentially lumpy and then the aramis portion of the growth is going to be more I dunno secular I guess, but and your third quarter guidance.

Kind of.

Uh huh.

And at the midpoint you know your revenues are due to be up slightly but I'm just.

Just wondering about your anticipated contribution from your <unk> segment, and other words will that potentially lumpy contribution on on wafer handling and maybe some other products there continue or or is this the case where.

Some of that Lumpiness may.

May.

Recede.

For the balance of the year. Thank you.

Can start and then Greg maybe you can add to that but put and types of the revenue performance of Fei image. As you mentioned remember that this is the 1 division that has the most exposure to capex.

So as you would expect in that context growth was particularly strong and and.

Capex driven platforms within the image so product lines like food.

Fluid handling solutions sensing and control.

But frankly, we also saw strength in.

Or wafer.

Next business, which is more for unit driven business for them.

Even and just smaller diameter 200 millimeter fabs are.

What are you seeing at very very high levels right now and that's benefiting some older generation products and of course, we've talked about the positive impact of our Rms.

Shifting to <unk>.

Bag for for biologics so.

I think that.

And the performance for a M H, which is up 30.

And 32% year to date.

I would expect actually that level of performance on an annual basis.

And again, mostly because.

RMS just strength in the industry Capex and.

And the positive impact of the RMS bags.

And then on the bottom line.

And Greg I don't know if theres anything you want to add to that no I would just say David you'd asked about as it relates to our guidance and we would expect that business to be.

And up slightly similar to.

And the overall broad based guidance.

Bertrand mentioned some areas, where the business has performed well. He also mentioned earlier and the call. It <unk> part of that business has done quite well and then profitability that team has executed well, but it's also our business probably with that.

Goes away for fixed cost leverage.

Both on the cost of goods sold line as well as operating leverage because they've got a relatively.

Relative to the other day divisions, lower much lower <unk> R&D spend and so that youre seeing that level.

Margins and 20.

4 per cent range like we saw and the most recent quarter.

Very good thanks, very much I appreciate it.

Well now move to our next question from Paris <unk> from Bahrenburg. Please go ahead.

Thanks, and good morning, and can you talk about your growth.

Hi, sorry, and the logic versus memory and.

First half of the share and any color or any expectation that you have for the second half and comes up which of these do you think that would be the bigger growth driver and the second half.

Yeah.

So so far and socially.

I mean, if you think about logic found.

And that he old Fabs and I'll really running at full capacity right now.

And then we're seeing obviously a lot more wafers being produced at the 10 nanometer and below so that's you know debt. That's good for us year to date that that particular set of customers is growing and the mid teens.

And we would expect.

That growth rate to increase and are in the backend of the year, because there would be a new capacity at the leading edge that is expected to come online and that's going to actually create favorable conditions for a pick up in revenue and liquid filtration and deposition materials.

And suffers.

It's prep.

Chemistries and so well so.

Again, good performance year to date, but I think that I would expect and exploration and the backend of the year.

Got it thanks, that's useful and then with regard to the SCM business can you just.

And could provide a little bit more color on your mix and this quarter and.

What's the mix the tailwind for margins.

On a sequential basis or year over year basis.

Do you want to take that Greg do you want me to share I'll take it yeah, so within within the.

S E M business I mean mix was slightly positive it was not it was not a significant factor.

I've mentioned in the prepared remarks, the margin did benefit from and IP sale, which had a.

Several basis point impact on net operating margin.

For the for the for the most recent quarter, but I'd say the mix was generally consistent with what we've been seeing.

Got it got it.

Thanks, and my last question is on your.

And your filtration business.

Do you all can tell your filtration.

Micro contamination products to other chemicals companies to help them.

Purify their products and and if yes, then 80 anyway, you could quantify as to what percentage of sales go through those channels.

So yes. The short answer is yes, we are selling.

<unk>.

For us to to a broad array of chemical manufacturers examples of products would be photoresist, obviously, but also.

IPA and and all sorts of different chemistries used and.

And the manufacturing process of semiconductors.

This.

This is a segment that's been growing very fast and it's growing and importance of for us because the degree of purity are required and bulk chemicals.

Chemicals.

Is it is it is becoming increasingly more stringent and debt has opened up opportunities.

<unk> not just for our liquid centers, but also increasingly for our high purity drums.

And we don't disclose and we don't intend to disclose those types of market statements so market segments.

And so I don't I don't really intend to break that.

It down for you today, but I would say that this is certainly.

A big area of growth for us.

And thanks for that thanks, Bertrand and that's all I had thank you.

Thank you.

And that is onto our next question from Chris <unk> from loop capital markets. Please go ahead.

Yeah, Hi, good.

And kudos to you and your team on execution.

I was hoping you might be able to further characterize your continued outperformance relative to the industry, Let's say I guess, maybe into the second half of this year or into next year.

And if excluding the effect of excuse me the air bags.

Good morning.

Do you see the outperformance be more pronounced and equipment product lines, where and consumables.

So thank you, Chris and profit for the nice comment I would say that you know what.

And you think about the <unk> product line, it's contributing.

<unk>.

For some of growth and year to date I think it will contribute.

Stronger or for 2 point of growth on an annual.

Basically for the rest of the outperformance is in fact, mostly unit driven and I think I gave you some.

Cruise.

And my.

My friend and my preliminary remarks, siting and particular.

Deposition materials growing at 28%, which is about twice the rate of wafer starts or also mentioning our.

Liquid filters.

Growing it about.

I think it's.

So 'twenty 1.

24% year to date so.

Again, 2 very important product lines for recall that those are areas, where we have invested a lot in R&D over the past year. So it was important for us to see the results and we are seeing results frankly that already.

Exceeding all expectations in many cases.

That's helpful and actually the follow up was on on that.

Metric you gave on the advanced deposition materials for 28% growth.

Curious about if you could get more granular and that in terms of logic versus memory. I think you had said advanced.

Sales were up mid teens, and maybe that was part of the or the answer but it was was this strong growth and advanced deposition was it more a function and ramping nodes in logic foundry or is it really most pronounced and the migration within the memory sector and 3 D NAND to architectures with the deeper layers. Thank.

And you very much.

So this share it has been a.

Most of them are memory still.

Story remember.

And remember that a lot of our customers have transition now to 128 layers and and some of them have been transitioning.

2.

176 layers.

Here's and and all of them are actually taking steps to transition to 200, plus layers going into 2022, so with dose transitions. We saw a number of new opportunities for deposition materials for opening up with so new opportunities for selective etch and chemistries.

And as well and doors are and <unk>.

<unk> that have been driving our SCM business. So its mostly memory. This year I would expect and logic to play a bigger role.

In the next years as some of those new molecules are.

More widely.

We adopted and another logic architectures I think it's going to be more for 'twenty 2 'twenty 3.

Event with memory, continuing to drive SCM growth in 2020, 1 and 2022.

That's very helpful color. Thank you.

And now move to my next question from Timothy Arcuri from UBS. Please go ahead.

Thanks, a lot I had 2 questions first for you Oh.

You know I I know I know you're talking to customers all the time and do you see any signs of them stockpiling inventory of your products at at.

And there's I know, we've heard more of that happening during the second quarter I'm. Just wondering if you can sort of handicap, whether or not you think this is happening.

So Tim it's it's a fair question and something we're constantly looking at and especially in our into very sharp ramps and especially at a time when we all capacity constraint and so obviously.

And you know something that we are paying very very close attention to I think that maybe a little bit of that and China for the reasons that we all know, but putting China. Aside I think that the demand for all products, all really driven by the very very strong level of fab activity right now and.

And if.

I mean do you I don't know about you, but I mean, we've.

It's hard to find electronics I would give you just an anecdote, but I think it's telling I mean, we've been hiring a lot of new.

Members of our for our teams and it's really hard to get them P. C on time.

If you talk to any 1 of our customers they are running at.

And at very very low levels of inventory for their finished products and in many cases for the integrity products for their raw materials.

Claim to be.

Below.

And what would be the normal inventory.

EBIT leverage so I think that.

And right now.

Is this as you know this this is not a this is not a risk and I don't think that there is really.

A lot of excess.

Inventory and to China's.

I don't think there's any I think well below normal levels.

Got it okay. Thank you. Thank you for that and I guess, Greg for you.

I guess I had a question on <unk>.

Gross margin drop through I mean, you did a great great job and June don't get me wrong, but the but the margins came in in line and if I look at the gross margin drop through over the past 3 years, you've done and 50%.

And more revenue and the gross margins basically hasnt really changed much over that period. So I'm just wondering what what can change to make the drop through a bit better I know you've been investing in and.

And capacity, but also we should see some leading edge wafer addition, and that should help gross margin and I would think as well due to mix.

Got it can you just talk about the drop through and you know should it get better going forward. Thanks.

Yeah. So.

First of all I mean.

On the gross margin in the most recent quarter.

Okay.

As I said in their prepared remarks, really I mean, the higher volumes were offset by.

The negative impact of mix and that emanates itself, primarily and the <unk> business.

With regard to sort of the longer term trends I mean, if you look over the last several years, our capital spending has been up pretty significantly as we add capacity and we add capability will continue to do that what I would say.

As I would expect the margin to have an upward bias, but I've always.

And said I mean think of this as a business where do I think we can do 4700.48 type margins yes.

But I don't think long term this is a business, where youre going to see margins and the fifties.

Yeah.

I wish I could say it differently, but I mean, I've watched and youre highlighting it and we've watched it over a long period of time and I think our customers are going to let us up margins.

And where they are maybe slightly above where we are.

Okay, great. Thank you.

Okay.

I will now.

Take our final question from Mike Harrison from Seaport Research Partners. Please go ahead.

Hi, good morning.

So for Tom we've talked a little bit about the debt.

Supply and demand tightness and your view that.

The demand is outstripping supply right now.

And we're in this broadly inflationary environment. So are you seeing.

But your pricing is increasing at all as a component of the revenue growth you are seeing either in response from inflation.

Or as a result of this tight supply demand environment.

So look I think we all we are obviously watching all of those.

Trends and and we're going to continue to adjust our.

Our strategies to <unk>.

Mickey Gate.

Potentially.

Negative factors too.

2 of margin John I don't think we want to go into the details of.

Our mitigation strategies or pricing strategies on on this call but.

And the Punch line is as Greg was mentioning just a just a second ago is that we.

We expect our margins to them to continue to.

To steadily improve.

And that's really a function of the greater value debt, we are contributing to talk customer roadmaps. So.

Obviously, a lot of moving pieces right now and she said.

We're very focused on that and.

We don't think that it will have any lasting negative impact on our bottom line performance.

Alright, and then and the MH segments are the margin there it looks like its a record.

And in terms of that 24.25 per cent.

Number I know that when you did your Investor day last fall.

<unk> had actually reduce the longer term margin target I believe 2 of 20% to 22%.

And number.

So how should we think about the sustainability or maybe long term.

And a potential of that image segment.

I think the points you make are all sort of the sort of right on and as you pointed out I mean, we're operating and at the 24% range and Q2.

As a very good a good margin, which reflects strong execution.

March strong operating leverage due I think longer term I mean.

Would I commit to that 'twenty for longer term and they were down at a point now where we're prepared to change our longer term targets that we've laid out but at these revenue levels the business should be able to sustain margins above the targets.

Aggregates that we talked.

<unk> talked about.

Back in November.

Mike I mean, if you look at really all of the many of the metrics in our business and the industry environment has proven to be strong much stronger than we laid out in November so in many cases were.

Sort of out.

Net of where we would have thought we would be.

At this point.

Okay.

Alright, and then Greg maybe a question for you the unallocated expense number look relatively high north of $13 million I think it's first time, that's been a double digit number and some time what drove that.

And can you give some guidance on what we should be modeling for unallocated expense and the second half.

So.

What drove it and the most recent quarter was the $3 million contribution Bertrand referred to what's driven it.

Overall, it would be it would be higher trends and.

Compensation costs related to the higher performance that we've had as a business.

And honestly I don't when we model and put our plans together I don't really focus on that on allocated number.

So I don't.

But I would say generally it's and SG&A number and our goal is to hold SG&A growth.

Well below sales growth on a percentage basis.

Alright, thanks very much.

Ladies and gentlemen, there are no more questions.

This concludes today's call.

Thank you for your participation and you may now disconnect.

Thank you.

Thank you.

Yeah.

Okay.

[music].

Okay.

[music].

Yes.

[music].