Entegris Inc (ENTG) 2021 Q2 法說會逐字稿

Good day, everyone, and welcome to Entegris' Second Quarter 2021 Earnings Release Call. Today's call is being recorded.

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

Good morning, everyone. Earlier today, we announced the financial results for our second quarter of 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 that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation.

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

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

Thank you, Bill, and good morning to all. We are very pleased with our second quarter performance, and I want to start by recognizing the phenomenal job done by our manufacturing and supply chain teams. During the quarter, sales grew 27% year-on-year and 11% sequentially. Our growth was strong across all 3 divisions as we benefited from robust industry conditions and increasing demand for our products and solutions.

We experienced strong flow-through on our sales, and margins improved nicely, leading to record operating income and EBITDA for the quarter. In addition, non-GAAP EPS was up 42% year-over-year and 21% sequentially.

Let me provide a little bit more color on our revenue performance. From a product standpoint, we continue to benefit from the growing demand for our leading unit-driven solutions, especially in strategic areas like liquid filtration, which is up 24% year-to-date and advanced deposition materials, which is up 28% year-to-date.

Another highlight of the quarter was obviously our CapEx-driven product lines, which are following the trend of a robust industry CapEx. Growth was especially strong in the fluid handling, wafer handling and gas purification product lines, which, in the aggregate, grew 37% in the first half. In addition, our Aramus high-purity bags, which are used for COVID-19 vaccines worldwide, recorded stronger sales than planned. We now expect that Aramus sales will reach approximately $50 million this year.

It is also worth noting that the unique characteristics of the Aramus bag, specifically high purity and high structural integrity, are of increasing interest for use in other non-COVID biologics.

I'm also very pleased to share that during the quarter, we made an additional $3 million contribution to the Entegris Foundation, which funds STEM scholarships for women and individuals of underrepresented communities. The first round of these scholarships were awarded for the upcoming school year.

During the first half of this year, we achieved organic growth of approximately 25%, impressive considering the various production and supply chain constraints the industry and Entegris have faced. Our manufacturing and supply chain teams have done an amazing job and have been instrumental in delivering these great results. However, in this constrained industry environment, every day is a battle and likely will be for a while. That said, we remain confident about our execution going forward.

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

The first area was labor constraints in some of our U.S. manufacturing locations. During Q2, we were able to alleviate most of that pressure by adding production head count and by moving many of our operations to a 24/7 work schedule. In addition, we expect to bring new production equipment online in Q3, which will bring additional capacity to certain critical product lines.

The last area relates to industry freight capacity and component availability, and we expect these constraints to ease as we progress through the second half of this year. Looking at the full year, our outlook for the industry and Entegris has improved again. The semi market looks increasingly strong across the logic, memory and mainstream segments, driven by improving demand trends in areas like mobile phones, high-performance computing, IoT and auto.

For the full year 2021, we now expect the market, based on our unit CapEx mix, will be approximately up 17% compared to our previous expectation of up 13% to 14%. Demand for our solution set is very good, and our order book continues to be at a record level. As a result, we expect to outperform the market and now expect our sales growth for the full year 2021 to range from 21% to 22%, compared to our previous expectation of up 17% to 19%.

Finally, we expect the EBITDA flow through to be in line with our target model and now expect full year 2021 non-GAAP EPS to exceed $3.30, which is starting to approach the 2023 EPS target of greater than $3.55, which we communicated in our Analyst Day last year.

Looking further ahead, the long-term fundamentals of the semiconductor market are very encouraging. Positive secular demand trends have become increasingly evident driven by accelerated digitalization, 5G and high-performance computing to name just a few.

In addition, the pace of no transitions for both logic and memory has quickened in recent years and device architectures are becoming much more complex. This is great news for Entegris 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 our rapidly expanding served market and increasing Entegris content per wafer.

And with 70% of our revenue, unit-driven or recurring in nature, we expect our business model to be more resilient across cycles as it has proven to be the case over the past decade.

Finally, I want to take a moment to thank our customers for the trust and confidence they place in Entegris. And once again, thank the Entegris teams around the world for their incredible work.

Now let me turn the call to Greg. Greg?

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

Our sales in Q2 were $571 million, up 27% year-over-year and up 11% sequentially. GAAP and non-GAAP gross margin were both 46.4%. Gross margin was essentially in line with our guidance as higher volumes were slightly offset by the negative impact of mix. We expect gross margin to be approximately 47%, both on a GAAP and non-GAAP basis in Q3. And we continue to expect gross margin will be approximately 46.5% for all of 2021.

GAAP operating expenses were $126 million in Q2 and included $13 million of non-GAAP items from amortization of intangible assets, integration and other costs. Non-GAAP operating expenses in Q2 were $114 million. OpEx was above our guidance range, but lower as a percentage of sales, both year-over-year and sequentially. OpEx for the quarter included the $3 million discretionary contribution made to the Entegris Foundation that Bertrand previously referenced.

We expect GAAP operating expenses to be approximately $129 million to $131 million in Q3. We expect non-GAAP operating expenses to be approximately $116 million to $118 million. Q2 GAAP operating income was $139 million. Non-GAAP operating income was $152 million, or 27% of revenue, up significantly both year-on-year and sequentially. Adjusted EBITDA was approximately $174 million and exceeded 30% of revenue.

Moving to below the operating line. Our GAAP tax rate was 15% and our non-GAAP tax rate was 17% for the quarter. For Q3, we expect both our GAAP and non-GAAP tax rates to be approximately 19%. For the full year 2021, we continue to expect both our GAAP and non-GAAP tax rate to be approximately 18%.

Q2 GAAP diluted EPS was $0.65 per share. Non-GAAP EPS of $0.85 per share was up 42% year-over-year and 21% sequentially.

Turning to our performance by division. Q2 sales of $180 million for SCEM were up 23% year-over-year and up 8% sequentially. Growth was primarily driven by specialty gases, advanced deposition materials and advanced coatings. Adjusted operating margin for SCEM was 25% for the quarter, up 400 basis points sequentially. The increase in operating margin was primarily related to higher sales volume and a benefit from the sale of some noncore intellectual property.

Q2 sales of $228 million for MC were up 24% from last year and up 10% sequentially. MC has performed very well across all product lines so far this year, with growth especially strong in liquid filtration and gas microcontamination. Adjusted operating margin for MC was 34% for the quarter.

Q2 sales of $173 million for AMH were up 36% versus last year and up 16% sequentially. It's worth noting that AMH has the greatest exposure to industry capital spending, and this was evident in very strong sales of wafer handling and fluid-handling products. As Bertrand referenced, sales of our Aramus high-purity bags continued to be very strong. Adjusted operating margin for AMH was 24%, up significantly both year-over-year and sequentially. The margin increase was primarily driven by the higher sales volume.

Second quarter cash flow from operations was $82 million and free cash flow was $40 million. CapEx for the quarter was $42 million. We continue to expect to spend approximately $225 million in CapEx this year.

Consistent with our capital allocation strategy, during Q2 we used approximately $11 million for our quarterly dividend, and we repurchased 15 million of our shares.

Now for our Q3 outlook. We expect sales to range from $575 million to $590 million. We expect GAAP EPS to be $0.76 to $0.81 per share and non-GAAP EPS to be $0.84 to $0.89 per share.

In summary, we continue to execute very well even in the midst of a dynamic supply chain environment. The industry outlook has become incrementally more positive for this year and beyond. Our solution set is increasingly more critical to industry road maps as evidenced by our top line outperformance. And finally, we continue to demonstrate the leverage in our unit-driven business model.

Operator, we'll now open up for questions.

(Operator Instructions) We will now take our first question from Toshiya Hari from Goldman Sachs.

Congrats on the strong results. Bertrand, I had, I guess 2 questions and one quick clarification for Greg. First of all, in terms of the big revenue beat in Q2, obviously, it was very strong beat within the context of your company's history. I feel like you've come in towards the high end, sometimes above the high end, but this was above and beyond what many of us expected. So was this kind of conservatism in hindsight, or was it better supply, better operations internally? What drove the significant revenue beat in Q2?

And then for the full year, you're raising your market forecast from 13% to 14% to 17%. It would be helpful if you could differentiate between how you're thinking about CapEx versus wafer starts. And then I have a quick follow-up.

Sure. Toshiya, let me start with your question on Q2. I mean the short answer to your question is that we were indeed probably a bit too conservative in our Q2 guidance in retrospect. I mean we expected very strong demand for our products going into Q2, and we saw just that across the board. So no real surprise here.

But on the flip side of that, we experienced very severe supply issues in Q1, and we were probably a little bit too conservative as a result of that in our forecast for Q2. And as I mentioned in my preliminary remarks, our supply chain and manufacturing teams have done a phenomenal job in Q2, exceeding our expectations, moving mountains to secure supply lines, to increase output in Q2 and our results in Q2 really show that.

When it comes to your second question on the annual guidance, I think the industry has continued to strengthen through the quarter, right? And it is clear that we are expecting, at this point, all fabs to operate at full capacity for the balance of the year. And the capacity plans of all of our customers have also firmed up and been confirmed.

So right now, the way you get to that blend of 17% for the full year is wafer starts up about 14% and CapEx slightly in excess of 25%. And again, CapEx for us is really the full industry CapEx as opposed to WFE. And you said you had a follow-up question, Toshiya?

Yes, I do. I guess, around EUV, clearly, there seems to be very strong momentum in terms of adoption of the technology. The big logic company here in the U.S. seems to be accelerating its efforts. All 3 DRAM companies at this point seem to be on board as it relates to technology.

So I guess my question is, if you can kind of rewind the clock and sort of speak to what you've seen in the foundry space as it relates to EUV, how that's benefited your business, and what your expectations are going forward as it relates to the EUV ecosystem, that would be super helpful.

And then one last quick clarification for Greg. You talked about selling noncore IP in SCEM. If you can quantify the positive impact from that in the quarter from an EBITDA perspective, that would be helpful.

Yes. So Toshiya, on EUV, we are indeed very, very excited to see the adoption broadly of this technology. As you know, this is an enabling technology to finer features and more complex architectures. And our solution set is really thriving on greater process complexity. The finer the features, the greater the need for very advanced purity in the materials and the chemistries used in the process. So all of that is going to create the conditions for greater Entegris content for wafer.

And I think it's great to see across memory and logic, much more ambitious technology road maps now with finer features, which Entegris will benefit from. So I think, again, great news, and certainly, 2021 is a breakthrough year for EUV, and that's very positive for us.

I'll turn to Greg to talk a little bit more about the impact of this sale of IP, which relates to some cleaning chemistries. And -- so go ahead, Greg.

Toshiya, it actually relates to some cleaning chemistries that we acquired the IP for when we -- that we acquired as part of the ATMI transaction. We retained the right to use the IP, but it's not IP that we view as needing on an absolute exclusive basis. So we sold it to another industry participant.

That showed up as a -- believe it or not, as a credit in the accounting mandate, that shows up as a credit in our SG&A line, and it benefited the SCEM division. It was low single-digit millions.

We will now move to our next question from Sidney Ho from Deutsche Bank.

Congratulations on a good quarter. Bertrand, you addressed some of this in your prepared remarks, but is there any chance you can quantify what the impact on revenue was for the first half from supply constraint? And perhaps what you expect in the second half. But do those missed revenue go to a competitor? Or do you think they will come back to you at a later time?

Yes. So let's just say that, I mean, the supply constraint issue is really a challenge that the entire ecosystem is facing, and that includes our competitors as well.

So the real solution for us and for our customers is that we increase our capacity as quickly as possible. And that's really what our customers want and need from us. And this is really what we've been very, very focused on. I will not be quantifying the delta between supply and demand. It is true that we were supply constrained in Q2. I expect some additional supply limitation going into Q3, and I would expect most of that to be alleviated as we get into Q4.

So again, the teams are very focused on reducing that gap to the minimum possible. So ask me the question again at the end of the year, and I will tell you if there is a gap left. But again, it's fair to say that as of right now in Q2 and going into Q3, demand is exceeding supply for us.

Okay. Great. I'll ask that question again in 3 months. My second question is, I noticed you don't disclose revenue by region in your slide deck anymore. I know it's in the SEC filings.

So just curious how your revenue into China has been? And can you double-click on that and give us a sense that the regular split between domestic versus multinationals, as well as memory versus foundry versus mainstream? And do you guys see any signs that your customers may be building up some buffer stocks?

Yes. So I mean, if you think about the regions, first of all, all regions had record revenue with growth year-on-year and sequential growth as well. I think specifically on China, we had a big quarter in China, exceeding 60% growth. And it's a function of a number of different factors.

I mean, first, remember that first half of last year was an easy comparison, right? A lot of our customers were in a very significant slowdown early in the year, last year. And then as you recall, we had a number of shipments that had been on hold pending getting the required export licenses. And I'm pleased to say that we -- in Q2 of this year, we've been able to get approval on all the necessary licenses to release the holds on our U.S.-made products.

So again -- so those are 2 important factors driving the China revenue. And then the last one is that there's been a lot of investment in China over the last 2, 3 years and a lot of new capacity has been coming online and that has been driving obviously greater consumption of our consumable products.

We'll now move to our next question from Patrick Ho from Stifel.

Congrats on the nice quarter and outlook. Bertrand, maybe first qualitatively, I know you don't want to give guidance over future quarters. But given some of the industry dynamics that we're seeing today, as you mentioned, the strong demand environment, some of the supply constraints that are still there, what's your visibility like, I guess, in both of your units as well as CapEx-driven products?

Are you getting visibility longer than you typically would? And how does that help you in terms of "alleviating" some of the supply chain issues that you have?

So Patrick, I think we commented on the visibility in the last couple of quarters. And I would say that the visibility remains very good and probably better than normal. So that's important, obviously, as we make capacity decisions, as we make procurement and planning decisions as well. And that's really what the team has been very focused on and will continue to be focused on, which is making sure that we secure access to the right level of supplies, and we've been working very, very closely with our supply chain partners.

And then making sure that, internally, we unlock as much new capacity as we can. And we talked about how we were intending to do that in Q2. And it was really mostly about hiring and training new operators. I think we've made a lot of good progress in Q2, and we are exiting Q2 with much greater capacity than we started the quarter.

And then in Q3, we are counting on a number of new levers with new membrane-surface treatment equipment coming online, new cleaning capacity for our liquid filters coming online, and that's going to benefit our liquid filtration product lines as we get into the second half of the year.

And we are also expecting to get new high-purity drum capacity in Q3, and that's going to help our AMH division. So we are very focused on short-term capacity additions, midterm capacity additions. Then, of course, we talked about our longer-term capacity plans with this big investment in Taiwan as well.

So we're very, very focused on that. And as you said, it's because we have a high degree of confidence in our growth strategy short term but also for many years to come.

Great. That's helpful. And as my follow-up question, you gave a good description on some of the opportunities on EUV. The industry is also progressing forward towards gate-all-around or formats of that nature. One of your large customers talked about it yesterday. How do you see the opportunities for gate-all-around because that is quite materials intensive? Does that provide another impetus for both the SCEM group and Microcontamination Control? What are some of the incremental opportunities you see there as you start working with your customers on that architecture?

I think your question is right on, Patrick. I mean, we are very excited about what we see on the road map. Those new architectures will be requiring highly engineered materials that are not used by the industry today, and that we are very, very focused on developing with our customers. As you know, those gate-all-around structures or features will be introduced at atomic levels in terms of dimension, and that's going to require much greater levels of purity throughout the process.

So again, a lot of reasons for us to be extremely excited and bullish about our prospects and about the road map and what it will mean in terms of Entegris content per wafer for the years to come.

We'll now move to our next question from Amanda Scarnati from Citi.

The first question I have is sort of on this component constraints that you said might be easing towards the end of the year. Are you seeing any specific issues with sourcing materials you've been hearing that the chemical supply chain is getting increasingly more tight across the board? Are you seeing any specific issues there? Or do you expect that to be progressing nicely throughout the rest of the year?

Yes, Amanda, it's a good question. I think that, that's one of the reasons why we want to remain fairly cautious in our outlook simply because, I think, we have control in the various initiatives that we can take internally to increase our own manufacturing capacity and our -- but we have less of a control on what our supply chain partners will be able to do. And again, they are making a lot of very promising commitments. But again, that's not something that we control directly.

So I think that there are many reasons for us to believe that the situation will ease as we progress throughout the year, but that's something that we're going to be obviously very focused on, and we're trying to help our supply partners in any way we can. And I think, again, as I was saying, I think that's the reality that is across the ecosystem.

Great. And then as a follow-up, in the Aramus bag division, you mentioned that you expect this to reach about $50 million this year. Is all of that COVID related? Are you starting to see any revenue generation outside of the COVID vaccines?

So Amanda, I would say that the revenue we expect to generate in 2021 will be mostly COVID-related. The good news, however, is that the opportunity pipeline is starting to have a slightly different shape with a lot more non-COVID-related opportunities. So if you take that statement in the context of the recent investment in new capacity, I would say that this capacity will be filled with COVID-related opportunities probably for the next 18 to 24 months. And then I would expect a smooth transition to non-COVID opportunities in the out years.

We now move to our next question from David Silver from CL King.

I had a -- my first question would be kind of on the capacity constraints either for yourselves or for your customers. But firstly, in your opening remarks, you did talk about new capacity additions coming on in the third quarter, maybe to relieve some bottlenecks. I was wondering if you might be able to detail that.

And then maybe Bertrand from a broader perspective, I mean, we -- there's a number of stories, obviously, for a long time now about shortage conditions or chip production being limited by various constraints.

From your planning perspective, I mean, do you believe that the "shortage conditions" or the near full out operating conditions in the industry, is that going to last well into 2022, beyond that, maybe be over by the end of the year? How are you kind of planning for the duration of what some people say would be sold out industry conditions amongst chipmakers?

Yes. So those are really good questions, broad questions. We could probably spend a lot of time discussing them. I'm going to try to be succinct in my answer.

I think when it comes to our capacity improvement plans, I cited a few new initiatives as we get into Q3, impacting -- positively impacting our liquid filtration output and positively impacting our high-purity drum output. And that's what we're going to be very focused on working with our customers to qualify those new pieces of equipment or those new production lines.

And as I was mentioning, we're continuing to hire a lot of new operators, train them, move aggressively most of our work centers to 24/7 work schedules, and all of that will have a nice positive impact on our capacity. When it comes to visibility, as I was saying, I think we have a good visibility for the balance of the year. I think it never really extends far beyond that. Having said that, when we think about 2022, I think all indications are that it should be another positive year for industry.

I mean we expect a lot of new capacity to come online. We expect our fab customers to run more wafers at the leading edge where we have higher Entegris content per wafer. I will not quantify those statements. We will do that in January, February time frame, as we always do when we report earnings for the year and when we guide for the next year.

But as we sit today, based on what we are hearing from our customers, we expect 2022 to be another good year for the industry and for Entegris.

Okay. And I'm going to follow up that overly broad question with kind of a more targeted one. But I wanted to focus on your AMH segment. It's your smallest segment, but year-over-year or sequentially, that was the segment that has shown the strongest growth. And there's certainly some elements in there. I consider the wafer handling element maybe more CapEx driven, potentially lumpy. And then the Aramus portion of the growth is going to be more, I don't know, secular, I guess.

But in your third quarter guidance, you've kind of -- at the midpoint, your revenues are due to be up slightly. But I'm just wondering about your anticipated contribution from your AMH segment. In other words, will that potentially lumpy contribution on wafer handling and maybe some other products there continue? Or is this the case where some of that lumpiness may recede for the balance of the year?

I can start. And then, Greg, maybe can add to that. But in terms of the revenue performance of AMH, as you mentioned, remember that this is the one division that has the most exposure to CapEx. So as you would expect, in that context, growth was particularly strong in our CapEx-driven platforms within AMH, so product lines like FOUP, fluid handling solutions, sensing and control.

But frankly, we also saw strength in our wafer shipping business, which is more of a unit-driven business for them. Even in the smaller diameter, 200-millimeter fabs are producing at very, very high levels right now, and that's benefiting some older generation products. And of course, we've talked about the positive impact of our Aramus bag for biologics.

So I think that the performance for AMH, which is up 32% year-to-date, I would expect actually that level of performance on an annual basis. Again, mostly because of the strength in the industry CapEx and the positive impact of the Aramus bags.

And then on the bottom line, I think, Greg, I don't know if there's anything you want to add to that.

Yes. No, I would just say, David, you'd asked about as it relates to our guidance, I mean we would expect that business to be up slightly, similar to the overall broad-based guidance. Bertrand mentioned some areas where the business has performed well. He also mentioned earlier in the call, EUV. The EUV part of that business has done quite well.

And then profitability, that team has executed well, but it's also our business probably with the highest, I'll call it, fixed cost leverage, both on at the cost of goods sold line as well as operating leverage because they've got a relatively -- relative to the other 2 divisions, lower -- much lower ER&D spend. And so that -- you're seeing that leverage, you see those margins of 24% range like we saw in the most recent quarter.

We'll now move to our next question from Paretosh Misra from Berenberg.

Can you talk about your growth that you saw in the logic versus memory in the first half of this year? And any color or any expectation that you have for the second half in terms of which of these you think will be the bigger growth driver in the second half?

Yes. So Paretosh, the -- I mean if you think about logic foundry, all fabs are really running at full capacity right now. And then we're seeing, obviously, a lot more wafers being produced at 10-nanometer and below. So that's good for us.

Year-to-date, that particular set of customers is growing in the mid-teens. And we would expect that growth rate to increase in the back end of the year because there will be new capacity at the leading edge that is expected to come online, and that's going to actually create favorable conditions for pickup in revenue, in liquid filtration and deposition materials and surface prep chemistries as well.

So again, good performance year-to-date. But I think that I would expect an acceleration in the back end of the year.

Got it. That's useful. And then with regard to the SCEM business, can you just maybe provide a little bit more color on your mix in this quarter? And was the mix a tailwind for margins on a sequential basis or a year-over-year basis?

Do you want to take that, Greg? Or do you want me to...

Sure. I'll take it. Yes. So within the SCEM business, I mean, mix was slightly positive. It was not a significant factor. I mentioned in the prepared remarks, the margin did benefit from an IP sale, which had a several basis point impact on that operating margin for the most recent quarter. But I'd say the mix was generally consistent with what we've been seeing.

Got it. Got it. And my last question is on your filtration business. Do you also sell your filtration microcontamination products to other chemicals companies just to help them purify their products? And if yes, then any way you could quantify as to what percentage of sales go through those channels?

So yes, the short answer is yes. We are selling bulk filters to a broad array of chemical manufacturers. Examples of products would be photoresist, obviously, but also IPA and all sorts of different chemistries used in the manufacturing process of semiconductors.

This is a segment that has been growing very fast and is growing in importance for us because the degree of purity required in bulk chemicals, is becoming increasingly more stringent. And that has opened up opportunities not just for our liquid filters but also increasingly for our high purity drums.

We don't disclose and we don't intend to disclose those types of market statements -- or market segments. So I don't really intend to break that down for you today, but I would say that this is certainly a big area of growth for us.

We now move on to our next question from Chris Kapsch from Loop Capital Markets.

Kudos to you and your team on execution. I was hoping you might be able to further characterize your continued outperformance relative to the industry, let's say, I guess, maybe into the second half of this year or into next year. And if excluding the effect of the Aramus bags, do you see the outperformance being more pronounced in equipment product lines or in consumables?

So thank you, Chris, and -- for the nice comment. I would say that if you think about the Aramus product line, it's contributing a soft 2% of growth year-to-date. I think it will contribute with stronger or a full 2 point of growth on an annual basis.

So the rest of the outperformance is, in fact, mostly unit-driven. And I think I gave you some clues in my preliminary remarks, citing in particular, deposition materials growing at 28%, which is about twice the rate of wafer starts, or also mentioning our liquid filters growing at about, I think it's 21 -- 24% year-to-date.

So again, 2 very important product lines recorded. Those are areas where we have invested a lot in R&D over the past years. So it was important for us to see the results. And we are seeing results, frankly, that are exceeding our expectations in many cases.

That's helpful. And actually, the follow-up was on that metric you gave on advanced deposition materials, the 28% growth. I'm curious about if you could get more granular on that in terms of logic versus memory.

I think you said advanced logic sales were up mid-teens. So maybe that was part of the part of the answer. But was this strong growth in advanced deposition, was it more a function of ramping nodes in logic foundry? Or is it really most pronounced in the migration within the memory sector, in 3D NAND to architectures with the deeper layers?

So this year, it has been mostly a memory story. Remember that a lot of our customers have transitioned now to 128 layers and some of them have been transitioning to 176 layers. And all of them are actually taking steps to transition to 200-plus layers going into 2022.

So with those transitions, we saw a number of new opportunities for deposition materials opening up. We saw new opportunities for selective etching chemistries as well. And those are the trends that have been driving our SCEM business. So it's mostly memory this year.

I would expect logic to play a bigger role in the next years as some of those new molecules are more widely adopted in the novel logic architectures. I think it's going to be more of a '22, ' 23 event, with memory continuing to drive SCEM growth in 2021 and 2022.

We'll now move to our next question from Timothy Arcuri from UBS.

I have 2 questions. Bertrand, first for you. I know you're talking to customers all the time. And -- do you see any signs of them stockpiling inventory of your products at customers? I know -- we've heard more of that happening during the second quarter. I'm just wondering if you can sort of handicap whether or not you think this is happening.

So Tim, it's a fair question. It's something we're constantly looking at, especially in the very, very sharp ramps and especially at a time when we are capacity constrained. So obviously, something that we are paying very, very close attention to.

I think there may be a little bit of that in China for the reasons that we all know. But putting China aside, I think that the demand for our products are really driven by the very, very strong level of fab activity right now. If -- I mean do you -- I don't know about you, but I mean we've -- it's hard to find electronics. I will give you just an anecdote, but I think it's telling.

I mean, we've been hiring a lot of new members of our teams, and it's really hard to get them PC on time. If you talk to any one of our customers, they are running at very, very low levels of inventory for their finished products. And in many cases, for the Entegris products for their raw materials, they claim to be below what would be their normal inventory levels.

So I think that right now, this is not a risk, and I don't think that there is really a lot of excess inventory in the channels. I don't think there is any. I think we are below normal levels.

Got it. Got it. Okay. And I guess, Greg, for you. I guess I had a question on gross margin drop-through. I mean you did a great, great job in June, don't get me wrong. But the margins came in, in line. And if I look at the gross margin drop-through over the past 3 years, you've done 50% more revenue and the gross margin basically hasn't really changed much over that period.

So I'm just wondering what can change to make the drop-through a bit better? I know you've been investing in capacity. But also, we should see some leading-edge wafer addition. And that should help gross margin, I would think, as well due to mix. So can you talk about the drop-through and should it get better going forward?

Yes. So first of all, on the gross margin in the most recent quarter, as I said in the prepared remarks, really, I mean the higher volumes were offset by the negative impact of mix and that emanates itself primarily in the MC business.

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

What I would say is I would expect the margin to have an upward bias, but I have always said, I mean think of this as a business where do I think we can do 47, 48-type margins, yes. But I don't think long term this is a business where you're going to see margins in the 50s.

I wish I could say it differently. But I mean I've watched it and you're highlighting, I mean watched over a long period of time, I mean, I think our customers are going to let us have margins where they are, maybe slightly above where we are.

We'll now take our final question from Mike Harrison from Seaport Research Partners.

So Bertrand, we talked a little bit about the supply and demand tightness. In your view that demand is outstripping supply right now, and we're in this broadly inflationary environment. So are you seeing that your pricing is increasing at all as a component of the revenue growth you're seeing, either in response to inflation or as a result of this tight supply-demand environment?

So look, I think we are obviously watching all of those trends. And then we're going to continue to adjust our strategies to mitigate, potentially, negative factors to our margins. I don't think we want to go into the details of our mitigation strategies or pricing strategies on this call.

But the punchline, as Greg was mentioning just a second ago, is that we expect our margins to continue to steadily improve. And that's really a function of the greater value that we are contributing to our customer road map.

So obviously, a lot of moving pieces right now, as you said. We are very focused on that. And we don't think that it will have any lasting negative impact on our bottom line performance.

All right. And then in the AMH segment, the margin there looks like it's a record in terms of that 24%, 25% number. I know that when you did your Investor Day last fall, you had actually reduced the longer-term margin target, I believe, to a 20% to 22% number. So how should we think about the sustainability or maybe long-term margin potential of that AMH segment?

I think the points you make are all sort of right on, and as you point out, I mean, we're operating at the 24% range in Q2, which is a very good margin, which reflects strong execution, strong operating leverage. Do I think it's longer term? I mean, would I commit to that 24% longer term? I mean we're down at a point now where we're prepared to change our longer-term targets that we've laid out. But at these revenue levels, the business should be able to sustain margins above the targets that we talked about back in November.

Mike, I mean, if you look at really all the -- many of the metrics in our business, I mean, the industry environment has proven to be much stronger than we laid out in November. So in many cases, we're sort of out ahead of where we would have thought we would be at this point.

All right. And then, Greg, maybe a question for you. The unallocated expense number looked relatively high, north of $13 million. I think it's the first time it's been a double-digit number in some time. What drove that? And can you give some guidance on what we should be modeling for unallocated expense in the second half?

So what drove it in the most recent quarter was the $3 million contribution Bertrand referred to. What's driven it overall would be higher trends in compensation costs related to the higher performance that we've had as a business. Honestly, I don't -- when we model and put our plans together, I don't really focus on that unallocated number.

So I don't -- but I would say, generally, it's an SG&A number, and our goal is to hold SG&A growth well below sales growth on a percentage basis.

Ladies and gentlemen, there are no more questions. So this concludes today's call. Thank you for your participation, and you may now disconnect.

Thank you.

Thank you.