Entegris' (ENTG) CEO Bertrand Loy Hosts 2017 Analyst Meeting (Transcript)

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Entegris Inc (NASDAQ:ENTG) 2017 Analyst Meeting March 20, 2017 11:00 AM ET


Steve Cantor - VP of CR

Bertrand Loy - President & CEO

Tim Hendry - Head of Intel’s Material Supply Chain

Todd Edlund - Chief Operating Officer

Clint Haris - SVP and General Manager

Bill Shaner - SVP and General Manager

Stuart Tison - SVP and General Manager

Greg Graves - CFO, EVP and Treasurer


Amanda Scarnati - Citi

Patrick Ho - Stifel Nicolaus

Edwin Mok - Needham & Company

Christian Schwab - Craig-Hallum

Chris Kapsch - Aegis Capital

Toshiya Hari - Goldman Sachs

Mehul Trivedi - Cooke & Bieler

David Silver - Morningstar

Hendi Susanto - Gabelli

Steve Cantor

I think we’re going to get started now. Good morning everyone. My name is Steve Cantor, Vice President of Corporate Relations for Entegris, and I’d like to welcome you all today both in the room and on the webcast to the Entegris 2017 Analyst Meeting. We have a very full agenda which we believe will illustrate very well why we’re so excited for the future and why the Company has a great place in the industry and also a great trajectory ahead of it.

In front of you in the room, in our handout, first of all let me just before I do that remind you that we will be making forward-looking statements today and our risks and uncertainties related to those statements and we encourage you to read our filings with the SEC very carefully.

So back to the agenda which is in front of you, which shows you a list of our speakers today, beginning with Bertrand Loy, our President and CEO and following Bertrand we have a guest speaker, Tim Hendry, who is the former Head of Intel’s Material Supply Chain, and we think you’ll find his Tim’s perspective extremely interesting since it reflects both the perspective of many of our customers as they content with both technical and supply chain challenge with respect to their electronic materials input which are becoming increasingly critical to their success.

Following Tim, you’ll hear from Todd Edlund, our Chief Operating Officer and after Todd we’re going to take a short 10 min break for those of you in the room. There are box lunches outside, so we’ll ask you and remind you that try to grab one quickly and get back, and we’ll start promptly with presentations by the heads of our three divisions. And following those presentations, Greg Graves will wrap up the formal part of the meeting with a discussion on our financial strategies and our target models.

There are few housekeeping items that I want to cover before we begin. We're going to try to end the meeting approximately at 2 PM Eastern. We ask that you hold your questions until all the presentations are complete. And you'll notice in a room here in front of you are, is a survey and we ask you to take moment following the meeting to fill that out because that's really helpful feedback for us to continue to improve these meetings.

The meeting is being webcast live and will be available on demand through our website. And we posted an electronic copy of the presentation material on our website, but if you need a copy you can see me and I'll get it to you.

And with that, I'll turn it over to Bertrand.

Bertrand Loy

Thank you, Steve. Good morning everyone, and thank you for joining us in New York or on the webcast for our Annual Entegris Analyst Day.

As Steve mentioned, we have a straightforward agenda but, here on this slide you can actually see the major themes that we want to be impressing upon you today. First, Entegris has been executing very well and we have delivered very strong financial performance over the last few years, but we can and will continue to improve from here on.

The semiconductor industry which is our largest market continues to be a great place to be especially as we are materials company. I would argue indeed that the next level of device performance will be mostly coming from advances in new materials requiring higher levels of purity. And because of its broad portfolio of capabilities, we believe that Entegris will be proved to be the ideal partner to enable the next wave of innovation that our industry requires.

Lastly, as the largest independently traded specialty material company with the very strong focus on electronics material, we offer a very strong and capable platform for future M&A. This is our business model at glance. We have a very clear mission, we focus, we innovate and ultimately we deliver. Our mission is to create unique value for our customers by developing very critical solutions for their manufacturing processes.

We focus on some of the most demanding manufacturing environments and more specifically on semiconductor processes where we can capture the most value for our solutions. We have as a result been able to develop a very rich pipeline of opportunities which we believe will allow us to continue to outpace the markets that we serve. The result of all of this is a very unique business model that delivers stable recurring revenues, strong cash flows and exciting earnings leverage.

In 2016, we celebrated our 50th anniversary of the Company, but more importantly we've celebrated many records, our top-line reached approximately a 1.2 billion as we grew 8.7% versus previous year which actually was about 400 basis points in excess of the underlying industry growth rate on a constant currency basis. We maintained a strong focus on improving our bottom lines and delivered EBITDA margins in excess of 22%, which is line with the objectives that we stated at the time of the acquisition of ATMI, and certainly a very nice step-up from the EBITDA levels that we were running at prior to the ATMI transaction.

We continued to generate very healthy cash flow that we used to pay down our debt and we brought our net leverage ratio down from about 2.0 at the time of the announcement of the ATMI transaction to about 0.7 at the end of December of last year. Essential to our success is our customer engagement model that you can see on this slide. This is really essentially our internal converse as we try to reach very strong internal organizational alignment from the very early stage of the ideation phase, all the way to the time when it's time for us to release our products to high volume manufacturing. And this model is constantly forcing us to assess our capabilities and make investment decisions so that we can remain the reliable supplier that we aspire to being, reliable supplier that is able to meet the ever increasing expectations of very demanding customers.

For Todd will actually provide some examples of the types of investment decisions that we've been focusing on recently in terms of technology to continue to enable the industry technology roadmap, investments in our global infrastructure to be an effective expansion of the engineering arms of our customers in most our major markets, but also investments in our own manufacturing capabilities as we try to reduce variation in our manufacturing processes and increase our levels of quality.

For the past many years, the semiconductor demand has been driven by a few discrete drivers, PC and notebooks moving on to tablets and smartphones, but all of that is changing very rapidly in front of our eyes, and going forward semiconductor demand will be driven by many interconnected drivers. For the new digital world to fully deliver on all of the nice promises that it covers, we will require a total revamping of the IT infrastructure so that we can really truly deliver the desired end-user experience.

So think about the faster network that will be required, think about the more powerful computing all around us that will be required and of course think about the new storage solutions that we need as we generate this massive amount of data, think about the autonomous vehicles that will be equipped with over 200 sensors and possibly your server in the trunk, generating about 4 terabytes of data a day. Think about the new stadiums equipped with the new volumetric video capture technology, capturing and streaming up to 2 terabytes of data a minute, so that you can enjoy a new dual experience in your living room.

So, all of that obviously already showing some signs in the overall trends for semiconductors, and you can see that on the slide here. First, if you look at the period from 2010 to 2016, you can see two departures from the previous decade. First, you can see less volatility in the demand for semiconductor. And second, you can a see a much closer correlation between semiconductor demand and global GDP. And I would expect actually both, the reduction in volatility and the stronger correlation with GDP to continue in the years to come.

Lastly, I would also expect the growth rate for semiconductor demand to exceed the growth rate of global GDP as a result of all of the trends I was describing at the previous slide. So, this virtuous cycle of growth in the semiconductor market will have very positive impact across the ecosystem and integrates will benefit many different ways from this. Remember that 80% of what we do is consumable in nature, so think about the materials, think about the filters that I used every day in production cycles of the fab.

The primary driver for those products is the level of activity in the fabs, and the best proxy for that you can see on the upper right lane would be wafer starts, and as you can see we expect very steady increase in wafer starts for the next two to three years. The secondary driver for those consumable products that would want to flag is the number of process steps require to process away for -- and as you can see as the industry transitions to more demanding geometries, we expect a steady increase in a number of process steps.

Lastly, 20% roughly of our products are still CapEx driven and while we expect some level of volatility on that part of our business, we continue to be very optimistic around to health of wafer fab equipment spending in the forcible future as you can see on the bottom part of the slide here. But for the past 50 years, the semiconductor industry has been very diligently following the cadence of Boyle's law. Physical scaling was came and as we collectively as an ecosystem were very hard to reduce the size of transistors, a lot of good things would happen to device performance.

We would see greater computing speed, we would see better energy efficiency and we would see the cost per gate coming down node after node, but let me tell you that this has come actually not become a lot harder to achieve recently with physical scaling alone. And I would argue that the next generation chip performance will be mostly driven by material scaling as opposed to physical scaling, and I would define material scaling as the adoption of new materials, more performing materials requiring greater levels of purity. And many presenters asked to me would explain to you, why we believe that Entegris is the ideal partner to enable, but also to benefit from those new requirements.

Our portfolio is actually very broad, we have separation technologies, advanced packaging solutions, profit chemistries, advanced materials and the addressable markets for all of those products is actually very, very large, but we have consciously decided to focus our developments and commercial efforts for the past 10 years on some of the most demanding profits environments where we can actually capture most value for what we do. As a results, our served market are somewhat smaller and we estimate our served market to be about $3.8 billion, and of the divisional leaders that we've succeeded in their presentation would actually provide a little bit more detail around the size of their respective served markets.

Now, while we certainly manage those three divisions independently, what makes Entegris unique in the eyes of our customers is the ability to combine and leverage all of those complimentary capabilities to create very unique solutions to help them solved very complex real and integration challenges. So, Tim Henry will actually talk to you about some of the process challenges and concepts in the fab environment, and Tim will also talk about why an intra-period material supply chain is the lifeblood of the semiconductor industry. Now that enrollment to general managers for the various divisions will then explain how we're putting all of those pieces together to create very unique solutions, why those solutions matter for the ecosystem and why as a result we expect to be in a position to grow, as we expand our fab, expand our share and all course semi-markets, but also as we leverage our knowledge and knowhow and capability into select adjacent markets.

So, after all of those contextual considerations and piece to unwire our growth formula and here it is, our growth formula calling for 4% to 6% CAGR over the next 2 to 5 years. As you can see, this 4% to 6% growth objective is the result of stocking up a number of assumptions starting with the fundamental layer calling for the GDP growth of about 2% to 3%, the middle layer really captures the additional growth we expect in our semi-market as the world invest into new infrastructure, require to make this new digital order reality, and then the upper layer is really what is within our control; and third and the divisional leaders will characterize some of those opportunities available to us, as new materials requiring greater levels of purity of being adopted by the industry.

So, overall again, the growth objective here is to continue to outpace the underlying industry by about 100 to 200 basis points for the years to come. So in summary, we expect a favorable business environment for the foreseeable future, we expect materials scaling to emerge as the primary driver for the next generation chip performance, and we will capitalize on all of those trends to continue to outpace our markets by about 100 to 200 basis points. We’ll maintain a very strong operational focus with the stated objective to increase our bottom-line at twice the rate of our top line growth. We’ll continue to be very thoughtful in our capital allocation decision and to sum of all those initiatives will translate into very meaningful expansion of our EPS.

And Greg Graves, our CFO will provide more details around every one of those components in his presentation. Thank you.

Greg Graves

Thank you, Bertrand. Before I turn it over to Tim Hendry, so what key takeaways in Bertrand’s presentation? One is we’re executing really well, 2016 we set records in revenue, EBITDA, EPS, so solid execution, earnings per share for the last three years 17% CAGR. We’re in a good industry. The semi-conductor industry has changed over the last several years. The number of applications have diversified, we’re no longer dependant on just the PC, enhanced that as the device makers have consolidated, the industry has become more rationale, so all that means more stability, but also greater growth as the pervasiveness of devices becomes more important.

And then last thing, we’re in a really good spot within that semiconductor ecosystem, about 80% of what we do is unit driven, only 20% tied to the capital cycle. So, what we’re not is a capital equipment maker. What we are is a materials player. So, with that I’m going to turn it to Tim Hendry, our guest speaker today. So, Tim has spent about 28 years with Intel. That time was split roughly evenly between running the Intel’s large fab in Albuquerque which was their first 300 millimeter fab, and then the second portion of his career, he ran what they call fab material operations, which is essentially think of that as supply chain for the consumables part of the business.

So, with that, I’ll ask Tim to come up and give you his perspective on the materials world.

Tim Hendry

Good morning. First, I’d like to thank Bertrand for the invitation to speak today. It's always interesting time to talk about from an analyst perspective. I’ve spoken at different conferences before and never have spoken at Analyst Meeting, so really enjoy hopefully the interaction today as well as the Q&As.

Today, I would say the introduction of new semiconductor technologies are the successes of those as largely based on two measures. One, did the transistor performance hit the measured targets that you had forecasted; and two, the technology yielding to the standards that you expected. And today, I’ll touch on both of those metrics, both on the performance side and how materials has really been a key role in improving the performance of semiconductor technology. Then, also I’ll talk about the role of yield in terms of the success of technologies, and I think you can probably see from history when people talk about the success of technologies, they talk about, did you execute on time, did you -- because the technology delivering the performance that you predicted as it basically hitting the yield target that you forecasted. Any one of those that they're not achieved will ultimately cause either a delay in the technology or impact to your company's reputation.

Given as material scientist, I must show at least the periodic chart, right. This is the only technical periodic chart here, but if you look at the trend here as more materials are being introduced into semiconductor processing. Two main reasons for that; one, the materials suppliers are becoming much more adept at handling and delivering more complex material. In the past, the sensitivity of these materials were such that very-very difficult to actually introduce into manufacturing. With the greater control that material suppliers have today, we're actually able to expand beyond the traditional types of material. And two, the equipment manufacturers are delivering new equipment that they're able to take advantage of those new material. So, clearly an expansion of the number of materials that are actually used and also been explored.

If you look at the right-hand side on this chart here, materials is playing an increasing role and actually delivering device performance. I've broken it out here into both scaling, design and materials. And it's a little bit difficult to discern exactly between the three of those components, but I think suffice to say materials has delivered on much bigger role on how the performance of those devices have evolved over the last several generations and everybody don't see that trend changing. So, the role of materials and delivering performance is going to increase overtime and it has increased especially as you moved away from the 28-nanometer node with introduction of high-k dielectric.

If you go down a little deeper in terms of how these materials have actually contributed to device performance. On the left-hand side on the cartoon with the cross section of the 3D of logic device, on the right-hand side is actually a cartoon in the FinFET transistor, one particular design FinFETs are the predominant transistor design within production today. The efficiency of power is going to be a key factor going forward. If you look at most of the markets whether it's IoT or data center, power efficiency is the key. New materials can have a big benefit in terms of helping to achieve those power efficiency targets.

Secondly, it's still the speed of transistor, speed still matters, certain markets especially in a data center, the performance of those data centers is both measured on the ability from power efficiency as well as speed, and new channel materials clearly will play a role in helping to improve the speed of those transistors. And lastly, how you connect with those transistors, are you going to acquire new metals because of the contact resistance? You don't want to develop a very a fast transistor and then not be able to connect that transistor or have the connection of that transition impede the overall performance. So, you need to develop a total solution from looking at overall transistor.

The evident to note here is, real transistor design is quite as pretty. This is where you'd like to be very tight conformal materials with very well controlled measured depositions as well as you're going to move from more selective deposition, which will allow you to become more creative in your transistor design. So, these are two factors here as I think materials will play a key role. If you look at the backend which is actually the wiring of those transistors and connecting up within the circuit, you can't ignore the backend and spend all your time on the frontend transistor design. So, if you think about the dimensions are again smaller, the wire signal the ways is going to become an increasing factor in the overall circuit performance.

So, as the dimensions get smaller, traditionally, we'd use a copper type of backend wiring to connect that all the transistors. That is going to be insufficient. You're going to have to likely move into a new metal of cobalt being whether the leading industry candidate. When you integrate a new metal, you have many different types of other material such as liners and part of this I'm showing via here. You have to change the liner and barrier in order to accommodate that new metal. So, it's an entirely new system of integration that must be put into play. In addition, the dielectric that separates the wire are also you need to move to more lower k, lower overall dielectric constant, otherwise the capacitance will have a bigger role.

So, you have to work on both. When you start introducing these locating materials, they also become more fragile and the integrity of the device is very important from the mechanical perspective because you have liability problems, if you don't have a well designed dielectric that has both low-k properties as well as good mechanical property. So, the backend in addition to the frontend will both evolve from the materials perspective to help move forward the performance of the device. Both of them move in concert and some technologies you'll spend more energy on the transistor design and you may leave the backend as it was. And in other cases, you can't, you have to do both in order to achieve your targeted performance metrics.

On the left-hand side of this cartoon is kind of the evolution of the basic transistor going from planar device into a FinFET device. As shown here at the bottom a gate all round device which is one potential transistor design for the future, one thing to note in all of these is that you're going to require more materials innovation and they need to be deposited at an atomic scale. So, ALD or atomic layer deposition is becoming a more predominant vehicle for depositing films. You're also going to move into ALE, atomic layer edge. So, you're removing and depositing very and molecule levels these films and it must be deposited very-very precise in order to main the performance and expected design.

If you look at the right hand side, it's a basically a cartoon of a stacked 3D NAND device. As you look at the different dielectrics which separates the wirings and all those stacks that will potentially drive new metal precursors for 3D NAND. 3D NAND is a significantly growing market as you can see the memory transitions are beginning to move into 3D NAND. A lot of increased capacity put in place around the world associated with the 3D NAND. A punch sign here is, atomic layer scale is where everything is moving towards the deposition and controller that is extremely important to maintain the device integrity and the complexity of the transistor designs.

So, with this comes more process complexity, Bertrand begin to show the number of increased steps associated with these advanced technologies. And you can see as you move up into the predicted in terms of 7- nanometer to 5-nanometer a kind of an exponential growth around profit steps. One is driven by the complexity of the transistor design; and two, you're moving into a lot of multilayered patterning in order to achieve that because of the delay in EUV has driven a lot of this increased number of steps. The red line is associated if, this is kind of a theoretical line, if I didn't do anything to improve my step yield beyond 28-nanometer and I began to introduce those new technologies with all those complexities, I would see an overall yield degradation. This is unacceptable, and as we're going to move forward with Moore's Law, you cannot have yield degradation associated with the introduction of the new technologies.

So, you must improve your yield performance with each individual step in order for the cumulative yield of the overall device to meet your target. This is essential for Moore's Law to continue. The targets for top transistor are predicated on high yield, so yield in specific device is extremely important. If I showed this kind of graph while still working at Intel on a red line, it is my prediction going forward I wouldn't be at Intel. This is unacceptable performance, you must be able to demonstrate high yields for new technologies and that's a critical component of Moore's Law. On the right hand side, I'll talk a little bit about EUV just briefly and I'm not trying to make the prediction here about when EUV is going to be introduced.

There are plenty of speakers out there in the world that will talk about EUV introduction timing, but this is a theoretical graph which says, if I could introduce 7-nanometer, I could begin to bend the complexity curve because I can reduce the number of multilayer patterning steps by what one EUV operation. So it has great economic benefit, likely we'll have yield benefit and will begin to bend this curve with respect to number of steps required for each process node. I think steps will still increase a number, but they'll begin to bend that curve a little bit associated with it. So EUV is an important technology. I think it's going to require to enable future technologies, not just for a resolution capability, but also for the ability to reduce the complexity of what it takes to build a device.

Let's talk a little bit about purity. On the left-hand side, there's kind of an analogy about just how pure materials need to be today in overall manufacturing. A little bit of analogy, one drop of water is basically the impurity that's in all of the water that passes over Niagara Falls in one day. So, that gives you an idea and what level on purity we're trained to target for overall materials, hence the predictability of those materials that's very important. And I'll talk a little bit later on in a few slides about it's not just reduction of impurity but its control. Once a given impurity of a material is defined, it's very important that it stays in that window. If you tried to improve on impurities later in the development cycle that impurity actually maybe playing a role that you didn't know in terms of how the overall material performance. So, it's not just about going lower, it's about control, control is extremely important in predictability.

The other factor that plays a role in terms of yield which is overall basically defector, kill a defect size. On the right-hand side is basically a picture of what the wiring overall pitch at 20-nanometers. And you can see there that the defect size that would actually bridge to metal line together causing a short circuit. If you look at a 7-nanometer typical metal pitch, you can see in the defect size that would cause a circuit to fail as much smaller. So, fundamentally, you can have to reduce the defect size as you move forward, otherwise you can end-up with that redline, which if you predict that redline, you're not going to move forward in a technology and so you can demonstrate equivalent yield performance or target a very little yield degradation, a very important factor.

On the next slide here, I've joined a simplistic supply chain through our material as it's produced all the way to application actually on the wafer. The raw material suppliers that are basically moving into the first segment of supply electronic materials, they have very little motivation to change their purity and the quality of their materials. Typically, electronic materials have the very small segments of what they deliver into a very-very large chemical market. Though, they are not going to invest in a new plan to produce simply better purity for the electronic materials market. So what you do, and if you're not able to actually get your sub-supplier to move forward in their quality, you have to basically build an additional purification steps prior to the introduction of into the electronic material. So, it's actually an intermediate step there that says, let's control that purity and that’s when I worked for Intel, that’s what we did.

Basically, in order to control the raw material supply, we work with our material suppliers to introduce new purification and filtration operations going into the material manufacturing operations. It's very difficult to extract an impurity and a particle way down into this supply chain, very expensive and very difficult, sometimes with unforeseen an undesirable result. But we always try to work very far upstream to make material as pure as possible going into the manufacturing operation. This is critical and I think more and more you're going to see intermediate operations in there, to control that because controlling the larger chemical market is like tilting the windmill. That just isn’t going to happen, right. You’re not a big enough player to get them produce. You must take the control of your own destiny.

As you begin to manufacture material, all of these elements here is very important. Both the manufacturing operations and today there are many world-class suppliers of such as Entegris of manufacturing of material. So, that part I think, the market is getting pretty well established and mature. So that's the mean I didn’t worry about the manufacturing of materials, but I work with trusted partners to basically develop those materials and they did a very good job. So, usually our results didn’t result from that actual manufacturing the material, it was either variability in the upstream or downstream. Also once you spend all this time manufacturing as very pure stable material, transportation is the key around the global supply chain. We had factories in Israel and Ireland and in the U.S. I’d be able to basically transport materials across the low very long cycle times because not everything can be shift on the plane, many materials must be ocean shipped. You have to rely on the stability. You need to ride on that dock it had to be the same quality as it was only left, and so transportation is the key elements in overall control.

The other aspect that you cannot ignore is actually the manufacturing of the plant today. When you've built the semiconductor plant, you must control the valving, the tubing. When materials flow throw a tube, a tube is not stagnant, it will reach out materials from those tubing. So, you must be very careful about the types of materials they're are using for valves as well as piping at the other source of contamination that can basically ruling the great material and work that was done previously. And finally, at the tool level to have predictability, you must control the filtration at the tool and this is your last line of defense and your best opportunity to also make some improvement in that material, as it enters into the final application of the wafer. Today, the total supply chain is really used to be managed and developed in order to actually deliver quality of material onto the wafer.

So, what did I look for when I was actually purchasing and developing materials for Intel, and as really keeps you up at night when you are running to global supply chain and you have a multitude of materials and multitude of ways that things can go wrong. So, you want to work with somebody that you can trust. The other thing as you want to work with somebody when things as do you go wrong that has the capacity to solve the problems because you are working the leading edge, things happen. And it's not necessary anyone's fault, it may have developed a new interaction that you didn’t see before. So, I really looked for companies that have strong engineering capabilities, and that's not just the developed products but also to sustain the products once you've gone into manufacturing.

The other element is speed of execution. Speed is very important. If you look at the cycle time of a new technology, it's getting very-very long due to all those extra process steps. So, you have to be able to developed and execute very rapidly both to integrate as well as to solve problems. In order to solve problems, analytical capability is very important. If you don’t know how to diagnose the problem, if you can't tell what's changed, you have a very difficult time determining what the solution path is. And analytical capability is the key and it's kind of fundamental to actually if you can't measure, you can't improve it. If you can't measure it, you can't fix it. The analytical capability is also one thing that I look for.

Once you've chosen a particular product, material or developed it or you are in production sometimes the amount of capacity that you need is not known. And so you need the partner that can move it has the capacity to actually expand very rapidly and also to be very agile, if the prediction of consumption is not necessarily known and so you get into manufacturing once you are in place your filter frequency for example maybe much sooner than what you would expect it to so you need to change more often and you need to come back and say you need to double your capacity. So you need to work with somebody that has the capacity to be able to respond to that demand change rapidly.

And finally, someone who can manage the supply chain, I mean I had no problem of coming in look to a supplier and helping them to manage our supply chain. I had the expertise. We had the people to do it at Intel. We were no problem coming into your backyard and say, okay, we're going to help, but at a much preferred to have the supplier who had the expertise to do it on their own. So, I have other things to do. So, I look for companies that have the expertise to manage our supply chain all the way up to the raw material.

So in summary, materials are going to continue to play an increasing role in overall device performance gains as new transistor architectures have developed. I think this trend will continue. Process complexity is going to continue to be a headwind for new technology note introductions and you must develop solutions that help reduce that complexity. As a company that can bring in a solution that reduces the complexity without sacrificing the performance is going to win market share, and you have to look at it from a holistic system when you look at the supply chain in order to basically deliver materials that are going to be acceptable from a quality level for these new advanced processes.

So with that, thank you very much for you time today.

Greg Graves

Thank you, Tim. So, before we shift over to Todd and talk about how all of this comes together. Let me just give you a history, so about two years ago Bertrand comes back from the Intel Supplier Day and he said, Tim Hendry gave a presentation that could have been at our IR deck. He talked about the importance of materials. He talked about the purity requirement in materials, and Tim was a guy that we really respected. He had been last up to the VP at Intel, like I said the whole procurement organization. So, when we had the opportunity to have him here today, we were really excited about that. So what did he tell us?

Bertrand talked about all the materials are becoming more important. Tim equated that to device performance, he equated that to the importance of materials in driving yield, he showed a graphic of the relative importance in materials compared to the laws of physics are diminishing. So, we’re now depending on design and materials. He showed a 3D NAND chip and the stacking and he showed frankly like where the deposition materials fit into that. He talked about lithography and the importance of purity. How quickly the number of process steps are moving up as we go to 10-nanometer, but he also showed that as we go to EUV, those process steps don’t fall off a cliff. So, as Entegris, we’re still in a very good place as we move to EUV.

So last thing we hit on that was the purity requirements, and if you think about what we do, I mean we’re not only making the chemistry and the gases, but we’re ensuring that their purer process supply chain whether it’s the beginning of the supply where we’re filtering product within the manufacturing environment, the containers we make, the shipping products we make, the tubing that we make the moves that are around the fab. But the whole materials ecosystem we fit very neatly into that and that ecosystem is absolutely critical in today’s advanced devices.

So with that, I’m going to turn it over to Todd who will give you an intro into three divisions.

Todd Edlund

Those sitting in the back of the room listening to all the honking out on the street, I realized one of the benefit of self-driving cars, you’re not going to need a horn. These streets are going to sound very different, if those realities come to us. So, let’s talk about, you've heard a couple of things today that are encouraging to me as the COO of Entegris. One, as we're currently talking about the strength of the industry, what’s driving it. While we believe, it’s going to be a solid place for us to continue to grow and outperform, and then Tim to talk about the importance of materials. There was a great article in the Wall Street Journal this morning. I’d encourage you to look at it about really the design becoming more important, and all the elements designed as Tim was showing, it was architectures. That's what they're talking about is really being able to enable those architectures. That's how they're driving to improve device performance and those devices are becoming more ubiquitous across their wires really.

So, the materials are really high enabled that -- are able to achieve those designs. Let me talk a little bit about how that fits into our portfolio. So, these are the three divisions of the Company and you're going to hear from the general managers of each of these divisions, a little bit later today. But just to give you a broad feel for it, so if you look at our specialty chemicals and engineered materials or SCEM, division on the left there, these are really those materials of periodic table, if you will being implied to the semiconductor industry. So, these are the things that are enabling, these new architectures in these new devices to achieve happen. They're integrated into the actual device themselves. They ship with a wafer in some cases or they're integral in terms of how they do cleaning to those things are being deposits on the wafer, that Tim talked about. So, that's our 100% unit driven business for us, if we're very focused this on specialty part of that, so again highly engineered solutions, again even working with those designers of the chips that I read about in that article this morning.

Microcontamination control -- oops, sorry, microcontamination control, just really think about that last line of defense. So, this is where we're actually purifying or filtering gases and liquids and also watching the airborne molecular contamination around particular processes that are in the fab. So, really trying to focus on contamination control, which gets us to that yield that Tim was asking for, very important part of that solution; and then advanced material family also protecting substrates either wafers or masks or radicals or individual devices at the end of the process and then fluids as they go through the process. So, this really about again, yield, protecting from physical damage, electrostatic damage, contamination, so those are the three parts of the Company you can hear more about today.

Let me talk to you a little bit more about how they fit together, and why we think it's really complementary to have the three of them. When I look at this, this really tells a story I think about. Why does it matter to have these three divisions and really at the end of the day, a lot of it's about being able to move faster and I think that these three divisions help us to do that. So, let me explain a little bit about that. Starting with advanced material -- sorry, advanced material handling, this is really an important entrée to us in the fab. One of the first things they start to do when they're going to design a fab is to look at the layout. What they're trying to accomplish with the device? So, look at the layout of the fab, how they're going to move product around? Do they need automation? How they're going to protect devices? And how they're going to protect wafers and radicals through help staff and we get involved in that discussion very early because we have this division.

Similarly, as they're designing the sub-fab, how they're going to move chemistries and gases around? Same thing, we're going to involve in that working with the engineers and architects for the fab to be able to understand how they're going to layout this fab, how they're going to provide purity in the fab. If you look at specialty chemicals, this is really again that enabling capability of the Company to help and actually design the device. So, we're getting early access to what is this device going to look like, what kind of architecture, is it a 3D NAND using FinFET or using variations on that? And we can find out actually working with the device manufacturer and the chip designer, what that's going to look like? Are these materials have to be integral part of that solution? When you look at microcontaminaton control, as you imagine basically that last line of defense for defect reduction and yield improvement, these products have to be very much matched to the application they're going as, not simply a matter of having a filter like a coffee filter where you're sipping out the individual grains of coffee, it's much more how do you match yourself with the chemistry.

And that get's where the interplay is. So, how does this help us move faster? If you look at -- we do filters and we do this specialty chemicals. One thing we've learned over the years and started many years ago is that the interplay between those two is critical. How you do filtration there is really not, again just about saving, but it's about how do you design the chemistry and the surface of that filter membrane to work right with the chemicals going to see. If you don't know that chemical is and the chemical companies even the device manufacturers with regard to those see takes pretty carefully. It takes longer to get to the right solution for filtration and purification. Because we understand both of those effects, we can work together to get there faster. But these two divisions can help each other move faster to get to the right chemistry with the right manufacturing solution and the right filtration solution that works with these advanced chemistries going forward.

If you look at the interplay here similarly between microcontamination control and advanced material handling, so inside of a super wafer carrier which is really a small environment for the wafers, so we actually do things to control the environment. We do purge or we'd actually do gathering technology to pull molecules out that and all gas off of the wafer and understanding how to make that happens, it's obviously something microcontamination controls know how to do well, applying that to wafer handling or radical containment to something and AMH knows how to do well. Together, as if you can move faster very similarly for chemicals, so for doing fluidics solutions in the fab, moving fluids the sub-fab. We have not only the valves, sitting in tubing and sensing products, control product, we also have filtration. None of our competitors really have that in a robust way. And so, it's a unique opportunity for us to move faster and get the more complete solutions and that's broadly capable of materials providers that can match for.

And then AMH and SCEM together, so here again chemical packaging and sensing solutions match these emerging chemistries. So, we, AMH also mixed the containers that a lot of these chemicals are put into and talk about the challenge of taking a pure chemical at the way that chemical manufacturers created, getting it to the fab in their pristine state. We understand a lot about how to do that in our chemicals -- our containers business; and we can apply that very quickly to advanced chemistry that are coming out of the SCEM division. So, it's a lot of interplay between these divisions and helping them solve problems faster. And that's why the key thing I'd like to understand is that really moving faster is the solution. This makes us more competitive and I'll talk about that mix quietly unique to our customers.

So, this is kind of interesting. So, you saw this ecosystem that Tim described across the top here. This is it some representative of parts of it. So, how do these divisions play across these different customer types? And it's actually one of the things that's really unique about Entegris is that most of our divisions cross, really the whole ecosystem from the production of the basic raw material be the data wafer or chemical, all the way so it touches the wafer and even it becomes part of the finished device as in the case of SCEM. So, I won't cover all this, but the thing you can take away and look at in the hand out, but these are some of the products that we have that help these different stages of customers that it goes through all the way to the finish device. So wafer growers, chemical manufacturers, these are our customers. The actual gases and chemicals that they are coming into the fab, the sub-fab distribution, incoming wafers. These are our customers. This is where we worked provide solutions.

And then process to overall all this becomes a part of the wafer and part of the finish device, there the customer set forth us and really all of our divisions work across those. So that's where our customers did actually apply or provide that last line of defense what actually goes into a device. And then beyond, I mean so a lot of the products and all this become chemistry is here and on the wafer and on the device, and we handle those finished devices as well. So, what's unique there for the customers as they got a company at Entegris that understands all of these steps and all the aspects along the way and can actually and does partner with all these types of customers, so we’re actually in the center of the ecosystem, working with all of the different people that enable this process that happen their semiconductors today.

So, what makes us a unique competitor as well, so if you look at this competitive environment and across the top here. We’ve got some of the main processes that we’re involved as Entegris in the semiconductor world and so the Entegris here in the dots basin, which means this is significant participant in those processes. Now, here is the list of kind of some of our main competitors and what makes them unique. So, there is kind of two types of competitors here, these large industrial companies like Danaher, which owns a Pall Corporation today. Donaldson, Dow DuPont, Parker, Saint-Gobain. These are large industrial companies and the small part of what they do has a got the semiconductor application. So, if I'm a semiconductor customer, I'd like be a little nervous how committed are they really going to be investing in a way, which need to invest is similar to be relevant and capable materials to provided to the industry.

So, we think we clearly are invested in that and that's clearly our focus and continues to be what we continue to focus on our company. The other is smaller companies, so as you think about our very nearly focus, so they [Indiscernible] company, they compete with us in wafer handling, but really nothing else. If you look at even [Indiscernible] so they obviously have materials rather they compete with us in, but they have none of the other parts of that whole supply chain to be able to be unique and helping the customers like Intel and others gets a solution. So that’s really what we think is making us different. We are focused on semiconductor and that’s clearly our customers and we have very broad understanding of all the process and were contamination and yield loss income from. So, we think we make us a very attractive partner for partnering on these advanced sales.

So, what makes a unique business model, so if you think about from an investor perspective. How should you think about Entegris? So as Bertrand mentioned, very highly recurring or unit driven business for staff here a lot of what we do is really consumed or used as our making products. So, wafer starts and millions of square inches of silicon important driver for us the predominant driver for us. We also get a very nice boost from these investment driven or capital driven revenues. So as they talk about this is that early access into the fab. So, we understand how the designs are going and how they’re going to lay out, and we’re partner from really day one as we’re starting to think about what's the next fab or the next line or the next expansion look like. So, we get a boost from that and then we get the recurring revenue coming out, so it's actually a pretty unique model even on the investment driven side. We’re also very highly diversified. Top 10 customers are less than half of our sales. We really serve everybody in the industry and that’s kind of what we’re showing here on the right.

All the segments of the ecosystem is semiconductor with they our customers, we know them all, we’re involve in joint development, so many, many of them and multi party development in lot of cases that can't solve these problems as I mentioned earlier just by yourself, neither to do it through the design integration and how it's going to be implemented in the setup. So, we're having all of these types of customers as our partner makes us unique. So, you're going to hear more about these three divisions again from the general managers coming out, they have a little bit of a different role in the Company.

So, microcontamination control as you’ve seen above market growth, we’ve made some recent investments that I'll talk about there that are paying off, strong margins. So, specialty chemicals and engineers materials a more stable business with good market share, but some very interesting emerging growth factors as I'll talk about in a moment, but to the bring deposition materials you’ve heard Tim talk a lot of about that, growing very, very quickly for us. So, we’re kind of focusing investment to that division on materials like that coating, some of the other material solutions, very focused investments on this rapid growth areas inside of a large really stable business.

And then advanced material handling, so pretty stable markets, its more industry investment driven as Bill will talk about. Then the other two divisions that give us a very important strategic element of that move quickly deal move faster than our competitors then provides a leading into the fab. So, you will hear some more in a moment about them. So, we've made -- we've put the platform together and now we need to make the right choice to invest in that platform smartly, get the return, get the outperformance that we’ve experiencing. So, several years ago, really 2012 and even slightly before that, we're trying and actually made the decision that, we saw somebody is transforming, we saw contaminations probably coming more important people like Tim were telling us. We have yield challenges for this advanced architectures and advanced knowledge, we need help. And we knew we need to invest to make that happen. So, we actually invested in like in certain parts of the Company, a specially microcontamination controls, but others that are well to increase our R&D, so we can be that relevant partners and we could have those solutions.

And really, we've got in that now to a point where we're feeling we're in right zone this 9% to 10% as well we intend to stay in. Going forwards that statement is very important for us to keeping healthy portfolio, but it's paying off and what we're showing, this upper right chart is really the growth and the percent of our revenue that comes from products introduced from the last three years. So, it’s the very particular measure as shows that grow on from about 20% near 30% on a fourth quarter rolling average basis. This is really important for me as this shows that the choices we've made they are paying off and we're renewing our business. The product lines are regenerating, there are new demand that customers are asking for and we’re able to deliver those and we really reach where I think is a healthy zone here as 25% to 30%. We can maintain that, we’re doing a great job of being dynamic and staying up with the industry.

So beyond that there is a very healthy pipeline coming up behind us, so this investment level easily working very well for us and keeping, them right on the vector projects, like focus on technology and break through projects platforms are larger product lines that we're investing in as providing there our performance. That’s really an accordance playing for the future, we maintain this investment, well continue to be able to have that outperform. So, we've also made investments in capacity and technology. We’re trying to talk about the key is really success for our and have the right technology, have right global presence, have the right operations excellence. And we’ve really made the right investments to do that. I am not going to go through all this with you, but if you look at a couple of things like if you look at the i2M Center, membrane manufacture filters cleaning and manufacturing expansion. These were decisions that we made a few years ago there that have come online in the last year and I really part of the reason that you saw the big increase in our next contamination business this year.

We needed capacity the demand especially for some of these chemical manufactures that's being growing as it's been driven down in their manufacturing process to have the purity. We've made the investments and that's taken off. Technical capabilities, if you look across that you'll see a lot of investment in Taiwan and Korea. Research capabilities near our customers, advanced capabilities in our research centers around the world for the things that we see growing most quickly deposition materials coating, microcontamination really the focus for that. Localization, so a large part of vast majority of our revenues come from Asia, as you would expect, you see lot of investments in Taiwan and South Korea that are really now starting to populate in a more significant way. And that will continue, you will continue and Greg will talk a little bit some of the coming investments and they are going to continually focus largely on Asia.

And lastly is the very importantly is investment in systems, things like statistical process controls for our manufacturing has driven a real improvement and quality, which I will show you our NPDs portfolio management, so we're spending significant amount of money in R&D. We want to make share we had a lot rigger around how we make those investments choices, and we put a very capable system in place to make sure that that's happening. And then, supplier management, the things that Tim talked about and important for him [Indiscernible] supply chain. But as quick this is the result, if you look the investment and quality, you've driven our defective parts for million down orders of magnitude in the last two years and then therefore driven up our sigma level which is really representative of improving and reducing customer complaints for about five sigma at this point, so what does that mean, is really what that means our customers can relax and trust that we're going to have a great quality and we can focus on the future. We can focus on starting about what's next, what products we want to be working on together, what solutions that we need. We have the confidence in you as the supplier because you've driven those investments to actually result in our quality.

And then lastly of course that's going to have an impact to our factories that we are having better yields and will get better yields by having fewer quality issues into its versions that's good for the help of the financials of the Company as well. So, I think again the right investment at the right time in producing the results. But we've shown you this before this is from last year's analyst event which we talked about some of those drivers, some of the individual opportunities that we are pursuing again just to representatives set things that are happening within the divisions that are exciting that are driving some of the growth and that we've been investing in. I'm not going to go through this all again in detail, but suffice to say that were very, very happy with the growth in all of these we have very strong results in all of them in 2016 and we're on track for what we've spoken you about before 70 million of incremental revenue just from these items by 2018. And continue to grow beyond. I think our view today is that most of these really actually seeing even broader opportunities that we saw a year-ago in terms of scope able we can do here.

But lastly, the growth opportunities that you are going to hear about these from each of the divisions again I'm not going to cover all of this information that you'll hear about it from the General Managers, but these are the things that you are hearing about when you hear about semiconductor and what's happening what's driving these in the industry. There is no strength or architecture design because advanced architectures 3D NAND and Memory the purity needs, the yields needs that are challenging ramping of new fabs and then interactive things in China plan our fastest growing region as last year 22% growth in China and cost behind it by one 17% so very, very strong growth in the lot of that of course the supporting, fabs that area working on some of those IoT solutions. But lots of activities and this is again just a really representative of some of the things that we can see divisions are looking at to respond to the things you've been hearing about these trends are good news for Entegris. We see this exciting opportunities driving and need for value creation.

So, we have these three divisions, which make this really a unique partner to our customers. I think by describing some of the interplay there, how they connect, and help us move faster which is really the goal of that. These special solutions and speed of developments and ramp are very, very important to the industry and for us to be responsive to the kinds of demand to the customers that are having this as Tim described and we've really innovated the right capabilities and made the right investments in those capabilities that I describe with R&D and some of our capital investments to make sure that we are worried and to be the successful broadly capable material provider to the industry that's you heard Tim ask for. At the end of the day what you have with Entegris is a unit drive very diversified business platform and as evidenced by recent results outperformed in a growing industry.

That’s all. I'll have Greg to sum up.

Greg Graves

Thanks a lot Todd. I think Todd did a nice job a sort of summarizing sort of what he's got here. And if you think about the divisions very integrated, all really kind of centered around contamination control, contamination control is really critical to the process. They share sales organization, they share CTO organization. So, it's not three separate businesses, we have to know manage them in three segments, but not three separate organizations. The only other point I'd make is really the investments that we have made over the last two or three years have paid off. I mean the folks that have been around while heard us talk a lot about the i2M Center, we have talked a lot about our increases in R&D. The growth that we had in 2016 organic growth of 8.6% that was an accident that happened because we chose wisely and made good investments over the prior two years.

So, with that, we are going to a take a 10 minute break. There are bag lunches outside. We are going to start back up in exactly 10 minutes. So, Bertrand so to like it -- let's see how this goes Greg. We will see, if you get everybody back in here. I am going to start talking in 10 minutes. So, I hope you guys are back. Thank you.


Greg Graves

So, we're going to start on three divisional presentations with our microcontamination control divisions. For those of you who've been around the Company while, you'll know that this is a very attractive business for us. But those of you who've been around Wall Street for a while, the street always really like filtration company and it's always given them really high multiples which is aspire to. But and I think Clint story will really layout for you, what's feel attractive about a filtration company. So, with that I'll turn it over to Clint.

Clint Haris

Okay good afternoon, welcome back. My name is Clint Haris, and I am responsible for the microcontamination control division. So I think you'll find -- I hope you'll find the next sections to be pretty exciting. This is really the takeaway as our microcontnamination control division is growing profitable division with significant competitive advantage over others in the markets we serve. If I look at the business as a whole and to sum up what we do, fundamentally we're in the business of ensuring purity of advanced liquids, gases and air. And it's interesting I usually like trivia in history, and as I came into this room today, and my apologies to those on the webcast that we have the beautiful panoramic view of the New York Public Library. And it's actually quite interesting because if you go back in time and to the 1900s, right across the streets of up here in midtown Manhattan was the very large above ground reservoir and that was a Croton reservoir. It serviced the water needs of all of New York and it actually had 50 foot high granite walls and a promenade that you could walk around a 4-acre reservoir.

And it's really interesting because at the time, the filters that the city used consisted of large barrels of sand. And so, if you look over the last 150 years or so, obviously it'd come along way with filtration technology, but it’s a really interesting backdrop of course since that time the reservoir was taken down and replaced by the New York Public Library. You can actually, if walk around afterwards, you can see the little foundations of that reservoir just outside our venue today. Within the microcontamination control division there is really three main areas that describe our business. The first of those is our liquid filtration, second is gas and the third is environmental or air filtration. And there is not only describe the business, but they also form the structure of my talk today. I'll walk through each of those in piece.

If you look at our business, it's predominantly a consumables business. What’s exciting about that from a financial standpoint is of course it’s a recurring revenue, it’s also a very sticky business. Once we gain a customer, they tend to stick with us for the long haul. We do have a segment of our business, about 21% that is tied to capital expansions of fabs. There are many filtration companies in various industries, but we are unique in our depth of understanding and focus into microelectronics. We understand the challenges and risk and that gives us a significant amount of technical as well as application experience which allows us to lead our competitors. The markets for filtration as a whole worldwide are a huge market, that’s a multi-billion dollar market. We’re focused on very specific segments of that market which is high-end technology driven and is about $1.5 billion around microelectronics and semiconductors.

If you look at that, it's a $1.5 million market, it’s a rapidly growing market and certainly that was reviewed in some of the earlier presentations by Bertrand and the rest of our presenters. I would like to point out two factors that do stand out in driving the business, the first in the top right shows the growth of the number of manufacturing steps required for each wafer processing the fabs. You can see that growth overtime. Below that you can that as the market has progressed. The pure requirements are becoming more and more stringent. When you take those two factors and you combine, it will all the new materials as well as processes, as well as the need to more frequently replace the filters within the semiconductor fab. You can see that Entegris is poised to achieve significant growth in the years ahead. The first of the major components of microcontamination control division is also our largest. It's our liquids filtration segment. This business services several different areas within semiconductor fabs specifically where that can clean photolithography, CMP.

Within those segments, we see quite a bit of growth associated with new where that steps and increasing where that process steps within the fab as well as with an increased number of photolithography processes as chips get more complex in line with smaller. We’ve been in this business for several decades and over that time we’ve really built up a leadership position. We have fundamentally one -- really only one major competitor in the segments where we serve. And our proprietary technology as well as applications experience is keeping others from really encroaching on the spaces where we're strongest. The second major area of gas filtration, our gas filtration business is heavily focused on OEM process tools where we supply small filters, which are used for dry gas process steps such as the etch step, and deposition step within semiconductor fields. This business has been growing rapidly as we've seen an increase in the number of tools used for new processes such as EUV as well as to support double patterning as line which gets smaller.

Additionally, we do see some new segments which are emerging. So, for example 3D NAND as Tim Henry mentioned earlier, we see that adoption growing and as that market takes off, there's more OEM processed tools which leverage our gas filters. The last major section is our airborne molecular contamination filtration group and these are solutions which are used for cleaning the air in processed tools as well as in the fab in general. [Indiscernible] show a picture of the Shanghai skyline on a sunny day and I did this for two reasons. One is to illustrate the fact that molecular contamination a very small level can have the significant impact on the environment and subsequently on semiconductor wafers. Secondarily, we do see significant growth within the China market and with that growth is quite a bit of opportunity for AMC filters.

But this market is not just centered on China, I had the opportunity to listen to a speech given at a symposium by Micron recently and Micron spoke of a situation where they saw yield degradation and as they returned to diagnose what was causing that, they found a direct correlation to the yield degradation to actually forest fires that were taking place in the Western United States. Once they diagnosed that, they implemented AMC filters. They were able to see their yields, not only go back to the baseline, but actually improve beyond that. So, with these types of challenges we see additional need for AMC filters throughout the new fabs.

Next, I'm going to talk about just a couple of specific examples and segments, growth factors which we see. One of these is an increasing trend for filtration further-and-further up the supply chain. This is not surprising given the value of specialty chemicals in our industry as an example you hear a lot of EUV technology, a gallon of EUV resist can cause upward to $10,000; so when you think about that value you can understand why fabs as well as their suppliers would want to make sure that they protect that and ensure the utmost purity of those materials. For us within microcontamination control, this is pretty exciting because we're expanding the customers we serve, but also as you hear in the next talk about one of the other divisions, our AMH division. We're finding applications where not only that we filtering these further up, up the stream, but we're also leveraging our carriers and tubing to ensure that contamination does not introduced into these materials.

Next, I wanted to refer back to a chart that Todd Edlund presented earlier where he showed the increase in our R&D investment over the last few years. This is very important, because as we've gone from technology nodes and been focusing on R&D, our customers are starting to recognize more and more value from the technological solutions we're providing. And with that value of course they're willing to pay for that value and that helped us as we looked at growing our top-line revenue. This is quite a challenge, I also borrow the chart slide from Tim Henry, because there as he mentioned earlier, if you think about the fact that we're trying to control the equivalence of one drop of water passing over Niagara fall in a day. from a filter standpoint, not only do we have to identify and pull out that one drop of water but we have let all of the other good molecules or good drops of water which are at similar sizes as it pass through. So filtration is not as easy as just blocking everything. But you have to selectively pickup the bad molecule while allowing good ones to go through.

So lastly, I'm going to talk a little bit about the business as a whole. Financially, we're -- we have about $360 million of revenue last year. Our margins were in the low 30s. And if you go back and time in 2015, 2014 our business was relatively flat, that was partially due to the fact that we were constraint from the capacity standpoint. As Todd mentioned, we invested heavily in our i2M facility as well as in other capacities to give us capability to grow beyond where we were. Additionally the size just the manufacturing investments we did have significant R&D investments which lead to new products release over the last 24 months. These two factors combined drove significant growth in 2016, so it is about 15% growth. And with that growth we also saw a good drop into our operating margin. Currently, we're in the low 30s, but as you look forward, and we're continue to do our R&D investments, we continue to foster our relationships with customers. We continue to work up through the supply chain. We see the opportunity for above market growth as well as driving our operating margins into kind of the mid-30 range.

So with that, I just want to bring it back to the view outside the window and I talk a little bit about the reservoir that used to be right outside of where we are today. So, today, New York Public Library I was trying to think through an analogy with the New York Public Library and there is about 3.5 million books in the New York Public Library. If you were to look at all the characters, all the letters and each of the books and periodicals that's in the New York Public Library, the technical challenge that we see as within filtration group is we equivalent of taking one letter just one letter, the letter A that’s in one book and trying to filter that out of all the other letters within the library. So, if you think about that technological challenge, if you look at the investments at Entegris has made over the years, you set to realize that that’s quite a challenge that only Entegris is capable of providing to the microelectronics industry and that’s going to drive our growth going forward.

Greg Graves

Okay. Thank you, Clint. So, next time, we give a presentation we won't have a Niagara fall to have fixture in New York City Library and we’ll be looking for that A. But really three things to remember about Clint's business, first of all this stuff is really complex. This isn't a filter under your kitchen sink, which is a membrane and a cartridge. It’s a membrane, it's surface modification, it's purification, not just anybody can do it, we have very strong competitive modes around this business, it’s a recurring revenue stream, once we’re qualified into a process unless we do something very wrong, we’re going to keep that business. More is better in finance, right especially if it's on the top line, if you think about this business the demand for purification you go to back to a slide that Tim Henry showed some that’s a problem its 45-nanometer, is a killer defect to seven nanometers. So, the whole contamination control becoming more important and then on top of that, the number of process steps are going to drive greater filtration. So the trends around this business and what's happening in this industry are very strong, and we've got a very good tailwind in this business.

So, with that, we’ll turn it over to Bill Shaner, who is going to talk about our materials handling business.

Bill Shaner

Thanks, Greg. Good afternoon, my name is Bill Shaner. I'm responsible for the advanced material handling division and thank you for coming today. Back in 1966, the original pattern for a wafer-like substrate about 25 millimeters and diameter is about the size of the quarter was applied for by an engineer in Chaska, Minnesota; and that was actually the impudence for the creation of the original company and was now called the advanced material handling division. So, I don’t know about you, by looking at this crowd phase on the crowd, I was on the planet yet. So, it's been a quite a long time. So, it's certainly a new advanced materials handling is the fact that we’ve been the market leader for over 15 years. So, we’ll walk you through the model today, and show you what the future lives for AMH.

You can think about the business in three different kinds of segments, one is wafer handling, these are products to use through protect and transport silicon wafers either from the wafer grower or actually in transfer in fabrication within the environment. The second one is chemical containers and Tim Henry talked a little bit earlier about the size with the supply chain and how the purity of the chemistry from when it's actually synthesized and these will be dispensed onto the wafer the same at all time. That’s kind of like a farm to table restaurant, so, we want that head of lattice that you got in the morning picked off the farm, you want under the plate for a salad in the afternoon. Well, if you think about this supply chain, there are times in that head of lattice is 16,000 miles away from where it's actually going to be consumed? If you want to put a head of lattice on a truck in the San Francisco and deliver here at New York in about a week, that’s a new destination of the wilted salad. So, really the things that AHD does as we guarantee that head of lattice is going to be the same when it gets pulled off the farmer when it gets put on top of your plate.

Finally, in fluidics, these are all the piping, tubing, valves, sensing photolithography pump technology that’s used actually dispense the chemistry from the drums that are shipped into the fab all the way up into the wafer. On the fluidics side of things, we worked pretty closely with the MC division that Clint just talked about of that purifying and filtering the chemistries as they get dispensed on the wafer. We are also worked closely SCEM division that will up next to talk about the chemistries and the process chemistries. We've an early visibility into the development of those chemistries and we optimize the containers to be compatible for those materials and that gives us the unique advantage as company. This business has a confirmation of unit driven about 45% and the CapEx driven is 55%. Most of our products were very physical, so if you walk into a fab and you have a bunny suit on in the clean room, you're going to see Entegris. You are going to see the boxes on the equipment of front end modules. You're going to see an overhead transport. You can see the chemistry drums. You're going to see all the valves, tubing, pipe and fittings coming in. Those are all polymer base. So, these were manufacturing technologies all polymer conversion base capabilities.

Moving to the next slide, there are truly three dynamics for the business. I was to start off talking a little bit about what it looks like inside the fab. So, the photo on the right is the FOUP, front opening unified pod that holds the silicon wafer as they are fabricated in the factory. If you look at that, it looks like that things about a mile long. You walk around in factories you see these things everywhere. There is over 5,000 interface points in side of fab and Entegris FOUP is used every step of the fabrication process for the silicon chip from when it goes from the wafer supplier to when its cut off and bonded and put into the mobile device that you have on your phone, moves in one of these FOUPs. That gives us really unprecedented access to fab design and development. So, these are the two areas that I want to focus on over here in the capital investment supply chain. When the Company decides to build a fab, one of the first things as they do as they bring Entegris in with the fab integrators because they need to know what type of FOUPs are they going to use. What kind of value, tubing, piping, fitting you needs. What's the type of logic that you're going to use for up seeing and bring your chemistries into the fab.

So, we were very closely with the OEM's and chemical manufactures up front. So that’s the capital driven part of our business is 55%. We're in early with a specified in with architectural engineering companies and that's what gives us the really entrée into the business. Is the fabs built we get into the life cycle of the fab? There are defiantly opportunities for us to get new bites of the apple fabs speak with new fab conversions, new technologies that are released. But really the referring sales component of this is really around the silicon supply and the chemical manufactures. This is where we have our [Indiscernible] specified in and we have the volume going into the fab. From a market force prospective, there is two components here and they are little bit competing. First of all we talked quite a bit today about the advanced requirement for critical materials handling, talked about 3D NAND, EUV lithography 1X process nodes, there is a lot of work that get set in R&D to make sure to we're developing products that are compatible and it's literally enabling this technologies.

But what happens when you win, when you win you still have to be able to support that ongoing material supply chain. So, you would have to have the agility, you have to have the capacity to serve that business, you have to have the supply chain excellence to maintain that market position. So over 50% of our business is actually in this recurring sales component, making sure that we're supplying that leading technology, know that actually get in initial win. Okay, from a market growth driver prospective, AMH is about a $1.1 billion served addressable market, it's really broken up into about third of each of our major areas. What's a little bit unique here in the fluidics business, this is all piping, tubing, values, fitting, this is most CapEx driven. So, when I talked about I talked about the engineering, our factual companies being early in the fab build this is where lot of that revenue just drive.

On the wafer solutions there is a little bit of the combination, it's the combination of FOUPs, which are used inside the fab and that’s only CapEx driven but then there is ongoing probably silicon shipping box business which is the recurring revenue and that's fall under Wafer solutions. And then finally in containers that's mostly going to be volume driven in the mature life cycles of fab, so you get specified in for the incoming chemistry and you get the recurring sales as the chemistry is consumed within the fab. We have in addition what tool shipments and then increasing number of process steps and complexity so not only are we being driven by the containers for the it's the chemistry usage because we get the smaller and smaller technology ins those we see more chemical usage in that business increase of the sales for the container business.

This is the first business segment the Wafer handling solutions so these are polymer boxes already use for shipping and transporting poly silicon throughout the fab or in between facilities or from the silicon supplier through the actual fab. It's driven by a couple of things on the chart on the right shows the expanding global fab capacity this is newly intravenous that's for silicon, so when a new fab is build that's a major revenue opportunity for us for the initial production of the FOUPs but then one such fab starts to ramp and silicon is being use inside the factory, a lot of the revenue switches over to the consumable Wafer shipping opportunity.

A couple of things that are important to note here for a in fab products like the FOUP we rely pretty heavily on the microcontamination technology for filtration inside of the box. These Wafers fee offers the chemistries and when they are put inside of the box they want to contaminate the box, so there are different types of methodologies that we use for either in our gap curves and gathering and other types of cleaning and technologies to make sure the all the type of clean wafer inside of the FOUP. We also rely heavily on our SCM divisions on what types of chemistries are actually need to be deposit on to the Wafer. The purpose of the Wafer is highly reactive, we need to know with that surface chemistry has been and what the out guessing metals contamination things would be on the FOUP. So we consume the capabilities of the products to make sure that's always clean.

On the container side this is really driven by the actual increase in shipments of gallons of chemistry. So our lithography materials continue to get more and more persuasive, same things with CMP scores and what actually same technologies. Clint said earlier that some of these materials are up to $10,000 per gallon, it gets shift in our products. So these are the containers that protect and transport those materials there are few major dynamics shows that makes us unique one that is safety. So, we have unique lithography or connection devices to make sure that we're combining the right chemistries to what right lines inside the fab.

So if you think about that one of these big facilities there multiple layers and the very bottom of the fab this is where those incoming chemistries come in. Yet to know how to connect this product leases they go up to the right part of the floor and have the right chemistry, you can't cross contaminate these chemistries and safety is really important factor inside the fab. The second thing around safety is that these are all transported materials either air shipping or ocean shipping, a lot of more highway vapor pressure types of materials and pretty aggressive chemistry. So, we have products that guarantee the safety and the purity of that material while in transit.

Finally, the fluidic section maybe I can talk a little bit about the graphic up here in the corner. This is a photo dispensed pump and this takes photochemistry and actually deposits under the wafer and the most important steps in that process which is the photolithography track. We have a liquid filter actually that's invaded into this product, so again this is a combination of having the material technology, the dispense capability and also the filtration to wrap that up in a one big solution. The fluidics business as I said earlier is all the piping, tubing, valves fitting manifold is a lot driven by new fab production, so let's talk little bit about the growth rate of the business and while we had a big CapEx share that drove a lot of activity on the engineering fab build side and that’s a big driver for this business.

Something that’s fairly unique about this business is really the relationship that we have within the supply chain. There is some discussion earlier with Tim that talked about new architecture and how that drives microcontamination, how it drives new materials. What's unique is that the IDM actually goes off to the OEMs in a chemical manufactures and so this is a kind of architecture I want to have in my facility. Entegris has a front row in early visibility to this because of our relationship on the chemical side with the OEM suppliers. So, we going to see there is a table and this makes us fairly unique. We also work as Consortia like IMEC and CEA Leti, but when you think about the periodic table that we shown earlier, now we have 45 different elements -- different chemistries, they need to know earlier on what the microcontamination factors going to be that inside the fab. They want to know are the drums going to be right, what happens with the two being, the value of fitting, I can't use another piping anymore because I have an element that’s really critical to metal contamination. So they bring Entegris and understand the new chemistries when they bring up the auto protectors where we can help specify that enabled via overall supply chain.

We have been talking about semi all day long, so here is an opportunity about life-science. And we have some life-science sales already one other thing that we are working on. How do we leverage the capabilities that we have in investments that we have made into other environments or other industries. So, this is an example of a demonstrable polymer bag used for single use technology in life-science. Our life-science is on a similar technology curve where these sensitivity towards metal and organic contaminations getting more and more significant. There is a big increase in single use type technology and a lot of the challenges are very similar to semiconductors. So, we are using active system to the new business. We will release this Aramus bag in the middle of last year where we work closely with the FCM on understanding the surface technologies and the interaction of the bag material along with the chemistries. And we have applied really a one of the supply chain process control that we have for the high, both supply chain control and quality levels to be compliant with the life-science initiative.

So finally, here's the overall financial performance of the division. We did $385 million last year as a growth of 11%, generally we grow pretty much in line with the industry; however Todd actually commented earlier, we are putting our R&D in the right places. So we are actually outgrew the market because not only do we have that base business and we are growing with the industry. But as new fabs are build in these technologies or deployed in these technology nodes, we get to see a bump there. So, that’s what really drove this component in 2016. The big margin drivers for us are the leveraging our global infrastructure. Like I said, we must do polymer conversion and manufacturing, so we have a fairly large footprint. We are really focused on plan efficiency, manufacturing initiatives and really driving them more volumes to the installed base.

Thank you very much Bill.

Greg Graves

So, Bill's business, he started that talking about started 50 years ago. We are trying like to refer to as the brand and if you go to somebody in the industry and you're trying to explain what Entegris does, they don’t really see any of the products and you say, oh we make FOUPs, people like oh, yes, okay, I get that’s Entegris. Business heavily dependent and really good at material science particularly polymer science, Tim talked about that supply chain and you can tend to have tube, a tubing or wafer ship or that we chose or all cast is under away for that this business is really all about. It’s about keeping those materials appear through the supply chain and in that fab environment. Stable business, we got relatively high shares, most mature business to smallest growth. And the last thing I would say is, this is the business that we are very focused on improving the profitability. Bill is here just above once a quarter or once a month that we need to do better here, but it’s the business that is capable of generating better returns and it’s generating today.

So with that, I’m going to turn it over to Stuart, who will talk about our chemicals, gas, and material businesses.

Stuart Tison

All right. Good afternoon, everybody. Last division is here to represent, I want talk about a couple of things. One is earlier today Bertrand gave you a broad overview of the Company and also some of the macroscopic drivers for the industry. Some of the important things whether it’s artificial, intelligent, autonomous driving, the cloud, some of those big macroscopic drivers, Tim talk about the technology which the industry is required in order to kind of meet that next generation needs, talked about 3D structure, which you talk about the need for materials and how they design of that circuit is important for integrating those end, right. So, what I’m going to do is talk about how those forces combined with Entegris’ unique capability and materials to propel our growth for the division.

So, this advanced materials division focused on a segment of the greater materials market within the semiconductor, and we broadly have organized these into four separate market segments. The first thing I’ll talk about today is especially gases segment, which is focused on delivery of high purity based gases, primarily for a doping application. The second will be our advanced deposition group which is focused on deposition material which effectively is what makes up the final circuit. The next one will be our surface prep and integration. So, this is every -- sometimes semiconductor circuits are -- there is an analogy to baking a cake, a multilayer cake. And so between every layer, you need to be able to prepare that surface. So, surface prep and integration group is really focused on that and I’ll talk about that a little bit later. And then finally I’ll finish up with our specialty materials group. So, while three business segments prior really focused on materials which are going into the circuit, our specialty materials group is providing materials which are used in the processing of the material, but not the material.

Thos business is almost 100% unit driven you can see that because there is materials of business we’ll talk about. We do so from ancillary equipment in order to enable delivery in material and more importantly, we worked with the different division microcontamination control as well as our advanced materials handlings group to optimize those delivery solutions. So, we are not just a chemical supplier, we are actually delivering material and high purity to the wafer to the device in its final form. So, I'll broadly go over some of the macroscopic parts of the business with regards to materials. I'll talk a little bit about how each one of those sub-groups supplies materials into the industry and I'll finish up with few important examples.

So, I'll start with this cartoon, this cartoon is a picture of a logic device, so you can think a microprocessor, transistor. And you can see composed of many different layers. The bottom layer is typically called frontend processing, whether the transistor itself is fabricated. And that has number of materials which we provide. Some of these materials are toxic. So we talk about one drop of water going over a waterfall and being able to purify that or you can think about one drop of water coming over a Niagara fall in a period of an hour that could kill you. And arsine is one of those gases that if it escapes, it will kill you. So, we provide advanced safety solutions to delivery of arsine phosphine.

Other important materials that are inside the circuit would be the dielectric in a juncture, we provide those as well. And then there is a series of metal layers which we provide deposition materials for whether its tungsten, copper, et cetera. Between each one of these layers that we've talked about before you have the need for both for cleaning and preparation, so whether it's conditioning of surface which is done with some of technology used for our CMP pad conditioners or it's actually cleaning that surface with our specialty chemicals. Those have done each of these steps. So, the takeaway from this slide is that there is a large number of opportunities where Entegris provides materials into a final devices. And this is a logic example later on I'll talk about a memory example as well.

So, when we think about the materials market, it's a very big markets, it's about $24 billion market for the semiconductor market. Within that segment, there is we have advanced material segment which is depicted here about $1.2 billion of our served available market. And what's broken in that year would be roughly how that segments with regards to the four business segments I talked about earlier, gases, advanced deposition materials, surface pre, chemistries and then finally our specialty materials area. So, the key takeaways from these that advanced materials are growing for the exact reasons that Tim spoke about earlier. These 3D structures are requiring new materials, which are more difficult to both manufacture and purify than commodity materials, which may have been used years ago and simple planner geometries. Those new materials also very sensitive to the chemistries that are used to clean they well and so new formulated chemistries are needed to be developed in order to enable those as well.

And you'll see there is a three main drivers with regards to growth are around, some of the common scenes we've talked earlier today, which are node strength which is requiring different materials in order to enable the device performance particularly speed. We also have the 3D structures, which makes it more complex both the deposited materials as well as to clean them and. Then finally we’ll talk about growth and we’ll talk specifically about how 3D is changing, the vertical is changing the industry. We’ll talk about the four different business segments. The first one is specialty gases. This business segment is focused on delivering high purity safe gas delivery solutions to the industry. A lot of these gases are not only toxic but also hazardous, we talked about arsine phosphine or other dopant materials which are also very difficult to deliver and safety in the chemical industry is number one.

If you ever go into a chemical factory and they do not talk to you about safety first. Safety is very important for the security of the employees, for the visitors and in the end for the business. And so while we provide to the industry really is the leading safety solutions with regards to sub-atmosphere delivery of gases. So just to put it simply, if the gas is stores that in a spirit in held then it will not escape. If it's stored at high pressures, if there is ever a valve failure you can have an escape of that gas which could result in damage the facility or loss of life. So, Entegris provides the best-in-class and that’s why we’re kind of in the number one position in the sub-atmosphere delivery.

The advanced deposition material group is focused on the materials which eventually effectively make up this integrated circuit. And those materials vary from conductors to insulators and then few examples here are given both for solid, liquids as well as gases. These new materials, some of them are listed here like aluminum floride, cobalt, lithium and others are enabling the circuits of the future and enabling the industry to be able to go down to 10-nanometer, 7-nanometers and below. Many of these are very difficult, they’re actually solid at room temperature and so they have to be heated up in order to be delivered. That is very difficult to do uniformly and Entegris has some unique solutions in not just the material result that they are delivering mechanism will talk about a few examples later.

The service pre and clean chemistries are enabling the structure by being able to remove contamination. Actually some parts of the semiconductor processing can be quite varying. Bill Shaner talked about earlier about how contaminates can get inside of these microenvironments and so we need to create a microenvironment that can be purged to get those contaminates out and there are also contaminates on top of the wafer surface because of the preceding steps know that we’re going to be clean without damaging the structure. And so the new materials seem to be more sensitive to structural damage, so you need what we call formulated cleans. Our cleans which are designed thorough move the contaminates while not damaging the underlying circuit structure and pro forma. And we talked about the areas we service and call post-AMP or chemical or mechanical planarization and also have to be edge province as well. These formulate cleans are actually going much faster than the clean area as a whole that is called commodity cleans area and that’s because more and more of the more exotic newer materials are being integrated into the device structure.

Last one, I’ll talk about specialty materials as a group provides materials, which are not actually put into the device structure itself or used to make components in the chambers or coatings of the chamber components and also used for other industries. So, these materials are typically graphite, sometimes silicon carbide and a number of wide variety of coatings. Examples shown here is one of a cell phone. Some of the new cell phones are actually made of glass, they're actually curved glass. That glass is curved by a molding process. Glass needs to go above a 1,000 C where we mold it. So, you need graphite to mold it. And our graphite has a very uniform structure which allows you to mold that curve on the glass without scratching it. And that's why I say, it enables high resolution glass forming like we see on some of our higher end mobile handsets. But, our materials aren’t limited to that. A number of our materials are being adopted into chamber components. The contamination can come through chemicals that come into a chamber; they can also result from the walls of a processing vessel causing particulate or metal contaminations which wind up onto the wafer surface. One way to abate that is to put special coatings onto the chamber which ensures that those -- the chamber itself does not contaminate the wafer surface. So, that's another area that's growing fast. We talk about the etch market is growing. That area is growing faster than industry itself. So, in both of those segments, we're market leader.

So, I'd like to talk about a couple of opportunities that we're working on now which are industry trends. The first is in the area of 3D NAND. So, 3D NAND or vertical NAND, Tim talked about earlier as being an important trend in the industry, tied to cloud computing, larger-and-larger SSDs that we put into our computers at home, and satiable number of photos that we take. And so what's happened here is that you've a -- you can think of this as a car park versus the multi-storey garage. In a plane or parking lot, even with these so many cars, if you want to put more cars in, you build a parking garage, and that's what this is. This is the equivalent of a parking garage where you have 64 alternate steps. Entegris is providing deposition materials which go into these steps, both for the dielectric layer, insulating layer as well as the metal layer as we call word lines, and lot of the other smaller layers which would be high-k dielectrics in the structure that forms this single memory cell.

So, the key take away from this is, there's more materials which are being put on per square inch; those deposition materials are in many cases require new types of precursors; and Entegris is really leading in that, not only in delivering the materials but protecting the wafers by chamber coatings around the chamber outage.

Second, what I'll talk about is the fluorine free tungsten. So, one of the applications of the industry is using tungsten in the metallization step. Tungsten usually comes with fluorine. There will be a six -- fluorine actually can damage the structure, particularly dielectrics. And in cases where you need to avoid that, you need the ability to have a fluorine free molecule. Entegris has developed molecule which is fluorine free, actually a number of them. What’s unique to Entegris is that not only can we synthesize these molecules but we can also purify them. We have special delivery mechanisms for delivering solids which is actually very difficult. And these materials are very corrosive in themselves and they will corrode the vessel that they're in. So, we're able to utilize the Entegris capabilities in coatings to make sure that that material is delivered in a pure form all the way to the wafer surface. And to make sure that the stability is there, we also have some analytical capabilities to enable that as well.

It’s really Entegris capabilities and delivery, coatings as well as chemistry that enables us to take advantage of this trend. And this is both present in 3D NAND applications as well as in advanced logic where tungsten integration is critical.

And finally, just to summarize on the business. This business is $428 million in this past year in revenue. It's been growing slightly above the CAGAR for the industry as a whole in terms of MSI, and it's truly poised to grow significantly, at a significantly higher rate. We talked about the 200-300 basis standpoints, based on upon the growth of those key drivers in 3D NAND and advanced logic. Margins will improve both due to product mix as well as being able to leverage our supply chain as more volume for those advanced precursors take hold. Thank you.

Greg Graves

All right. Okay. Thank you, Stuart.

Key highlights on the business. Essentially unit driven business, the 100% unit driven, high recurring revenue stream against sticky products. It’s a nichy business. So, when you peel it back, I mean Stuart talked about it’s SDS system, it’s gas business and it's around safety for some very toxic gases. And we're not competing broadly with an Air Products or a Praxair. But, we're doing very well on a relatively small niche. Same thing he talked about formulated cleans. We're not participating in the spot market for cleaning chemistries; we're focused on sort of the advanced side of that business. And then, the last thing that he spent time on this is our business; it's probably the most leveraged to 3D NAND. We get a lot of questions from investors about what do you see in 3D NAND, which of your businesses are exposed to 3D NAND and this would be that business.

So, with that, I'm going to switch over and talk a little bit about our finances. And really Bertrand gave some history. I'm going to focus primarily going forward. Before I do that I want to just acknowledge two people. You've heard from everybody from Entegris that is here today, but Jolene Bergner who helped you at the registration, countless hours, putting this altogether and then Bruce Beckman who's in the back who is our VP of Corp. FP&A who's also played an important role in putting this together.

So, starting out with our objectives. Just to crystallize what Bertrand talked about, our goal is to grow 100 to 200 basis points more than the market. The market for us, 80% semiconductor unit production, 20% capital. Continue to expand our EBITDA margins from the 22% we had last year moving forward. I'll talk more about that. Historically, we've been a strong cash flow generator, continue to drive higher cash flow levels and then grow that bottom line and that EPS line at twice the rate that we've grown -- that we grow the top-line. From an investment perspective, you can expect to see us to continue to invest in the R&D at the levels we're investing today. We’re going to continue to invest in our internal capabilities. As I look at what we’ve done with the investments we’ve made in some of our processes like statistical process control, like some of our process around R&D selection and its paid off. So, you'll see us continue to do that. Obviously acquisitions are something that we’ve got on our radar screen. And then, last piece here from an objective standpoint, we will continue -- we’ve used the target model since 2009, and we'll continue to use the target models we operate the business, and I'll lay that out for you today.

When we think about the three divisions, I just want to kind of give you from the CFO’s share how I think about this portfolio. It’s a relatively balance portfolio. If you think about the microcontamination control business, I would clearly put it in kind of star category, high growth, high margins; we’ve invested heavily in the business; we have high expectations for continued strong growth and continued margin expansion. The AMH business, sales business that’s our legacy business, relatively limited investment going forward and we will continue to invest in FOUP technology which is the cornerstone of that business, but we’re not expecting a lot from that business from a growth perspective, roughly market, maybe a 100 basis points, more than that, but view this as a strong -- it’s historically been and we would expect it to continue to be a strong cash generator.

And then, Stuart’s, the SCEM business kind of falls somewhere in the middle. We are investing pretty heavily in that business, a lot of what we invest there is for growth. We’re investing in our cylinder and canister fleet; we’re investing in deposition materials; and we'd expect that business to grow a couple of hundred basis points in excess of the market.

Talking about growth and kind of our relative growth. This is my favorite slide in the deck. So, on a relative basis, the slide on the left is, how did we do in 2016 versus our market and our peers. So, our market, again, I talked about that 80% units, 20% CapEx. If you put that together that’s about 4% blended market. We were 8.7. We did have a little bit of a tailwind from currency. But even without that, we outgrew the market by about 400 basis points versus our company A&B, other specialty chemical companies that have a strong component of electronic materials.

Chart on the right is just how we’ve done since the ATMI acquisition. So, a two-year CAGR. Market’s grown about 3; we’ve grown about 4.5. So really, right in line with that 100 basis points to 200 basis points commitment to outgrow the market.

Our profit growth path. Where do we go from here? The column on the left is where did we end 2016. I just want to -- I showed a chart like this in the middle of 2014, right after we did the ATMI transaction, and I did a walk to 2016. It looks a lot like what we reported. So, -- but in 2016, 1,175 in revenues, 22.4% EBITDA margin, $0.94 in earnings per share. Bertrand talked about 5% top-line growth rate based on an industry that would grow kind of 3ish, 3 to 3.5 and also growing that industry by 100 basis points to 200 basis points. So, 5% on a CAGR basis that would take the 1,175 to a 1,360 million in 2019. At a 5% growth, our internal planning is based on a 3% industry number. We put external forecasters’ industry numbers in the appendix for perspective. That 3% is a relatively conservative number. But we've all been in the industry a long time, so we’re going to play on the conservative side.

And then from a margin improvement prospective, that EBITDA margin from about 22%, a little over 22%, up to the 25% to 26% range. What does that do? It takes you from $0.94 in EPS to $1.25 to $1.32. Now that is assuming that we just -- all the cash we generate, we keep it on the balance sheet. It doesn’t take into account capital allocation, and I will talk about that in a couple of slides.

So, target model: We're going to an annual target model in terms of how we guide the street. So, you see the 2013, you see where we were, about 19% operating margin; 2016, we were at 22% operating margins -- or EBITDA margins. As we move out from here at a 1.2 billion, we would expect that operating margin to be 24ish, so some improvement from where we were last year at almost 22, at a 1.325 billion and at a 1.4 billion kind of 26%. This is really consistent with what we've talked about before; we talk about 40% flow through. So, if you were to take the midpoint of all of this, it reflects about a 40% flow-through. So that takes us on an EPS basis from $0.94 in 2016 at a 1.2 billion, we think a $1 plus or more at a 1.3 billion, call it a $1.15 plus. The street today, I mean if you look at estimates, they’re kind of somewhere right in the middle and estimates -- the consensus is in that 1.07, 1.08 range. So, really lining up with what we view as kind of our longer term target model.

We talked about cash flow. Historically, we’ve generated very strong cash flow. Last year, the operating cash flow was over 200 and the free cash flow was approximately 130. As we come -- as we look forward, we think the business over the next three years can generate operating cash flow of about $700 million or free cash flow of about $400 million over the next several years. So, that gives us a fair amount of capital to work with as we think about our capital allocation strategy.

Where we're going to invest? So, we're going to really invest, I talked about continuing to invest from the in P&L, E R&D and continuing our trends. From a capital perspective for 2017, we would expect to invest $80 million to $90 million, same kind of number in 2018. As we come through this heavy investment cycle, you should see that come down a little bit as we get out toward 2019.

No surprise, the big investment initiatives, filtration; within that business, it's about membrane capability, it's around cleaning capability and just in general, continuing to drive the capabilities of the MC business forward.

Stuart’s business, the chemical and gas business, the largest area for investments there is going to be our -- within deposition. As I talked about, we’ll also continue to invest in the fleet of cylinders and canisters to support the overall growth of that business. The other area, we are investing is the coatings business which Stuart talked about. In the AMH business, he talked about the next generation FOUP and also updating some of our capability -- our molding capabilities.

We continue to have a very strong balance sheet. We have $406 million in cash; a $140 million of that cash is in the U.S. We brought our debt down to a little more than $560 million from over $800 million -- excuse me. We brought our debt down to $590 million from about $860 million at the time of the ATMI transaction. So, we’ve brought it down relatively significantly. Last week, we re-priced our debt. So, the notes stay the same at 6% but our term-loan is now at LIBOR -- went from LIBOR plus 275 to LIBOR plus 225. That’ll have a modest impact on our interest cost going forward. We do intend, right now our capital allocation strategy calls us for us to continue to pay down about $100 million in debt this year, so $25 million in each of the quarters this year.

Let's talk about our capital allocation strategy. So, if you think about our options from a capital allocation perspective. On one hand, we can say really, really flexible, pile cash up on the balance sheet. I think ultimately our investors aren’t can't let us do that but that would be an option. At the far end, in terms of driving EPS growth, we think that M&A is probably our -- likely to drive the greatest proportion of EPS. But that said, I mean we've also got good options in the middle. We're not -- it's not critical that we do M&A to continue to drive our EPS. So, what this chart shows? On the left side, we accumulate cash on the balance sheet; our capital allocation is going to have no impact on our earnings per share. If we just continue to pay down the debt that we've got outstanding with the free cash flow that we generate, it’ll have about $0.10 impact over the next three years.

If we were to buy back shares assuming we buy back shares at a forward price in the mid-to-high 20s, it would have about a $0.14 impact on our earnings per share over the next three years; and then, M&A, about $0.16. Let me talk a little bit about some of the assumptions here. So, on the left hand side of the page, that $1.25 to $1.32 is what I showed you a couple of slides ago on the operating EPS loss forward. The debt, it’s just paying down the debt that we have at the interest rates that we currently have. I talked about the buyback assumptions and the M&A assumptions; we assume that we could acquire at about 10 times EBITDA, post synergies.

From how much -- the capital that we are employing here is essentially that free cash flow and the portion that is domestic with a couple $100 million of repatriation as well. So, this doesn’t reflect specific targets. It's really -- it's kind of -- one level, it’s just math, but you can do the math based on the footnote. So that would take us, Bertrand showed early in the deck, 2019 kind of $1.40 number. We show $1.35 to $1.48 here based on the operating EPS walk I showed and our capital allocation. The other thing that I'd point out here though is this doesn’t assume any additional leverage. Obviously, if we had an attractive acquisition come along, we’d be able to take our leverage back to kind of that 3.5 level and we potentially do better than that.

So, what should you take away from the meeting today, I think we believe we are well-poised for continued growth on the top-line. We are in a multi-year cycle within the industry; the industry is a good industry. I mean, it's less volatile than it's been historically; it's driven by more than just sort of PCs and handsets, and the number of applications continues to expand. Materials are absolutely critical, and there is really -- there is nobody better when you think across the material supply chain than we are. We are pervasive across the fab environment; we’ve got a broad range of products.

In the end, we are well-positioned to continue to grow the business on the top-line; grow EPS at twice where we grow the top-line; and then obviously M&A could put potential icing on the case. And from an M&A perspective, we look at what we did through the ATMI process where we have essentially -- I talked about 17% CAGR in EPS since 2013, which is the year prior to ATMI. We think we are good at it; we are good at integrating; and so, we will continue to look at that as a strategic option.

So with that we have talked a lot. We haven't taken a lot of questions. I am going to have the rest of this team come up and we will take questions from the group. Bertrand is going to moderate that, but we are willing to take questions for anyone of us as well as for Tim. Thank you.

Question-and-Answer Session

Q - Amanda Scarnati

Thanks, guys. Amanda Scarnati from Citi. The first question is for Greg on kind of operating margins. Maybe just kind of walk throughout that a little bit. If you look at the margins of the three different business units, it seems to be growing by up 2% to 4% target wise, whereas the overall corporate average margin is about 1% to 3% in the targets that you put out. Talk about what's happening in the margins there, and how the -- what's happening in the corporate side of kind of pulling the margins down below the targets in three groups?

Greg Graves

The targets in the three groups are -- I mean, it all -- the whole model rolls together. I mean, we have got relatively aggressive targets in the three groups. We’d expect the corporate spending to be relatively consistent. So, we are showing -- I am showing operating margins expansion in the businesses and we are showing EBITDA expansion when we talk about 300 basis points at the corporate level. So, the delta is really around the EBITDA takes into account relatively significant CapEx investment that we talked about. So that’s why you get 300 basis points of operating margin and couple of hundred basis points of EBITDA margin.

Amanda Scarnati

And then, Bertrand, talk about China strategic partnership that was announced week and a half ago. I mean, could you just talk about the benefit of that and how that’s going to help to grow Entegris over the next year or two?

Bertrand Loy

So, I’ll take the first part of this question and probably turn to Stuart, since this partnership was really established to enable business units. But, but as we mentioned, China has been a growing market for us. We have been growing very steadily in China 2015, but also in 2016 we grew about 22% in China. Our business has been very, very strong, both with the foreign investors in China, the large traditional international semiconductor sales but also increasingly with the emergence of new indigenous players in China. So, we really wanted to be in a position to better support what we expect to continue to be a significant wave of investment and greater activity at fab level and some of the chemistries that we’re updating on that’s really [ph] travelling very, very well. And in addition to that some of those cost of gases and advanced materials that we’re making can subject sometimes to very contagious regulations. So in order to [indiscernible] all of that and to put us in a agile position to support those Chinese players, we decided partnership with Spectrum. But Stuart, maybe you want to add to that.

Stuart Tison

So, I think Bertrand mentioned that Chinese market is growing very rapidly. Expansions are planned this year, next year and following years. And being able to support our customers and region is important. I think Tim actually mentioned the fact that many of these chemicals cannot be shipped by air. They have to shipped by boat. And so, if you think about the amount of time it takes to ship a chemical from North America to Asia by boat, you wind up with a very long supply chain. And being able to shorten our supply chain, reduce our cost and actually increase the surety of the chemical arriving on time for our customers in China. So it’s a strategic move for us to better our customers in China.

Amanda Scarnati

And does Spectrum have any control over IP or is Entegris managing the IP relationship as well?

Stuart Tison

So, Spectrum -- the relationship with Spectrum is what we call a toll filler. So, we own the canisters, we own the technology, we actually even own the equipment that’s used to fill the cylinders or canisters. And so, they’re operating the filling process…

Bertrand Loy

They’re essentially acting as a contract manufacturer for us and we are maintaining the direct relation with the end customer.

Patrick Ho

Thank you. Patrick Ho from Stifel Nicolaus. Bertrand, maybe a big picture question for you looking at the business and how it’s evolved to this point. Given a lot of your relationships with your customers are becoming deeper and deeper, particularly in development stage, what’s the challenge for you in driving more value position? And particularly what I’m focused and this is on the gross margin side. You’ve increased the operating margin since the ATMI deal, but how do you extract more value, particularly as you are closer to some of your biggest customers?

Bertrand Loy

Well, it is in the constant balance that we’re trying to decide. So, at one level, we do believe that one of the new solutions that we're developing in collaboration with our customers are increasing in value, enabling them to advance the performance of their chips, improving their yields. And we're trying node after node to know to capture more of that value. Having said that, we also recognize the fact that without this very intimate relation with those customers, we will not be able to develop the next generation technology.

So, there is this happy symbiosis, if you want, in the ecosystem where we're going to try to capture as much value as we can, but we also need to be cognizant of the fact that we need to maintain and preserve the strength of our relation with our customers, so that we get invited to participate on their next process technology challenge. So, I think we've been able to do that well. And I think the proof of that is that the fairly steady margin profile that we've been able to guarantee across all business lines and the steady expansion that we've been able to deliver at the bottom-line, in spite of the increasing R&D spending that we've done, in spite of the many investments that Todd was describing in terms of new tech sensors, new meteorology capabilities and new talent that we've been adding to operate those tech sensors. So again, I think that we're seeing -- maybe it’s another way to say that we are seeing the benefits of scale. And that was, if you remember, that was actually one of the reasons why we acquired ATMI. We felt that the size of Entegris back in the 2012-2013 was not as sufficient to allow us to be able to again, to optimistic expectations of our customers. I think now, we have the appropriate scale and I think we have demonstrated that we can put that to good use.

Patrick Ho

And maybe as a follow-up for Greg, in terms of the total corporate operating model that you highlighted today. We saw the different business groups give their target models, and especially some of the three-year targets that you motioned. One of the things I noticed was operational efficiencies in all of them. Can you give specifically, like I guess what could drive additional operational efficiencies because you’ve had good operating margins growth? What else more can you extract say over the next three years for each of these business groups?

Greg Graves

So, I mean, if I go business unit by business unit, I would say in Stuart’s business, in chemical and gas business specifically, that's our business where our assets are the most underutilized. So, volume amount is going to play a meaningful role in improving the profitability of that business. If you move to the AMH business is -- we’ve owned all of those businesses and operated those businesses for a long time. It's the first time they sort of -- in the configuration they are under today have been under one senior leader who has actually been at the Company a long time. And our view is there is opportunities for additional efficiency that we view it as the cash cow. And so, additional efficiency, more probably on operating expense line. And then cleans business, it's a function of -- that's our highest growing business. We're going to continue invest heavily but it's a function of volume leverage as much as anything.

Edwin Mok

Hi. Edwin Mok with Needham & Company. So, just I guess Greg, since Patrick asked this question, I’ll just follow-up. Entegris combined with ATMI has quite a number of facilities, around the world frankly. You guys talk about for example your current facility you’re investing in because you want to localize that. Any thoughts about site consolidation and does it make sense do it or do you think can grow to your footprint? Any thoughts on that? And I have a follow-up.

Greg Graves

So, what I would say is two things. One is, we’re constantly looking at our cost structure; we’re constantly looking at the footprint. If you think about it across businesses though, most of our facilities are running at very high levels of capacity utilization; most of the floor space is used up, as I say, I talked about it when I answered Patrick’s with the exception of the specialty chem and gas business. And there, I think over time we’ll consume the footprint, but that doesn’t mean we will consume it meaning will grow into it but that doesn’t mean we won’t continue to sort of look at opportunities to be more efficient on the footprint front.

Edwin Mok

Okay, great. That’s helpful. And then, I guess the two parts question on R&D. First, I guess just staying with you Greg. R&D, as you’ve shown, there has been a 9 to 10% of your sales. You set kind of optimal level. Do you see increase in that? You talk about obviously less ratio on your model as you grow your top-line. So, should we expect R&D stay level but leverage mostly comes from sales and marketing all the things [ph] about that? And then, in terms of where the R&D is expensed, a follow-up question. I think you talk about a quarter of it on platform, a quarter on kind of disruptive and half of it being go on business [ph] rate? Do you see that mix of spending changing; do we expect more maybe platform higher, go disruptive technology down the road?

Bertrand Loy

Yes, I can take maybe the first question and then Todd, do you want to take the second one? But we will constantly look at the corporate amount of R&D. We know that there is a cost to be the technology leader in those product platforms that we have chosen to have in our portfolio. And we want to be spending the adequate amount of R&D to be viewed as the technology leaders by some of the most demanding customers. Right now, based on everything we see, we believe that 9 to 10% is probably the right number. If we need to spend more, we will spend more. We will do that by making choices as we have always made. When we increase the level of R&D spending, we did, to your point look for efficiencies elsewhere in SG&A and we were able to increase R&D without really compromising on the overall commitment we made in expanding our bottom-line. So, you should expect us to continue to do that on an ongoing basis. I think that’s really the quality of the execution that we keep referring to. In terms of the make-up of the portfolio, I’ll turn to Todd but you should expect us to also constantly look at the optimum savings.

Todd Edlund

If you look at that pie chart a few years ago, you’ll see a higher percentage from derivatives, more than half. And so, we’ve actually evolved a quite a bit towards the more advanced solutions because that’s what the industry has been demanding. So I think the balance actually is where we want it right now. To be a responsible supplier to this -- to all the players of the industry, we’re always going to have derivative work to do for the fast day-to-day as well as the kind of backward looking part of the business that is at the core of the business. So, we have the right balance. And that pie chart that I showed you, I am sure we’re very comfortable with that in a number of projects to continue to delivering the results that we’re getting from the position we made on R&D a few years ago. I feel it’s right balance. I don’t think it will change much more.

Unidentified Analyst

The management described how they [inaudible] total compensation changes in stock prices.

Bertrand Loy

The question was about management incentive compensation. So, we've a base salary; we have a variable component. On top of that that ranges from anywhere between 50% to 100% for myself. And then, you have a stock based component. So, describes a little bit more those last two components. The variable plan is primarily driven by a bottom line performance and that accounts for about 75%, means EBITDA and that's 75% of the plan, and the remaining 25% would be series of corporate objectives, some of which have to do with top line growth, some of which have to do with new product introduction, and some of which have to do with operational performance such as quality levels, on-time delivery, inventory turns. Then finally, the stock component, the equity component, it's a mixture of RSU, performance shares and stock options; and performance shares, it's really key, and we're tracking the semiconductor in the stock index.

Unidentified Analyst

[Question inaudible]

Bertrand Loy

So, the question was some of the returns that we hope to achieve would be through stock buybacks. And the question was really challenging us on the fact that there haven't been significant stock buybacks in the past? And you're correct. I mean, there was a significant stock buyback back in 10 years ago roughly. Since then, we had some small opportunistic stock buybacks. But you're right, none of any magnitude. Recently, we've committed to have an ongoing stock buyback program to eliminate the dilution coming from stock-based compensation. So, you should take that to continue going forward. But I think what Greg was suggesting is there may be a point in time where it would be the right decision for us to commit for larger stock buyback. And I think Greg prefixed that comment by saying we continue to believe that M&A is the best way for us to create shareholder value. We have demonstrated that with the ATMI acquisition. We believe that we're a very effective integrator and a very effective acquirer, but if we're not able to find a right target at the right price, down the road, we may have to actually revisit the prioritization of our capital allocation options. And that's really what beyond the comment that Greg mentioned.

Unidentified Analyst

[Question inaudible]

Bertrand Loy

So, the question was what type of -- any targets where will we be looking for? Would they be natural or horizontal? And could you -- I want to be sure I answered your question, what you…

Unidentified Analyst

[Question inaudible]

Bertrand Loy

I think you should expect actually a little bit of both. In some cases, we believe that we could benefit from adding to the existing technology platforms. But you should also expect probably most of the M&A focus to be about adding to the portfolio and find technology platforms that would be very synergistic with the existing technology portfolio.

Unidentified Analyst

[Question inaudible]

Bertrand Loy

So, the question is about [indiscernible]. So, we were actually a shareholders of [indiscernible]. And we didn't feel that [indiscernible] would necessarily be striving as part of our portfolio. And as a result we decided not to expect an interest of those assets. And I want to believe that these acquisition is probably going to be benefitting from the more intense focus on the [indiscernible] providing for those assets.

Take the next question from Christian Schwab?

Christian Schwab

Thanks. There was a follow-up on the M&A question first and then I have one quick follow-up. On the M&A front, would we assume -- you said that you would look for possibly new areas for -- just want us to clarify. So, let’s say it’s microcontamination, your fastest growing, highest profitability, lowest market share, maybe logically you would look there. With that being to expand market share, your served markets or would that be to go after underserved markets, if you could give us some clarity there?

Bertrand Loy

So, some of you know that I started my career in Millipore and probably I have a great affinity to filtration technology. So, yes, I would love to find ways to add to our filtration and purification business, whether it is just a co-existing applications in our core semi-markets but also potentially look at broadening our market focus. So, I would say, we'll look at both, and it's going to be a question of actionability and affordability. Putting that aside, I would also say that -- you've heard that from all of the presenters, we tend to like as a management team, recurring revenues. So, you should expect us to probably also be primarily interested in unit-driven types of businesses. And that's the other area of focus for our M&A strategy.

Christian Schwab

Great. And then, my last question is for Greg. Could you quantify 2016 with your exposure as to 3D NAND and elaborate then what the potential of that could be as we transition the rest of the wafer start?

Greg Graves

I really can't do that specifically. I’ll let Bertrand…

Bertrand Loy

It's not something we can easily do because what we sell to -- the companies that are making 3D NAND; these are similar products and other processes. We don't get that division. Clearly, at all as Tim described, that form factor and what they’re trying to accomplish there, requires a lot of kind of the things that we do, be it for layering or for definition materials or cleaning. So, definitely driving important part of our growth, especially as we talked about growth of deposition materials last year, but the rest will start get a little more blended, FOUPs and filter and so forth and kind of across all process, but we like the growth in that, the complexity in the chip, be it logical or the 3D NAND that drives needs for our product…

Greg Graves

And that’s always a specific process. It’s always hard for us to answer. If you go to the pie chart that Todd showed, only about 55% to 60% of our revenue is direct to a fab; the balance of it is to a materials supplier or to an equipment maker or chemical supplier.

Chris Kapsch

Yes. Chris Kapsch at Aegis Capital. I want to drill down on the operating margin target and the progression. You emphasized both, I guess Bertrand in the opening remarks and then Greg in your summary and the Q&A that a lot of that delta is driven by leverage associated with just greater sales volume. But clearly, as the industry is progressing along Moore's Law and the increased complexity at the advanced nodes, you’re presumably getting better sales mix contributing to it. So, I'm just wondering how important is leverage and how important is mix in that progression. And how dependent is your model on the progression to the advanced technology nodes actually staying on track?

Greg Graves

What I would say is leverage is very important to it and volume in that, and the new product growth. If you look at the -- Todd showed, 30% of our business is new products. Our margins in that business is as you might expect that new products are higher than our legacy business. But at the same time, some of the products that have been around the long-time that are supporting the Internet of Things, we continue to do well on them, but we do experience some price degradation. So, we plan for 1% to 2% of annual ASP erosion.

Chris Kapsch

Okay. And then, if I could just follow-up on what Tim -- Tim, thank you for your comments and there was interesting chart that you emphasized talking about the yield degradation that comes with the advanced nodes. So, you I’m suggested that maybe the node transition being delayed is inevitable unless something happens to improve the yields dramatically. I think at 10 nanometers, it would look like a 60% yield and going well below that for 7 nanometers. So, what's your crystal ball say about, how the industry plays out in terms of progressing these advanced node, is it that there is just going to be fewer winners that are capable of actually making that transition based on the technology and complexity requires? Thanks.

Tim Hendry

First of all, that was a hypothetical degradation, if you didn’t make any improvement based upon 28 nanometers. But clearly, we’re making -- the industry is making improvements in terms of overall yield. So, I don’t expect that degradation to occur. The complexity of number of steps and number of problems that we have to solve, as you move forward, is really probably the issue I think that will cause some delay in the nodes. You just have a longer cycle time. So, you have to figure how to do development across that. And remember, information terms simply is going to go down. So, there is some -- there is things you can do to increase your learning rate by segmenting the process. But -- so that’s one factor; it's just clearly the length of the process itself has a force of how information turns you can get within a given development cycle. So that’s one for us. The other one is you have to solve these yield issues before you go into a ramp; otherwise, it’s economically very impactful. So, the rate with which you can solve these problems is key and that’s why I emphasize speed and execution and new development of materials. The companies that can actually solve problems faster are going to win business, because there are just more problems to solve in a given period of time; you do that math. So, that’s going to be another factor that I think will put pressure on node transition.

The other is I think companies are going to want to extract more value out of the investments that they made for a given node. The given node investments are going up. You’re going to want to extract more value from that investment before you move on to the next node. So, I think there is several factors that will put pressure or headwinds, as I call them, on node transitions. There is still very strong economics for making those transitions. So, there will be immense amount of pressure to try to figure out and expedite those transitions and solve problems faster and work with partners more closely to develop more integrated solutions.

So, I think Moore’s Law is not dead; it's just going to take little more time I think to solve some of the problems. You certainly want to be ready to launch with a well-characterized process that you can commit to customers and high volume. And that’s the thing; you’ve just got to be able to commit. So, I think that -- in order to have that predictive schedule, you might want to exercise a slightly longer node transition, to just have that predictability that customers can count on. Changing a schedule is very impactful to your customers that have planned platforms around the given product and no design. So, you want to be predictable and you don’t want to disappoint your customers. So that may drive some elements of pushing up a node, just to be careful. That’s my own aside of Intel to you, that’s my personal view on my experience. I've done about eight different technology transfers and you really need to make sure that you have a very good predictive and solid technology base before you commit to the outside world. I don’t know if I answered your question.

Toshiya Hari

Hi. This is Toshiya Hari from Goldman Sachs. Bertrand, thanks a lot for the day, very helpful. You guys are positioned pretty well across the spectrum, when it comes to portfolio. But I think you're SAM today is about, as you pointed out 3.8 billion and a TAM that is maybe north of 50 billion. So, you do address a fairly small percentage of overall market. And I can totally appreciate your focus on technology and your focus on margins, but on a three to five-year view, how big could that SAM number be as a percentage of the overall TAM.

Bertrand Loy

Thank you for the question, Toshiya. And I agree with you. I think that -- believe that we have a very versatile product portfolio that should be leverageable to other markets and applications. We have characterized a few of the initiatives that exist and that we are sponsoring organically. I guess it’s fair to say that if we want that number to grow significantly bigger, we probably will need to supplement the organic efforts with some well-targeted M&A, simply because when you work with very, very demanding semiconductor customers, it’s extremely difficult for those research teams and development teams to really find the mind share to appropriately focus on those other markets. So, we have actually carved out some dedicated resources and organizations at some point in time. Once we know that some of those other non-semi opportunities are real, and are really, really exciting and could be actually about larger than what they are today, we probably would have to make some meaningful investments and we would talk about that when we are ready to talk about that.

Toshiya Hari

Okay. And then, my follow-up is for Tim. Again, thanks for spending time with us today. You used to probably spend a significant amount of time with Bertrand and the broader team. And I was hoping we could get your unbiased view of Entegris; o, maybe the two or three things that differentiates the Company from the rest of the industry and perhaps the one or two development areas for the Company. Thank you.

Tim Hendry

So, one is the speed of problem solving resolution. I think being able to integrate packaging technology, the filtration technology and have the knowledge of the chemistries allows one to solve problems and present solutions more rapidly. And again, the number of problems you have to solve is growing. So, if you can partner with somebody who can be more efficient and solve those problems quicker and requires less than your own internal engineering resources, that's a plus. I mean, that means -- less engineers to solve the problem with Entegris because they have the ability to integrate across that. So that's kind of very important. The other one I think is the agility to expand capacity and broaden it across the global base. Forecasting demand in the filtration business is not easy. I never knew how long a filter was really going to last until I got into production and then I could set my expectations around that with the R&D team. That sometimes requires the ability to ramp very quickly on unforecasted volume. And I loved it that I could ask them and they would deliver and they had foreseen investments to be able to do that. Other companies maybe didn’t invest as much in that ability in the future and therefore they would just say, couldn’t meet my demand and tell one of manufacturing partners that I couldn’t deliver, that is unacceptable. They go, Tim, figure it out. And so working with Bertrand’s team, they rarely, rarely disappointed me, when I asked for a lot of more, and that's very important. So, I think the ability to integrate and expedite solutions and having also the agility to meet unforecasted demand. Those are some key attributes. That’s what I think -- that's about supply-chain, as well as technical expertise.

Unidentified Analyst

[Question inaudible]

Bertrand Loy

Let me take that one. I mean, first of all, I think Greg was really using a number of really plain vanilla assumptions in the model. So, don’t take that number as a hard wired number. I think it's really again stressing the type of assumptions that we use to build the accretion model. And in terms of the level of leverage that we would be comfortable with, at the time of the ATMI acquisition when we announced the deal, the gross leverage for us three point -- about literally over three. And at the time, we said that we would have been comfortable pushing it to probably 3.5. So that's I would say at high level in the framework than we see it had. I think of course all of that will depend on the types of target, the nature of their business and we probably would have a different answer if this is a business that is more CapEx driven as opposed to a business that is more recurring in nature. So, a number factors would probably impact the answer to your question.

Unidentified Analyst

[Question inaudible]

Bertrand Loy

Potentially. Ultimately, we get to generate favorable accretion and we get to generate a favorable ROIC over time.

Mehul Trivedi

Mehul Trivedi, Cooke & Bieler My question is related to CapEx. Couple of years back, you had invested in the i2 or iM facility; ATMI had expanded into Asia. So, you would have kind of expected CapEx to kind of trend down a bit a little bit, but it seems like it's going back up again. And so can you speak to -- is that because you’ve already filled the volume that you added as part of the facility or is it because you feel more confident around some of the growth initiatives and the traction that they have gotten, and so you’ve got a investment sort of CapEx for potential sort of growth out there?

Greg Graves

I’d say our biggest CapEx initiatives, I mean there is no really -- literally no, I mean it's a very modest footprint expansion in that CapEx. So, most of it is capability driven. So, it's greater capabilities, just a new membrane system, a membrane that we don’t make today in MC; kit's expanding our capabilities in deposition materials; it's expanding our coatings capabilities, all places where we’ve got to growth ahead. But it's not -- I mean, the footprint really has not changed, since we did ATMI. So, I would say, I think your question is fair. What I would say is investing in some of these capabilities frankly has cost more than I would have anticipated two or three years ago.

David Silver

Hi. This is David Silver from Morningstar. I have kind of a big picture question about M&A but maybe from a different perspective. When I look at the newspapers, [indiscernible] maybe selling its business. In the semiconductor equipment area, there has been a number of M&A transactions. And I think Tim has implied that working with fewer suppliers is better than maybe working with more numerous suppliers even if the overall capabilities are same. So, is it your opinion that the bigger picture consolidation in the industry is going to drive similar consolidation momentum at the materials and equipment supplier level that you operate in?

Bertrand Loy

I can take that. And I would that’s -- yes, I mean certainly we have seen a fair amount of consolidation among the semiconductor manufacturers. And frankly, I think that this has had some really positive impact on the industry. I think that those consolidated platforms have been behaving a lot more maturely in terms of capital allocation and in terms of really trying to find the right balance between supply and demand. And I think that’s one of the results probably why we haven't seen in the long time some of those very nasty cycles in the industry. So, I think that consolidation has had a positive impact on the semiconductor manufacturers and get positive impact on the industry. And I think it’s going to drive us certainly to do the same as an ecosystem.

I would tell you again from a practical experience, when micro [ph] came with Entegris, it was because of the realization that as $200 million, $300 million to $400 million companies, we could not afford building the like technical centers in all of the major geographies. And number two, we were not even very attractive at subsequent platforms to attract top talent away from some of our customers and establish again the application knowledge and the process knowledge that we needed to win in the marketplace. So, we actually went one step further with the execution of ATMI. And as a $1.2 billion company, it’s a lot easier to justify making those investments without again comprising on the financial results of the Company. And so, I would say that yes, we need to continue this potential and you should expect us again, assuming we could find the right target to play a role in that industry consolidation.

Unidentified Analyst

You received a bunch of questions on the M&A and just to think about M&A as kind of the best way to complement the organic initiatives and more dramatically expand the SAM, and we kind of focus on the platform and scale which I think was highlighted more this time than in previous years is a competitive advantage. If I take a step back and go to the capital allocation chart in Greg’s presentation. When I look at the lessons, have you kind of balanced flexibility and patients? Clearly in the short-term, it’s not as enticing as $0.16 carried on M&A. But if I think back to ATMI, it was kind of overcapitalized, but then really ready for something more transformative. So, how do you kind of balance those two in the short-term?

Bertrand Loy

It’s a good question and you’re right that it’s going to be up to us collectively to decide what is the right amount of patients that we need to have. And I’m glad that you collectively as investors did allow us to keep some level of cash on the balance sheet back in 2012 and 2013. Without that we would not have been in a position to act on ATMI. And I think we would all agree with this that we have generated a lot of value for our customers, for our investors as part of that transaction. So, I think the reason we are interested so much on M&A is that we want you to know that we are focused on it. But, we’re going to have to find the right time, the right target, and the right value. And we don’t know and we won’t know until such time as all of those car’s wheel aligned. So, I hope that you would as always do again exercise judgment. Now, again, what we wanted to say and that’s really what was the message from Greg is that we also, recognizing the fact that if we are [indiscernible] we probably would have to do something with the cash that we’ve been -- on the balance sheet and have a commitment that we’ll be responsible and thoughtful as we have always been in our capital allocation decisions. And we’ll do that to create value and return cash to shareholders one or another.

Any last questions?

Hendi Susanto

Hendi Susanto from Gabelli. You highlighted IoT and connected devices as one major growth driver. And I think there is a market view that a major portion of that is tied into material node, material process technology or other nodes. So, how should we view that area? Should we view that as more unit drive or there is a more to that where you can see some complexity and high value solution driving your new growth opportunities?

Bertrand Loy

Yes. So, I would answer it in two parts. But yes, you’re right that IoT will require a lot of sensors. But I think Tim made the point that a lot of sensors would have to be a lot more reliable than they are today, a lot more energy efficient than they are today. So, I would expect actually to have some benefits to the current process technologies used to make those sensors. But again, remember that when you hear Todd mention that 30% of our revenue comes from new products, it means that 70% of our revenues come from older generation products, and a lot of those products go into those trading age fabs. So, we are also very focused on very large number of customers running older fabs.

Now, the one thing again I want to stress and I think you've heard that across the board from all presenters is that those sensors are one, in my opinion one real but small components of what we will be required to enable this new digital order. I continue to believe that faster computing power, more energy efficient servers will be required to crunch the massive amount of data that will be collected. Again, a large, better storage solutions will be required. Again the amount of data that we are generating every minute is just growing exponentially, and I don't see any end to that. And then again, massive amount of investment will be required to 5G network and I’m sure the next generation that will be right around on the corner. So, don't think IoT -- benefiting older generation IT devices. I really do believe that it's really a very holistic -- you will have a very holistic impact across many, many, many different types of semiconductor architectures.

Steve Cantor

So, I think that's it. Bertrand, do you have any final comments?

Bertrand Loy

No. Again, thank you very much. It's been great to see you actually stick around for this very deep and busy day. So, we really appreciate your attention and hopefully see you very soon. Thank you.

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