管理層發言
Welcome to the Entegris Second Quarter 2026 Earnings Conference Call. Operator instructions were provided. I would now like to turn the call over to Jeffrey Schnell, Vice President, Investor Relations. Please go ahead, sir.
Good morning, everyone. Earlier today, we announced the financial results for the second quarter of 2026. 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 in 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. Joining me on the call today are Dave Reeder, our CEO; and Sukhi Nagesh, our CFO. With that, I'll hand the call over to Dave.
Thanks, Jeff, and good morning. The second quarter was another strong quarter for Entegris as we continued to capitalize on accelerating AI-driven demand and the significant and growing investment across the semiconductor ecosystem. We exceeded our guidance ranges on all metrics. Revenue growth of 11% year-over-year was above our guidance range, driven by double-digit growth in both our unit and CapEx-driven businesses. Gross margin improved sequentially as our operational initiatives gained momentum and strong free cash flow generation further enhanced our balance sheet and financial flexibility. Our performance reflects both improving market conditions and our focused efforts to strengthen and invest in our core semiconductor businesses. With these investments and our continued execution, Entegris is well positioned to accelerate growth, expand profitability and drive long-term shareholder value. Unit-driven revenues grew 10% in the second quarter. Technology transitions continue to increase the material content required to manufacture at the leading edge. This increased intensity is visible in the strong growth in liquid filtration, CMP in particular pads, advanced deposition materials and selective etch chemistries. Notably, liquid filtration delivered its fourth consecutive record quarter. CapEx-related revenue increased 15% year-over-year in the second quarter, driven by significant growth in FOUPs and broad-based strength in gas filtration and purification solutions. We continue to see customers accelerate investments to support AI infrastructure with increasing activity across advanced logic, HBM memory and advanced packaging ecosystems. Bookings across our CapEx-oriented businesses strengthened throughout the quarter, driving backlog levels higher and providing greater visibility into customer spending plans. We believe these trends reflect the early stages of a broader semiconductor investment cycle, one that should benefit Entegris through both the construction phase and the subsequent ramp to high-volume manufacturing. With increasing visibility into accelerating customer demand, we are proactively scaling ahead of the market, unlocking capacity, expanding capabilities and strengthening supply chain readiness. As demand continues to build across areas such as filtration, specialty coatings, FOUPs and CMP, the visibility we have enables us to identify emerging constraints early and take targeted actions to increase throughput and unlock additional capacity before they become limiting. Leveraging our existing global footprint and prior capacity investments, we are well positioned to meet customer needs, support technology road maps and capitalize on the opportunities ahead. Turning to profitability. Adjusted gross margin was another highlight of the quarter, exceeding our guidance range and reaching its highest level since early 2022. The improvement reflects stronger operational execution and the benefits of actions we have taken over the past several quarters to simplify and optimize the business. We also continue to sharpen our strategic focus and footprint during the quarter. Given the significant and increasing semiconductor demand, we decided to exit our Life Sciences Fluid Management business in the U.S., concentrating resources on our core semiconductor businesses. Additionally, we announced plans to close our Logan, Utah facility, our third dilutive facility rationalization since late 2025, further streamlining our manufacturing footprint without impacting availability for our core semiconductor market. These combined actions underscore our disciplined approach to portfolio management and our commitment to concentrating resources in areas where we have the greatest opportunities for long-term growth, differentiation and value creation. Free cash flow was another highlight of the quarter, reaching $120 million or 14% of sales. This performance was driven by higher earnings and disciplined working capital management, resulting in a greater than 10% year-over-year improvement in our cash conversion cycle. The strength of our cash generation enabled us to repay an additional $200 million of debt and reduce net leverage to 3.4x. Given our improved earnings trajectory and cash flow outlook, we now expect to end the year with net leverage in the high 2x range while continuing to invest for growth. Turning to the outlook for our end markets. Based on current demand trends, we now expect 7% to 8% MSI growth in 2026 versus the mid-single-digit assumption we started out with at the beginning of the year. While our expectations for advanced logic and memory remain largely unchanged, we expect a mixed but modestly improving environment for mainstream logic contributing to a more constructive outlook for the industry. The most notable change since last quarter has been the continued acceleration in semiconductor capital spending. Momentum in both wafer fab equipment and fab construction is strengthening, as evidenced by increasing project awards and backlog growth. To put this in perspective, we are currently tracking over 20 major leading-edge capacity expansions globally, including approximately 8 to 10 advanced logic facilities, 7 to 8 advanced memory facilities and 6 to 8 advanced packaging projects. We expect these investments to become a more meaningful contributor to our growth in the second half of 2026 and into 2027. The breadth of these investments is also a leading indicator of future MSI growth and reinforces our confidence in the durability of the industry's growth and the expanding opportunities for Entegris. Breaking down the specific components of our end market mix. Advanced logic, which represents approximately 40% of our revenue, remains a significant growth opportunity as demand for leading-edge compute accelerates technology migrations and increases semiconductor complexity, playing directly into Entegris's strengths. We are already seeing this translate into strong results, including double-digit growth in Taiwan, driven by both advanced node capacity expansions and higher production volumes. We also increased design wins tied to EUV lithography and continued to see strong demand for FOUPs, reflecting our expanding content opportunity at the industry's most advanced nodes. With positions of record at the industry's most advanced nodes and a strong innovation pipeline, we are well positioned to accelerate growth as customers continue to scale next-generation AI infrastructure. Memory, which represents approximately 30% of our revenue, remains a compelling growth opportunity driven by AI-related demand and favorable technology road maps. Similar to advanced logic, increasing memory complexity, tighter process tolerances and growing performance requirements are driving greater need for the high-purity materials and solutions where Entegris is differentiated. In DRAM, increasing investment activity is providing greater visibility into future capacity expansions and production road maps. In NAND, technology transitions and layer scaling continue to support higher output and improving demand trends, which we expect to lead to additional capacity investments. These dynamics reinforce our confidence in the long-term growth outlook for memory and the expanding role Entegris plays as a critical enabler of advanced semiconductor manufacturing. Recent HBM4 and TSV and CMP wins, along with approximately 2x year-over-year growth in molybdenum precursor demand, are further evidence that increasing memory complexity is translating into greater content opportunities for Entegris across next-generation AI memory architectures. And lastly, mainstream logic remains mixed, and while modestly improved compared to last quarter, it continues to lag leading-edge markets. To summarize, the next phase of semiconductor investment cycle is underway, supported by healthy unit demand and accelerating capital investment activity, creating multiple growth vectors for Entegris through the second half of 2026 and into 2027. Second, our technology leadership positions across key product lines, including CMP and selective etch processes, filtration and purity solutions and FOUPs, combined with our growing presence at the industry's most advanced technology nodes, continue to strengthen our competitive advantage, increase our strategic importance to customers and provide additional content opportunity. Finally, execution remains a key differentiator. We are expanding capacity and margins, strengthening cash generation, simplifying the portfolio and enhancing our financial flexibility, while proactively investing in next-generation products to meet increasingly stringent customer demands and capture future growth opportunities. These trends reinforce our confidence in Entegris' long-term growth algorithm of above-market growth and margin expansion. Our technology leadership, expanding advanced node exposure and disciplined execution are positioning Entegris to become the foundational materials platform underpinning the build-out of global AI compute infrastructure. Our strong results this quarter are a direct reflection of the dedication and execution of our employees around the world. Their commitment to serving customers, advancing innovation and operating with discipline continues to differentiate Entegris. With that, let me turn the call over to Sukhi to discuss the financials.
Thanks, Dave, and good morning, everyone. I'm thrilled to be joining Entegris at such an exciting time for the company and the industry. The combination of market leadership in technology, strong customer partnerships and significant growth opportunities ahead reinforces my confidence in the long-term potential of the business, and I look forward to working with the team to help unlock that potential. Q2 sales were $883 million, an increase of 11% year-over-year and above our guidance range. Our GAAP net income was $94 million, and our adjusted net income was $143 million, an increase of 42% from a year ago. Both top and bottom line metrics were above the high end of guidance. Gross margin on a GAAP and non-GAAP basis was 47.6%. The sequential improvement reflected continued progress in operations even as we continue to invest for growth. We have increased our factory direct labor a double-digit percentage from Q4 that will help unlock additional capacity. We expect to build on this momentum as the year progresses. Operating expenses on a GAAP basis were $255 million in Q2 and $204 million on a non-GAAP basis or approximately 23% of sales. The majority of the year-over-year increase is driven by higher variable compensation associated with the stronger business performance. Adjusted EBITDA in Q2 was $251 million or 28.4%, also above our guidance range as the benefit of higher gross profits flowed through. The GAAP tax rate in Q2 was 15% and the non-GAAP tax rate was 16%. GAAP diluted EPS was $0.61 per share in the second quarter and non-GAAP EPS was $0.93 per share. Now switching to our segments. Material Solutions delivered second quarter sales of $371 million, up 5% year-over-year, driven by advanced deposition materials, selective etch chemistries and CMP. Growth in Material Solutions accelerated from the first quarter, and we expect the MS segment to deliver double-digit year-over-year growth in the second half of 2026, benefiting from increased demand across deposition, CMP, etch and implant materials product lines. MS adjusted operating margin was 20.9%, in line with the prior year. Higher raw material and logistics costs, together with planned investments in direct labor associated with customer demand were largely offset by improved manufacturing performance and productivity initiatives across the segment. APS delivered Q2 sales of $515 million, up 17% year-over-year, driven by strength across both unit-driven and CapEx-related demand. Liquid filtration had its fourth consecutive record quarter. Our microenvironments business, led by FOUPs delivered its strongest performance in more than 3 years. Demand was strong in Taiwan due to expansions in leading-edge logic and advanced packaging capacity. We also saw a return to year-over-year growth in North America. APS is benefiting from multiple growth drivers. We are seeing increasing demand tied to higher wafer starts, advanced node transitions and accelerating semiconductor capital spending. These trends are creating opportunities across the portfolio that should persist throughout this year and beyond. Adjusted operating margin for our APS segment was 30.3% for the quarter, expanding both year-over-year and sequentially. This performance reflects volume growth, favorable mix, continued improvements in operational execution, more than offsetting costs and investments we are making for the customer demand. Now switching to cash flow and the balance sheet. We delivered free cash flow of $120 million in the second quarter or 14% of sales, reflecting higher earnings, lower capital spending and continued working capital improvements. We reduced our cash conversion cycle by approximately 20 days year-over-year and repaid an additional $200 million of debt in the quarter. As a result, net leverage improved to 3.4x, and we now expect to end the year below 3x. Moving on to the details of our third quarter outlook. We expect Q3 sales to range between $905 million and $935 million, a year-over-year increase of approximately 14% at the midpoint, reflecting continued momentum in the industry. Gross margin is expected to be between 47.5% and 48.5%, both on a GAAP and a non-GAAP basis, marking another improvement from Q2 and more than 400 basis points of expansion year-over-year. At the midpoint, we expect GAAP operating expenses of approximately $260 million and non-GAAP operating expenses of approximately $215 million, reflecting higher variable compensation and investments to support the growth we are seeing across our portfolio. At the midpoint, we expect Q3 EBITDA margin to be 28.5%, net interest expense of approximately $43 million and a non-GAAP tax rate of approximately 15%. We expect GAAP EPS between $0.75 and $0.83 per share and non-GAAP EPS between $0.96 and $1.04 per share. And we expect depreciation to remain largely stable for the balance of this year at approximately $34 million per quarter. Looking ahead to our fourth quarter revenue expectations. With our current visibility, we expect revenue to grow approximately 4% from the midpoint of third quarter's guidance range, which represents mid-teens percentage growth year-over-year. Finally, I'd like to update a few modeling items for the full year 2026. We expect net interest expense to be approximately $180 million, the non-GAAP tax rate to be approximately 14% and diluted share count of approximately 154 million for the full year and CapEx of $250 million. We entered the second half with strong momentum. Since joining Entegris, I have spent considerable time with our global teams and have seen the strength of our technology, market position and people. My near and midterm priorities are to deliver profitable growth, help drive operational excellence and allocate capital with discipline. Before turning the call over to questions, I'd like to mention that we will be hosting our Investor Day on November 9 in New York City. We look forward to sharing a more detailed view of our AI materials platform strategy, technology road map and long-term financial framework. Seating will be limited and by invitation only. Registration information will follow in the coming days. The event will also be webcast live for those unable to attend in person. With that, operator, let's open the line for questions.
分析師問答
Operator instructions were provided. And our first question will come from Melissa Weathers with Deutsche Bank.
A lot to talk about. I guess for my first question on the fab CapEx outlook. I was just hoping you could talk a little bit more about what you're expecting in terms of your CapEx-oriented business. We're seeing a lot of fabs get built out. So just trying to think about how you guys are — how we should be modeling that business second half of this year and into the first half of next year. That would be helpful.
Melissa, thanks for the question. As a reminder, 75% of our revenue is driven by wafer starts and 25% by CapEx. Within CapEx, 10% is driven by WFE and 15% by fab construction. So tactically, for 2026, as you'd expect, we're seeing the greatest uplift in our CapEx business from WFE. With our WFE order rates up at a growth rate that's very similar to the growth rate that's being reported by the WFE market, so call it 20% to 30%. We are seeing some benefit from increased fab construction in 2026, but the majority of that benefit will actually accrue to 2027, not into the second half of '26. So thematically, second half of '26 CapEx revenue driven by strong WFE growth, low double-digit fab growth and 7% to 8% unit growth. 2027 will benefit from much stronger fab construction growth, followed again by WFE as those fabs are populated with tools, which will then be followed again by increased wafer unit growth that those tools process wafers. Also, I'd point out that I mentioned in my prepared commentary, we're currently tracking 20 leading-edge capacity expansions in the markets. That's about 8 to 10 in advanced logic, 7 to 8 in advanced memory and 6 to 8 in advanced packaging. So our teams are encouraged by the industry backdrop, and we're working very diligently to ensure that we've got supply positioned to deliver to our customers. Did you have a follow-up, Melissa?
Yes, I did. Maybe I'll first welcome Sukhi to the call. Sukhi, from the couple of months that you've now been in the seat, anything that stood out to you? Any strategic priorities that you've been working on? And it was really helpful to hear about some of the rationalizations in the business exit that you talked about. So any strategic priorities that we should be looking forward to ahead of Analyst Day?
Yes. Thanks, Melissa. Look, it's less than a quarter that I've been here and my first impressions really are that the technology that we have here is critical. First and foremost, I'm incredibly impressed with the technology of the company. Very few companies can deliver the innovation and the materials science that Entegris can provide, be it on the Purity Solutions side or on the Advanced Materials solutions side. Second, what comes to mind here is that we have pretty strong positions in the fastest-growing areas of the technology space in semiconductors, especially. And third, we have ample room to optimize and get the full entitlement out of the portfolio of assets that we have here. So those are my first impressions here being in the seat for less than a quarter. So with that backdrop, my near-term priorities are pretty clear. We need to help drive profitable growth, further enhance the operational excellence and efficiencies of our assets and deploy capital in a manner where we get the best return for every dollar spent.
Our next question will come from Yiling Sun with Citi.
I guess my first question is for the full year, it's good to see your guiding Q3 and Q4 both up like 4% sequentially. I guess for the full year, are you still on track to your target model of outperforming the market by 3 to 6 points? And what would be the driver to the upside to the full year outlook?
Sure. Let me take that one, Yiling. And Sukhi, if you have any follow-up, please build on the commentary. For third quarter, at the midpoint of our guidance, we're essentially guiding up mid-teens. That implies more than 10% growth, both in MS and in APS. And so what you're seeing is the business accelerate: 5% year-over-year growth in first quarter going to 11% year-over-year growth for the second quarter, moving up to mid-teens year-over-year growth for the third quarter. So that's the guidance through the third quarter. Given our increased order visibility in our backlog, we did want to give you at least some improved visibility for fourth quarter, very similar to what we did in last quarter. We guided fourth quarter up sequentially about 4%. We'll tighten up that guidance when we get to our third quarter call. But based upon what we currently see, even that would be up mid-teens on a year-over-year basis, again, with MS and APS both growing more than 10%. So what we're seeing is the business accelerating. We're seeing both businesses accelerate from the first half of the year into the second half of the year. And given all the activity, both in fab construction as well as more than 50 engineering engagements in new projects, we think that bodes well for 2027 as well. Did you have a follow-up, Yiling?
Yes. Thanks for the color. And on the gross margin side, it's good to see your Q2 is above the guidance. So my first question is, what was the upside in the Q2 gross margin? And then in Q3, it's nice to see you are touching 48%. I'm not asking for a new target model, but from this point, you are talking about your operational efficiency improvements and factory rationalization. So I'm just curious what is the kind of baseline gross margin we should think of at this point?
Yes. Let me maybe take the big picture and Sukhi, maybe you can color in some of the details. Look, we're very excited about the potential of our product portfolio. I said here in third quarter last year, we had a tremendous amount of untapped capacity in the network. I talked about how we were driving four things operationally: the network optimization, the centralization of procurement, improved focus on yield and then a maniacal focus on productivity. When you think about all of those activities that you've seen us consistently drive now for three quarters, we're actually making very good progress across all of those initiatives, including closing another dilutive facility — or announcing the closure, I should say, of another dilutive facility. So we're very pleased with the progression, and we think we have significant room to continue to grow from here. Sukhi, do you want to talk about some of the specific dynamics Q1 to Q2 and then Q2 to Q3?
Yes. Our gross margin improved 70 basis points sequentially. And I think it's also important to note that we delivered pretty strong incrementals despite intentionally investing ahead for demand. That should show proof points that we're on the right track. The underlying business continues to benefit from productivity and operational improvements and our ability to drive structurally higher margins and flow-through as we continue to scale. The underlying business continues to benefit from all of this, and I think we'll be in a position to drive structurally higher margins through the cycle.
Those are good points, Sukhi. If I could build on one comment: we are investing ahead so that we can unlock that capacity that I mentioned across the network. For example, we've increased direct labor by more than 20% since the end of 2025, again, investing ahead of the capacity and the products that will be delivered in future quarters. So we're making good progress to unlock the capacity that exists in our manufacturing network.
Our next question will come from Timothy Arcuri with UBS.
I don't know if you or Sukhi want to take this. My question is on the gross margin drop-through. So you delivered drop-through between 70% and 75% year-over-year in June. The guidance for September is 75% to 80% drop-through. Are there any one-timers in there? The question is, is that a reasonable drop-through to use? Because I don't see any reason why you should be growing any less a year from now. If I use the same mid-teens growth and that drop-through, your gross margin should be in the 52% range a year from now. So are there any one-timers helping your drop-through right now? And is that a fair metric to use?
Thank you for that question. On a year-over-year basis, there was about 150 basis points of uplift because of the useful life adjustment that we had. If you take that off, we did also increase margins by more than 300 basis points, excluding that. As you look forward into next year, we will give you an update on more of our target model at Investor Day. Typically, I think what you should be seeing is incremental flow-through in the 60% range. Dave, do you want to add anything there?
Tim, we think the right comparison is Q1 to Q2 where we had nice flow-through gross profit over revenue of around 60%. It's a similar number at midpoint from second quarter to third quarter sequentially. That takes out any year-over-year dynamics related to useful life. So we think that's probably the best comp as you model out into the future.
Okay. So Sukhi, just on the Q4 guidance, up 4% is only really in line with normal seasonality for Q4. It still seems a little conservative. You're doing great, but up 4% seems a little light. Are there any dynamics you can call out in Q4?
That's a good question. It's important to put the guidance in context, Tim. A 4% sequential increase in Q4 would still translate to mid-teens year-over-year growth, which represents a pretty healthy growth rate and reflects our continued momentum across our businesses. When you consider our composition of revenue, 75% of our revenue is tied to semiconductor unit growth, which we expect to grow by 7% to 8%. The remainder is tied to capital spending. So our outlook implies a meaningful outperformance relative to the underlying semiconductor market. This is supported by content gains we're seeing, technology transitions and our exposure to some of the leading-edge pure-play AI enablers.
Well said.
Our next question will come from Bhavesh Lodaya with BMO Capital Markets.
Maybe on the strong growth that you are seeing in liquid filtration, could you add some more color as to maybe the regions that this is coming from? Is it new fab capacity or just higher operating rates? And if you could comment, is KSP playing a role in this as well?
Sure. When you look at liquid filtration, as you think about how important micro-contamination is to the most advanced nodes, once you get down to sub-5-nanometer and down to 2-nanometer, 2-nanometer is 20 angstroms. Depending on the size of the molecule, you can have molecules that are 5 angstroms. Purity is becoming increasingly critical at the most advanced nodes of manufacturing. So you've seen liquid filtration grow disproportionately as more production capacity is added to the most advanced nodes. That's true primarily in advanced logic, but it's also becoming increasingly true across memory and in limited examples across advanced packaging as well. So as the market expands capacity at the most advanced nodes, it drives tighter requirements that drive a greater need for filtration. With respect to operating sites like KSP, we produce the majority of our filters across three sites: one in North America, one in Japan and KSP in Taiwan. KSP is on track. We are on track perhaps to break even this quarter, probably a little bit ahead of schedule. KSP is participating in the ramp: we're through a lot of the qualifications and now into the ramping stage. When you think about ramping KSP, you're going from essentially a facility that was losing money on a stand-alone unit basis to breakeven in the third quarter, certainly in the second half of this year. Then as we move into 2027, it will move into the dilutive category and then ultimately into the enterprise average gross margin category. So we're making good progress, and I would characterize KSP as being on track, and it is participating in some of the liquid filtration ramp that we've spoken about. Did you have a follow-up, Bhavesh?
Yes, please. Great to hear on KSP. For a follow-up, Dave, you mentioned before that the business has around $1 billion of incremental sales capacity without adding more plants or capacity. Is it possible to break that $1 billion between the consumable side and the CapEx-exposed part of the business? My guess is given how the CapEx business has performed, you probably have more capacity than the 25% mix that you have for your business.
I don't have the exact breakdown off the cuff between units and CapEx. What I did mention last year was that we had significantly greater than $1 billion. So I wouldn't limit it to $1 billion of incremental capacity in the network. It's more than that. It is broad-based and across units and CapEx. I don't have that split off the cuff. But I can tell you, as I sit here today, we have increasing confidence that we can satisfy the vast majority of the demand we see in front of us with the current manufacturing network with limited capital investments. We do have to spend some money ahead to unlock that capacity, but by and large, we believe that we can satisfy the current demand that we have visibility to through the current manufacturing network.
Our next question will come from James Schneider with Goldman Sachs.
Clearly, the outlook for WFE growth continues to get more constructive for 2027. I think you referenced that your CapEx-related business, given the fab construction profile, could start to outpace WFE growth next year. What are some of the reasons why your CapEx-related business would or would not exceed WFE growth for 2027?
It's really just the timing, Jim. If you think about the 25% of our business that is CapEx, 10% is WFE driven, 15% is fab construction driven. We don't get revenue at time zero of a fab construction. We don't get revenue when you move dirt, pour concrete, place steel. We get revenue around 12 months later once you start facilitizing the fab, then another slug as you take process piping to tools, then another slug with the placement of the tools, and finally we get the unit volume at the end. So roughly you'd have slugs of revenue at 12 months, 18 months, WFE around 24 months and units thereafter. Given the fabs we are tracking, assuming they move into the construction build-out and tooling stage, timing-wise you migrate from the second half of '26 being more WFE driven to perhaps '27 being a bit more fab construction driven, and then back to WFE as they populate tools. WFE continues to be strong, but you then start to get units out probably in '28. So we have three waves of demand in that sense.
That's very helpful color. As a follow-up, when you took over as CEO, you referenced evaluating sales strategy and maybe entering parts of the market where you hadn't been previously. Can you give an update on the overall sales strategy now?
Sure. We have an enterprise sales team at the corporate level that tracks all opportunities across our top 35 customers, which represent the largest portion of our business. We've looked at all those customers, tracked our product line placements within each customer and developed detailed plans specific to each customer to penetrate accounts with more product line coverage. That's different from history. In terms of portions of markets we're interested in, we'll color in the lines more at Investor Day. For example, advanced packaging is an area where historically the company has not played significantly. We've always been more front end of line focused. Advanced packaging is growing quickly. There are portions of that market not as attractive to us, but there are portions that are attractive. We have about a $100 million runway in that portion of the market today. It's an area we'd like to grow more quickly and have more product placement. We'll provide more detail at Investor Day, but the high-level strategy is enterprise sales, customer-by-customer plans across product lines, deep customer R&D engagements with more than 50 projects in flight, and targeting attractive SAMs such as advanced packaging that we can penetrate more deeply.
Our next question will come from Charles Shi with Needham.
Many of your customers are signing long-term agreements and securing pricing upstream. From a materials perspective, is there opportunity for companies like Entegris to sign long-term agreements as well and lock in pricing so you capture fair value?
Thanks, Charles. We do have some supply agreements with customers. We've been approached more recently to engage in more supply agreements given the current demand environment, and that's an area we're looking at closely, not only from pricing but from supply. Our number one priority right now is to make sure we can support our customers through this period of accelerating demand. We will ensure that we are appropriately compensated for the value, capacity and technology we provide. But our top priority is unlocking the manufacturing network I've spoken about and getting fixed cost absorption, volume and providing products customers need as they engage in ramps. We're tracking more than 50 engineering projects with customers and more than 20 advanced fabs being built. While our guidance today doesn't contemplate material pricing, we are confident we will be compensated for the value we bring. Did you have a follow-up, Charles?
Yes. Thanks, Dave. I want to ask about molybdenum. We've heard some equipment companies suggesting a third entrant in moly deposition for memory. What are your thoughts on overall moly growth going into next year? And are you agnostic to market share dynamics among equipment suppliers?
Thanks, Charles. We have not seen a third entrant in a meaningful way yet. It's largely a two-horse race today. Moly is up significantly year-over-year; I don't have the exact number for Q2, but it was more than 20% year-over-year in the second quarter. NAND volumes are starting to grow to the high 200s or 300-plus layer count, which drives the need for moly. We believe we're well positioned. Moly is a unique chemistry for the memory market. You need to deliver a delivery cabinet with very stable pressure for a molecule that is aggressive from a process piping perspective, and you have to sublimate a solid into a gas and deliver it at pressure and temperature to get the right performance. We're happy with the performance and the team's work; overall moly demand probably doubles year-over-year from '25 to '26 for us.
Our next question comes from John Roberts with Mizuho.
Could you back up a little and tell us where you are overall in your footprint optimization program? You took a couple of actions in the quarter; put that in perspective for us in terms of what's to come.
Sure. Let me broaden that to what we're trying to drive in manufacturing and operations. We have four work streams: network optimization (the rationalizations you referenced), centralizing procurement to drive leverage across total procurement, maniacal focus on yield to reduce scrap and improve throughput, and productivity measured across people and machines. We've been working on these for roughly a year and are making good progress across all of them. Each has meaningful potential to expand gross margin and profitability while reducing future capital needs. We did pause additional rationalization earlier as demand increased in Q1 and then again in Q2. Demand remains strong and increased materially in the middle of Q1, then again in Q2. So we are carefully evaluating where the demand signal settles. No additional plans for incremental network optimization at this time. We still have roughly 35 manufacturing facilities and will utilize them to the fullest extent. If we see opportunities in the future, we'll update you.
As the balance sheet continues to improve, how are you thinking about bolt-on M&A? There's still a fair amount of white space across your customers' needs.
Our immediate near-term focus is reducing leverage. We have a clear path: we expect to get under 3x net leverage by the end of this year. In fact, in July we repaid another $25 million of debt. That remains our top priority. Overall, we'll evaluate investments relative to our cost of capital. We'll look at internal investments, CapEx and external M&A — each with different risk profiles — and pursue those that get the right return for the investment.
To add, the rate and pace of deleveraging is happening faster than I expected. I did not anticipate sitting here in August and saying we expect to end the year with net leverage that starts with a 2. The team has done a great job expanding gross margin, moving that down to net income and through to free cash flow via working capital improvements. We'll continue to drive free cash flow and reduce leverage, which opens up more opportunities as Sukhi mentioned.
Our next question comes from Michael Harrison with Seaport Global.
One of your competitors suggested they're seeing some share gains in CMP slurries and cleans. Could you talk about the competitive environment within CMP and whether you think you're encountering any share shift one way or the other?
We feel good about our CMP business. We've got strong growth rates in CMP and market-leading growth in pads. We think we're successfully growing, expanding and defending planes of record in slurries. So overall, we're pleased with the trajectory, including some inroads into advanced packaging that weren't in place a year ago. MS is accelerating this year — expecting more than 10% growth in Q3 and Q4. So we're very happy with MS overall and specifically CMP.
My follow-up is specific to the molybdenum business. You've talked before about the need to optimize CMP solution as well as selective etch and filtration components around that. Are customers adopting the full optimized suite from Entegris, or are they picking different suppliers for different parts like deposition, etch and CMP?
Specifically for molybdenum, the majority of the envelope tends to sit around the distribution cabinet and the molecule itself. The other portions — etch and follow-on processes — are largely separate buying centers today.
Our next question comes from Christopher Parkinson with Wolfe Research.
Just in terms of what you're expecting in the second half on a sequential basis, both Q3 and Q4, can you hit on your expectation for mainstream operators in the second half of the year and also HBM as it pertains to memory? Any color would be appreciated.
Mainstream demand remains mixed. There's memory-related pressure on some consumer markets, but that's offset by strength in AI-related applications like power management and silicon photonics. We see mainstream as improving, but still somewhat mixed because consumer-related markets, such as mobile, are tied to mainstream and are experiencing memory pressure. We think foundry utilization in mainstream has improved to probably 80% to 85%, depending on provider. The direction appears modestly higher. Our view is it's slightly improved compared to last quarter, but still tempered and below the trend growth for 2026, potentially longer pending memory pricing and availability.
Just a quick one. Can you give a little extra framework on the Life Sciences business you exited and the optics on a segment level?
The Life Sciences business we exited is less than $20 million of annual revenue and is more about fluid management products. We still have some filtration products for life sciences that continue. Think of the exited business as fluid management that had dilutive gross and EBITDA margins. Given the growth in semiconductors and the need to focus management time and effort, it made sense to announce the closure and wind down that stand-alone facility.
Our final question for today comes from Edward Yang with Oppenheimer.
Welcome Sukhi. Nice quarter. On the MS side, it's great to see you guiding for double-digit growth in the second half, but it was a bit below industry MSI in the second quarter. I wanted to close the loop on that. Was that just timing? The segment margin was also down year-over-year. Do you expect margins in MS to expand in the second half as well?
I'll talk about the growth and Sukhi will comment on margins. MS grew 5% year-over-year in Q2. MSI probably grew around 7% to 8% in Q2 depending on the metric. We think we were in line given some year-over-year comps related to Liberation Day last year and some pull-forward. We expect to most likely grow above market in Q3 and Q4. Sukhi?
On the margin side, as manufacturing becomes more complex and customers migrate to advanced nodes, the number of opportunities for the company is expanding. We're seeing that in the growing set of SAM opportunities across the portfolio. As you would expect, we are investing accordingly in areas where we see significant long-term growth in the MS division, including capabilities such as moly precursors and other high-value opportunities. The operating leverage we're generating is being intentionally reinvested to support future growth, and you should see that earnings power increase over time.
Dave, on advanced packaging, it didn't sound like you're interested in acquiring a bigger footprint there. How quickly could you scale that business organically from the $100 million run rate?
We haven't ruled out acquisitions, but we haven't said we won't either. When we look at advanced packaging, it's still being defined. You have changes in materials, packaging sizes, and substantial technical changes around thermal expansion, conductivity and attach. There's a lot still to be defined. It's a rapidly growing space; five years ago it was low single digits of industry CapEx, and this year it may approach double digits of total industry CapEx. We think there are many growing SAMs that can support differentiated products we can provide. Those are the spaces we want to target. There's more than enough opportunity to target those spaces and still have a right to win without necessarily facing an incumbent advantage. We'll provide more color at Investor Day.
Thank you. This concludes today's Entegris Second Quarter 2026 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.