Entegris Inc Q3 FY2025 Earnings Call

Welcome to the Entegris Third Quarter 2025 Earnings Conference Call. I would now like to turn the conference over to Bill Seymour. Please proceed.

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 roadmaps 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 roadmaps 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 basis points 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.

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.

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.

It was great to reconnect, Jim, and good to see you at SEMICON West. From a commercial standpoint, we will keep doing what Entegris has always excelled at, which includes engaging directly with fabs, foundries, IDMs, and the wider ecosystem to assist them with their technology roadmaps and integrate our innovations in purity and materials into their plans. We will maintain these efforts. Additionally, we plan to extend the customer engagement model that has worked well with our largest customers in advanced manufacturing technology, reaching out to upstream ecosystem partners and incorporating some of those advanced capabilities into mainstream logic. These are the two significant changes we are aiming to implement, which are still in the early stages of development, and we've been focused on them for the past 10 weeks. Operationally, we've invested heavily in Rockrimmon, which we intend to open this quarter, as well as in KSP South in Kaohsiung, Southern Taiwan. We need to qualify those facilities and get them fully operational. We have made considerable progress in the qualification process for KSP South and expect to ramp up production volumes more substantially in 2026 rather than in 2025. For Rockrimmon, we are set to commence production this quarter, complete qualifications primarily in 2026, and start increasing volume toward the end of 2026 and into 2027. Do you have a follow-up, Jim?

Yes, that was helpful. Regarding expanding the customer base to be more mainstream, how far do you plan to go with that? Specifically, would you consider using price as a strategy, even if it means increasing revenue at the cost 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 processes 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 discuss whether the BIS bands, the affiliate band, impacted your revenue in September? How are you factoring this into your December guidance? Additionally, if it didn't affect you in December, will it impact 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 discuss some of your comments about wafer starts and your wait-and-see strategy as we approach 2026. It seems like we are nearing the bottom of the cycle, particularly in the NAND sector. You will benefit as soon as utilization begins to increase at those fabs. Could you provide any additional insights into why you are taking this wait-and-see approach? What are you observing regarding wafer starts? Also, could you share any details about the order patterns this quarter, considering that recent weeks appear to have been much stronger than at the start 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, do you anticipate some product rationalization as part of requalifying your U.S. products for the Chinese market? Will that have a significant impact on sales in 2026?

With our sales into China, it may be helpful to outline that broader strategy a bit more fully. We anticipate achieving over 80% local-for-local manufacturing for our Chinese customers by the end of this year. By local for local, I mean we are fulfilling needs from the region into China, avoiding some restrictions associated with products originating from the United States. We expect that percentage to rise above 90% by 2026. However, we don't expect to reach 100% due to small volume products that are not cost-effective to relocate for local manufacturing. For these types of products, we will either pay a tariff or collaborate with our customers to identify alternative sources, both of which we believe will not significantly impact our revenue in 2026. We are confident that the majority of our offerings will be produced locally for local markets in 2026. Our performance in the Chinese market has been encouraging, with a sequential increase of about 8% and a year-over-year growth of 3.5% for the quarter. Additionally, excluding China, Asia overall has seen a 7.5% year-over-year increase in the third quarter and an 8.5% rise year-to-date. We are very satisfied with our sales across Asia and the effectiveness of our teams in that region. Specifically regarding China, we believe we have a highly capable team that has successfully navigated a complex environment, and our internal teams are executing well in terms of 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. I'll start by noting that this is my 10th week here, so I may not comment extensively on 2026 just yet. However, as we enter the fourth quarter, I feel more optimistic about both advanced logic and memory. These are two key areas we are focusing on as we move into the fourth quarter and likely into 2026. The mainstream market is expected to experience a slow recovery as it navigates through its demand cycle. Regarding node transitions, we're quite confident in our progress. As manufacturing complexity increases, the demand for higher purity products from Entegris grows, including those needed at the point of use and at the source. In terms of liquid filtration, we're optimistic about our plans for advanced logic, photo bulk, and point of use. We've already discussed some promising advanced nodes in memory, specifically 3D NAND with moly, along with several plans of record in that area. For CMP slurries, we’ve seen two times more plan of record wins at N2 compared to N5, and we are looking forward to significant growth in HBM for CMP solutions. Additionally, we've achieved a record quarter for liquid filtration. As we consider these node transitions, they will likely lead to higher content per wafer from Entegris, impacting our core assets positively. This increase in content should contribute to growth in that segment of our business. It's worth mentioning, though, that advanced nodes still make up a small fraction of total wafers. AI-driven wafers, for instance, are projected to be around 5% of total wafers started in 2025. While we're excited about these transitions and the potential growth they bring to Entegris, they still currently represent a minor portion of total wafer starts. Do 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?

Overall, Taiwan and Rockrimmon are amazing facilities for us and very strategic assets that are critical to our local for local approach. We did put Rockrimmon into service in October, and in our Q4 guidance, you'll notice the incremental depreciation. Going forward, expect to see depreciation for the full year in 2026. I see the Colorado facility as smaller than the Taiwan facility, and I believe the incremental depreciation is very manageable. Currently, all our facilities are underutilized, and as our volumes increase across these facilities, we will benefit in 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 upcycle, 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 roadmaps 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 you provide more insights on what you're observing in APS? I realize you prefer not to discuss 2026 too much, but regarding the trends in the second half, have they been surprising, and do you perceive them to be better or worse? What is your outlook for the remainder 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?

In your initial discussions with shareholders, what was the most surprising feedback you received regarding your transition into this new position? Were there aspects you believe the organization could improve on in terms of communication? You mentioned some candid feedback; could you elaborate on that?

Yes. In my discussions with shareholders over the past 10 weeks, the main feedback focused on growth, profitability, and leverage. These were the three primary areas that received the most commentary. Many shareholders expressed concerns about the timeline for generating more free cash flow to navigate the investment cycle and reduce leverage, especially given the current state of the semiconductor market. However, growth was also a significant topic of interest. From a company perspective, we aim to address all three concerns. Our growth strategy begins with our most advanced manufacturing customers, whom we've historically worked with the most. We plan to extend our focus to their suppliers and apply our learnings to mainstream logic customers, an area we've not concentrated on previously. This approach will not only support growth but also help us utilize the facilities we've invested in and improve cash flow. The feedback from investors aligns with my observations during my first 10 weeks at Entegris. Regarding what we do well, I've been impressed by the technical expertise and quality of our teams globally, particularly in Asia, which has exceeded my expectations. However, we could improve our communication across regions as we sometimes lag in this area. We're already working on enhancing communication and ramping up our facilities to ensure we meet qualification and volume requirements for production. This will be a focus for us 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.

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 upcycle, 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 roadmaps 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 take a deeper look at what you're experiencing in APS and how we should interpret that? I realize you prefer not to discuss 2026 too much, but regarding the trends in the second half, have they been surprising to you, either better or worse? How do you view the situation through the end 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. In your early discussions with shareholders, what was the most surprising feedback you received regarding your transition from your previous position to your current one? Did anything catch you off guard? Are there areas where you believe the organization could improve, particularly in communication? You mentioned some candid feedback, and I would appreciate it if you could elaborate on that.

I have had the chance to engage with shareholders on several occasions over the past ten weeks, and the feedback primarily revolved around growth, profitability, and leverage. These three areas captured almost all the comments I received. Many shareholders were particularly interested in how long it would take to generate more free cash flow and navigate through the investment cycle to lessen our leverage, which was the most discussed topic, especially considering the current state of the semiconductor market. However, the comments on growth were also notable. From our standpoint, we need to consider how to effectively address these three areas. When it comes to growth, our focus starts with our most advanced manufacturing customers, with whom we traditionally spend the most time. We aim to extend our efforts further up the supply chain to their suppliers and also share our insights with mainstream logic customers, which have not received as much of our focus in the past. We are committed to investing in innovation and node transitions, as we've always done, but we're also broadening our view of where our products can fit into the market to drive not only top-line growth but also increase the utilization of our facilities that have substantial unused capacity. This will ultimately lead to improved cash flow. As for what we do well, I'm highly impressed by the quality of our teams, particularly in Asia, where both technical and commercial expertise stands out. However, there's room for improvement in our communication across different regions, which we're actively working on. Additionally, we're focused on ramping up our facilities by successfully completing qualifications and getting volume production started, ensuring we maximize the capabilities of our investments through 2026.

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?

Thank you, Edward. The 5% we mentioned for AI refers to the total number of wafer starts. While these wafers account for about 30% of our revenue, they represent only 5% of the total wafer volume. Looking ahead to 2025, we expect 5% of the wafers shipped to be AI-related. That segment of the market is performing exceedingly well, although the remaining 95% is likely down around 15% from its peak. The situation varies by technology; mainstream is close to 15% down, while NAND is roughly 25% down, although this depends on how many layers of capacity are actually being utilized. Overall, the industry is still significantly down from its peak. The 5% is merely an indication of the proportion of wafers influenced by AI. Our business, particularly at the most advanced nodes that typically command higher prices, is thriving, outpacing the reported growth rates in unit volume, although this is balanced out by the rest of the market and by capital expenditures. Regarding HBM and CMP, let's touch on advanced packaging briefly. This segment of the market is experiencing about 25% growth in terms of capital expenditures. I don't have unit numbers available, but advanced packaging is expanding rapidly, driven by its connections to both AI logic and high-bandwidth memory. Historically, we haven't engaged extensively in this area, but we anticipate generating around $100 million in revenue from advanced packaging this year. We have strategic plans to expand our focus in this market over time, and we’re looking forward to discussing this at Capital Markets Day. Currently, our involvement in advanced packaging is somewhat limited as our main focus has traditionally been on the front end. As for the CMP process in the HBM sector, we've secured some wins there, and while it's starting from a small base, I believe that segment of the business is experiencing a 100% increase year-over-year. We're quite pleased with that growth. Edward, do you have a follow-up question?

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.