Good day, everyone, and welcome to the Entegris 3rd quarter 2020 turning over 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, Vice President of Investor Relations. Please go ahead, sir.
Earlier today, we announced the financial results for our third quarter of 2020. 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 are contained in our most recent annual report and subsequent quarterly reports that we filed with the SEC.
Please refer to the information on the flamer 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 press release, as well as on the Investor Relations page of our website at entegris.com. On the call today are Bertrand La la, our CEO and Greg Graves, our CFO. With that, I'll hand the call over to Bertrand.
Thank you, Bill, and good morning, everyone. As we have discussed, since early in the outbreak of the pandemic, our primary focus has been keeping our teams safe. To that end, we have continued to strengthen our safeguards and protocols and I am proud of the safe environment we have created for our Integrys colleagues. I am also very proud of the tremendous work by our global teams to maintain high service levels in support of our customer ramps around the world. And as we begin the final quarter of the year, our operations and supply chain are all operating at normal levels.
Let me now turn to our 3rd quarter performance. And I will start by saying that I am very pleased with our results and the quality of our execution. In the third quarter, sales grew 22% year on year and 7% sequentially above our guidance. Growth was strong across all three divisions as we benefited from several node transitions and strong overall demand for our products and solutions. Gross margins improved year on year and sequentially and adjusted EBITDA was up 32% year over year and up 8% sequentially.
Finally, our non GAAP EPS of $0.67 was above our guidance, up 34% year on year and up 12% sequentially. Showcasing the leverage that exists in our business model. Our record Q3 revenue was driven by our continued outperformance in a few key areas. First, we continued to benefit from the accelerated demand for our leading edge solutions in advanced technology nodes especially in liquid filtration advanced deposition materials and formulated claims. The second area of strength was in our AMH division and its solutions for new fab projects.
Growth was strong in fluid handling, food and sensing and control products within our sensing and control platform, in particular TSS, which required in 2018 and GMTI, which we just acquired in July of this year, had a strong quarter. As you know, these complementary solutions provide critical particle and process control for the CMP slurry, chemical delivery loops. All in all, a very good quarter and excellent execution by the team. Next I would like to quickly address the evolving U. S.-China trade situation.
To put things in context year to date, China represented 13% of our revenue. And the local customers in China comprise less than half of that. We are obviously monitoring closely the latest developments from the U. S. Administration.
In order to remain in full compliance with the regulations. Unfortunately, to date, the various trade restrictions had no material impact on our overall business. Now I would like to discuss a new program I am very excited about. This summer, we officially launched Entegris' corporate social responsibility program. We have been active in many elements of CSR and ESG in the past, but we had yet to fully articulate our philosophy purpose and aspirations.
In my CSL letter posted on our website in August, we laid out our belief that what we do as a business must be closely linked to what we stand for as an organization and have a lasting positive impact on our world. It also laid out the 4 pillars of our CSR approach, which are innovation, safety, personal development and inclusion and sustainability. Next week, we will be announcing ambitious goals for each of these 4 pillars. And there will be a lot more to come from us in the weeks to come on CSR and ESG at Entegris. Looking ahead to the fourth quarter and the balance of the year, from an end market perspective, the semi market appears to be holding up better than expected, driven by the well documented strength in areas like data centers, 5G, laptops and gaming, and relatively stable conditions in the memory segment.
Lastly, global auto and industrial markets appear to be rebounding, which should translate into strong demand in mainstream trials. For the full year 2020, we now expect the market based on our unit CapEx mix will be up low to mid single digits compared to our previous expectations of down mid single digits. In addition, demand signals in our own business continue to be strong. In particular, our advanced memory and logic customers continue to be very committed to their node transitions. And given our new opportunities at these nodes, we expect to sustain about the long term fundamentals of the semiconductor market.
In Tigris, we are benefiting from the 2 intersecting themes of the growing importance of process materials and materials purity and the impact they have on semiconductor performance cost and reliability. We expect that these key trends will continue to result in increased integrase content per wafer. In conclusion, I am very pleased with the performance and the resilience of our business, and I am optimistic that we will have a strong close to the year. In 2020, we expect to deliver record sales and EPS, which I am especially proud of considering the many challenges we faced during the year. Before I turn the call over to Greg, I would like to remind you of our upcoming virtual 2020 investor in Analyst Day on November 17th.
It's been a few years since we have done an Analyst Day. So we look forward to updating you on the Integrys story. Now, let me turn the call to Greg. Greg?
Performance and our 4th quarter guidance. The 3rd quarter was an excellent quarter for Entegris with record performance across the board. Q3 sales were $481,000,000 compared to $475,000,000 at the high end of our guidance. Sales were up 22% year over year and 7% sequentially. This growth was driven primarily by our own market outperformance as Bertrand discussed.
Q3 GAAP diluted EPS is $0.58 per share, up 93% year over year and 16% sequentially. Non GAAP EPS of $0.67 was slightly above the top end of our guidance range of $0.66 and up 34% year over year and 12% sequentially. Moving on to gross margin. GAAP and non GAAP gross margin were both 47% in Q3 versus our guidance of approximately 46%. As well as very good execution by both on a GAAP and non GAAP basis in Q4.
GAAP operating expenses were approximately $119,000,000 and included a total of approximately $15,000,000 of non GAAP items from amortization of intangible assets, integration and other costs. Non GAAP operating expenses in Q3 were $105,000,000, which was higher than our guidance There were 2 primary drivers of this. 1st was higher variable compensation driven by the better than expected Q3 performance and the improved annual soon to be established in Tager's foundation, which among other things will fund STEM Education in underrepresented communities. We expect both GAAP and non GAAP operating expenses will be approximately Q3 GAAP operating income was $107,000,000 or 22.2 percent of revenue, and non GAAP operating income was $122,000,000 or 25.3 percent of revenue. Adjusted EBITDA was approximately $142,000,000 or 29.6 percent of revenue.
Our GAAP tax rate was 17 point below our guidance of approximately quarter, we expect both our GAAP and non GAAP tax rate to be 21% for Q4. First, in Q3, we had a discrete benefit related to option exercises that will likely not recur in Q4. And second, in Q4, the benefit from foreign tax credits will be slightly less than initially anticipated. Turning to our performance by division. Q3 sales of $150,000,000 for SCEM were up 18% year over year and up 3% sequentially.
The growth was primarily driven by advanced deposition materials, advanced coatings and cleaning chemistries. The Synmed acquisition also had a modest positive impact on year over year growth. Adjusted operating margin for SCEM 22% was up over 300 basis points year over year. The year over year increase in operating margin was driven primarily by high volume. Q3 sales of 194,000,000 dollars sequentially.
On a year over year basis, liquid filtration, gas filtration and the impact of the Anau acquisition drove the sales growth. Adjusted operating margin for MC was 33.7 percent, up almost 200 basis points year over year and down slightly sequentially The year over year margin increase was driven primarily by higher volumes and favorable mix. The sequential margin decline was driven primarily by higher R and D investments and higher variable compensation costs. Q3 sales of $144,000,000 for AMH were up 23% versus last year and up 14% sequentially. The year over year sales increase was primarily driven by high purity liquid containers fluid handling products sensing and control products and wafer handling products.
The sequential sales increase was primarily driven by sensing and control products, and fluid handling products. As Bertrand highlighted, the performance of PSS was particularly strong in the quarter. The GMT acquisition had a modest impact on both year over year and sequential growth. Adjusted operating margin for AMH was 20 0.3%, up 600 basis points year over year and up 400 basis points sequentially. The year over year and sequential margin increase was driven by Cash flow from operations for the quarter was 101,000,000, free cash flow was 69,000,000 CapEx for the quarter was $33,000,000.
We continue to expect to spend approximately $120,000,000 in CapEx in 2020, related to ongoing investments in support of our During Q3, we used approximately $11,000,000 for our quarterly dividend. We did not do any share repurchases in the third quarter. However, we did reinstate our $15,000,000 per quarter programmatic buyback We remain committed to our Turning to our outlook for Q4. We expect sales to range from $480,000,000 to $495,000,000. We expect $7 per share.
In summary, we are extremely pleased with our performance in the third quarter year to date. During the third quarter, our revenue EBITDA and EPS were all at record levels. Demand for our advanced products in the new logic and memory technology nodes continues to be very strong. And we have confidence in the strength of our platform, our value proposition, our execution and our strong balance sheet. Operator, we'll now open
We'll take our first question from Sidney Ho with Deutsche Bank. Please go ahead.
Great. Thank you and good morning everyone. Congratulations on a strong quarter. The first question is, I appreciate your comment on this year's market outlook. Is there, do you have any preliminary thoughts on how next year will look like maybe as differently I think we're seeing quite a change during the year, but assuming the market conditions hold the same as in Q4, how would 2021 be for your market adjusted for the mix?
And maybe more specifically, in the CapEx side of things, do you expect the effect construction activities to be as strong as this year? That's my first question.
Good morning, Sydney, and thank you for your question. I would probably only say that we, we continue to be optimistic about the general health of the industry and our relative competitive position as we exit 2020. So there are reasons to be optimistic about 2021, but it's too early for us to, go past those generic statements. So We will provide more details and be more specific about our 2021 outlook when we report our Q4 results in February.
Okay. Maybe my follow-up question is, if you can kind of go back to Q3 thinking about clearly the revenue, there's a lot of upside to it. But if I kind of look at the fall through, that you guys have talked about in the past, the incremental gross margin on the revenue side is close to 60%, even though most of the upside seems to be coming from AMH which is obviously the lower margin business. But the incremental operating margin was slower than we would have expected. Trying to understand the dynamics on both the gross margin and the operating margin side.
Yes. So I on the gross margin side, Sydney, I would say we've got 2 or 3 things at play there. I mean, the tailwinds that we have are obviously, the higher volumes at the same time we continue to have modest headwinds related to freight and logistics costs. We continue to have modest headwinds. Again, we're providing bonuses for our contracturing teams.
We have slightly higher variable compensation. So I'm actually really pleased with the margins. I mean each quarter sequentially through 2020, they've been up a little bit. When you think about the up operating margin, if you look at full year, 1st 9 months of the year, our flow through the EBITDA line is 46 percent. Revenues up $178,000,000 and EBITDA is up $82,000,000, so very strong flow through.
Year over year, the flow through is, for the quarter was up 40%. So I think when you look at it, On a quarter by quarter basis, I mean, we had, again, had higher variable compensation. We had to see out the $2,000,000 contribution related to our corporate social responsibility program. But I guess what I'm saying is I'm pleased with the profitability and I'm I think we continue to demonstrate the leverage in the model.
We'll take our next question from Toshiya Hari with Goldman Sachs. Please go ahead.
Hi, good morning, and thanks for taking my question. I had 2, if I may. Bertrand, if we take the midpoint of your Q4 revenue guidance, I think you'll be growing the business about 15% in 2020 versus 2019, which is obviously very strong outperformance relative to the updated market forecast that you provided about low single digits to mid single digits. I was hoping you could break down the 10 percentage point or 10 percentage points plus outperformance for the year into M And A, and also, the organic part of the story. And for the organic part, if you could highlight maybe 2 or 3 product areas where you feel like is particularly contributing to that outperformance, that would be very helpful.
Then I will follow-up. Thanks.
Sure. Good morning, Toshiya. Thank you for the question. Yes, so let me try to help you with the 2020 guidance So as you said, the full year guidance at the midpoint is about 15% up versus last year. What is very nice this year is that that growth rate is actually fairly consistent across all three divisions.
They are all expected to grow in the mid teens. From a market standpoint, we expect the market based on our mix of unit and CapEx to be up in the low to mid single digits or call it 4% to 5% up. The acquisitions that we've made recently will contribute about three points to the growth in 2020. There's another factor that I want to call out and that's some level of customer pull ins, particularly in China. We saw that in Q3.
We expect to see more of that in Q3 4, and that probably at the end of the year will contribute to about one point of our growth. But the rest is organic growth. And that organic growth is well in excess of the industry. And if I want to call out some of the products, I would say that, it's, as I said, it's really across the board. So A and H has been doing very well, a lot of strength in our advanced fruits of food handling solutions, at all becoming increasingly a standard in the advanced fabs, both in memory and logic, but we have also talked about the growing importance of our UltraQ packaging solutions.
So image has done really, really well this year on the back of strengthening all of those various product platforms. Microcontamination, the team is well understood. I think by all of you, it's really 2 big product lines driving the growth, it's Dorento and Protego. Those are the liquid filters and new liquid purifiers that are used in aggressive cleaning chemistries by the industry. We expect those 2 products to achieving records in Q4 and overall, we expect those products to have a great year.
And SCM division is expected to grow in the mid teens as well. It's a little bit of a tale of two cities for SCM this year. On the one hand, very, very strong growth in advanced deposition materials, cleaning chemistries, and specialty coatings. But they are facing a significant headwind in our graphite business used in a number of industry applications. I mean, that business has shrunk significantly against last year and has not recovered.
So with that as a backdrop, I think that the performance in SCMs actually really, really exceptional this year. So going back to you Toshiya, I think the other second question.
Yes, I do. Thanks for the detailed response of the trial. My second one is on AMH profitability, 23.3 percent in margins, obviously a very impressive result you talked about higher volume and, solid cost management as contributors for that performance. Was hoping you could elaborate a little bit, on the cost management side. What exactly drove the improvement in margins, both sequentially and year over year?
And I guess importantly, going forward, should we consider this 23% plus level as a new normal for AMH or could margins revert lower to the high teens or 20 percent? Thanks so much.
Hey, Toshiya, I'll take that one. Greg. So I would not take the 23 percent to the bank as sort of the, you know, the ongoing, profitability of that business. They had a very good quarter from an execution standpoint. Benefited from the higher volumes.
I mean, I do think that the profitability of that business though over the longer term starts with it. With the 2. From a cost management perspective, this team, I mean, this is our most mature business. And this team, I would just say, has done a very good job managing costs across the board. It's not really anything specific, but just generally focused on improving the profitability of the business
Thank you.
We'll take our next question from Amanda Garnati with Citi. Please go ahead.
Hi, good morning. I just had a quick follow-up question. They're trying to mention that you're expecting to see sort of mid teen growth, from all of the different segments this year. When I look at next quarter that seems to imply that specialty chemicals should see some significant growth in the other 2 divisions could see a little bit of a pullback. Is that how you're looking at sort of next quarter when you're giving your guidance?
Yes, good morning, Amanda. So I mean, we typically don't provide specific guidance by division on a quarterly basis for the outlook, but I'll try to be helpful. I would say that, I would expect that you may to be modestly down sequentially, and that's in line with reduced sequential CapEx projections for the industry. In Q4. The other 2 divisions are expected to be up sequentially and see continuation of the trends I was describing.
Liquid filtration really driving the sequential growth in microcontamination. But the fastest sequential growth is expected to come from SCM. And that really has to do with really capitalizing on a number of new product introductions in the position materials and cleaning chemistries in particular. And again, yeah, I'm talking about the sequential growth Q4 over Q3.
Okay. And then with the demand pull forward that you mentioned, I assume it's mostly from China as there's expectations of continued trade pressure and restrictions. But are you seeing anything else sort of at the leading customers in Taiwan or New York in terms of pulling forward? And do you expect that to have any sort of significant impacts going into 'twenty one?
Look, I mean, that remains an open question. I mean, something that we've been trying to assess very, very carefully. We don't think that the industry, the inventory overhang will be a lingering issue as we go into 2021, but that remains to be seen. I think certainly we've seen some of our leading edge customers, increasing the levels of inventory that they want to carry. But the feeling that we have is that this is really more of a permanent decision that they are making just to reduce the ongoing supply chain risks.
So again, I don't think that the flip side of that, which would be a destocking risk. I don't think it's something that, we are overly worried about at this point.
We'll take our next question from Patrick Ho with Stifel. Please go ahead.
Thank you
very much and congrats on a really nice quarter outlook. Bertrand, maybe first off, you highlighted the strength that you're seeing at the advanced nodes as well as the higher layer content memory. Can you give a little bit of color on any signs of recovery in the more mature technology node, we didn't get any data points of markets like automotive, CMOS image sensors. That are starting to pick up. Can you give a little color on how that's impacting some of your older legacy businesses?
Yes, good morning, Patrick. Yes. So I think that the strength in the mainstream fabs is probably what drove our business ahead of our guidance for Q3. The recovery in mentioned fabs were certainly steeper and more broad based than we originally feared. And we expect that trend to be I mean, to continue going into Q4.
I mean, obviously, like everybody else was very closely watching the second wave of COVID-nineteen it's really, again, something that it's hard for us to assess, but what would be the impact on the economy and potentially on some segments of the semiconductor industry remains clear, but I don't think it would be a factor in for the fourth quarter.
Great. That's helpful. And maybe as my follow-up question also for you Bertrand, in terms of the DRAM market specifically on the memory side market has actually held up pretty well given some of the demand drivers that you mentioned. We know a lot of the memory growth you seen in recent years has been on the NAND Flash side with materials and contamination control products. But can you discuss some of the changes going on in DRAM that also will have a positive impact for your businesses?
So you're right that for us, the great opportunity in memory is around a 3 d NAND architect Having said that, there are some opportunities in DRAM as well. I think the primary change really is around the further miniaturization of the features. And that leads to need for greater purity. So that's going to impact a suite of products in microcontamination and AMH. And we also see actually some interesting opportunities for new materials as well.
So we will actually share a little bit more during the Analyst Day and Jim O'Neil, our Chief Technology Officer, will join us during the Analyst Day that we intend, I mean, that we planned for November 17th. And during that, event, we will try to grow in more details into the technology roadmaps of our customers and how different parts of our portfolio intersect with the roadmap of our customers. So stay tuned. I think you would probably learn a lot more in a few weeks.
We'll take our next question from Mike Harrison with Seaport Global Securities. Please go ahead.
Hi, good morning.
Good morning.
I
was wondering if you can talk a little bit about the operating expense line. It looks like in the quarter, you came in a little bit higher than you anticipated. I know in muffler contamination until you mentioned higher incentive comp and some investments. But maybe help us think about what portion of these higher expenses could be categorized as investments that maybe should leverage over time? And what portion we should think of as just being, I guess, related to ongoing higher costs?
Thanks.
Yes. So hey, Mike, it's Greg and Greg. Good morning. So when you look at the quarter versus Q2 or the quarter is our expectations coming in, you're correct. I mean, we were we were a little higher than we expected to be.
The vast majority of that increase was higher variable compensation. So about 2 thirds of it related to higher variable comp. We did have, higher investments in some of the divisions MC in particular on the E R and D line that will obviously benefit longer term. And of course, you know, the variable comp called variable for a reason. I mean, if our performance were to, you know, at these levels, we're accruing pretty high levels of variable comp, but as the performance were to come back, those numbers would obviously flex down as well.
All right. And then I think you also mentioned that there was strength in the, the particle sizing in this business PSS that you acquired a couple of years ago. Can you talk about, what's driving that? And are we kind of hitting an inflection point in, additional customer acquisition or additional uptake of that technologies.
Yes. I'm glad you're asking the question and So PSS has been really a bright spot for us, not just in the quarter, but for a few quarters now. If you recall, it's a business that we acquired in early 2018 and that business today is running at about twice the pre acquisition revenue levels. And it's really coming from the introduction of those solutions to a new set of customers. It was originally, used at 1 or 2 large logic customers.
We've been expanding the served market in logic, but more importantly, we've actually started to introduce these capabilities with success in the memory segment as well. So the business has done really well in a very short amount of time. I think that there's still a lot of potential for the business or in 2, 3 years from now, I would expect the revenue for PSS to still be a multiple of where they are today. And I would say that GMTI is another option that we have to actually grow that particular set of capabilities very nicely across multiple segments. So it's the recipe worked very well with PSS.
I think that GMPI is very similar in terms of capabilities and in terms of opportunity. And I think that those two businesses will have a very positive impact on AMH, both in terms of growth as well as margin profile.
All right. That's great to hear. Thanks very much.
We'll take our next question from Weston Twigg with KeyBanc Capital Markets. Please go ahead.
Hi, thanks for taking my question. And first, I just wanted to say thanks for the details on the corporate social responsibility program and then looking forward to hearing more over the coming weeks. My first question is related to China. You mentioned that there's really no material impact that you've been evaluating the business. And I'm wondering Is that just because the revenue contribution is quite low or is it because, you don't have products that go under this military end user and that has come up recently.
Yes, good morning, Wig. And so It's a good question. And first, I mean, remember that we have a very broad customer base, so no customer really is, I mean, with a few exception, I mean, most of our customers are just representing a few single digits of our total revenue. Number 1. And then number 2, even if this particular if SMIC was to be placed on the entity list, we believe that we would still be able to supply many of our products to this customer because it would not be subject to the export control rules.
And that is because many of our products are manufactured outside of the U. S. And they have a low U. S. Content.
And then for the other products, obviously, that are subject to these controls, we would seek the required export licenses from the U. S. Government as everybody else. So that's really what leads us to say that we expect the overall impact to be, to be non maturing to our performance.
Okay. That's very helpful. And then my other question is just you had mentioned the graphite business has been under pressure since last Could you just give us an idea of how big that business is now and then your expectations of any continued recovery next year?
Yes. So that business, last year was about close to $100,000,000 And, and again, I think the headwind, I mean, we saw contraction, of close to 50% in the year. So we would expect a scheduled recovery as we get into 2021, but obviously, this has been a pretty 60 headwind for the SEM division this year.
We'll take our next question from Chris Kappish with Loop Capital Markets. Please go ahead.
Hey, good morning guys. So Bertrand, you've consistently discussed really for years now how integris is well positioned competitively, particularly as the production of advanced chips becomes more material intensive and how the security of those those materials is increasingly important and that thesis has absolutely played out. So I just wanted to say kudos to you and your team. And The question I have is looking to 2021. And obviously without stealing any thunder from next month's investor events, you referenced your customers being committed to their leading edge node transitions.
Just wondering if you could talk about like transitions might the most profound in terms of moving the needle or impact on Integris' results next year. Obviously, the memory continued transition to the architectures, the dents or layers is going to be a contributor, but I'm wondering how that might compare to the benefit from no grants and foundry logic customers?
Good morning, Chris, and thank you for the nice comment. So I mean, if you if you look at the technology roadmap in memory and logic, it is clear that all of our customers have very, very ambitious objectives. They will not include a combination of further amortization of critical dimensions, you know, total structures with, higher spec ratios, and down the road, the introduction of nanowires, so data all around technology. All of this will place squarely in the value proposition of Entegris because all of those technology inflections will require superior materials and greater levels of purity? And at the end, that really for us, it means that our served market will continue to go faster than wafer start.
So rather than picking 1 or the other of these technology infractions, I think I would really encourage you to look at it in the aggregates because I really do believe that one of the unique strengths of Entegris is really the breadth of capabilities and the quality of the opportunity pipeline as opposed to any particular product line or any particular technology transition. And we feel really, really good about the health of the opportunity pipeline. And that's something that we will discuss in more detail with you in November. So stay tuned. I think you will probably learn a lot during the Analyst Day.
Okay. Fair enough. And then if I could have just one follow-up on, and I guess beyond your comments about China, I was hoping you could discuss the sales cadence or development by geography, you need to have that one page in pie chart with, in the quarterly back that I'm about to put any color on sales trends by region would be appreciated. Thank you.
Yes, good. So, I'm going to try to make it short. I think that the performance was really strong across the board. So a lot of our regions have been growing, on a year to date basis with an excess of 10%. So the 2 things I want to probably flag and you would see that when we filed our Q and a few others.
But so one, comment probably in Korea. I mean, Korea, you would see that year to date, the growth is in the single digit. The reason for that is that we had significant series of gas purification systems last year, in conjunction with a number of new fab build ups. So if you were to normalize for that, Korea would be up 25% pretty much in line with the other geographies. What you will also probably note when we filed a Q is that, Taiwan was down sequentially.
It's a sequential decline that we fully anticipated and it really has to do with the timing and the buying patterns by our customers when they prepare for, new transitions. I mean, typically, they take order of, I mean, they take of fruits about 3 to 6 months ahead of the node transitions and they also build some amount of inventory for filtration and critical chemistries few months ahead of the ramp, which is what we saw in Q1 and Q2 of this year. So if you look at it on a year to date basis, we're growing in Taiwan at 20%, which is a very, very strong performance and we're going to be on track to deliver our best year on record in the island. So everything else that you will see will be pretty much, I would say, in line with your expectations, but I just wanted to single out those 2 geographies because you may have had some lingering questions as you look at the queue. So I wanted to provide some context.
We'll take our next question from Pertosh Misra with Berenberg. Please go ahead.
Great. Thanks and good morning Bertrand, Greg and Bill. I know you don't typically talk about pricing in your business first just wondering if you could broadly just discuss pricing trends that you're seeing this year. I'm mostly focused on this the materials or specialty chemicals part of your portfolio. And so just curious what you're seeing there, both on the advanced note side, and also on the mainstream fabs where I believe you typically see a deflation in some of those products So any color on that would be great.
Hey, Faretosh. Good morning. It's Greg. So from a pricing perspective, when we talk about it broadly across the portfolio. I mean, historically, we've talked about price erosion on an annual basis of 1% to 2% across portfolio.
This year, we're clearly running below that level. So our pricing has held up very well through the year. Think your comments were, pretty much
spot on.
I mean, as
that the more advanced nodes we are able because we're doing bring more value. We are able to secure more on the pricing front, whereas we do tend to have some price erosion with some of the older products at the legacy fabs. But in aggregate, when we look across the portfolio, the erosion has been less than 1%. So we feel very good about the value proposition that we're delivering to the customer and our ability to maintain price.
Got it. That's very useful And then second, just on the memory side, just kind of big picture, apologies if you already covered that, but what are you seeing, and hearing regarding the transformation to 96 plus layers this year. I think, last quarter, you were expecting to be about 50% there this year. Is that still what you're seeing or any color on that would be great?
Yes, Prakash. So I think those trends are still, we remain our expectation. We expect about 50% of the 3d9 wafers, to be produced at 96 layers or higher and you would expect that number to be at least 70% in 2021. So we would continue to expect further migration to the advanced nodes and advanced technology this year and for the years to come.
Got it. Thanks, Vikram.
We'll take our next question from David Silver with C. L. King Brokers. Please go ahead.
Yes. Hi. Good morning. Thanks. So my question would be maybe focused on the R and D line of your income statement.
So this was a record quarter in many areas, but I think it's also record quarter again for your R and D spend. And, at your previous investor day, I did speak with Jim a little bit and he emphasized that, above the bulk of the projects that the R and D F is focused on are things that will come to fruition maybe in a 2 to 4 year timeframe. So I guess some a lot of the questions here are about 2021 understandably. But based on the jump up in R and D spend, I was wondering if you could characterize where that incremental effort, you know, seems to be focused. So in other words, I'm guessing ABM are advanced deposition materials and maybe improved efforts to prevent killer defects on the micro contamination side, but maybe if you could just characterize why you feel now is the time to kind of at another 15% or 20% to your R and D effort.
And where are the incremental, targets for for that effort given your ability or your presence in so many different parts of the chip production process. So just maybe some characterization of how the R and D spend and the R and D effort is you evolving would be very helpful.
So if I step back, I would say that Entegris has changed a lot over the last 10 years. The breadth of our portfolio has increased. Our capabilities are much better today. Than ever before. And as a result of that, our credibility and trust as a strategic supplier has increased.
And what it means is that we are given more opportunities to contribute to the roadmap of our customers. And that's great. But with that comes some expectations then what we are expected to do is to put more, risk R and D dollars to work. And we are actually gladly doing that. And we are doing that in particular to your point in microcontamination and as Centimeters, because that's where we see the biggest challenges for the technology roadmap, and therefore, the biggest opportunity for us.
So that's why you should expect us to continue to increase our R and D spending in the year come. And that's something that we will be, describing a little bit more clarity during the Analyst Day as well.
Okay. Thank you for that.
Just one follow on comment.
Trying to talk about sort of a bit about how we're investing and where we're investing. I just want to make a comment. Our team has become much better at picking the better opportunities and indeed making the investment call, killing the projects that aren't working. So not only are we spending more money, but we're spending in my judgment, we're spending it in a much wiser fashion.
And if I could just follow-up on that just a little bit, but is there any way to characterize, I guess there's 2 ways to go with R&D. 1 would be basic research or or efforts you conduct internally. And then of course, there's the projects you work with in collaboration with your customers. So compared to a few years ago, I mean, would you say that the R and D effort is more collaborative or about as collaborative? In other words, how closely aligned is it to, I guess, what the customers are bringing to you as opposed to maybe your own folks looking ahead and trying to anticipate things maybe as a competitive competitive advantage?
Thank you.
Yes. So the business for the as evolved, a lot of what we do is really customer driven innovation. And it's usually a lot of multi party joint development initiatives with equipment makers and fab customers. So it's a 3 party collaboration, if you want. And as you would expect, we are increasingly spending in new platform development and breakthrough technology as opposed to sustaining engineering.
And the shift is actually very, very drastic if you compare where we are today versus where we were 15 years ago. And I would expect that trend to continue going forward. Is a good thing because it means that we have access to the roadmap of our customers at an earlier stage. And that they are engaging with us on some of their biggest challenges, which in turn allows us to create some very, very unique value for our customers.
Okay. That's great. Thank you very much.
We'll take our final question from Toshiya Hari with Goldman Sachs. Please go ahead.
Hi. Thank you for taking my follow-up. I just have one, Bertrand. You guys talked about reinstating the $15,000,000 share repurchase program in the current quarter. To the extent there is an update I'd like to get your thoughts on your capital allocation plans, both in the near term as well as in the long term.
And specifically on M and A, if you can comment on kind of robustness of your pipeline today, that would be super helpful. Thank you.
Sure. The capital allocation framework remains really unchanged. I mean, we had that, permanent programmatic buyback of $15,000,000 that is essentially a fixed commitment that we've made to the investment community, which expanded it in Q2 due to the prevailing uncertainty in the operating environment. And But today, we feel that it was appropriate for us to put it back in. Having said that again, we are routinely looking at the various levers at our disposal, dividend buybacks.
And then M and A, and that's something that we are routinely discussing with our board of directors and, we will continue to tune that depending on, the level of activity that we expect to see on the M and A front in particular.
Thank you.
At this time, I'd like to turn the conference back to your speaker for any additional or closing remarks.
Thank you. Thank you very much. That concludes our call for day.
Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.