Entegris Inc (ENTG) Q4 2021 Earnings Call Transcript

Entegris Inc (NASDAQ: ENTG) Q4 2021 Earnings Call dated Feb. 01, 2022

Corporate Participants:

Bill Seymour — VP of Investor Relations

Bertrand Loy — President, Chief Executive Officer, and Board Member

Unidentified Speaker

Analysts:

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

Sacha Hari

Sidney Ho

Unidentified Participant

Patrick Ho

Paretosh Misra

Josh Silverstein

Presentation:

Operator

Good day and welcome to the Entegris fourth Quarter 2021 Earnings Release Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Bill Seymour, VP of Investor Relations. Please go ahead, sir.

Bill Seymour — VP of Investor Relations

Good morning, everyone. Earlier today, we announced the financial results for our fourth quarter and full year 2021. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation.

On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation-G. You can find reconciliation tables in today’s news release as well as on the IR page of our website at entegris.com. On the call today are Bertrand Loy, our CEO and Greg Graves, our CFO. With that, I’ll hand the call over to Bertrand.

Bertrand Loy — President, Chief Executive Officer, and Board Member

Thank you, Bill and good morning to all. I will start by saying that, I am extremely pleased with our fourth quarter results which capped off another record year for Entegris. I am very proud of what our team achieved in 2021, especially in-light of the challenging operating environment we faced throughout the year.

During the fourth quarter sales of $635 million grew 23% year-on-year and 10% sequentially. Our growth was strong across all three divisions, as we benefited from robust industry growth and record demand for our products and solutions. EBITDA margin increased significantly to over 31% of sales and non-GAAP EPS of $0.96 was up 35% year-over-year.

These full fourth quarter results exceeded expectations and were driven in large part by our team successfully fighting through many of the supply chain hurdles that impacted us last year. Looking at the full year 2021, we achieved record sales of $2.3 billion, up 24% all three of our divisions, experienced strong top-line growth and delivered significant margin expansion in 2021.

Our outperformance, for the year in semiconductor applications was driven in large part by our strong position and wins with leading-edge solutions like liquid filtration, for advanced deposition materials, selective edge and other areas of increasing importance to our customers across the semiconductor ecosystem. In addition to our semiconductor-focused solutions. During 2021, sales of the Aramus high purity bags used for COVID-19 vaccines exceeded $50 million, and looking further ahead, we are generating strong interest for these solutions for use with non-covered biologics.

Wrapping up the financial results for 2021 gross margins increased, albeit modestly, due to the COVID related cost pressures. But we once again showcase the leverage in our model with EBITDA up 29% and non-GAAP EPS, up 35% year-on-year.

During 2021, we allocated $489 million of capital, which included reinvestments in our business of $211 million in CapEx, and a $168 million in R&D and we return $111 million to shareholders in dividends and buybacks. On top of that, we repaid $150 million of net debt. Our 2021 corporate social responsibility program was another highlight for the year, some of our accomplishments include publishing our first CSR annual aeport contributing an additional $3 million to the Integrys Foundation, which is focused on providing stems scholarships to women and individuals from under-represented communities. To date Entegris has contributed $5 million to the fund, with the goal of investing more than $30 million in stem scholarships and internships by 2013.

During the year. The percentage of diverse members of our Board of Directors increased to almost 40% well on our way to our 2030 goal of 50%, and from an EST ratings point of view, we increased our equal various waiting to silver and our MSCI score to an A-rating. On the M&A front, we completed the acquisition of BASF’s precision micro chemicals business, which we have already migrated to our SAP platform. We are currently running a 100% of our global operations on one single instance of which greater end to end process optimization and visibility. These advantages have served us very well in the past two years, as we have effectively managed complex supply chain risks very effectively across our global platform.

With all of our recent tuck-in acquisitions, integrated into SAP this provides obviously a great foundation for the future integration of CMC materials, which then leads me to our pending acquisition of CMC materials, as I said when we announced this transaction, we have long had tremendous respect for CMC materials technology, its team and its reputation for operational excellence.

We are very excited about the potential of this transaction to meaningfully expand our served markets and hence our customer relationships and create new value for our customers. As a reminder, the combined company will have a resilient business model with approximately 80% of unit-driven revenue. And we expect the transaction to be significantly accretive to non-GAAP earnings in the first year following close. We continue to expect the transaction will close in the second half of 2022, once we satisfy all of the customary closing conditions including approval by CMC Materials shareholders and approvals on the United States and certain foreign antitrust and competitive loss.

On that point. Last week, the mandatory waiting period on the US antitrust laws expired without any objection to the acquisition and to-date for the CMC shareholder vote to approve the transaction was set for March 3rd. In addition, we have started to focus on integration planning, so we can hit the ground running immediately after the close. During the period between sign and close, we will be spending a great deal of time analyzing the various parts of CMC’s portfolio of businesses to assess their respective long-term strategic fit to the combined platform actively identify areas of revenue synergies and potential candidates for sale. No final determination has been made as of today on this final point, and of course as you know until closing Entegris and CMC will continue to operate as two completely separate businesses. Wrapping up 2021, our excellent operating performance showcase the strength of our team’s execution and our highly differentiated unit driven business model. As I said, throughout last year given the persistent supply chain issues, I cannot say enough how proud and grateful I am of the dedication resilience and perseverance of our team. Looking ahead to 2022, semi market demand is expected to remain very strong, driven by robust chip demand and high industry CapEx, all of this bolstered by accelerated digitalization, smartphones, IoT and high performance computing to name just a few. Semiconductor industry ecosystem was tested in 2021 and responded well given the circumstances. We expect 2022 will likely be another year where the industry will struggle to meet the strong demand, and, while the supply chain issues are expected to ease. We expect they will persist to some degree for most of 2022 as a result of the lingering COVID induced supply chain inefficiencies. Looking at our business, we expect our sales growth in 2022 to range from 15% to 17%. Let me unpack that for you. To start for the full year 2022, we expect the market based on our unit CapEx mix will be up approximately 10% and given our strong position and wins in the new logic and memory nodes. We expect to outperform the market by approximately three to five points. Consistent with what we laid out during our recent Analyst Day.In addition, we expect to a little bit more than two points of growth from the impact of the BASF precision micro chemicals business acquisition and continued growth in our Lifesciences high purity bags business. We also expect EBITDA flow through to continue to be in line with our target model and we expect to achieve a full-year 2022 non-GAAP EPS in excess of $4.10. To be clear, the guidance I just provided does not include the impact from the pending CMC acquisition. In summary, this is an exciting time for Entegris. We have increased conviction in the secular growth of the semiconductor market demand for our products and solutions continues to be at record levels and our relevance in the value chain has never been higher. In addition, the pace of node transitions for both logic and memory, continue to be strong, and device architectures are becoming much more complex. This is great news. As you know for Entegris because the unique set of capabilities we have built around process materials and materials purity will be key enablers of these new chip architectures.And as we have laid out, this will translate into a steadily expanding Entegris content per wafer. Finally, I want to take a moment to thank our customers for the trust and confidence they place in Entegris and once again thank the Entegris teams around the world for their incredible work and grid in such dynamic times. Now let me turn the call to Greg. Right.

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

Thank you. Bertrand, and good morning everyone. Our fourth quarter capped off another record year for Entegris. Our sales in Q4 were $635 million, up 20% year-over-year and up 10% sequentially. GAAP and non-GAAP gross margins for both 46, 5% above our guidance and up 90 basis points sequentially.

For the full year, gross margins were just over 46%, up versus 2020 driven by volume leverage, which more than offset the well-documented headwinds from COVID and the related supply chain inefficiencies> We expect gross margin to be approximately 46, 5%, both on a GAAP and non-GAAP basis in Q1, we also expect gross margins will improve throughout the year and be approximately 47% for all of 2022.

GAAP operating expenses were $136 million in Q4 and included $17 million of non-GAAP items from amortization of intangible assets, transaction and other costs. Non-GAAP operating expenses in Q4 were $119 million. We expect GAAP operating expenses will be $150 to $152 million and non-GAAP operating expenses will be $126 million $128 million in Q1. Q4 GAAP operating income was $160 million, non-GAAP operating income was $177 million or 28% of revenue up 39% year-on-year and up 16% sequentially.

Q4 adjusted EBITDA was approximately $200 million and over 31% of revenue. EBITDA margin for the year was over 30% up over 100 basis points compared to 2020.

Moving to below the operating line. Our GAAP and non-GAAP tax rate was 20% for the quarter, higher than our guidance of 18.5% in part driven by less favorable geographic income mix. For the full year 2022, we expect both our GAAP and non-GAAP tax rate to be approximately 17%. It’s worth noting, for modeling purposes, that the first quarter typically has the lowest tax rate of the year. To be clear, we have not assumed any impact from potential tax reform in the 17% tax rate guidance.

Q4 GAAP diluted EPS was $0.87 per share. Non-GAAP EPS of $0.96 per share was up 35% year-over-year. And 4% sequentially. Turning to our performance by division. Q4 sales of $188 million for SCEM were up 11% year-over-year and 7% sequentially. Growth was primarily driven by advanced deposition materials formulated cleans and selective etch chemistries. As we referenced last quarter SCEM was the most impacted by supply chain constraints during the year. Adjusted operating margin for SCEM was 25% for the quarter. The sequential increase in margin was driven primarily by the higher volumes. The significant year-over-year margin increase was driven by the volume improvement and the impact of a discrete inventory valuation adjustment taken in Q4 of 2020, that did not recur in Q4 2021.

Q4 sales of $259 million for MC were up 26% from last year and up 15% sequentially. Growth was strong across all product lines in MC in 2021 especially in liquid filtration, driven by strong traction in advanced logic and memory nodes and in Gas Filtration and Purification, which benefited from strong activity in new fab construction and strong demand from our OEM customers.

Adjusted operating margin for MC was 36% for the quarter, up year-over-year and sequentially. Also driven primarily by higher volumes. Q4 sales of $198 million for AMH, were up 30% versus last year and up 6% sequentially. Year-on-year growth was strongest in wafer handling and fluid handling. In addition, sales of the Aramus product significantly contributed to the growth in AMH during 2021. Adjusted operating margin for AMH was 23%, up slightly year-over-year and up over 100 basis points sequentially. The AMA margin improvement was driven primarily by higher volumes.

Fourth quarter cash flow from operations was $116 million and was $400 million for the full year. Free cash flow was $39 million in Q4 and a $190 million for the full year. Our 2021 free cash flow reflects our choice to invest in new capacity to support future growth and in working capital to support customer demand and protect our supply chain. CapEx for the quarter was $77 million and for the full year was $211 million. Consistent with what we outlined in the Analyst Day. In 2022, we expect to spend approximately $500 million in total CapEx with $225 million for our new facility in Taiwan, 2022 is expected to be our peak year for overall CapEx spending. During Q4, we distributed approximately $11 million for our quarterly dividend and we repurchased $17 million of our shares. As we said when we announced the acquisition of CMC materials we are suspending our share buyback program, but we are maintaining our quarterly dividend, which we have recently increased 25% to $0.10 per share. Now for our Q1 outlook, we expect sales to range from $630 million to $650 million. We expect GAAP EPS to be $0.81 to $0.86 per share, and non-GAAP EPS to be $0.96 to $1 per share. In summary, I would like to express express my gratitude to the entire Entegris team for a great year in 2021 and look forward to another record year in 2022. I would also like to take this opportunity to say, we look forward to closing the CMC acquisition and welcoming our new colleagues to the Entegris team operator. We’ll now open up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions].

We’ll take our first question from Sacha Hari with Goldman Sachs. Your line is open. Please go ahead.

Sacha Hari

Good morning. Thank you so much for taking my question and congratulations on a very strong year. Bertrand is my first question, I wanted to ask about your 2022 outlook, you mentioned that your expectation for the market is for the market to be up 10%. Can you differentiate between MSI wafer starts and the CapEx side of your business and perhaps more importantly, you noted that you expect your outperformance to be somewhere in the 3% to 5% range on an organic basis. I was hoping you could unpack that for us a little bit which segments which product areas, do you expect to be the biggest driver. Then I have a quick follow-up.

Bertrand Loy

Good morning. So 10% indeed is the plan for the industry going into 2022. We are expecting MSI should be in the mid to high single digits and right now we are thinking about CapEx to be in the mid-teens for 2022. So the outperformance, as you know, will be driven mostly by many node transitions that we expect both in Logic and in Memory, the timing of those node transitions there is still something that needs to be confirmed by some of our customers and that’s why you have this range of about three to five points of outperformance, that’s really more per-function of the timing of those node transitions.

The products that will be driving that outperformance of products that we’ve been discussing, most recently with you during our Analyst Day in early December. So the surprise here, it will be our advanced liquid filters, it would be our new deposition materials and our selected to edge chemistries for the most part, I mean we expect all products to do well, but those three platforms will be the ones leading the outperformance in semiconductor applications and as we mentioned, outside of semi, we expect our high-purity bag offering to continue to grow strongly in 2022 and to contributed about– about a point of growth in 2022, and you said you had a second question Toshiya.

Sacha Hari

Yes, I do. Thank you for that response Bertrand. And then my second question is on gross margin. Perhaps one for one for Greg. Sorry if I missed this but what were some of the key drivers in the Q4 beat revenue obviously came in significantly above. So, I’m guessing volume, but to the extent there was anything else. If you could speak about that, that would be helpful. And then expectations for Q1 and how to think about the balance of ’22, from a gross margin perspective, I’m sure there is a lot going on in terms of cost inflation on the negative side, higher volume mix and perhaps pricing on the positive side, but if you can discuss the puts and takes, that would be super helpful. Thank you.

Gregory B. Graves

Yeah– yeah. So for the quarter. I mean you’re right, I mean the additional volumes certainly helped us on the gross margin, I mean that was the primary driver. That was offset by– we didn’t– Our mix was not as good as we initially expected. And then we continue to experience a number of sort of supply chain inefficiencies as well as you mentioned, higher material inputs. But, given the volumes we had, we were able to offset all of those things.

As we go into 2022, our margin expectation for Q1 is 46.55, our margin expectation for the full year is 47% the primary drivers there is, we expect is A) improving mix and B) that the higher volumes will certainly play into it. We are, there is no hiding the fact that we are facing headwinds in a number of categories on the raw material input side, but we expect that we’ll be able to overcome them and then we do continue to experience inefficiencies around our supply chain related things related to COVID things like labor, specifically absenteeism is creating a little that are headwind for us as well.

And then on up pricing, we have implemented selective pricing increases and Bertrand might want to comment a little bit more on that.

Bertrand Loy

Yeah, I think we mentioned that in the the previous call that we were in the process of speaking the close look at some of the input cost increases and trying to false between what was transient and what was more permanent in nature and to take appropriate measure to offset that with targeted price increases. We don’t expect to see the benefits of those increases probably until later in 2022 and that’s consistent with the picture that Greg was drawing for you, which is a steady improvement of the margins through the year, in 2022.

Gregory B. Graves

I would just summarize by saying, overall, when I look at 2021 I was pretty pleased with the margin, I mean the stability of the margin through the year. I mean, we were plus or minus about 40 basis points of 46% every quarter of the year, we didn’t experience and we had our fair share of headwinds for sure. And so I don’t view that 46 is kind of steady state margin at all, but I mean our team really performed well we avoided any sort of major catastrophic things that would negatively impact the margin in a quarter so likes it overall felt quite good about it and feel good about in our operational capabilities as we move into 22.

Sacha Hari

And sorry the potential increase in depreciation on the back of the investments that you’re making in Taiwan. Is that more of a 23, 24 dynamic or should we expect depreciation to creep higher throughout the year.

Gregory B. Graves

I mean– I mean it will creep higher this year for sure. And as well– That’s why we’ll see more improvement in the EBITDA margin than we will in the operating margin because of those higher depreciation levels this year as a result of the significant investment in 2020 and 2021, especially 2021. There any headwinds from depreciation related to the Taiwan facility won’t come into play until 2023.

Sacha Hari

Very helpful, thank you so much.

Operator

We’ll take our next question from Sidney Ho, at Deutsche Bank. Your line is open. Please go ahead.

Sidney Ho

Thanks and I’ll add– I’ll add my congratulations to the team. First question I have is on the revenue outlook just follow up on the previous question, thanks for all the details. Now, every company in the supply chains in semi- Question is talk about very strong demand. Last quarter you mentioned you expect exiting the year. You have a net demand of roughly $50 million. Can you give us an update there. From what you’ve seen do these revenue just get pushed out or will customers able to satisfy the demand from a different supplier.

Bertrand Loy

So, Sidney. I think obviously with the strong finish that we had in Q4, we have reduced significantly. The difference between the actual demand for our products and the constrained demand on the unconstrained demand for our products. So there is still a number of lingering supply chain issues and we are going to be obviously very focused in 2022, with the goal to permanently put the supply chain limitations behind us, but we expect to see some leading aren’t lingering impact of those supply chain issues in the first half of 2022 and we have obviously taken that into account in our Q1 guidance.and our full year guidance.

Sidney Ho

Maybe just follow up. So, based on the comments you just mentioned. Does that mean the revenue profile this year will be more back-end loaded than the normal year, which I think typically is what 44, 52 kind of split in the past five, six years.

Unidentified Speaker

That’s correct, Sydney. You should expect a fairly steady increase throughout the year. We don’t expect any meaningful Cincinnati at this point in the year. So, expect to see a steady,– steady growth for the year.

Sidney Ho

Okay, great. Maybe a follow-up question is related to CMC Materials deal understanding–I understand it’s probably too early for you to talk about any financial projection post close, but based on the disclosure in the prospectus it looks like the deal came together pretty quickly. Can you talk about what gives you confidence about the deal and the premium that you pay and how should we think about the timing of all these of regulatory approval process for countries that listed there. You talk about US obviously but also particularly around the anti-trust concern, given the combined portfolio addressing the entire team CMP process. Thanks.

Bertrand Loy

Look Sidney. I think as we said in the prepared remarks, we are so very focused as a team on moving the process along and we are very pleased with our progress so far. I talked about S-4 filing becoming effective last week, the date of this CMC shareholders vote is now set for March 3rd, which is frankly very fast and that’s evidence of the quality of the work by both teams.

Last week, we also received HSR clearance in the US, which actually confirms our view that the two platforms of very complementary with virtually no competitive overlap, something that we would describe to you when we announced the transaction in mid-December last year. And as we’ve said, integration planning is it swing. So, I mean that –that all of that tells you that joint teams are very busy and very effective and that’s the reason why we– we continue to expect to be in a position to close the transaction in the second half of 2022 and I’m not going to go into a lot of a boost by country on the regulatory front because, I would be speculating. And I just don’t want to be speculating.

Sidney Ho

Okay, thank you very much.

Operator

Our next question will come from [inaudible]. Your line is open. Please go ahead.

Unidentified Participant

Good morning. I think you mentioned during the fourth quarter. Your tax rate was a little bit higher than expected due to regional sales mix. Can you just parse out which regions saw a stronger demand during the quarter and what your outlook is as we progress throughout 2002 by region. Thank you.

Bertrand Loy

Yeah. And it’s probably an overstatement. To say that I mean it ties directly to the revenue. It really ties to the profitability of the region in the profitability frankly is impacted heavily by intercompany pricing. So, I wasn’t trying to make an insinuation that one region or the other was stronger from a revenue perspective.

Unidentified Participant

Perfect.

Bertrand Loy

I mean, obviously were differences through the year. I mean if you look at in the current quarter. Taiwan was up 12% Rio was up 7%, I mean all on a sequential basis. North America was up 6%, but the tax rate really isn’t very directly about the revenue.

Unidentified Participant

Great. And then I think SCEM seems to be a little bit more impacted by some of the supply and raw headwinds, if you can just help us parse out and SCEM specifically how we should be thinking about the potential margin uplift that these ease throughout the year, and in ’22 in general. Thank you.

Unidentified Speaker

I can talk about the at high level and then., Greg if you want to add to it. On the margin front. But I mean the truth is that if you go back and look at 2021, and the supply issue has impacted all three divisions in different degrees that different times during the year, but all divisions were impacted. As we exit 2021 and as we entered 2022, as I mentioned was to dealing with a few lingering supply chain issues, I think, the most significant is probably including in our SCEM division and we’ve talked about specifically, your availability of substrates for Coating Solutions. That has been to be a constraint for us through 2021 and I think we will likely remain a pinpoint in the first half of the year.

But the other two divisions, are still facing some level of supply chain issues as well. I mean for micro contamination. It’s mostly around component availability for liquid filters and that remains a concern, and then for the attention will be on materials availability and price capacity. So, again it’s been a hot year. I think the team has done extremely well and I’m very thankful the work done by our ops teams in our supply chain partners, but we are not entirely out of the woods and that’s why, as I said a bit of focus in 22 will be to make your systemic improvements to permanently put those supply chain mutations behind us and the margin inefficiencies that goes with it.

But Greg. I don’t know if there’s anything you want to add on the margin front.

Gregory B. Graves

Specifically

Unidentified Speaker

You may be on mute Greg.

Gregory B. Graves

We expect to see continued improvements in mix within that business and that business probably more than any, is any of the three years mix plays– plays a role. We also have a number of smaller businesses within that division where I expect to see operational improvements through 2022 all of which will benefit the gross margin, which in turn will benefit the operating margin.

Unidentified Participant

Thank you very much.

Operator

Next is, Patrick Ho with Stifel. Your line is open. Please go ahead.

Patrick Ho

Thank you very much. Bertrand, Maybe first off for you in terms of a lot of these moving pieces with the supply chain, higher input costs a that’s going on right now, how do you find the balance in terms of passing on these cost year customers while at the same time continuing to face the supply chain challenges, where I’m sure freight and logistics costs are still high, things of that nature. How do you find the balance on that.

Bertrand Loy

Well yeah, it’s something that we’ve been monitoring, obviously very closely through 2020 and 2021. I think there was a G early in 2021 that a lot of the input price increases that we saw were mostly transient. And as we progressed– yeah, deeper into the year in 2021 it became apparent that some of those increases were here to stay, and that led us to take some action on the pricing front. We I’ve never been opportunistic when it comes to pricing. We have always been very strategic and deliberate in what we’re doing and that’s what we did in 2021, trying to find an offset for some permanent increases in certain types of commodities that we are buying, and again as we said. Now, given the lead times for some of our products, we wouldn’t expect to see the benefits of those price increases until probably later in 2022.

Patrick Ho

Great, that’s helpful. And maybe Greg just As a follow-up question. We’re looking at your 1Q guidance on OpEx, it’s still below the percentages that you highlighted at your Analyst Day. Should we expect OpEx to kind of steadily rise as we progress through 2022 to kind of get to the– to the target model that you’ve talked about, at your Analyst Day.

Unidentified Participant

I mean OpEx in Q1 will be lower than the other. Second, third and fourth quarter. We continue to really focus on making the investments in ER&D and so we would expect to see continued increases in R&D and we continue to work hard to do what we can to keep the SG&A line relatively– it’s not going to be flat, but certainly growing at considerably less than revenue, that would be our goal as we move through the year. But like but your point is, it does move up as we move through the year.

Patrick Ho

Great, thank you again, and congrats.

Unidentified Speaker

Thank you.

Operator

We’ll go next [inaudible] with KEYBanc. Your line is open. Please go ahead.

Unidentified Participant

Thank you and good morning everyone. I wanted to ask you about the pace of node transitions in ’22 and ’23, is there any sign that these supply chain issues are resulting in slower node transitions or is everything on track.

Unidentified Speaker

Let’s say, it’s a good question and that’s something that we will obviously paying close attention to, as of right now we don’t see any significant risk. But that certainly is something to watch for and that’s why again we were putting that outperformance range at about three to five- -three points of outperformance would be if some of those transitions get delayed a bit and five points would be what you should be expecting if the no transitions announced by a number of for logic and memory customers take place on time.

Unidentified Participant

Thank you. Bertrand. And as a follow-up, your mid-single digit wafer starts assumption for this year, some may say it could be conservative. I don’t know if you agree and are you thinking about some level of inventory correction, perhaps in the back half of this year.

Bertrand Loy

I think, I said mid to high. So, it’s been a bit higher than mid, but look, I mean this is –do you typically continue to update you on our views about the industry both intensive CapEx growth and wafer start growth, we will obviously do that in 2022 as well as we have greater visibility. I think it’s fair to say that as we mentioned during the Analyst Day. We have a high degree of conviction in the secular growth potential of the semiconductor industry, most of our customers, fab customers have their capacity essentially fully committed for the year. So we expect a high degree of fab utilization, which is obviously very good for us and should– to your point alluded to very healthy levels of wafer starts. So, for now our projection is mid to high single-digit for wafer starts. And if– if it’s better than that and we will update our guidance accordingly.

Unidentified Participant

Thank you.

Operator

We’ll go next [inaudlble] Scarnati with Citi. Your line is open. Please go ahead. Good morning. Can you just quantify the growth can you quantify the growth by leading edge versus the support you’ve been getting from greater utilization on the lagging edge and how that ties into sort of what your expectations are going forward.

Bertrand Loy

Yeah, I mean it’s so good morning on our first and– it’s not something that we track, in that fashion, Amanda. So I don’t want to try to make up numbers on the slide, but I just want to confirm what is embedded in your question, which is we have seen strength across wafer sizes of 200 millimeter business had a great year in 21, we expect a similar type of performance in 2022. And as we’ve said throughout the year, we expect again strength across all segments, be it memory and logic. So, we expect to see growth everywhere, but in terms of the outperformance, the outperformance will be driven by the leading edge and will be driven by the greater Entegris content per wafer that we expect to enjoy as more customers in 3D NAND, for instance, transition to highly account architectures, or in logic and foundry when more wafers are produced at smaller line with. So– So again, I think the setup for the year for 2022 is actually pretty positive for us across– across segments.

Unidentified Participant

Thanks. And then Chris talk about sort of the deposition chemicals that you’ve highlighted in the past as being a big driver on 3D NAND, can you talk about the traction that you’ve been gaining or not. It’s part of the strategic rationale. I think for the CM CDR conversations changed at all since you’ve announced that deal.

Unidentified Speaker

Look, I mean I think it’s early for us to talk about what the combination between the two companies, could mean in terms of growth and opportunity per wafer, I would just say that conversations with customers have been positive, but remember that until we close, we still two independent companies and we won’t really be able to really work on the potential of the combined platform, as we’ve said, we expect to provide a little bit more color around synergies and that includes revenue synergies. After we close the transaction, which we expect to be in the second half of 2022.

So, I PPI SKU for a bit of patients with that question Amanda.

Unidentified Participant

Certainly. I appreciate that. Thank you.

Operator

Our next question comes from Paretosh Misra of Berenberg. Your line is open. Please go ahead.

Paretosh Misra

Thank you and good morning everyone. So you guys probably had $300 million to $400 million sales to China, last year, can you talk about the competitive landscape and how it’s evolving, are you still mostly competing against the Western companies are increasingly seeing more local Chinese competitors.

Bertrand Loy

Yeah. So, China is is about a 15% country for us. I mean, so, very stable at that level. Now for a number of years. The competitive landscape has not really meaningfully evolved over the last three years and we compete mostly with foreign competitors.

Paretosh Misra

Thanks. And then typically you have seen about I guess about 100 basis points deflation in legacy products. Can you talk about what you saw last year because, I think the year before that it was much lower than that typical 100 basis points.

Unidentified Speaker

Yes, I think we have become more disciplined and more strategic in our pricing practices that applies to, setting the price. Right. For the new products that we introduce when we have an opportunity to capture some of the value that we create for our customers, but that discipline extends also to managing pricing over the lifecycle of the products and that price erosion in many cases it’s been managed more and more effectively over the last few years as well. So the net of all of in 2021. We didn’t see the price erosion that we would typically see I will the, in the past.

Paretosh Misra

Got it. And last one for me, in your SCEM business, can you discuss what you saw in some of the other product categories like a graphite and specialty gases.

Bertrand Loy

Yeah, so first of all in, is that the performance in SCEM was really driven in 2021 by very very strong performance in deposition materials, which grew 26% year-on-year. The other areas of growth were specialty gases and specialty coating in spite of the supply chain issues that we were mentioning, which grew in the mid to high teens glass I did recover Graphite grew in the high teens in 21 is not back to pre-COVID levels quite yet. But is in a healthy situations. If you go back to ago our graphite business was both a headwind from the top line growth standpoint. And a headwind from a margin standpoint, that’s no longer the case improve again in the high teens, and the margins are favorable. So I think, again, a lot of– a lot of good foundational work took place in SCEM during 2021.

Paretosh Misra

Thanks for the color. Bertrand. Good luck with everything thank you.

Operator

We will go next to Mike Harrison Seaport Research Partners. Your line is open. Please go ahead.

Unidentified Participant

Hi, good morning. Was I was wondering, I was wondering if you could talk a little bit about the you’ve been in the process of adding shifts and trying to expand manufacturing capacity. It seems to be progressing fairly well based on your performance, but maybe just give an update on your ability to find labor and are the returns on some of the investments you’ve made an additional capacity in line with expectations, better or worse.

Bertrand Loy

Yes, yes, it’s true that so much has happened in 2021 that, we almost forgot how we got to that strong finish and you’re right that we made very significant and steady progress throughout the year in terms of adding manufacturing capacity for context, in 2021. We added about 1500 manufacturing jobs in Entegris and to your point, we’re running, most manufacturing sales 24×7 right now. We also successfully added a number of new pieces of equipment in the second half of the year that came online really smoothly. Once again, kudos to our up teams and I was particularly helpful to our liquid filtration product lines and you and obviously, see the results of that output maximization focus in the Q4 results. So as I said, I think we are in a very good place as we start to intensive internal capacity. We have a few projects for 2022 that will be required for us to to be able to fulfill the demand for the strong demand we expect for 2022. But of course, the focus is also around the large investment we’re making in Taiwan investment that will be very important to add capacity required for demand.

We expect the strong demand we expect for products in 2023 and beyond as we presented during the Analyst Day. So a lot of good work. But the upstreams in 2021 to 2022 and 2023 would be too busy years for our ops teams as well.

Unidentified Participant

Well, my other question is actually about that Taiwan investments that you announced that you were expanding investment pretty meaningfully from $200 million to $500 million. Can you talk about what drove that decision to expand maybe what additional capabilities, you’re going to be adding. And I don’t know if this is a dumb question, but it sounds like the size of the facility is doubling. But the cost is more than doubling. So maybe help us understand why, why that is.

Unidentified Speaker

I mean I think it’s a very first. First of all, remember that we needed and the need to add capacity. Because we expect strong growth across a number of product lines. So we have already today significant manufacturing capacity in the US, the second largest country for us is Taiwan, it wasn’t very natural choice for us to decide to expand manufacturing presence in Taiwan, which was not sufficient, I mean, to be clear, so that is be the basis for that decision and then we expect a lot of growth and a lot of new opportunities on the island. And so finally to question about the correlation between the size and CAPEX level. I mean it has to do with the desire to really invest in state-of-the-art manufacturing capabilities, we want to bring a new level of automation cleaner manufacturing processes. The goal is to short-term lead times and to be obviously battery manufacturers and then our competitors from and we also have very ambitious environmental goals with this investment. Just for example, we expect to be reusing and recycling 85% of the water that we consume on this slide. So all of that obviously requires some level of upfront investment, but I have no doubt that it will pay off big dividends over time

Unidentified Participant

All right, thanks very much.

Operator

We will take our final question from Josh Silverstein at Wolfe Research. Your line is open. Please go ahead.

Josh Silverstein

Thanks, good morning guys. I was just going to stick with the Taiwan facility. You mentioned CapEx of about $500 million this year with about half of that coming from that facility alone, would you expect the going to stand-alone CapEx to stay at that level, in 2023 before potentially falling off in ’24 and then along the same lines, you mentioned potentially a $500 million plus revenue number one fully ramped up, how long will it take that facility to ramp up to that level.

Bertrand Loy

Greg, do you want to take the first part of that question. I can– and the revenue path. you may be on mute.

Gregory B. Graves

Right. Yeah, I am on mute. And can you– I caught the revenue part, but what was the– I’m sorry, the first point.

Josh Silverstein

No, just on the spending level this year is about $500 million roughly half of that from the Taiwan facility. Would you expect CapEx to remain at that level in 2023. I know the facilities slated for initial output next year.

Gregory B. Graves

Okay. Sorry if I got it– I got it. I’m sorry, I didn’t fully understand. Now, So, our expectation is that 2022 will be our peak spending year for overall CapEx. It will also be the peak year for what we spend in Taiwan. So when, when we look forward, we would expect by 2024 our free cash flow levels will be back to the levels that we saw in 2020 as cap and when it comes as a CapEx as a percentage of revenue comes down and when it comes to the revenue picture we expect the bulk of the customer qualifications to take place in the first half of thousand 23 and we expect to start ramping up high volume production in the second half of ’23. So expect this fab to really continue to ramp into 2024 and ’25.

Josh Silverstein

Got it. And then last one for me, I know you had few a little bit quiet around potential asset divestitures around the transaction, but would you still consider any sort of small bolton deals like the kind of $7500 million acquisitions while you’re going through the process.

Gregory B. Graves

I think it’s fair to say right now that the focus for us would be number one, two not– no. The CMC integration to be a distraction. And to execute on the strong organic growth plan and I think that and probably applies to our friends at instrumental units as well. Next priority will be to to work on integration planning and ready-day one after close to hit the ground running. And I think it’s going to leave us with very little time to really think about additional small M&A at least for the foreseeable future.

Operator

[Operator Closing Remarks].