Q3 2021 Entegris Inc Earnings Call

Good day, everyone and welcome to antibodies third quarter 2021 earnings release call.

Today's call is being recorded.

This time for opening remarks, and introductions I would like to turn the call over to Bill Seymour and published we think Investor Relations. Please.

Please go ahead Sir.

Good morning, everyone earlier today, we announced the financial results for third quarter of 2021.

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, 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.

Defined by the SEC regulation G.

You can find a reconciliation table in today's news release as well as on our IR page of our website at Integra Dot com.

On the call today are Bertrand Loy, our CEO and Greg Graves our CFO.

That I will hand, the call over to Archrock.

Thank you Bill and good morning to all.

Third quarter, we continued to deliver on our growth strategy.

<unk>, a very dynamic supply chain environment I am proud that we've been able to deliver 23% organic sales growth year to date.

During the third quarter.

Sales grew 20% year on year and 1% sequentially.

Our growth year on year was strong across all three divisions as we benefited from a robust industry growth and record demand for our products and solutions.

Lower operating expenses did offset the decline in gross margins and this resulted in 30% EBITDA margins in line with expectations up over 20% year on year and up slightly sequentially.

Non-GAAP EPS was up 37% year over year.

8% sequentially.

Let me now provide more color on our operating performance.

From a product standpoint, we continue to benefit from strong demand for both our unit driven products and Capex driven solutions.

Within the unit driven products growth has been especially strong in strategic areas, such as liquid filtration up 21% year to date.

And in advanced deposition materials up 26% year to date.

In addition, we recorded another strong quarter of revenue for our RMS high purity bags, which are used for the bulk transportation of COVID-19 vaccines worldwide.

As I just mentioned the supply chain environment across the industry continues to be very dynamic.

On balance our teams executed well keeping our factories running at full utilization even in regions.

That experienced government mandated shutdowns.

We have also addressed some of the key capacity bottlenecks, we discussed in the last few quarters, including adding production head count and moving many of our operations to a 24 seven work schedule.

However, our operations were impacted by a few nagging supply chain issues, which have been pervasive across the industry.

The two most significant areas of constrained during the quarter, where availability of raw materials and freight.

These constraints negatively impacted gross margin and prevented us from getting Q Mitchell you spin and in some cases from shipping finished products out of our factories in a timely fashion.

We expect some of these challenges to linger and we have taken this into account.

Quarter guidance.

Having said all of that demand for our products and solutions continues to be at a record level and we.

<unk> to have a high degree of conviction in the positive secular growth of the semiconductor market driven by accelerated digitalization five G and high performance computing to name just a few.

In addition, the pace of node transitions for both logic and memory has accelerated and device architectures, all becoming much more complex.

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 rapidly expanding integrity conte.

And per wafer.

Looking at the full year.

Reaffirming our revenue guidance of up 21% to 22%.

Also expect EPS to be in line with our target model and expect full year 2021, non-GAAP EPS to exceed $3 30 per share.

Which as we referenced last quarter, you're starting to approach the 2023 EPS target of greater than $3 55.

Which we communicated in our analyst day last year.

Before I turn the call to Greg I would like to highlight a couple of additional items.

Last week, we published our first corporate social responsibility annual report.

This report highlights our CSR strategy the ambitious goals, we set for 2030 and the progress we have made to date istar.

Establishing our CSL program has allowed us to more fully embed these efforts into both our business strategy and in our operations.

Which enhances our ability to measure our progress and the impact of our efforts.

Going forward, we expect to provide annual updates and we look forward to your feedback as we continue this important journey.

Next I would like to ask you to please hold your calendars for a virtual analyst meeting on December 1st.

We would not necessarily do an analyst meeting every year. However, given the growth we are delivering in 2021 to three year financial model. We provided last year needs. Updating in addition, we look forward to highlighting our strategy to sustain attractive growth rates for the years to come.

Finally, I want to take a moment to thank our customers for their trust and confidence, replacing integrity and once again, thank the integrity teams around the world.

The incredible work and resource furnace.

Now, let me turn the call to Greg.

Yeah.

Thank you Bertrand and good morning, everyone. Our sales in Q3 were $579 million up 20% year over year and up 1% sequentially.

GAAP and non-GAAP gross margin were both 45, 6%.

Gross margins were lower than expected driven by manufacturing inefficiencies and higher input and freight cost challenges that have been well documented across the industry.

We expect gross margin to be approximately 46% both on a GAAP and non-GAAP basis in Q4.

GAAP operating expenses were $125 million in Q3 and included $13 million of non-GAAP items from amortization of intangible assets integration and other costs.

Non-GAAP operating expenses in Q3 were $112 million.

We expect GAAP operating expenses to be approximately $128 million to $130 million in Q4.

We expect non-GAAP operating expenses to be approximately $116 million to $119 million.

Q3, GAAP operating income was $139 million.

Non-GAAP operating income was $153 million or 26% of revenue up 26% year on year and up slightly sequentially.

Adjusted EBITDA was approximately 176 million and 30% of revenue.

Moving to below the operating line.

Our GAAP tax rate was 8% and our non-GAAP tax rate was 11% for the quarter the lower than expected rate in Q3 related primarily to our planning initiative that resulted in a discrete foreign tax credit benefit.

For Q4, we expect both our GAAP and non-GAAP tax rate will be approximately 18, 5%.

Q3, GAAP diluted EPS was <unk> 86 per share.

Non-GAAP EPS of <unk> 92 per share was up 37% year over year and.

8% sequentially.

Turning to our performance by Division.

Q3 sales of $176 million for SCE.

We're up 17% year over year and down 2% sequentially.

We're on year growth was primarily driven by advanced deposition materials and specialty gases.

As Bertrand mentioned the shortages of key raw materials in the quarter were the primary driver in the modest sequential sales decline.

Adjusted operating margin for our CEO, almost 23% for the quarter up year on year in Dallas sequentially.

<unk> margin decline was primarily driven by a onetime benefit from the sale of intellectual property that occurred in the second quarter.

Q3 sales of $226 million for AMC were up 17% from last year and down slightly sequentially.

Growth has been strong across all product lines in MMC, so far this year, especially in liquid filtration.

The freight availability issues Bertrand restaurants negatively impacted shipments of large gas purification systems and MSC during the quarter.

Adjusted operating margin for MMC was 35% for the quarter up slightly from Q2.

Q3 sales of $186 million for <unk> were up 29% versus last year and up 8% sequentially.

Year on year growth was strongest in wafer handling and fluid handling and measurement is both product lines benefited from the strong industry Capex environment.

Sales of our air them as high purity bags also continued to be very strong adjusted operating margin for <unk> was 22% down both year over year and sequentially. The margin decline was primarily driven by the supply chain inefficiencies discussed earlier.

Third quarter cash flow from operations was $150 million and free cash flow was $101 million.

Capex for the quarter was $49 million.

We continue to expect to spend approximately $225 million in capex for the full year.

During Q3, we paid $11 million in quarterly dividends, and we've repurchased $20 million of our shares.

Now for the Q4 outlook.

We expect sales to range from $580 to $600 million we.

We expect GAAP EPS to be 80 to 85 per share.

And non-GAAP EPS to be 87 to 92 per share.

In summary, we are very optimistic about the secular demand trends in the semiconductor industry and our ability to outperform the market and.

And finally, we look forward to updating you on our longer term outlook and the Integra story at our virtual analyst meeting on December one.

Operator, we'll now open up for questions.

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

You're using a speaker phone. Please make sure again the assumption is turned off to all of you.

Sigma is that he said equipment.

Press Star one to ask a question.

We'll take our first question from Mircea <unk> with Goldman Sachs.

Hi, good morning. Thank you so much for taking my questions.

Return on I was hoping you could.

Provide maybe a little bit more color on some of the supply chain issues that you're experiencing you talked about.

Raw materials and freight, but what was he.

How meaningful was the impact on revenue and gross margin in Q3, and what sort of impact are you embedding in your Q4 guidance again as it relates to <unk>.

Supply chain issues and at what point would you expect the environment to normalize sometime in early 'twenty, one 'twenty two or could it could it be the second half of 'twenty, two and then I've got a quick follow up.

Mhm.

We wanted to share let me.

Maybe done.

On the top line and then that will be put to Gregg on your question on on margin, but if you think about Q3.

Think about that in the context of <unk>.

Record level of demand for products and solutions.

And as we said that was offset by some.

Supply in fleet constraints more specifically if you look at the difference between what we're reporting today for Q3 end and the high end of our Q3 guidance.

It bodes down to two major factors. The first one was the availability of substrates.

For our coating solutions.

And that impact.

Division and then the other one was the lack of container availability.

Which impacted the timing of shipment of several large gas purification systems out of our sandwich with esports site in southern California.

We expect.

The first supplier issue so the.

The inability of substrate to be.

Partially resolved in Q4.

And with respect to the freight availability.

It's sort of a bit harder to comment on one level.

We are obviously encouraged by the latest developments in.

The ports of thousand, California, but not the level obviously.

Expect to see continued pressure throughout the holiday season, so it's going to be harder for us to want to opine on this one I would defer to Greg on the margin question and then we'll take your.

Your next question.

Yeah. So yeah on the margin side, where the supply chain issues really sort of emanate themselves are in I would call it sort of the labor labor inefficiencies.

We've put labor in place and then we don't have the inputs.

To build a product.

So really not any more complicated than that as it relates to the gross margin I can comment more on the gross margin broadly.

At some point, if you'd like but as it relates to the supply chain.

Emanates itself really in labor and efficiency.

Right. So Greg I guess as a quick follow up on your on your comment.

I guess 140 basis point.

Missing gross margin in Q3 is that primarily supply chain slash labor inefficiency related or were there was there I would guess it yes. So I would say really we've broken down into three pieces, we said manufacturing inefficiencies.

Input and freight costs on the manufacturing inefficiencies, you've really got three pieces to that you've got labor I mean, we've hired over 1000 people this year so.

Training and ramping new employees.

And inexperienced employees I mean, they impact their quality then it impacts our scrap and material shortages, which I commented on and we've got material shortages, you're obviously.

More inefficient.

<unk> staffed and planned for certain volumes and you can't do the volumes because of the materials and then the last place manufacturing inefficiencies of emanated themselves as we've got a couple of ramps going on we have a facility ramp going in life Sciences in Minnesota, and we're ramping.

Jerome facility in Korea.

And then on the on the input side.

It's Ben.

Nothing specific it's not any one thing.

I think where we've seen probably the.

Most impact has been probably around resins and Chemistries and then freight costs in general whether it's inbound freight moving moving product around between our facilities or the like.

And I would say when you take all of those things.

Yeah.

Probably equal weight, maybe a little bit more biased toward manufacturing inefficiencies and foot pricing in terms of the overall impact on the margin.

Got it and the 46% guide for Q4.

Guessing embeds.

Some of these risks.

And yes, maybe persist into Q4.

That's exactly right I mean, we certainly expect the logistics costs and the materials cost.

Yes to persist into Q4, we do expect some improvement in.

Our plant performance and manufacturing efficiencies.

Okay got it and then as my follow up.

John back to you.

I was hoping to ask you a little bit about the out year and given your scheduled analyst day.

You would.

Sure too much on this call, but I was hoping if you could comment qualitatively.

Your hopes and expectations into into next year, obviously, you're operating in a very dynamic environment, but you did talk about how customer node transitions seem to be accelerating.

Getting across logic foundry and also the memory side as well so I feel like the set up for you guys. Specifically is very positive given the content growth potential, but yes. If you can kind of share your preliminary thoughts.

<unk>.

On the out years that would be super helpful. Thank you.

Sure I think you mostly answered.

The question.

But as you said there are many reasons for us to be optimistic about 2022, we expect a lot of new capacity to come online after the surge in capex that we've seen for the last couple of years.

As of today, we expect or sort of a number of important node transitions.

Next year, both in logic and memory.

Where we have higher in taking this content per wafer so.

I would not quantify dose.

Quantity keep statements today, but we are generally optimistic about 2022 and beyond.

Thank you.

Thank you.

Our next question from Sidney Ho with Deutsche Bank.

Great. Thanks for taking my question let.

Let me follow up with the previous question on calendar 'twenty two I understand you don't have perfect visibility, but based on your order book and lead times. How are you thinking about first half of next year versus second half.

This year and if I look back to your past five six years it seems like first half.

Total revenue growth mid to high single digit over the second half of the previous year with the exception of 2018, just curious if you have if you're willing to on.

On this call to talk about talk about it.

Seeing anything different than previous years.

Yeah.

Sydney as I've said and done.

In my previous answer I'm, not going to try to quantify 2022.

In general.

On trying to talk about first half versus second half as I said I think there are many reasons for us to be.

The mistake about 2022.

Mistake about the momentum going into 2022, as we've said in the prepared remarks, we see the next generation into demand for our solutions and products.

So all of that is positive, but I won't I won't quantify that.

Okay.

Right.

My follow up question is.

So what we learned over the past few months, you said a lot of times supply constraints and not just your supply chain.

So what about your supply chain, but also your customer supply chain are there any particular end market segment that you are worried that your customers may not be able to get all of the parts. They need such that you will get impacted even though your sales did that may not be constrained thinking broadly like maybe fab construction proceeds equivalent suppliers me wafers.

Stocks.

Any any color will be helpful.

Yes, well I think that we are obviously in.

Very close contact with our customers trying to understand.

Instantaneous speed up their business both in terms of <unk>.

Construction projects as well as the liver Mets.

Sad that TBD.

To put that in context, I mean going into Q4, we expect in fact sequential decline in the industry. We expect that MSI, we'd be down we expect that capex would be sequentially down.

Modest and in spite of that we expect.

Demand for our products to continue to accelerate and we expect to outperform the industry. As a result of that in spite of some of the supply chain issues that we.

We expect to encounter in Q4.

So it is a very dynamic environment.

Supply chain issues.

Coming from our supply partners and Youre right that we also increasingly you're watching supply chain constraints that could impact your output.

From.

For our customers.

And then obviously you have been.

The impact on the demand for our products and we're trying to factor all of that into our Q4 guidance.

Okay. Thanks.

Thank you we'll take our next question from Patrick Ho Stifel.

Thank you very much Berkshire, maybe just following up on the supply chain issues.

As the quarter progressed, you still actually did pretty well on the revenue front did you have to qualify new investors to get residual materials in that front.

Or was it simply just the timing and things kind of improved as the quarter went where you were able to procure the necessary materials to at least get through your your revenue guidance line.

Yes, Patrick so it is as.

As you know very difficult for us to.

Substitute suppliers into qualified suppliers.

It requires.

A lot of work both by us and by our end customers and right now we frankly collectively do not have the time to do that so the solution usually used to work with the existing <unk>.

Quantified suppliers.

And to help them increase their output.

Or as Greg was mentioning to you in some cases really incur.

Premium freight in order to accelerate the shipment of incoming material. So.

I think what has been very difficult not just for us, but I think for the industry in general over the last three to six months is the fact that.

Every week.

Seems to be another crisis that emerges.

Our teams have done an amazing job with <unk>.

Many many diving catches if I can put it this way I know you're a baseball fan.

And energy.

But but but I think what we were worried about all the unknowns right.

And and we know that windows unknowns, all becoming visible to us we know that.

Our joint teams between our manufacturing support teams.

Our existing supply chain partners, we'll find solutions.

So maybe tough times.

Great that's really helpful and maybe as a follow up question.

And then maybe more of a qualitative outlook, obviously now we're starting to see it in the U S. Our search shop, where the Covid vaccines for four people. How do you look at the Ara Mist business you know going forward does this provide one eight incremental boost to that.

Business opportunity, particularly as you look into 2022.

Sure as we've said I think the demand for our RMS product continues to accelerate.

We expect the revenue to exceed $50 million this year.

Very pleased in fact by the work of our nice things teams. The capacity additions are progressing well the capacity is coming online as scheduled so in other words, we do not expect constraints on that front, which is good.

And I also like the greater diversity into new opportunity pipeline. So clearly the current demand and the demand for the bag next year will be driven by COVID-19, but I would expect that to start shifting.

Further down the road and frankly beyond the business success I think it's been very very gratifying for everyone.

Take rates to contribute to the global fight against COVID-19.

And in such a meaningful way so many reasons for us to be very pleased with that.

The business in that investment.

Great. Thank you very much.

Thank you. The next question comes from Amanda <unk> with Citi.

Good morning can you talk a little bit about the pricing environment I know you've mentioned in the past that you've been working on.

Take us up to improve pricing and how is that been in sort of the environment.

And also I think the demand pie constraints etcetera have you seen any increased benefit and pricing.

Yeah.

So I can take that one, but I would say that.

Nick was mentioning earlier, we are right now very carefully assessing.

The input.

Costs.

Trying to assess what is permanent versus what is transitory.

And.

When and where it makes sense we are increasing.

And Thats something that we just started literally in the last few weeks.

And then the other question I have is just sort of.

And shipments versus demand can you talk about what percentage are sort of under shipping are you able to meet full demand in certain product areas or sort of is it more of a broad based issue with the raw materials and the shipping.

Yeah.

No as we said in May.

Many different ways already on the call that the demand far exceeds.

Our ability to to needed.

I think that it is fair to say that.

Demand is very strong right now.

As I've said before the demand for our products.

Even stronger.

So.

And the singular focus that we have as an organization is we need to to maximize output.

To meet the customer demand.

And as Greg was mentioning in his comment around margin.

In some cases.

You spoke of is <unk>.

<unk> com at the expense of margin optimization.

Sure.

So when you think about the business today, it's really a tale of two CD.

Strong demand for our products.

Offset by supply chain efficiencies and margin efficiencies.

Okay, and if I could just make sure I heard something right earlier, you said the MSI was youre expecting it to be down in the fourth quarter.

Sequentially, yes.

Great. Thank you.

Yes.

Thank you we'll take our next question from Mike Harrison with Seaport Research partners.

Hi, good morning.

I was wondering.

Tom If you can talk a little bit about what you're seeing with some of your trailing edge or legacy customers as they work to get additional product into the auto OEM and other industries.

That are struggling with the with the chip shortage are you seeing some of these fabs add lines or look for other ways to improve production.

Any insight on when they might make some progress on that would be helpful.

Yes, it's a good question in fact, if you look at some of the just the.

The markets, where those mainstream fabs are operating in be it a Japan or Europe, we are seeing.

Record levels of revenue in those two regions.

Europe is growing at.

25% year to date for US Japan is growing at about the same level.

And its partially due to the high level of activity that we're seeing indoors.

Mainstream fabs so that has been.

Nice.

In July for 212 business in 2021.

And we frankly expect that to continue going into 2022 as well.

Alright, and then on the the supply chain disruptions you mentioned.

That due to freight you had some equipment that maybe didnt shipped during the quarter and I'm, just wondering a little bit about the impact on customer node transitions.

If they're seeing delays in getting equipment are getting materials.

Have you seen any delays.

In the pace of those transition either from supply chain impact or ability to get equipment or anything anything else.

Yes.

Yeah.

Look I think I think this is a general industry phenomenon.

We do have supply chain shoes, I think that on balance we are managing them well.

I'm not aware of being the one supplier being the cause of delays in the industry.

And I hope it stays that way.

The data, we know that some projects have been delayed due to.

Lack of equipment or material availability.

But to the best of my knowledge, we have never been the one reason for dosing days.

Alright, Thank you very much.

Thank you.

The next question comes from Keith <unk> with Mizuho.

Hi, good morning.

I was just wondering it's a little bit of a longer term question, but when we think about the current uptick in capex spending and what that means for future demand both from memory and logic perspective.

Are there any areas, where you currently feel maybe underrepresented or where you would like to increase your exposure and whether you see that from like an organic perspective, or even organic perspective on a go forward basis, I know you might address that a little bit more during the investor day, but if you have any color you can give us at this time that would be really help.

I think that in general terms, we've said that historically we've had.

Sort of exposure to logic and foundry technology, Roadmaps and we had been behind in terms of.

Opportunities in memory, we've been able to greet stat with the migration from <unk> to <unk> architectures, and we talked at length in previous calls about <unk>.

Why that was the case, what's really the introduction of doors.

Big ratios architectures, triggering the need for new materials, and triggering the needs for high acuity levels in the processes.

We expect to see similar trends at work with.

DRAM.

With the introduction of <unk>, which would be enabling greater the miniaturization, which.

Ton went actually make those contamination challenges.

More significant for the DRAM.

Roadmaps and and that we'd like to be accretive opportunities for us to increase our content per wafer so again.

That.

We are seeing a machine.

A shift in where we see the.

Opportunities for us in the industry, we used to have but we're mostly a singular.

Opportunity in logic, and we're seeing now a much broader and much more diverse opportunity pipeline for us with greater opportunities in three D NAND and.

And I think a few years in India around as well.

Right.

And then I guess just then this is more of a near term focus question. If we think about this.

Fly chain kind of logistical raw material environment persisting longer into 'twenty two.

Are there any levers that you can pull to maybe.

Whether it's plant optimization or just in general investing in the overall business of returning capital to shareholders.

The near term that you think could supplement some of those headwinds if they were to persist longer.

Or how should we think about that thank you.

Could you I'm not sure.

And your question would it be possible for you to to rephrase it.

Yeah, I was just saying.

If this headwind.

Environment, where we're seeing supply chain challenges raw material impacts et cetera persist longer than we expect them are there any internal initiatives that you can take maybe to improve gross margins to help offset that over the near term.

Wow.

I think we are obviously very focused.

If you think about that.

The supply chain issues why do you have.

Big buckets, right now and that we've been talking.

In the previous three quarters in each of those buckets have been.

The source of constrains at one point or another so far this year early in the year. It was really around our own manufacturing capacity.

I think we've made a lot of progress there as Greg mentioned, we have hired.

A lot of new headcounts close to 1100 manufacturing and manufacturing support positions.

And more than half of those positions.

Were created during the summer and one piece to say that the training is mostly complete.

And which means that as we are entering Q4 now in most of our manufacturing says all running.

24 seven operations.

We have also invested in new equipment competed to quantification for that.

And so new capacity would be coming online in Q4, and it would be good for liquid filter is good for our high purity drums out of Korea. So again.

Good focus on our internal capacity, we have enough capacity internal capacity to meet your expected demand in <unk>.

2021, we're going to continue to make investments in 2022 and 2023.

In the U S.

In Taiwan and in Japan.

Due to sustained growth and I've always said, we expect for the years to come.

And then when it comes to the other two whether that's you know supply chain.

And freight I mean, we are working with our partners.

And we.

We hope that they make similar types of investments and that's where you have a supply of day coming up in a few weeks and that will be one of my major ask or reaffirming the need for.

Similar types of investments by our supply chain partners, because we expect.

The secular growth in this industry and the secular demand for our products remains very attractive and very strong for the years to come so.

Not a focus at all levels internally and externally with our partners.

Great. Thank you so much.

Thank you. The next question comes from Chris Capps with loop capital markets.

Yes, hi, good morning, just following up on the factors that were influencing the slight margin pressure.

You know I get the optics of degradation, maybe on a sequential basis or relative to some models that were out there, but on a year over year basis. It looks like it's only the A&H segment. That's a degradation. So you you called out a number of the issues. There I'm. Just also wondering if there's any mix effect that influence your way down on the year.

Over year margin degradation in A&H.

Yeah, So broadly I'm just talking about gross margins I just wanted to say I mean, the margin that we experienced in the most recent quarter I mean, it's not really it's not a natural margin I mean, that's not the margin power.

Of the business.

All that was going on in supply chain some of the headwinds on material costs that we're not sure it will be permanent or transitory like I said the labor inefficiencies. So.

I don't like where the margin was in the quarter, but I don't I, certainly don't view it as sort of the margin power of the business. If you think about the margins.

Across the company.

In the most recent quarter you asked the question on mix I mean mix was certainly more.

Mine are factor.

When we've given our guidance coming into Q3, we expect an improving mix and we didn't see that.

You commented on <unk>, specifically I would say that's the division that probably saw the most impact.

Related to <unk>.

Great Expediting in particular and also.

Headwinds related to ramping facilities, both of the facilities I referred to.

The <unk> facility as well as the life Sciences facility reside in that business. So when I think about the margins overall I guess I would say I'm comfortable to say that I think will be on an improving trend I'm not predicting when these supply chain issues are going to go away but.

Ultimately that will improve and will continue to see an improving trend in our margin, which.

Our current guidance is pretty modest for Q4.

Okay. That's helpful. Thanks, Greg.

Just as a follow up sort of to a prior question.

Despite the margin.

The headwinds I got.

The sales growth and a M H, which is the equipment oriented was.

Strong and may have been stronger if not for some of these constraints, but I was just curious if you have visibility regarding demand there is debt.

Skewed, mostly the customers are adding capacity at leading edge nodes or is it really spread across all technology nodes. So is it is it skewed towards leading edge or is it more balanced.

Let's say in EMEA in particular.

For China.

Your question is around the image Chris correct.

Yes.

Okay, Yeah, I think we're seeing capacity additions in logic.

And we are seeing technology upgrades in memory.

So it's a little bit of both.

Okay, and just one last one since you teed up the December 1st analyst event.

Reference that the three year modeling.

We would need some update if you could just remind us the 355 EPS bogie that was referenced how much if any share repurchase activity was factored into that or maybe you could just talk about the latest thinking in terms of share.

She says that as the capital allocation lever. Thank you.

That's the $3 55 number was an organic number we had laid out in the analyst meeting last November as sort of and I don't have it right in front of me the impact that we could have from certain capital allocation scenarios, including.

More aggressive share repurchases.

Right now in terms of our strategy around share repurchases.

I don't want to comment specifically other than to say that we'll standby.

Our.

Our capital allocation framework that we've laid out which suggests that.

M&A would be our top priority.

But that over time.

Our goal to return 60% of free cash flow to shareholders in the form of buybacks and dividends.

Fair enough. Thank you.

Thank you. The next question comes from Timothy Arcuri with UBS.

Thanks, a lot Bertrand I I I heard you say you were talking about Q4 and talking about MSR.

<unk> Capex, both being down which I think is kind of interesting and so my question is sort of around customer behavior.

How are they changing their behavior if at all given the shortages.

See any equipment companies they are guiding pretty flat.

In December and the chip guys are generally guiding up.

So I guess I'm wondering are you seeing orders deferred because of the supply issues I guess I would I would think it would probably go the other way that if you can't get what you need you might order more not less so I guess I wanted to kind of double click on your comment that capex and MSI will be down in Q4.

Yeah. So.

Third, we expect MSI and capex to be down mid so MSI.

Slide down.

Mid single digits, and Capex down low single digits sequentially.

To your point Tim.

Tim I think that.

Some customers may not go down.

Demand for our products simply because they are running at fairly low level of safety stocks.

But we know that in some of the cases, they may actually choose to them.

To slow down demand for products. So it's a mixed bag and you know obviously I won't go into customer specific commentary here.

Okay, but I guess just on that so you. So you are seeing some business deferred as a result of the shortages.

And nothing really meaningful and frankly, that's one of the reasons why we expect to outpace the industry by.

No.

Four to five basis points sequentially.

Okay, I guess, maybe just.

On that point can you just give an idea of what unconstrained demand as there was a question before that was trying to get at this maybe to ask it a different way if you didn't have any constraints.

What would revenue have been it sounds like maybe you would have been at the high end or maybe even above the high end, where it not for these issues can you just talk about that.

Yes, it would have been at the high end if it wasn't for those for those issues absolutely yes.

And you know.

If you fast forward into I would say that's project forward to the end of the year.

All of those come Tweens constraint issues out of it.

No voting effects. So if you fast forward to December.

I would expect the difference between the unconstrained demand.

And what we expect to be able to ship.

This year to be around $50 million.

So a couple of points of.

Loan growth on an annual basis.

50 million.

On a quarterly basis or.

Annual annual annual basis annual basis. Okay. Thank you. Thank you for your time.

Thank you we'll take our next question from Josh Silverstein with Wolfe Research.

Hey, Thanks. Good morning, guys just wanted to follow up on the prior comments around the cash return profile.

And maybe just thinking about what what else you may want to do with the cash you got in your long term debt down about $150 million kind of year over year. The the cash is building.

Just wanted to see what the.

Gross debt reductions.

You want to undertake or maybe thinking about the other way other way like what's the capacity for for buybacks that you guys may have going forward.

Or is there some sort of limiting factor around leverage profile that you want to stick to.

Yeah. So I think we've consistently said that I would like to keep our ongoing leverage.

Around two times on a gross basis, we're a little bit below that today, but the depth that we have in place today is largely permanent debt. So are there other than a $100 million or so on the term loan you're not there's really there's no intent to reduce the debt levels from where they are as we think about returning cash.

Shareholders I think it's a function of two things its reinvestment in the business and we've we've said previously we've got some relatively significant investments coming up the next several years, the Taiwan facility, specifically will comment on that.

More in December.

And then.

A function of the M&A environment, we set M&A as a priority.

And so it's sort of I guess, it's a bit of a rubik's cube.

But like I said, our intent over time is to return a meaningful amount of cash to shareholders.

And if you look at the last year or so it hasn't been great, but if you look at the three prior years, we were just short of that 60% in aggregate, we're just sort of sort of that 60% target that we talked about.

Great and then just following up on the M&A comments is there one or two things that you you guys wish you you had in the portfolio today.

And that's where you're trying to target or are these smaller bolt on transactions that are just kind of complementary to what you guys already have or just you know.

And it's an extension of what you already have within the portfolio.

Yeah. So that's great set of things M&A continues to be a important part.

Our growth strategy, we have strong balance sheets and liquidity.

But.

So expect us to be active but selective.

And what it means is that you know our teams are very very busy right now so expect us to be active on.

Targets that are.

Really a perfect strategic fit with our platform.

And we are really focused on a few Oems right now.

Small to midsize deals would be the type of things you should expect us to.

I want to focus on at this point.

Yeah, I would just think with with the multiple that you guys have in the balance sheet and maybe there is some some bigger opportunities out there. So that's why I wondered if it was bigger or smaller and would you be willing to issue some.

Use that currency.

For potential acquisition.

Yeah.

I think we've said that often but the right from the RIDEA, we it would be.

Willing to.

To use.

This currency indeed, I mean, we.

We tore.

<unk> talked about that in the context of this.

Some discussions several years ago and our position remains the same.

Great. Thanks, guys.

Thank you.

Comes from Mr. Victor <unk>.

Thank you.

Good morning can you provide some more color on growth drivers in your specialty chemical segment, I guess, Greg flagged a deposition, especially gas for hydraulics. So maybe if you could quantify that and any color on the cleaning.

Cleaning chemistries in graphite business that's.

Great.

So yes, so the big driver for SCM this year and in this past quarter has been advanced deposition.

Physicians until units, that's up 26% year to date, it was up sequentially nicely as well.

Other parts of the business are doing well, but not growing as fast.

Gas specialty coatings.

Up about.

'twenty two.

22% year to date are significantly higher than that MSI.

In spite of some supply.

Supply issues that we were mentioning so it was down sequentially, but year to date.

Strong performance for those product platforms, and the others be it <unk> or some of the other product lines so more into them.

In the low to mid teens, so more in line with waste.

Wafer starts.

Got it thanks, and then just I guess big picture.

In terms of memory and logic growth how is it looking on a year to date basis so far.

So logic is.

Is is doing well I mean, certainly led by outperformance in leading edge foundry since where we see the biggest growth in logic for US and then memory continues to be the one big driver for us.

That segment is really in the mid 20%.

And that's a function of the node transitions that I was referencing earlier, which are driving the steady expansion of our served market as we see greater opportunity on a per wafer basis for materials.

Sure.

Just kind of keep etch chemistries and for some of the coatings solutions that are used in the timber components at the edge towards memory applications.

Thanks, but maybe if I could ask just one last one probably.

Before Greg I realize you may not want to save your detailed comments on the Taiwan facility for December but maybe just in terms of timing is that plan still.

Set to start at the end of next year and how much of this year's Capex, it's what's that facility.

So the capex for that facility this year will be less than $50 million.

And then as it relates to timing late 2022 early 2023, depending on.

Which division you're talking about but overall I think the end of next year is the right way to think about it.

Yeah.

Got it thanks guys.

Thank you. This concludes today's call. Thank you for your participation you may now disconnect.

Okay.

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