Bertrand Loy: Right. So, thank you for asking that follow-on question. I mean obviously if the MS division was the star of our Q4 results, the star of the full-year 2023 was our MC division. MC benefited from a strong backlog, getting into 2023, but that’s really not the full story. The demand for products and solutions continue to be very strong through the year and I want to maybe highlight a few of them. Our gas purification system, for example, continues to perform at very elevated level. As a matter of fact, our Q4 revenue for gas purification systems was at a record level. And that is a function of steady fab construction activity and the fact that those systems become mostly industry standards now for several years. The other part of the Microcontamination division that went — that performed really strongly in 2023 was the liquid filtration platform.
You heard me. The quest for materials purity is unabated in this industry. Our customers are really trying to chase higher yields and long-term reliability of their devices. And to do that they need to continue to increase the purity requirements chasing ever smaller contaminants and making the permissible concentration levels more stringent. So these forces were at-work in 2023. And that’s the reason why MC essentially outperformed the industry by close to 16 points, so a massive outperformance level in 2023. And that’s a trend that we expect to continue going forward. And that’s actually the basis for the level of outperformance we expect to see for the next two to three years, an outperforming level of five to seven points as I presented earlier.
Bill Seymour: Okay, next question from Toshiya from Goldman. So if you can — if you can break down the 4% industry growth for 2024 MSI versus CapEx end-markets.
Bertrand Loy: So remember that 2024 will be a recovery year for the industry. And by that I mean that different segments of the industry will be recovering at different times and at different rates. The recovery will be led by advanced logic and DRAM, 3D NAND is expected to stay relatively muted especially early in the year. And of course mainstream fabs have just entered the downturn just a few months ago. And we expect fairly significant wafer start reductions and utilization rates compression, especially in the first quarter of this year. So that’s the lay of the land. And that’s what we took into account when quantifying our expectations for the industry. So we expect MSI, in that context, to be up about 5%. And here again, I’m talking about 2024 compared to 2023.
And we expect the industry CapEx to be essentially flat. And here again, remember that I’m talking about the total industry CapEx, not just WFE. So if you blend those two numbers, you get to that 4% industry growth in 2024.
Bill Seymour: And then I’ll ask a follow-up from Atif from Citi which would be okay, that’s the market growth and then we talked about our level of outperformance for 2024. What are the what are the drivers of that outperformance in 2024.
Bertrand Loy: Well, the drivers are essentially the drivers we called out in the presentation, right? We expect to continue to benefit from greater Entegris content per wafer. We expect some node transitions in 3D NAND in particular in 2024. And we also expect a number of advanced logic manufacturers to start getting ready for significant node transitions late in the year and preparing for 2025. So all of that will contribute to that four to five points of outperformance in 2024.
Bill Seymour: Next question. John Roberts, Mizuho. So, AMH revenue margin decline in Q4. Can you maybe provide some color around the drivers of that and then maybe put into context how the AMH performance last year.
Bertrand Loy: Maybe I can start with the performance, Linda, and then you can add-on the margin. So if you think about AMH, as we have mentioned multiple times, AMH had actually a very significant backlog entering 2024. And that really help them sustained elevated revenue levels in the first-half of the year. That backlog disappeared in Q3 of 2023, and that’s really the impact that you’re seeing in Q4 of 2023. Going-forward, we would expect AMH to steadily recover through the year in 2024.
Linda LaGorga: And regarding margins for AMH in Q4, a couple of drivers I’d call out. First, there was some volume deleveraging based on the revenue. And secondly, some onetime impacts including a rebalancing between our divisions of the variable compensation. So as Bertrand said very much expecting a recovering of those margins as we go into Q1 and the rest of 2024.
Bill Seymour: Okay. This will be a combined question. So Chris Kapsch from Loop and David Silver. So first on the Chris Kapsch, item number one is, Bertrand, can you talk a little bit about the progress of the sales synergies from CMC. And then David Silver asked a little bit about some examples from the products that we got from that acquisition and how are those doing in the end-to-end solution.
Bertrand Loy: Okay. So, we’re very pleased with the way the combination with CMC Materials is shaping out. I talked about a few different metrics, but more importantly, the way the two teams have come together is extremely gratifying. And I’m also very, very pleased with the quality of the customer engagements that we’ve seen in the last 18 months. So all of that contributed to actively seeking new opportunities, different ways to combine and co-optimize solutions across our various platforms, ways to optimize our post-CMP cleaning chemistries based on the better understanding of the slurry blend and mix, ways of optimizing our slurry filtration platform based on the better understanding of the slurry. So all of that has been taking place as you would expect.
You should know that as a matter of fact, we had a compensable goals last year looking at the opportunity pipeline and the funnel. And you should know that actually we not only met that particular objective, but we far exceeded that objective. And that is what is giving us confidence when we talk about the potential of the MS platform going-forward. And this is why actually, we are committed to outperforming the market by four to six points in MS for the years to come.
Bill Seymour: Okay, next question for Linda. So Mike Harrison from Seaport. EBITDA margins, 26% in Q4. How do you see the cadence of EBITDA margins as we go into Q1 and then throughout next year. And what are the drivers?
Linda LaGorga: So, as we go into next year, as we said the guidance for EBITDA margin is approximately 29%. In Q1, the guidance is approximately 27%. Bertrand mentioned, we’re expecting a gradual recovery throughout the year. So you’ll see a gradual uptick also in our EBITDA margins. As we as we look at the drivers, first, there is some volume leverage as an aspect of a driver. There is mix. We always are and will remain very focused on productivity, helping with our margins across-the-board. And one other item I will mentioned is, last year, I talked a bit about the impact of our inventory reductions on margins. This year, we’re absolutely still focused on working capital. But that impact as we continue to reduce inventory will not be as great as it was.
Now, all that are the positives. We will still have headwinds in 2024 from the ramp of KSP. I mentioned in the comments that in 2023, those headwinds were approximately 70 basis points. You should think of those headwinds in 2024 is about the same to slightly more. Now what will happen in 2024 with KSP is the impact will be heavier in the first half and then will start to alleviate that in the second half. Pulling this altogether, we’re going to continue to balance between investment and cost. And as we talked about, we’re going to manage to that 40% EBITDA flow through. So, that gives you the context of how I see 2024 EBITDA margins coming together.
Bill Seymour: Okay. Another question for you, Linda, from Bhavesh from BMO is can you update us, we’ve obviously presented some information in the presentation, how are you looking at leverage going forward?
Linda LaGorga: Yes. So I mentioned in the presentation that by the end of 2024, we expect gross leverage to be less than 4 times and we expect our net leverage to be less than 3.5 times. As we continue to go forward beyond 2024, we will continue to focus on deleveraging. But we will also retain some optionality. The great news is, as I talked about in the presentation is we have a rock solid capital structure. And so, as we move forward, we want to balance between the deleveraging and some of the optionality will have going forward. The most important thing is we will continue as we’ve demonstrated to be prudent in our capital allocation strategies.
Bill Seymour: Bertrand, this comes from Aleksey from KeyBanc. Guided a 9% R&D as a percentage of sales. Is this — why is it — why is this critical and is this part of — is this a driver for the outperformance, maybe just put some color around that.
Bertrand Loy: Yes, multiple different ways to actually think about that number and why the number has been growing over time. And the first one is the complexity of the challenges our customers are inviting us to collaborate on is, as I mentioned, growing. You should also know that because of that we are invited to collaborate with our customers earlier in their technology process development cycle. So all of that contributes to that greater spend. And then there’s just the number of new opportunities ahead of us. The fact that we expect to Entegris content per wafer to continue to grow is just indicative of the fact that our customers see the value that Entegris can provide, see the value of that end-to-end solution capability that we are marketing.
They understand that it’s going to be key to not only device performance, but also time to yield, and ultimately time to node transition, all of which are extremely important for our customers. But to do that and to really realize the opportunities ahead of us, we have to be willing to invest in R&D. And that’s something that we did in the current downturn in 2023. And that’s the level of investment that we are committed to maintaining an increase for the years to come.
Bill Seymour: Okay. Charles Shi. Can you talk about the market and revenue progression as we go through 2024. And then I’ll add a little flavor on that. And he asks about, okay, so we talked about MSI and CapEx for this year. How do you see that kind of going-forward as well.
Bertrand Loy: Yes. So, first, let’s start with the first-quarter, right. I mean, we are guiding sequentially down 4%, which is in line with normal seasonal cycles. And again, a reflection of the fact that many of our customers in advanced logic and of course in mainstream logic have indicated a sequential compression in fab utilization. From thereon we expect actually a steady sequential increase in revenue as again, we expect growth in advanced logic. We expect further recovery in-memory. And we expect also, you know, more stable conditions at some point in the year from our mainstream customers.
Bill Seymour: Excellent. Question from Aleksey on Taiwan, the facility there. The volumes ramping in the second half. What does that mean for the first half and where are we at with the facility.
Bertrand Loy: Maybe I can take the first part. Linda. If you want, maybe elaborate a little bit on the margin impact. But let me just say that we are very pleased with the progress we have made in the construction phase of our KSP investment. Today, we have about 200 employees on site. Our internal qualifications are progressing rapidly and progressing well. And in a few cases, customer qualifications have already started. So, we expect revenue to be generated out of that facility in the second half of the year. I mean, we are already taking some orders, customer orders, but they are actually very small right now. We would expect the level of revenue from the KSP facility to reach somewhere between $40 million to $50 million for the year in 2024.
Linda LaGorga: Right. So taking that to the margin side. Think about it across four quarters, in the first couple of quarters, we have cost. And then as Bertrand said, the revenues will start ramping up. That will start to offset some of that cost. So we still have a headwind from KSP in 2024, but we’re starting to alleviate that as we progress through 2024, and that will continue into 2025.
Bill Seymour: And then will ask a similar question. You talked a little bit about this Linda already, from Toshiya. You talked about EBITDA drivers and trends. So how would you position gross margin trends improvement opportunities going forward.
Linda LaGorga: Well, a lot of the trends that improve EBITDA I mention — that I mentioned really are around the gross margin aspect. So I mentioned, for example, productivity. A lot of that productivity will come around gross margin. In addition, some of the volume ramps really impact the gross margin. Now volume ramps also when it comes to EBITDA give us sales SG&A leverage. So it’s both. But as we grow and that volume ramps, we will get more plant utilization. So, those are some of the big drivers that come to my mind as we think about that evolution of gross margin throughout 2024.
Bill Seymour: Bertrand from Aleksey here from KeyBanc. And what’s — how would you qualify the opportunity in gate all-around?
Bertrand Loy: So during the presentation we highlighted a number of new opportunities. Gate all-around being one of them. And this is just another flavor of those 3D architectures that we expect to proliferate in the industry in the years to come. So, specifically around the gate all-around, we expect to see opportunities around new precursor materials, slurries and other polishing solutions as well as etching chemistries and solutions for ion implant as well. So we believe that we are in the very early innings of the adoption of that particular architecture. And as you saw on the analysis in terms of wafer content, we expect that to be a big driver for the increase. We expect to see from 5 nanometer all the way to 1.4 nanometer in advanced logic.
Bill Seymour: A little bit of a follow-up there in terms of applications. Silicon carbide, slurries and pads, what’s obviously for us silicon carbide did really well this year. Slurries any updates, any color you can provide there.
