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Entegris Inc (ENTG) Q3 2020 Earnings Call Transcript

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Entegris Inc (NASDAQ: ENTG)
Q3 2020 Earnings Call
Oct 22, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to Entegris' Third Quarter 2020 Earnings Release Call. Today's call is being recorded.

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

Bill Seymour -- Vice President of Investor Relations

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 have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation.

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

On the call today are Bertrand Loy, our CEO; and Greg Graves, our CFO.

With that, I'll hand the call over to Bertrand.

Bertrand Loy -- President and Chief Executive Officer

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 Entegris colleagues. I am also very proud of the tremendous work by our global teams to maintain high service levels in support of our customer rents 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 third 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 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 cleans.

The second area of strength was in our AMH division and its solutions for new fab projects. Growth was strong in fluid handling, FOUPs and sensing and control products. Within our sensing and control platform, in particular PSS, which we acquired in 2018, and GMTI, which we just acquired in July of this year, had a strong quarter. As you know, these complimentary 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 comprised 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 have 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 announced 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 our CSR 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 four 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 four 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 strengths 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 fabs. 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 new transitions. And given our new opportunities at these nodes, we expect to sustain our strong market outperformance. More broadly, we continue to be very optimistic about the long-term fundamentals of the semiconductor market.

At Entegris, we are benefiting from the two 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 Entegris 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 and Analyst Day on November 17. It's been a few years since we've done an Analyst Day, so we look forward to updating you on the Entegris story.

Now, let me turn the call to Greg. Greg?

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Thank you, Bertrand. In my comments today, I'm going to cover our third quarter financial performance and our fourth quarter guidance. The third quarter was an excellent quarter for Entegris with record performance across the board.

Q3 sales were $481 million compared to $475 million, 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 was $0.58 per share, up 93% year-over-year and 16% sequentially. Non-GAAP EPS of $0.067 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%. The higher than expected gross margin was driven by higher sales volume, as well as very good execution by our manufacturing teams. We expect gross margin to be approximately 47%, both on a GAAP and non-GAAP basis in Q4.

GAAP operating expenses were approximately $119 million in Q3, and included a total of approximately $15 million of non-GAAP items from amortization of intangible assets, integration and other costs. Non-GAAP operating expenses in Q3 were $105 million, which was higher than our guidance.

There were two primary drivers of this. First, was higher variable compensation driven by the better than expected Q3 performance and the improved annual outlook. The other factor was a $2 million contribution commitment made to the soon to be established Entegris Foundation, which among other things will fund STEM education in underrepresented communities. We expect both GAAP and non-GAAP operating expenses will be approximately flat in Q4 compared to Q3.

Q3 GAAP operating income was $107 million or 22.2% of revenue and non-GAAP operating income was $122 million or 25.3% of revenue. Adjusted EBITDA was approximately $142 million or 29.6% of revenue.

Our GAAP tax rate was 17.3% and our non-GAAP tax rate was 18.1% for the quarter, below our guidance of approximately 20%. For the full year 2020, consistent with our guidance last quarter, we expect both our GAAP and non-GAAP tax rate to be 18% to 19%, which implies a quarterly rate of approximately 21% for Q4.

The higher rate in Q4 is a function of two factors. 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 million 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 Sinmat acquisition also had a modest positive impact on year-over-year growth.

Adjusted operating margin for SCEM of 22% was up over 300 basis points year-over-year. The year-over-year increase in operating margin was driven primarily by higher volume. Q3 sales of $194 million for MC were up 24% from last year and up 5% sequentially. On a year-over-year basis, liquid filtration, gas filtration and the impact of the Anow acquisition drove the sales growth. The sequential sales increase was driven primarily by liquid filtration.

Adjusted operating margin for MC was 33.7%, 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&D investments and higher variable compensation costs.

Q3 sales of $144 million 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 GMTI acquisition had a modest impact on both year-over-year and sequential growth. Adjusted operating margin for AMH was 23.3%, up 600 basis points year-over-year and up 400 basis points sequentially. The year-over-year and sequential margin increase was driven by higher sales volume and solid cost management.

Cash flow from operations for the quarter was $101 million. Free cash flow was $69 million. Capex for the quarter was $33 million. We continue to expect to spend approximately $120 million in capex in 2020, related to ongoing investments in support of our new product introductions as well as capacity expansions.

During Q3, we used approximately $11 million for our quarterly dividend. We did not do any share repurchases in the third quarter. However, we did reinstate our $15 million per quarter programmatic buyback at the beginning of Q4. We remain committed to our dividend and our programmatic buyback program.

Turning to our outlook for Q4. We expect sales to range from $480 million to $495 million. We expect GAAP EPS to be $0.55 to $0.60 per share, and non-GAAP EPS to be $0.62 to $0.67 per share.

In summary, we are extremely pleased with our performance in the third quarter and 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 up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll take our first question from Sidney Ho with Deutsche Bank. Please go ahead.

Sidney Ho -- Deutsche Bank -- Analyst

Great. Thank you and good morning, everyone. Congratulations on 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 asked differently, I think we've seen 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 fab construction activities to be as strong as this year? That's my first one.

Bertrand Loy -- President and Chief Executive Officer

Good morning, Sidney, and thank you for your question. I would probably only say that 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.

Sidney Ho -- Deutsche Bank -- Analyst

Okay. Maybe my follow-up question is, if you can -- kind of going back to Q3, thinking about clearly the revenue, there's a lot of upside to it. But if I tend to 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 lower than we would have expected. Just trying to understand the dynamics on both the gross margin and the operating margin side.

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Yes, so on the gross margin side, Sidney, I would say we've got two or three 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 were providing bonuses for our manufacturing 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 operating margin, if you look at full year, first nine months of the year, our flow through at the EBITDA line is 46%, revenue is up $178 million, EBITDA is up $82 million, 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 high -- again, had higher variable compensation, we had CSR $2 million contribution related to our corporate social responsibility program. But I guess what I'm saying is, I'm pleased with the profitability and I think we continue to demonstrate the leverage in the model.

Sidney Ho -- Deutsche Bank -- Analyst

Okay, great. Thank you.

Operator

We'll take our next question from Toshiya Hari with Goldman Sachs. Please go ahead.

Toshiya Hari -- Goldman Sachs -- Analyst

Hi, good morning and thanks for taking my question. I had two, if I may. Bertrand, if we take the midpoint of your Q4 revenue guidance, I think you'll be growing the business about 50% in 2020 versus 2019, which is obviously very strong outperformance relative to the updated market forecast that you provided of up low single digits to mid-single digits. I was hoping you could break down the 10 percentage point or 10 percentage point plus outperformance for the year into M&A and also the organic part of the story? And for the organic part, if you could highlight maybe two or three product areas where you feel like is particularly contributing to that outperformance, that would be very helpful. Then I will follow-up. Thanks.

Bertrand Loy -- President and Chief Executive Officer

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 a 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 Q4. 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, as I said, it's really across the board. So AMH has been doing very well, a lot of strength in our advanced FOUPs, our fluid handling solutions that are becoming increasingly a standard in the advanced fabs, both in memory and logic, but we have also talked about the growing importance of our ultrapure packaging solutions. So, AMH has done really, really well this year on the back of strength in all of those various product platforms.

Micro contamination, the theme is well understood, I think, by all of you. It's really two big product lines driving the growth. It's Torrento and Protego, those are the liquid filters and liquid purifiers that are used in aggressive cleaning chemistries by the industry. We expect those two products to achieve new records in Q4. And overall, we expect those products to have a great year.

And SEM division is expected to grow in the mid-teens as well. It's a little bit of a tale of two cities for SEM 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 industrial applications. I mean, that business have slown significantly against last year and has not recovered. So, with that as a backdrop, I think that the performance in SEM is actually really, really exceptional this year.

So, going back to you Toshiya, I think you have a second question.

Toshiya Hari -- Goldman Sachs -- Analyst

Yes, I do. Thanks for the detailed response, Bertrand. My second one is on AMH profitability, 23.3% in margins, obviously a very impressive result. You talked about higher volume and solid cost management as contributors to that performance. I 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 the new normal for AMH or could margins revert lower to the high teens or 20%? Thanks so much.

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Hey, Toshiya, I'll take that one. This is Greg. So, I would not take the 23% to the bank as sort of the ongoing profitability of that business. They had a very good quarter from an execution standpoint. They clearly benefited from the higher volumes. I mean, I do think that the profitability of that business though, over the longer term starts with the two. 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.

Toshiya Hari -- Goldman Sachs -- Analyst

Thank you.

Operator

We'll take our next question from Amanda Scarnati with Citi. Please go ahead.

Amanda Scarnati -- Citi -- Analyst

Hi, good morning. I just have a quick follow-up question. Bertrand, you mentioned that you're expecting to see, sort of, mid teen growth from all the different segments this year. When I look at next quarter, that seems to imply that specialty chemicals should see some significant growth and the other two 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?

Bertrand Loy -- President and Chief Executive Officer

Yes. Good morning, Amanda. So, 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 AMH to be modestly down sequentially and that's in line with reduced sequential capex projections for the industry in Q4. The other two divisions are expected to be up sequentially and see continuation of the trends that I was describing, so liquid filtration really driving the sequential growth in Micro contamination, but the fastest sequential growth is expected to come from SEM. And that really has to do with -- really capitalizing on a number of new product introductions in deposition materials and cleaning chemistries in particular. And again, here I'm talking about the sequential growth Q4 over Q3.

Amanda Scarnati -- Citi -- Analyst

And then what's 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 locks in terms of pulling forward, and do you expect that to have any sort of significant impacts going into '21?

Bertrand Loy -- President and Chief Executive Officer

Look, Amanda, that remains an open question and something that we've been trying to asses very, very carefully. We don't think that the industry -- the inventory overhang will be the 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're 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 is something that we are overly worried about at this point.

Amanda Scarnati -- Citi -- Analyst

Great. Thank you.

Operator

We'll take our next question from Patrick Ho with Stifel. Please go ahead.

Patrick Ho -- Stifel -- Analyst

Thank you very much, and congrats on a really nice quarter and outlook. Bertrand, maybe first off, you highlighted the strength that you're seeing at the advanced nodes as well as the higher layer comps in memory. Can you give a little bit of color on any signs of a recovery in the more mature technology nodes? We didn't get any data points of markets like automotive, CMOS image sensors that are starting to pick up? Could you give a little color on how that's impacting some of your older legacy businesses?

Bertrand Loy -- President and Chief Executive Officer

Yeah, good morning, Patrick. Yeah. So I think that the strength in the mainstream fabs is probably what drove our business ahead of our guidance for Q3. The recoveries in mainstream fabs were certainly steeper and more broad-based than we orginially feared and when we expect that trend to be -- to continue going into Q4. I mean, obviously, like everybody else, we are very closely watching the second wave of COVID-19. 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 still unclear. But I don't think it would be a factor for the fourth quarter.

Patrick Ho -- Stifel -- Analyst

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 that 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've seen in recent years has been on the main flash side with materials and contamination control products. Can you discuss some of the changes going on in DRAM that also will have a positive impact for your businesses?

Bertrand Loy -- President and Chief Executive Officer

So you're right, for us, the great opportunity in memory is around the 3D NAND architectures. 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 need for greater purity. So that's going to impact a suite of products in micro contamination 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'Neill, our Chief Technology Officer, will join us during the Analyst Day that we intend -- I mean that we planned for November 17. And during that event, we will try to go 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 will probably learn a lot more in a few weeks.

Patrick Ho -- Stifel -- Analyst

Great. Thank you very much.

Operator

We'll take our next question from Mike Harrison with Seaport Global Securities. Please go ahead.

Mike Harrison -- Seaport Global Securities -- Analyst

Hi, good morning.

Bertrand Loy -- President and Chief Executive Officer

Good morning.

Mike Harrison -- Seaport Global Securities -- Analyst

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 micro 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.

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Yeah. So, hey, Mike, it's Greg Graves. Good morning. So when you look at the quarter versus Q2 or the quarter versus our expectations coming in, you're correct. I mean, we were a little higher than we expected to be. The vast majority of that increase was higher variable compensation. So about two-thirds of it related to higher variable comp. We did have higher investments in some of the divisions, MC in particular, on the ER&D line, that will obviously benefit longer term. And of course, the variable comp is called variable for a reason, I mean, if our performance were to at these levels were accruing pretty high levels of variable comp as the performance were to come back, those numbers would obviously flex down as well.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. And then I think you also mentioned that there was strength in the Particle Sizing Systems 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 technology?

Bertrand Loy -- President and Chief Executive Officer

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 one or two 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. So in two, three 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 the recipe worked very well with PSS. I think that GMTI 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.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. That's great to hear. Thanks very much.

Operator

We'll take our next question from Weston Twigg with KeyBanc Capital Markets. Please go ahead.

Weston Twigg -- KeyBanc Capital Markets -- Analyst

Hey. Thanks for taking my question. And I just wanted to say, thanks for the detailed on the Corporate Social Responsibility program. And I'm looking forward to hear more about that over the coming weeks. My first question is related to China. You mentioned that there's really no material impact and it's been evaluating the business, and I'm wondering, is that just because of the revenue contribution is quite low or is it because you don't have products under those military end-user restriction that has come up recently?

Bertrand Loy -- President and Chief Executive Officer

Yeah. Good morning, Twigg. 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 going -- with a few exceptions, I mean, most of our customers are just representing a few single-digits of our total revenue, number one. And then number two, even if this particular NIC [Phonetic] 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 we would not be subject to the export control rules. And that is because many of our products are manufactured outside of the US, and they have low US content. And then for the other products, obviously, that are subject to these controls, we would seek the required export licenses from the US government as everybody else. So that's really what leads us to say that we expect the overall impact to be not material to our performance.

Weston Twigg -- KeyBanc Capital Markets -- Analyst

Okay, that's very helpful. And then my other question is just you had mentioned the graphite business has been under pressure since last year. Could you just give us an idea of how big that business is now and then your expectations of any recovery next year?

Bertrand Loy -- President and Chief Executive Officer

Yeah. So that business last year was about close to $100 million. And again, I think the headwind -- I mean, we saw a contraction of close to 50% in the year. So we would expect a steady recovery as we get into 2021. But obviously, this has been a pretty significant headwind for the SEM division this year.

Weston Twigg -- KeyBanc Capital Markets -- Analyst

Okay, that's helpful. Thank you.

Operator

We'll take our next question from Chris Kapsch from Loop Capital Markets. Please go ahead.

Chris Kapsch -- Loop Capital Markets -- Analyst

Hey, good morning, guys. So Bertrand, you've consistently discussed, really for years now, how Entegris is well positioned competitively, particularly as the production of advanced chips becomes more material intensive and how the purity of those materials is increasingly important. And that piece 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 event, you referenced to your customers being committed to their leading edge node transitions, just wondering if you could talk about what transitions might be most profound in terms of moving the needle or impact on Entegris' results next year. Obviously, that memory continues to transition to the architectures with denser wires is going to be a contributor. But I'm wondering how that might compare to the benefit from node grants and boundary logic customers?

Bertrand Loy -- President and Chief Executive Officer

Good morning, Chris. And thank you for the nice comment. So, I mean, 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 would not include a combination of further miniaturization of critical dimensions, total structures with high aspect ratios, and down the road, the introduction of nano wires, so we cater all-around technology. All of this will play 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, really for us, it means that our served market will continue to grow faster than wafer start. So rather than picking one or the other of these technology inflections, I think I would really encourage you to look at it in the aggregate, 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 details with you in November. So stay tuned. I think, you will probably learn a lot during the Analyst Day.

Chris Kapsch -- Loop Capital Markets -- Analyst

Okay, fair enough. And then if I could have just one follow-up on, I guess beyond your comments about China, I was hoping you could discuss the sales cadence or development by geography. You used to have that one page of pie chart in the quarterly deck that talks about it, but any color on sales trend by region will be appreciated? Thank you.

Bertrand Loy -- President and Chief Executive Officer

Yes, Chris. So I'm going to try to make it short. I think the performance was really strong across the board. So a lot of our regions have been growing on a year-to-date basis in excess of 10%. So the two things I want to probably flag, and you will see that had when we file our Q in a few hours, but -- so one comment probably in Korea. In Korea, you will see that year-to-date the growth is in the single-digit and the reason for that is that we had significant sales of gas purification systems last year in conjunction with a number of new fab build ups. So if you were to normalize for that, you know, Korea would be up 25%, pretty much in line with the other geographies.

What you will also probably note when we file the 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 node transitions. I mean typically the take order -- I mean the take of FOUPS to about three to six months ahead of the node transitions. And they also built some amount of inventory for filtration and critical chemistries a 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 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 two geographies, because you may have had some lingering questions as you look at the Q. So I wanted to provide some context.

Chris Kapsch -- Loop Capital Markets -- Analyst

Okay. That's very helpful. Thank you. Appreciate it.

Operator

We'll take our next question from Paretosh Misra with Berenberg. Please go ahead.

Paretosh Misra -- Berenberg Bank -- Analyst

Great. Thanks. Good morning. Bertrand, Greg, and Bill. I know you don't typically talk about pricing in your business, I was just wondering if you could broadly just discuss pricing trends that you're seeing this year. I'm mostly focused on the specialty materials, the specialty chemicals part of your portfolio. And so just curious what you're seeing there both on the advanced node 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.

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Yeah. Hey, Paretosh. 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 the portfolio. This year, we're clearly running below that level. So our pricing has held up very well through the year. I think your comments were pretty much spot on. As we have more advanced nodes, we are able -- because we're delivering 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 with 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.

Paretosh Misra -- Berenberg Bank -- Analyst

Got it. That's very useful. And then secondly, just on the memory side, just to get a big picture, and apologies if you already covered that, but what are you seeing and hearing regarding specifically the transformation to 96 plus layers this year. I think, last quarter, you were expecting us to be about 50% there, this year is that still what you're seeing or any color on that would be great?

Bertrand Loy -- President and Chief Executive Officer

Yes, Paretosh. So I think those trends are still -- remain our expectation, we expect about 50% of the 3D NAND wafers to be produced at 96 layers or higher, and we would expect that number to be at least 70% in 2021. So, we would certainly continue to expect further migration to the advanced nodes and advanced technology this year and for the years to come.

Paretosh Misra -- Berenberg Bank -- Analyst

Got it, thanks. Thanks, Bertrand.

Operator

We will take our next question from David Silver with CL King Brokers. Please go ahead.

David Silver -- CL King -- Analyst

Yeah. Hi, good morning. Thanks. So my question would be maybe focused on the R&D line of your income statement. So this was a record quarter in many areas, but I think it's also a record quarter again for your R&D spend. And your previous Investor Day, I did speak with Jim a little bit and he emphasized that the bulk of the projects that the R&D effort is focused on are things that will come to fruition maybe in a two to four year timeframe. So I guess a lot of the questions here are about '20 and '21 understandably. But based on the jump up in R&D spend, I was wondering if you could characterize where that incremental effort seems to be focused. So in other words, I'm guessing ADM or advanced deposition materials, 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 add another 15% or 20% to your R&D effort and where are the incremental targets 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&D spend and the R&D effort is evolving would be very helpful? Thank you.

Bertrand Loy -- President and Chief Executive Officer

Sure. 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. And what we are expected to do is to put more risk R&D dollars to work, and we are actually gladly doing that, and we are doing that in particular, to your point, in micro contamination and SEM, 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&D spending in the years to come. And that's something that we will be describing a little bit more clarity during the Analyst Day as well.

David Silver -- CL King -- Analyst

Okay, thank you for that.

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

One follow-on comment. Just one follow-on comment. Bertrand talked 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 taking the better opportunities and indeed making the investment call, killing the projects that aren't worthy. So not only are we spending more money, but in my judgment, we're spending it in a much wiser fashion.

David Silver -- CL King -- Analyst

And if I could just follow-up on that just a little bit. But is there any way to characterize, I guess, there's two ways to go with R&D, one would be basic researches or efforts you conduct internally, and then of course there's the projects you work with in collaboration with your key customers. So compared to a few years ago, I mean, would you say that the R&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 advantage? Thank you.

Bertrand Loy -- President and Chief Executive Officer

Yeah. So the business model has 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 three-party collaboration, if you want. And as we would expect, we are increasingly spending in new platform developments 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, which 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 unique value for our customers.

David Silver -- CL King -- Analyst

Okay, that's great. Thank you very much.

Operator

We'll take our final question from Toshiya Hari with Goldman Sachs. Please go ahead.

Toshiya Hari -- Goldman Sachs -- Analyst

Hi. Thank you for taking my follow-up. I just have one, Bertrand. You guys talked about reinstating the $15 million share repurchase program in the current quarter. To the extent, there is an update, I would like to get your thoughts on your capital allocation plans both in the near term as well in the long-term, and specifically on M&A, if you can comment on kind of robustness on your pipeline today, that would be super helpful? Thank you.

Bertrand Loy -- President and Chief Executive Officer

So the capital allocation framework remains really unchanged. I mean, we had that permanent programmatic buyback of $15 million that is essentially a fixed commitment that we've made to the investment community, we suspended it in Q2 due to the prevailing uncertainty in the operating environment. 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&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&A front in particular.

Toshiya Hari -- Goldman Sachs -- Analyst

Thank you.

Operator

And at this time, I'd like to turn the conference back to your speaker for any additional or closing remarks.

Bill Seymour -- Vice President of Investor Relations

Thank you. Thank you very much. That concludes our call for today.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Bill Seymour -- Vice President of Investor Relations

Bertrand Loy -- President and Chief Executive Officer

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Sidney Ho -- Deutsche Bank -- Analyst

Toshiya Hari -- Goldman Sachs -- Analyst

Amanda Scarnati -- Citi -- Analyst

Patrick Ho -- Stifel -- Analyst

Mike Harrison -- Seaport Global Securities -- Analyst

Weston Twigg -- KeyBanc Capital Markets -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

Paretosh Misra -- Berenberg Bank -- Analyst

David Silver -- CL King -- Analyst

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