Entegris Q2 2025 Earnings Report

Entegris EPS Results

• Actual EPS: $0.66
• Consensus EPS: $0.65
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.71

Entegris Revenue Results

• Actual Revenue: $792.40 million
• Expected Revenue: $753.85 million
• Beat/Miss: Beat by +$38.55 million
• YoY Revenue Growth: -2.50%

Entegris Announcement Details

• Quarter: Q2 2025
• Date: 7/30/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, July 30, 2025
• Conference Call Time: 9:00AM ET

Entegris (NASDAQ:ENTG) develops, manufactures, and supplies microcontamination control products, specialty chemicals, and advanced materials handling solutions in North America, Taiwan, China, South Korea, Japan, Europe, and Southeast Asia. It operates in three segments: Materials Solutions (MS); Microcontamination Control (MC); and Advanced Materials Handling (AMH). The MC segment solutions to purify critical liquid chemistries and process gases used in semiconductor manufacturing processes and other high-technology industries; integrated circuit chemical mechanical polishing solutions, high-performance etch and clean chemistries, gases and materials, and safe and materials delivery systems. The MS segment provides materials-based solutions, such as chemical mechanical planarization slurries, pads, deposition materials, process chemistries and gases, formulated cleans, etchants, and other specialty materials. The Advanced Materials Handling segment develops solutions for customers' yields by protecting critical materials during manufacturing, transportation, and storage, which include monitor, protect, transport and deliver critical liquid chemistries, wafers, and other substrates for semiconductor, life sciences and other high-technology industries. The company's customers include logic and memory semiconductor device manufacturers, semiconductor equipment makers, gas and chemical manufacturing companies, and wafer grower companies; and flat panel display equipment makers, panel manufacturers, and manufacturers of hard disk drive components and devices, as well as their related ecosystems. It serves manufacturers and suppliers in the solar and life science industries, electrical discharge machining customers, glass and glass container manufacturers, aerospace manufacturers, and manufacturers of biomedical implantation devices. Entegris, Inc. was founded in 1966 and is headquartered in Billerica, Massachusetts.

Entegris Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Revenue beat guidance: Q2 sales were $792 M, up 2% sequentially, with non-GAAP EPS of $0.66 at the high end of guidance and an EBITDA margin of 27.3%.
• Positive Sentiment: Materials Solutions strength: Sales rose 4% year-on-year, led by CMP slurries and pads, selective etch, and deposition materials driven by China growth, HBM demand, and node transitions.
• Negative Sentiment: Advanced Purity Solutions decline: APS sales fell 7% year-on-year due to reduced facilities CapEx, partially offset by modest growth in photoresist and CMP liquid filtration.
• Positive Sentiment: Global manufacturing ramp: Taiwan site is on track for qualification by year-end with volume ramp in 4Q, Colorado grand opening in November, and plans for 70% of Asia demand to be served from non-US plants.
• Neutral Sentiment: Industry outlook mixed: AI-enabled logic and HBM growth is strong but small in wafer-starts; mainstream logic and 3D NAND remain subdued amid trade policy volatility, though stronger H2 performance is expected.

Presentation

[Operator]

Welcome to the Entegris Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions following the presentation. I would now like to turn the call over to Bill Seymour.

[Bill Seymour, Partner at Vallum Advisors]

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

[Bill Seymour, Partner at Vallum Advisors]

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 in Regulation G. You can find reconciliation tables in today's news release as well as on our IR page of our website at entegris.com. On the call today are Bertrand Lalois, our CEO and Linda LaGourga, our CFO. With that, I'll turn the call over to Bertrand.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Thank you, Bill, and good morning, everyone. I am pleased with our performance in the second quarter. Revenue was above our guidance range and was up 2% sequentially. Gross margin and EBITDA margin were within guidance and non GAAP EPS was at the high end of guidance. Taking a closer look at our quarterly performance by division, Materials Solutions sales were up 4% year on year, led by CMP slurries and pads, selective etch and deposition materials, which all delivered double digit year on year growth.

[Bertrand Loy, CEO, President & Chairman at Entegris]

This was driven by strong growth in China, strength in HBM and the early positive impact from upcoming node transitions in Logic and three d NAND. Advanced Purity Solutions sales were down 7% year on year. This was largely driven by the anticipated decline in facilities based CapEx investments, which we spoke about last quarter. This particularly impacted our FUPS and Fluid Handling revenue. The year on year sales decline was partially offset by modest growth in photoresist and CMP liquid filtration.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Next, let me provide an update on our global manufacturing and supply chain strategy and related investments. Our facility in Kaohsiung, Taiwan continues to progress. We are on track to complete most of the critical product qualifications by the end of the year and expect to meaningfully ramp volumes in the fourth quarter. Our new Colorado manufacturing site is also on track with construction and tool installation largely complete. We are planning the grand opening of this facility in November and we plan to start customer product qualifications and initial volumes later this year.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Over the past decade, we have invested in a broad global manufacturing footprint, offering the convenience of redundant manufacturing sites to our customers for all our major strategic product lines. In addition, we have developed well integrated supply chain clusters around our largest regional manufacturing centers. This expanded localization of our production and supply lines close to our global customers will serve us particularly well during this time of increased trade policy volatility and uncertainty and over time will drive several business and financial benefits, including shorter lead times, lower working capital requirements and more secure supply lines. Currently, our Asia customers represent approximately 70% of our total revenue. And as we exit the year, we expect to have approximately 70 of this demand served by our non U.

[Bertrand Loy, CEO, President & Chairman at Entegris]

S. Manufacturing sites. And that number will continue to increase as we capitalize on the ramp of the investments recently made in Taiwan, Korea, Japan and Malaysia. On July 17, we opened our new state of the art Korea Technology Center, an opening that also coincided with our thirty fifth year of doing business in Korea. This investment along with our three existing manufacturing sites in Korea will supplement our capabilities and strengthen our engagements with the local DRAM and NAND technology leaders.

[Bertrand Loy, CEO, President & Chairman at Entegris]

So we can help them and their ecosystem address yield, reliability and performance challenges. Looking ahead, overall for the industry, the trends are largely unchanged. AI enabled applications are driving significant growth in advanced logic and HBM, even though AI demand only represents a very modest proportion of wafer starts. Elsewhere, fat activity levels remain subdued, especially at many of our mainstream logic and three d NAND customers. In addition, the uncertainty and volatility around trade policies are expected to continue to have direct and indirect impacts on semiconductor demand and levels of capital spending by the industry at least in the short term.

[Bertrand Loy, CEO, President & Chairman at Entegris]

As a result, we expect the semi market will continue to be dynamic and the visibility to a broad based recovery remains tenuous. That said, we fully expect a stronger second half performance from our business. And looking further ahead, nothing has changed in our long term view of the industry. We remain very optimistic and continue to have high confidence in our strong long term growth outlook. Let me now turn the call over to Linda. Linda?

[Linda LaGorga, SVP & CFO at Entegris]

Good morning and thank you, Bertrand. Our sales in the second quarter of $792,000,000 were down 3% year over year and up 2% sequentially. As a reminder, we have now fully lapped the impact of the CMC divestitures. Foreign exchange positively impacted revenue by $5,000,000 year over year and $6,000,000 sequentially in Q2. Gross margin on a GAAP basis was 44.444.6% on a non GAAP basis in the second quarter, generally in line with our guidance.

[Linda LaGorga, SVP & CFO at Entegris]

The sequential decline in gross margin was driven by the anticipated impact from tariffs, our focus on balancing production volumes with inventory management and some operational inefficiencies. Operating expenses on a GAAP basis were $245,000,000 in Q2. Operating expenses on a non GAAP basis in Q2 were $188,000,000 Adjusted EBITDA in Q2 was 27.3% of revenue, in line with our guidance. The GAAP tax rate in Q2 was 5%, and the non GAAP tax rate was 13%. GAAP diluted EPS was $0.35 per share in the second quarter.

[Linda LaGorga, SVP & CFO at Entegris]

Non GAAP EPS was $0.66 per share at the high end of our guidance. Sales for Materials Solutions in Q2 were $355,000,000 Sales were up 4% year on year and sequentially, both driven by CMP slurries and pads, selective etch and deposition materials. Adjusted operating margin for MS was 21.3% for the quarter, up year on year. Sequentially, the adjusted operating margin decline was primarily due to some operational inefficiencies. Sales for Advanced Purity Solutions in Q2 were $440,000,000 down 7% year on year and up 1% sequentially.

[Linda LaGorga, SVP & CFO at Entegris]

The year on year sales decrease was driven by the impact of the decline in facilities based CapEx investments. The modest sales increase sequentially was driven by liquid and gas filtration and FUPs. Adjusted operating margin for APS was 24.1% for the quarter. The year on year and sequential decline in margin was primarily driven by lower volumes. We are continuously looking for ways to optimize our business model and drive further efficiencies in our cost structure.

[Linda LaGorga, SVP & CFO at Entegris]

In the second quarter, we implemented cost reduction initiatives, which will deliver $15,000,000 in annual cost savings. Moving on to cash flow. Free cash flow was $79,000,000 in the first half of the year, yielding a free cash flow margin of 5%. We continue to expect our free cash flow margin to be in the low double digits in 2025, driven by our stronger second half business performance and our intense focus on optimizing working capital and capital expenditures. A quick overview of our capital structure.

[Linda LaGorga, SVP & CFO at Entegris]

Shortly after the end of the second quarter, we paid down $50,000,000 of the term loan from cash on hand. As a result, at the July, our gross debt was approximately $4,000,000,000 and our net debt was approximately $3,700,000,000 Gross leverage was 4.3 times and net leverage was four times. Our debt is well structured and de risked. The blended interest rate on the debt portfolio is approximately 5% and currently approximately 95% of our debt is fixed. And there are no maturities on the debt until 2028 and no maintenance covenants on the debt.

[Linda LaGorga, SVP & CFO at Entegris]

From a capital allocation standpoint, our single priority remains paying down our debt. And we will use all levers at our disposal to reduce our gross leverage to below four times. Moving on to our Q3 outlook. We expect our Q3 sales to range from $780,000,000 to $820,000,000 We expect our gross margin percent to be approximately in line with Q2, both on a GAAP and non GAAP basis. GAAP operating expenses of $228,000,000 to $232,000,000 and non GAAP operating expenses of $182,000,000 to $186,000,000 We expect EBITDA margin of approximately 27.5%.

[Linda LaGorga, SVP & CFO at Entegris]

Net interest expense of approximately $48,000,000 We expect our non GAAP tax rate to be approximately 9% in Q3 due to the expiration of a tax reserve GAAP EPS between $0.43 and $0.50 per share non GAAP EPS between $0.68 and $0.75 per share and we expect depreciation of approximately $51,000,000 I'll now hand it back over to Bertrand for some closing remarks.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Thank you, Linda. In closing, in this dynamic environment, you can expect us to remain focused on what we control, engaging with our customers and winning critical POR positions in future technology nodes, actively managing our cost structure while making investments critical for our future and improving free cash flow to reduce our debt levels and lower our leverage. Finally, as I step back and reflect on my years as the CEO of Entegris, I could not be prouder of what we have accomplished. Entegris is now one of the most recognized and trusted electronics materials companies in the world, known for its world class innovation, its unwavering commitment to operational excellence and thoughtful capital deployment. But as much as I am proud of what we have accomplished, I am even more excited about where the company is headed as Entegris fully capitalizes on the powerful platform we have built.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Our expertise in material science and materials purity is increasingly valuable for our customers to help them improve device performance and achieve optimal yields. The R and D investments we have made in material science and material security will be critical to the industry in enabling new device architectures and in reaching new levels of miniaturization. Because of the uniqueness of our value proposition and the quality of our execution, we expect to grow and outperform the markets in the coming years. And of course, I am very excited that Dave Reeder will become the next CEO of Entegris. I could not think of a better leader to take Entegris to the next level of excellence.

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

I know that Dave is eager to meet with all of you, and you will get that chance in the coming weeks. With that, operator, let's open the line for questions.

[Operator]

The floor is now open for questions. Our first question is coming from Melissa Weathers with Deutsche Bank. Line is open. Please go ahead.

[Melissa Weathers, Vice President Equity Research at Deutsche Bank]

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

[Melissa Weathers, Vice President Equity Research at Deutsche Bank]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

Yes. Think your words are correct, Melissa, in describing the current industry conditions. They are mixed and the conditions are very similar to what we described at the end of Q1. We cited strong AI related demand that impacted production levels in advanced logic and HBM fabs. But as I mentioned in my prepared remarks, I need you to remember that AI related Logic and HBM only represents less than 5% of wafer starts.

[Bertrand Loy, CEO, President & Chairman at Entegris]

So while those trends are exciting from a volume of production, which is the primary driver for our business, that remains actually fairly small. So elsewhere, the fab utilization levels remain subdued and that includes mainstream logic, traditional DRAM and NAND. So the end demand for these devices have been weak in the first half of the year. The only positive news on that front is that inventory levels have been trending back to levels approaching the pre pandemic levels. And that means that we expect to see sequential improvement in wafer starts through the balance of the year.

[Bertrand Loy, CEO, President & Chairman at Entegris]

So I'm not going to provide any quantification of those statements. But at high level, qualitatively, for the year, we expect wafer starts to grow very modestly at best. As you referenced, we believe that fab utilization rates are still currently in the mid-eighty percent. So again, it's a slow improvement. And we expect wafer start again to be modestly up at best for the full year.

[Bertrand Loy, CEO, President & Chairman at Entegris]

And then CapEx, we believe that will be flattish at best for the year and that's a function of fab construction related CapEx that we expect to be down mid single digit for the year and WHE, which will be up modestly for the year.

[Melissa Weathers, Vice President Equity Research at Deutsche Bank]

Perfect. Thank you for all that color on the full year. And then really quick on the China side just because it was a pretty big topic on the last earnings call. Can you help us level set our models? Did your Chinese customers resume orders in the quarter?

[Melissa Weathers, Vice President Equity Research at Deutsche Bank]

Did you see any pull in activity? And how should we think about the trajectory of that China business going into the second half?

[Bertrand Loy, CEO, President & Chairman at Entegris]

Yes. So the China business certainly started slow in the first part of Q2. Shipments and orders were essentially on hold. And then when the doors reopen, when tariffs were put on hold in May, then things started to accelerate. And we are pleased with what we saw in the second part of Q2.

[Bertrand Loy, CEO, President & Chairman at Entegris]

I mean, obviously, we generated a quarter that was up sequentially 8% in China, which is very good. Year to date, the China business is flat. And that's really a reflection of some of the higher level trends I was mentioning. So some positive on the wafer start front, offset by some softness in the levels of CapEx spend in China in 2025. Going forward, we expect the again, assuming no new development in the trade policies, we expect a stronger second half in our China business.

[Operator]

Got it. Thank you. Our next question comes from Bhavesh Lodea with BMO. Your line is open. Please go ahead.

[Bhavesh Lodaya, Equity Research Analyst - US Chemicals at BMO Capital Markets]

Hi, good morning, Bhatran. Solid quarter, but first of all, you for the leadership at Integris. You are not going far, but you will certainly be missed. And then certainly congratulations and welcome to Dave as well.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Thank you very

[Bhavesh Lodaya, Equity Research Analyst - US Chemicals at BMO Capital Markets]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

We also recognize that the tariff uncertainty led to fairly erratic buying patterns by many of our customers in the second quarter. And it's really hard to predict if it will have an impact or not on our Q3 revenue. And then more generally speaking, I think we are encouraged by the recent developments in the trade negotiations, but it's fair to assume that the tariff and the export policies will likely continue to be a factor in the second half of the year. And it's again, it's an impact that is very hard for us to quantify. So in that highly volatile environment, I think we are choosing to be prudent and that's probably what you want us to be given the prevailing volatility around us.

[Bhavesh Lodaya, Equity Research Analyst - US Chemicals at BMO Capital Markets]

Got it. And then a follow-up on the China business discussion. How is the progress so far on the requalification process? Do you have a number to share as to how much of The U. S.

[Bhavesh Lodaya, Equity Research Analyst - US Chemicals at BMO Capital Markets]

To China business has have been transitioned or maybe a time line that you're targeting to move that business to maybe Taiwan or Japan or some other regions?

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Bhavesh Lodaya, Equity Research Analyst - US Chemicals at BMO Capital Markets]

Great. Thank you.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Thank you.

[Operator]

We'll go next to Jim Schneider with Goldman Sachs. Your line is open. Please go ahead.

[Jim Schneider, Senior Equity Analyst at Goldman Sachs]

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

[Jim Schneider, Senior Equity Analyst at Goldman Sachs]

And when should we see those gross margin pressures abate?

[Linda LaGorga, SVP & CFO at Entegris]

Thanks, Jim. Appreciate the question. So in the context of Q2 and some of the commentary, as we've talked about broadly in the context of this trade environment, Q2 was a quarter of change, uncertainty and demand shifts from the customer. We started out the quarter with a higher tariff environment in China that then shifted, and there are other examples of that. In this backdrop, it's just not truly conducive to optimizing gross margin perfectly.

[Linda LaGorga, SVP & CFO at Entegris]

So on your question, we did make some decisions to optimize manufacturing production to manage inventory levels. This contributes to our free cash flow, and we'll continue to do this as we go into Q3 and Q4. But it does impact gross margin in the near term as we make those decisions. I think also importantly is to think about our business priorities. We remain very focused on our business priorities, and this leads to some of the inefficiencies of moving production to Asia to localize with our customers.

[Linda LaGorga, SVP & CFO at Entegris]

We're ramping two manufacturing facilities, Taiwan and Colorado. Colorado is going to be coming online. And in the context of all this, we're balancing gross margin and inventory. Where I really want everyone to focus is longer term, our path to higher gross margins remains intact. With more volume growth, the ramping of the two large facilities in Taiwan and Colorado and our highly differentiated products, which we are very proud of, position us very well for higher gross margins going forward. So it's a very good story for the future.

[Jim Schneider, Senior Equity Analyst at Goldman Sachs]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

Yes. So I think this is something obviously that we're going be watching very carefully in the quarters, the upcoming quarters. We are encouraged by the discussions we've been having with our mainstream customers. So we'd expect that to be probably the areas where we start seeing the earlier signs of recovery, as I mentioned. And then I would expect that to start expanding to NAND probably not until next year and then DRAM as well, traditional DRAM.

[Jim Schneider, Senior Equity Analyst at Goldman Sachs]

Thank you.

[Operator]

And we'll take our next question from Charles Chi with Needham. Your line is open. Please go ahead.

[Charles Shi, Senior Analyst at Needham & Company]

Hi, Szechuan. Once again, congrats on a very successful leadership at at the Integris that you will be missed.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Thank you, Chubb.

[Charles Shi, Senior Analyst at Needham & Company]

May maybe, yes, thanks. Maybe I want to ask a little bit more about Q4. In your press release, prepared remarks, you talked about second half will be better than first half. But it from my view, it doesn't really set a very high bar for q four. Directionally, may I ask, based on your current visibility, is q four going to be higher sequentially as in, let's say, typical seasonality or it can be lower?

[Charles Shi, Senior Analyst at Needham & Company]

The reason why I asked this is that your largest customer in Taiwan is right now assuming kinda like a 10% q on q decline. Just to be conservative ahead of the macro uncertainties such as section two thirty two, semi tariffs that which may may come very shortly. And I wanna gather some of your thoughts given there seems to be a little bit of a fog between now and the q four. Thanks.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Charles, all good questions. I promised Dave Reeder, my successor, to not provide Q4 guidance. So I need to honor that promise. But and you're right that one of the reasons it was an easy commitment for me to make is that there is a lot of uncertainty ahead of us indeed. Having said that, as I mentioned, we expect to see strength in wafer starts and then some level of recovery in certain segments of the industry that have been very, very soft for long periods of time.

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Charles Shi, Senior Analyst at Needham & Company]

Thanks, Patran. We we we definitely look forward to hear more about q four from from David a little bit down the road. So maybe wanna wanna ask you a little bit of high level question. One, I think, one very interesting maybe I would wouldn't necessarily call it divergence, but there's some differential between your commentary about your mainstream customers versus what their comments are so far into this earning cycle, especially from the analog companies, is that you seems to be more seeing a subdued non AI market demand. But your customers, especially some of the analog companies, are are more more confident or have, I would say, much higher conviction on a cyclical recovery, the thing that's underway.

[Charles Shi, Senior Analyst at Needham & Company]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Charles Shi, Senior Analyst at Needham & Company]

Thanks, Petra. That's all from me.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Thank you.

[Operator]

We'll take our next question from Timothy Arcuri with UBS. Your line is open. Please go ahead.

[Timothy Arcuri, Managing Director at UBS Group]

Thanks a lot. Bertrand, I've known you for, I think, twenty five years. So congratulations. I think you've done a great job over the years.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Thank you, Tim.

[Timothy Arcuri, Managing Director at UBS Group]

Yeah. So

[Timothy Arcuri, Managing Director at UBS Group]

I guess on just on China, Bertrand. So my understanding was that there was a $50,000,000 headwind and you were going to get, I thought, about half of that back. So can you just update that? Did you, in fact, get half of it back? And I think you expected to have the remediation of all of it by the end of the year.

[Timothy Arcuri, Managing Director at UBS Group]

So is it all gone by December? Can you just give us some numbers on that?

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

And we expect that number to get to 95% next year. And I'm going to defer to Dave and Linda to provide more clarity. Needless to say that we're trying to get to that point as quickly as we can. And that has engendered a number of inefficiencies on the margin front, which is something that Linda has been flagging as well. So pleased with the progress.

[Bertrand Loy, CEO, President & Chairman at Entegris]

I think the team is very focused on it, and we're getting a lot of positive support from our customers.

[Timothy Arcuri, Managing Director at UBS Group]

Okay. So you got almost all the 50,000,000 back. So basically, is no more China headwind between June and September. Is that the right way to think about it?

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Timothy Arcuri, Managing Director at UBS Group]

Got it. Okay. And then Linda, just on gross margin, I mean, I take the $800,000,000 midpoint, it's still like 100 to 150 basis points below where gross margin was in the 2024. Yet in the interim, you've had selective etch and depth chemistries and CMP slurries. These are definitely much, much better over that period and these are quite high margin products.

[Timothy Arcuri, Managing Director at UBS Group]

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

[Linda LaGorga, SVP & CFO at Entegris]

Yeah. I mean, some of it is similar to what I have said, but let me add a bit more context for you, Tim, to help here. Again, as we went through the Q2 and some of this is going to continue in Q3 with the trade uncertainties and the uncertainties in the environment. Secondly, we are going to continue to work on the balance between our gross margin and our inventory levels. And so, therefore, we're gonna make some select decisions to reduce production in order to help bring down our inventory levels.

[Linda LaGorga, SVP & CFO at Entegris]

And, you know, I do wanna see the dollars of inventory progress downward as we go through the remainder of the year. And as you and I know, that does impact gross margins. And then as Bertrand and I both talked about, it has been a priority. Look, it's a part of the long term strategy, but it's a priority to continue to move more of our manufacturing to locally serve our customers. And, you know, as we do that in this context, there are some inefficiencies that come out until we get things moved over there.

[Linda LaGorga, SVP & CFO at Entegris]

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

[Timothy Arcuri, Managing Director at UBS Group]

Okay. Thanks.

[Operator]

And we'll go next to John Roberts with Mizuho. Your line is open. Please go ahead.

[John Roberts, Managing Director at Mizuho Financial Group]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

Yes. So the fab revenue was up sequentially in the low single digits. As you would expect, the driving force was our Logic business. Sales to equipment makers and engineering companies were down modestly quarter over quarter, which is in line with the narrative and the commentary I was giving on the soft industry CapEx environment. And I would just finally tell you that the sales to our chemicals and materials companies were also down mid single digits, mostly a reflection of the weak demand from our wafer grower customers.

[John Roberts, Managing Director at Mizuho Financial Group]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

So in some cases, we're going to choose not to localize production and have the production either only in Asia or only in The U. S. And that may have an impact on the long term potential of those product lines. Having said that, as you would expect, those products are not strategic and are not the products that we're counting on to continue to outperform the industry.

[John Roberts, Managing Director at Mizuho Financial Group]

Very helpful. Thank you.

[Operator]

And our last question comes from Aleksey Yefremov with KeyBanc. Your line is open. Please go ahead.

[Aleksey Yefremov, MD & Equity Research Analyst at KeyBanc Capital Markets]

Good morning, Bertrand. Wishing you all the best and Dave, congrats and best of luck.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Thank you.

[Aleksey Yefremov, MD & Equity Research Analyst at KeyBanc Capital Markets]

Actually have first question for Linda. What's your best guess when this inventory adjustment process would be over? And any number that you could put on the actual impact on gross margins that this process is having right now?

[Linda LaGorga, SVP & CFO at Entegris]

Yes. Thanks, Alexei, for the question. So I'm not going to quantify it because it's a balancing act. It's about optimizing gross margin and inventory. This is a very important working cap optimization is a very important lever for free cash flow.

[Linda LaGorga, SVP & CFO at Entegris]

We've talked about free cash flow this year. It's a it's a real goal for us as an organization. We wanna continue to improve our free cash flow. We want our free cash flow margin and what we're targeting this year is in the low double digits in 2025. And then over the next several years, we do expect our free cash flow margin to return even to the mid to high teens percent to the pre pandemic levels.

[Linda LaGorga, SVP & CFO at Entegris]

So this inventory management is an important lever for that, and we'll continue to balance it this year.

[Aleksey Yefremov, MD & Equity Research Analyst at KeyBanc Capital Markets]

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

[Bertrand Loy, CEO, President & Chairman at Entegris]

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

[Aleksey Yefremov, MD & Equity Research Analyst at KeyBanc Capital Markets]

Okay. Thanks a lot.

[Bertrand Loy, CEO, President & Chairman at Entegris]

Thank you.

[Operator]

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

[Bill Seymour, Partner at Vallum Advisors]

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

[Operator]

Thank you. This concludes today's Entegris second quarter twenty twenty five earnings conference call. Please disconnect your line at this time and have a wonderful day.

Participants

Executives

• Bertrand Loy, CEO, President & Chairman
• Linda LaGorga, SVP & CFO

Analysts

• Bill Seymour, Partner at Vallum Advisors
• Melissa Weathers, Vice President Equity Research at Deutsche Bank
• Bhavesh Lodaya, Equity Research Analyst - US Chemicals at BMO Capital Markets
• Jim Schneider, Senior Equity Analyst at Goldman Sachs
• Charles Shi, Senior Analyst at Needham & Company
• Timothy Arcuri, Managing Director at UBS Group
• John Roberts, Managing Director at Mizuho Financial Group
• Aleksey Yefremov, MD & Equity Research Analyst at KeyBanc Capital Markets