Entegris - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue was $792.4M, up 2.5% sequentially and above both company guidance ($735–$775M prior) and Wall Street consensus; non-GAAP EPS of $0.66 was at the high end of guidance and a modest beat versus consensus.
• Gross margin compressed to 44.4% (non-GAAP 44.6%) on tariffs, inventory optimization, and operational inefficiencies amid manufacturing localization; adjusted EBITDA margin was 27.3%.
• Q3 2025 outlook guides sales to $780–$820M, adjusted EBITDA margin ~27.5%, GAAP EPS $0.43–$0.50, and non-GAAP EPS $0.68–$0.75; CFO highlighted lower non-GAAP tax rate (~9%) and net interest expense (~$48M) for Q3.
• Segment performance mixed: Materials Solutions (MS) grew on CMP/etch/deposition materials, while Advanced Purity Solutions (APS) declined YoY on weaker facilities CAPEX; China demand recovered late in Q2 as tariffs were put on hold.
• Catalysts: revenue/EPS beat vs consensus, China reacceleration, continued localization ramps (Taiwan, Colorado), and announced CEO succession (effective August 2025) supporting medium-term execution narrative.

What Went Well and What Went Wrong

What Went Well

• MS delivered YoY and sequential growth on CMP slurries & pads, selective etch, and deposition materials; CEO: “double-digit year on year growth... driven by strong growth in China, strength in HBM and early node transitions in logic and 3D NAND”.
• China demand reaccelerated in late Q2; management “got most of [the ~$50M tariff headwind] back,” targeting 85% of China demand served from Asia sites by year-end and ~95% in 2026.
• Cash generation remained solid with CFO of $113.5M and free cash flow of $47.0M in Q2; management implemented cost reductions delivering $15M annualized savings.

What Went Wrong

• Gross margin and APS margins compressed on tariffs, inventory optimization, and operational inefficiencies; adjusted operating margin fell to 20.9% (vs 22.0% prior year).
• APS sales down 6.9% YoY on softer facilities CAPEX (FOUPs, fluid handling); adjusted APS margin declined to 24.1%.
• Visibility remains tenuous outside AI/advanced logic; management cited “erratic buying patterns” from tariff uncertainty and mid-80% fab utilization levels, limiting broad-based recovery near-term.

Transcript

Operator (participant)

Welcome to the Entegris second quarter 2025 earnings conference call. At this time all participants have been placed on a listen only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2 so others can hear your questions clearly. We ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press zero. I would now like to turn the call over to Bill Seymour.

Bill Seymour (VP Investor Relations)

Good morning everyone. Earlier today we announced the financial results for the second quarter of 2025. Before we begin, I would like to remind listeners that our comments today will include some forward looking statements. These statements involve a number of risks and uncertainties and actual results could differ materially from those projected in the forward looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. You can find reconciliation tables in today's news release as well as on our IR page of our website at entegris.com. On the call today are Bertrand Loy, our CEO, and Linda LaGorga, our CFO.

With that I'll turn the call over to Bertrand.

Bertrand Loy (CEO)

Thank you Bill and good morning everyone. I am pleased with our performance in the second quarter. Revenue was above our guidance range and was up 2% sequentially. Gross margin and EBITDA margin were within guidance and non-GAAP EPS was at the high end of guidance. Taking a closer look at our quarterly performance by division, Material Solutions sales were up 4% year on year led by CMP slurries and pads, selective etch and deposition materials, which overall delivered double-digit year on year growth. This was driven by strong growth in China, strength in HBM and the early positive impact from upcoming node transitions in logic and 3D NAND. Advanced Purity Solutions sales were down 7% year on year. This was largely driven by the anticipated decline in facilities based on CAPEX investments which we spoke about last quarter. This particularly impacted our FOUPs and fluid handling revenue.

The year on year sales decline was partially offset by modest growth in photoresist and CMP liquid filtration. Next, let me provide an update on our global manufacturing and supply chain strategy and related investments. Our facility in Kaohsiung, Taiwan continues to progress. We are on track to complete most of the critical product qualifications by the end of the year and expect to meaningfully ramp volumes in the fourth quarter. Our new Colorado manufacturing site is also on track with construction and tool installation largely complete. We are planning the grand opening of this facility in November and we plan to start customer product qualifications and initial volumes later this year. Over the past decade we have invested in a broad global manufacturing footprint, offering the convenience of redundant manufacturing sites to our customers for all our major strategic product lines.

In addition, we have developed well-integrated supply chain clusters around our largest regional manufacturing centers. This expanded localization of our production and supply lines close to our global customers will serve us particularly well during this time of increased trade policy volatility and uncertainty and over time will drive several business and financial benefits including shorter lead times, lower working capital requirements and more secure supply lines. Currently, our Asia customers represent approximately 70% of our total revenue and as we exit the year we expect to have approximately 70% of this demand served by our non-U.S. manufacturing site and that number will continue to increase as we capitalize on the ramp of the investments recently made in Taiwan, Korea, Japan and Malaysia. On July 17 we opened our new state-of-the-art Korea Technology Center, an opening that also coincided with our 35th year of doing business in Korea.

This investment, along with our three existing manufacturing sites in Korea, will supplement our capabilities and strengthen our engagements with the local DRAM and NAND technology leaders so we can help them and their ecosystem address yield, reliability and performance challenges. Looking ahead, overall for the industry, the trends are largely unchanged. AI-enabled applications are driving significant growth in advanced logic and HBM. Even though AI demand only represents a very modest proportion of wafer starts elsewhere, fab activity levels remain subdued, especially at many of our mainstream logic and 3D NAND customers. In addition, the uncertainty and volatility around trade policies are expected to continue to have direct and indirect impacts on semiconductor demand and levels of capital spending by the industry at least in the short term.

As a result, we expect the semi market will continue to be dynamic and the visibility to a broad-based recovery remains tenuous. That said, we fully expect a stronger second half performance from our business and looking further ahead, nothing has changed in our long-term view of the industry. We remain very optimistic and continue to have high confidence in our strong long-term growth outlook. Let me now turn the call over to Linda. Linda.

Linda LaGorga (CFO)

Good morning and thank you Bertrand. Our sales in the second quarter of $792 million were down 3% year over year and up 2% sequentially. As a reminder, we have now fully lapped the impact of the CMC divestitures. Foreign exchange positively impacted revenue by $5 million year over year and $6 million sequentially in Q2. Gross margin on a GAAP basis was 44.4% and 44.6% on a non-GAAP basis in the second quarter, generally in line with our guidance. The sequential decline in gross margin was driven by the anticipated impact from tariffs, our focus on balancing production volumes with inventory management, and some operational inefficiencies. Operating expenses on a GAAP basis were $245 million in Q2. Operating expenses on a non-GAAP basis in Q2 were $188 million. Adjusted EBITDA in Q2 was 27.3% of revenue, in line with our guidance.

The GAAP tax rate in Q2 was 5% and the non-GAAP tax rate was 13%. GAAP diluted EPS was $0.35 per share in the second quarter. Non-GAAP EPS was $0.66 per share at the high end of our guidance. Sales for Materials Solutions in Q2 were $355 million. Sales were up 4% year on year and sequentially, both driven by CMP slurries and pads, selective etch, and deposition materials. Adjusted operating margin for MS was 21.3% for the quarter, up year on year and sequentially. The adjusted operating margin decline was primarily due to some operational inefficiencies. Sales for Advanced Purity Solutions in Q2 were $440 million, down 7% year on year and up 1% sequentially. The year on year sales decrease was driven by the impact of the decline in facilities-based CAPEX investments. The modest sales increase sequentially was driven by liquid and gas filtration and FOUPs.

Adjusted operating margin for APS was 24.1% for the quarter. The year on year and sequential decline in margin was primarily driven by lower volumes. We are continuously looking for ways to optimize our business model and drive further efficiencies in our cost structure. In the second quarter, we implemented cost reduction initiatives which will deliver $15 million in annual cost savings. Moving on to cash flow. Free cash flow was $79 million in the first half of the year, yielding a free cash flow margin of 5%. We continue to expect our free cash flow margin to be in the low double digits in 2025, driven by our stronger second half business performance and our intense focus on optimizing working capital and capital expenditures. A quick overview of our capital structure.

Shortly after the end of the second quarter, we paid down $50 million of the term loan from cash. As a result, at the beginning of July our gross debt was approximately $4 billion and our net debt was approximately $3.7 billion. Gross leverage was 4.3 times and net leverage was 4 times. Our debt is well structured and de-risked. The blended interest rate on the debt portfolio is approximately 5% and currently approximately 95% of our debt is fixed and there are no maturities on the debt until 2028 and no maintenance covenants on the debt. From a capital allocation standpoint, our single priority remains paying down our debt and we will use all levers at our disposal to reduce our gross leverage to below four times. Moving on to our Q3 outlook, we expect our Q3 sales to range from $780 million-$820 million.

We expect our gross margin % to be approximately in line with Q2 both on a GAAP and non-GAAP basis, GAAP operating expenses of $228 million-$232 million and non-GAAP operating expenses of $182 million-$186 million. We expect EBITDA margin of approximately 27.5%, net interest expense of approximately $48 million. We expect our non-GAAP tax rate to be approximately 9% in Q3 due to the expiration of a tax reserve, GAAP EPS between $0.43 and $0.50 per share, non-GAAP EPS between $0.68 and $0.75 per share and we expect depreciation of approximately $51 million. I'll now hand it back over to Bertrand for some closing remarks.

Bertrand Loy (CEO)

Thank you, Linda. In closing, in this dynamic environment, you can expect us to remain focused on what we engaging with our customers and winning critical POR positions in future technology nodes, actively managing our cost structure while making investments critical for our future and improving free cash flow to reduce our debt levels and lower our leverage. Finally, as I step back and reflect on my years as the CEO of Entegris, I could not be prouder of what we have accomplished. Entegris is now one of the most recognized and trusted electronics materials companies in the world, known for its world class innovation, its unwavering commitment to operational excellence and thoughtful capital deployment. As much as I am proud of what we have accomplished, I am even more excited about where the company is headed.

As Entegris fully capitalizes on the powerful platform we have built, our expertise in material science and materials purity is increasingly valuable for our customers to help them improve device performance and achieve optimal yields. The R and D investments we have made in materials science and materials purity will be critical to the industry in enabling new device architectures and in reaching new levels of miniaturization. Because of the uniqueness of our value proposition and the quality of our execution, we expect to grow and outperform the markets in the coming years. Of course I am very excited that Dave Rieder will become the next CEO of Entegris. I could not think of a better leader to take Entegris to the next level of excellence.

Dave has strong experience in our industry, from years as a process engineer working in fabs around the world to his more recent leadership roles at GlobalFoundries. Dave knows what shareholder value creation means from the various CEO and CFO positions he has held in different industries. Finally, there is a strong cultural fit which will ease his transition into his new role at Entegris. As Executive Chairman for the next year, my sole purpose is to support Dave. Together we will be visiting customers, our major sites and global teams. I will be providing context to Dave as he develops a deeper understanding of our business. I know that Dave is eager to meet with all of you and you will get that chance in the coming weeks. With that, operator, let's open the line for questions.

Operator (participant)

The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question is coming from Melissa Weathers with Deutsche Bank. Your line is open. Please go ahead.

Melissa Weathers (Director Equity Research)

Hi there. Thank you for taking our questions. Bertrand, if this is your last Entegris earnings call, I wanted to say thank you for all the help and congrats on the great career and well deserved retirement. First, I wanted to touch on the industry conditions that you're seeing in semis. It sounds like it's a pretty mixed environment where some parts are good and some parts are still pretty weak. You called out weaker utilization in NAND and mainstream logic. Can you just give us a little more color on what you're seeing cyclically and how should we be thinking about where we are in the cycle and what that could mean for growth in the second half?

Bertrand Loy (CEO)

Yeah, I think your words are correct, Melissa, in describing the current industry conditions. They are mixed and the conditions are very similar to what we described at the end of Q1. We cited strong AI related demand that impacted production levels in advanced logic and HBM fabs. But as I mentioned in my prepared remark, I need you to remember that AI related logic and HBM only represents less than 5% of wafer starts. So while those trends are exciting from a volume of production which is the primary driver for business, that remains actually fairly small. Elsewhere the fab utilization levels remain subdued and that includes mainstream logic, traditional DRAM and NAND. The end demand for these devices has been weak in the first half of the year.

The only positive news on that front is that inventory levels have been trending back to, you know, levels approaching the pre-pandemic levels. That means that we expect to see sequential improvement in wafer starts through the balance of the year. I'm not going to provide any quantification of those statements. At a high level qualitatively for the year we expect wafer starts to grow very modestly at best. As you referenced, we believe that fab utilization rates are still currently in the mid 80%. Again, it's a slow improvement. We expect wafer starts again to be modestly up at best for the full year. CapEx, we believe that will be flattish at best for the year. That's a function of fab construction related CapEx that we expect to be down mid single digit for the year and NW fee which will be up modestly for the year.

Melissa Weathers (Director Equity Research)

Perfect, thank you for all that color on the full year.

Really quick on the China side just because it was a pretty big topic on the last earnings call. Can you help us level set our models? Did your Chinese customers resume orders in the quarter? Did you see any pull in activity? How should we think about the trajectory of that China business going into the second half?

Bertrand Loy (CEO)

Yes, the China business certainly started slow in the first part of Q2. Shipments and orders were essentially on hold. When the doors reopened, when tariffs were put on hold in May, things started to accelerate. We are pleased with what we saw in the second part of Q2. I mean obviously we generated a quarter that was up sequentially 8% in China, which is very good. Year to date, the China business is flat and that's really a reflection of some of the higher level trends I was mentioning. Some positive on the wafer start front offset by some, you know, softness in the levels of CAPEX spend in China in 2025. Going forward we expect, you know, we expect again, assuming no new development in the trade policies, a stronger second half in our China business.

Melissa Weathers (Director Equity Research)

Got it. Thank you.

Operator (participant)

Our next question comes from Bhavesh Lodaya with BMO. Your line is open. Please go ahead.

Bhavesh Lodaya (US Chemicals Equity Research)

Hi, good morning Bertrand. Solid quarter, but first of all thank you for the leadership at Entegris. You are not going far but you will certainly be missed. Certainly congratulations and welcome to Dave as well.

Bertrand Loy (CEO)

Thank you very much.

Bhavesh Lodaya (US Chemicals Equity Research)

With respect to your guide for the third quarter, can you call out what scenarios you're building in for the lower or the higher end of the guide? I remember last quarter there was some tariff related impacts that you had built in. Are you building those in currently or are these just volume and industry based assumptions?

Bertrand Loy (CEO)

Yeah, I think it's a mix of all of that. Right. At high level it's a guidance at the midpoint that is up 1% sequentially, mostly driven by the more favorable wafer start environment that we expect going into Q3. The business momentum going into Q3 is strong, but there are a number of realities that we need to take into account. Right. I mean we mentioned the green shoots that we're seeing in mainstream, but let's recognize that we are in the very early stages of that recovery. We also recognize that the tariff uncertainty led to fairly erratic buying patterns by many of our customers in the second quarter and it's really hard to predict if it will have an impact or not on our Q3 revenue. More generally speaking, I think we are encouraged by the recent developments in the trade negotiations.

It's fair to assume that the tariff and the export policies will likely continue to be a factor in the second half of the year. Again, it's an impact that is very hard for us to quantify. In that highly volatile environment, I think we are choosing to be prudent and that's probably what you want us to be given the prevailing volatility around us.

Bhavesh Lodaya (US Chemicals Equity Research)

Got it. And then a follow up on the China business discussion. How is the progress so far on the requalification process? Do you have a number to share as to how much of the US to China business has have been transitioned or maybe a timeline that you're targeting to move that business to maybe Taiwan or Japan or some other regions?

Bertrand Loy (CEO)

Yeah, so we're making a lot of progress. It's been a very high priority within the organization. It will continue to be a very high priority in the second half of the year. Our Asian customers agree with that strategy, and they are really actively qualifying the various Asian manufacturing sites that we have, helping us again leverage all of the investments we've made in local capacity in Taiwan, in Japan, in Korea, and in Malaysia. Specifically, when it comes to China, we expect to end the year with about 85% of the China demand served from Asia manufacturing sites, and we expect to reach a number closer to 95% sometime next year. A lot of focus and a lot of work going into that, obviously to try to make that happen as quickly as possible.

Bhavesh Lodaya (US Chemicals Equity Research)

Great.

Thank you.

Bertrand Loy (CEO)

Thank you.

Operator (participant)

We'll go next to Jim Schneider with Goldman Sachs. Your line is open. Please go ahead.

Jim Schneider (Senior Equity Analyst)

Good morning. Thanks for taking my question. I was wondering if you could maybe speak to some of the margin headwinds that you talked about in the prepared script, maybe quantify for us whether there was a significant impact on the reserve inventory. It sounds like you built in the quarter as well as maybe talk a little bit about the operational efficiencies that you noted in the script and to what extent are those going to kind of go away over the next couple quarters and when should we see those gross margin pressures abate?

Linda LaGorga (CFO)

Thanks, Jim. Appreciate the question. In the context of Q2 and some of the commentary, as we've talked about broadly in the context of this trade environment, Q2 was a quarter of change, uncertainty, and demand shifts from the customer. We started out the quarter with a higher tariff environment in China that then shifted. There are other examples of that in this backdrop. It is just not truly conducive to optimizing gross margin perfectly. On your question, we did make some decisions to optimize manufacturing production to manage inventory levels. This contributes to our free cash flow and we'll continue to do this as we go into Q3 and Q4, but it does impact gross margin in the near term as we make those decisions. I think also importantly is to think about our business priorities.

We remain very focused on our business priorities and this leads to some of the inefficiencies of moving production to Asia. To localize with our customers, we're ramping two manufacturing facilities, Taiwan and Colorado. Colorado is going to be coming online. In the context of all this, we're balancing gross margin and inventory. Where I really want everyone to focus is longer term, our path to higher gross margins remains intact with more volume growth. The ramping of the two large facilities in Taiwan and Colorado and our highly differentiated products, which we are very proud of, position us very well for higher gross margins going forward. It is a very good story for the future.

Jim Schneider (Senior Equity Analyst)

Understand. Thank you. Then Bertrand, relative to some of the end market commentary you made earlier on lagging edge and things like memory, could you maybe give us some color on over the next few quarters and heading into 2026, some of the areas that have been under pressure in terms of volume, such as NAND flash, such as trailing edge, logic and analog, can maybe talk about which of those you think has the best chance of inflecting first of those three.

Bertrand Loy (CEO)

Yeah. I think this is something obviously that we're going to be watching very carefully in the upcoming quarters. We are encouraged by the discussions we've been having with our mainstream customers. We'd expect that to be probably the areas where we start seeing the earliest signs of recovery, as I mentioned. I would expect that to start extending to NAND, probably not until next year, and then DRAM as well. Traditional DRAM.

Jim Schneider (Senior Equity Analyst)

Thank you.

Operator (participant)

We will take our next question from Charles Shi with Needham. Your line is open. Please go ahead.

Charles Shi (Senior Analyst)

Hi, once again congrats on a very successful leadership at Entegris that you will be missed.

Bertrand Loy (CEO)

Thank you, Charles.

Charles Shi (Senior Analyst)

Maybe. Thanks.

Maybe I want to ask a little bit more about Q4. In your press release prepared remarks you talk about second half will be better than first half, but from my view it does not really set a very high bar for Q4 directionally. May I ask, based on your current visibility, is Q4 going to be higher sequentially as in let's say typical seasonality or it can be lower? The reason why I ask this is that your largest customer in Taiwan is right now assuming kind of like a 10% Q on Q decline just to be conservative ahead of the macro uncertainties such as section 232 semi tariffs, that which may come very shortly and want to gather some of your thoughts even there seems to be a little bit of fog between now and Q4. Thanks.

Bertrand Loy (CEO)

Charles. All good questions. I promised Dave Rieder, my successor, to not provide Q4 guidance. I need to honor that promise. You're right that one of the reasons it was an easy commitment for me to make is that there is a lot of uncertainty ahead of us. Indeed, having said that, as I mentioned, we expect to see strength in wafer starts and then some level of recovery in certain segments of the industry that have been very, very soft for long periods of time. That's number one. Number two, we also expect to see a number of node transitions in Q4 in NAND with the adoption of Molly and then in advanced logic obviously. That will have a positive impact on our materials platform as well as on our liquid filtration platform.

If you factor all of that in, I think that, and again I'm not going to risk a guess on what may be ahead of us in terms of trade policies, etc. I think that in all likelihood the second half of the year will be stronger for us in spite of the, you know, the volatility and the external factors that you mentioned.

Charles Shi (Senior Analyst)

Thanks, Bertrand. We definitely look forward to hear more about Q4 from David a little bit down the road. Maybe want to ask you a little bit of high level question. One, I think one very interesting, maybe I would not necessarily call it a divergence, but some differential between your commentary about your mainstream customers versus what their comments are so far into this earnings cycle, especially from the analog companies, is that you seem to be more seeing a subdued non-AI market demand, but your customers, especially some of the analog companies, are more confident or have, I would say, much higher conviction on a cyclical recovery they think is underway. What could be causing a little bit differential, I mean, in between the terms of yours and theirs, and is it just a matter of conservatism? Is it just a matter of timing?

They seeing it, you will see it a little bit down the road. Or do you not quite believe the cyclical recovery at this point of the time? Just want to have some high level, get some high level thoughts on you. Thank you.

Bertrand Loy (CEO)

Yeah, I think you are hearing very, very similar narrative. The one thing that you and I know you appreciate is that some of those mainstream customers still have high levels of inventory. Some of them have gone through that digestion phase and are back already today at normal levels of inventory, but some are not. Expect that to continue to improve and I think that customers are getting closer to building and shipping in line with the actual end demand and I think that that's positive and I think we're going to see positive trends to our business as it relates to that. I think there's a little bit of a disconnect between their revenue story and what is actually happening in their fabs. I know you know that you know what is driving our business is really the volume of productions.

Charles Shi (Senior Analyst)

Thanks Bertrand. That's all from me.

Bertrand Loy (CEO)

Thank you.

Operator (participant)

We'll take our next question from Timothy Arcuri with UBS. Your line is open. Please go ahead.

Timothy Arcuri (Managing Director)

Thanks a lot, Bertrand, I've known you for I think 25 years, so congratulations.

I think you've done a great job over the years.

Bertrand Loy (CEO)

Thank you Tim.

Timothy Arcuri (Managing Director)

Yeah, so I guess just on China, Bertrand. My understanding was that there was a $50 million headwind and you were going to get, I thought, about half of that back. Can you just update that? Did you in fact get half of it back? I think you expected to have the remediation of all of it by the end of the year. Is it all gone by December? Can you just give us some numbers on that?

Bertrand Loy (CEO)

Yes. I think when it comes to Q2 specifically, we got most of it back in terms of the remediation strategy, which is really largely having our China customers qualify a number of alternative Asian manufacturing sites. Going back to the answer I provided to an earlier question, we are making a lot of really good progress. We expect to be able to serve 85% of the China demand from those Asian manufacturing sites. Our goal was never to be at 100% by the end of the year, but we've made a lot of progress and we expect that number to get to 95% next year. I'm going to defer to Dave and Linda to provide more clarity. Needless to say that we're trying to get to that point as quickly as we can.

That has engendered a number of inefficiencies on the margin front, which is something that Linda has been flagging as well. Pleased with the progress. I think the team is very focused on it and we're getting a lot of positive support from our customers.

Timothy Arcuri (Managing Director)

Okay, so you got almost all the 50 back. So basically there is no more China headwind between June and September. Is that the right way to think about it?

Bertrand Loy (CEO)

Based on what we know today? Yes, I would say yes.

Timothy Arcuri (Managing Director)

Okay, got it. Okay. And then Linda, just on gross margin, I mean, if I take the $800 million midpoint, it's still like 100 to 150 basis points below where gross margin was in the first half of 2024. Yet in the interim you've had selective depth chemistry and CMP slurries. These are definitely much, much better over that period. And these are quite high margin products. So why are gross margins still under so much pressure? We keep talking about these inefficiencies and I mean, is this all Taiwan and Colorado and will we get out from under this once these facilities are fully ramped? You know, you keep talking about this long term target, but it continues to be sort of under pressure every quarter.

Timothy Arcuri (Managing Director)

You can talk about that. Thanks.

Linda LaGorga (CFO)

Yeah, I mean some of it is similar to what I have said. But let me add a bit more context for you, Tim, to help here. Again, as we went through the Q2 and some of this is going to continue in Q3 with the trade uncertainties and the uncertainties in the environment. Secondly, we are going to continue to work on the balance between our gross margin and our inventory levels. Therefore, we are going to make some select decisions to reduce production in order to help bring down our inventory levels. And, you know, I do want to see the dollars of inventory progress downward as we go through the remainder of the year. As you and I know, that does impact gross margins. As Bertrand and I both talked about, it has been a priority.

Look, it is a part of the long term strategy, but it is a priority to continue to move more of our manufacturing to locally serve our customers. As we do that, in this context, there are some inefficiencies that come out until we get things moved over there. Those are some of the factors that we are seeing around gross margin right now. I think on the positive side, as we balance gross margin and inventory, it is a positive story for free cash flow, which is an extraordinarily important goal for us. Longer term, volume is going to be key, ramping our facilities as we ramp up. As we move into 2026 as planned, we are going to see some mitigation of some of those inefficiencies. It is a very good long term gross margin story as that all comes together.

Timothy Arcuri (Managing Director)

Okay, thanks.

Operator (participant)

We will go next to John Roberts with Mizuho. Your line is open. Please go ahead.

John Roberts (Managing Director)

Yeah, thank you as well, Bertrand, and welcome also, Dave.

Could you discuss any significant differences in sales direct to fabs versus your sales to equipment makers or chemical suppliers or via distributors? I mean, how are the different channels?

Bertrand Loy (CEO)

Yeah, so the fab revenue was up sequentially in the low single digits as you would expect. The driving force was our logic. Business sales to equipment makers and engineering companies were down modestly quarter over quarter, which is in line with the narrative and the commentary I was giving on the soft industry CapEx environment. I would just finally tell you that the sales to our chemicals and materials companies were also down mid single digit, mostly a reflection of the weak demand from our wafer grower customers.

John Roberts (Managing Director)

As you move more local for local in your manufacturing, what are the products that you can't really move into Asia for the Asia customers, what are you going to have to sell from the U.S. into Asia.

Bertrand Loy (CEO)

I'm not really going to provide product specific detail around that strategy, John, but your question is actually a good one and important one. I think that for us to justify investment in redundant manufacturing sites, we need to have enough volumes. Right. And as you know, we produce and market a very, very broad number of SKUs. In some cases we're going to choose not to localize production and have the production either only in Asia or only in the U.S. and that may have an impact on the long term potential of those product lines. Having said that, as you would expect, those products are not strategic and are not the products that we're counting on to continue to outperform the industry.

John Roberts (Managing Director)

Very helpful, thank you.

Operator (participant)

Our last question comes from Aleksey Yefremov with KeyBanc. Your line is open. Please go ahead.

Aleksey Yefremov (Managing Director and Equity Research Analyst)

Good morning, Bertrand. Wishing you all the best. Dave, congrats and best of luck.

Bertrand Loy (CEO)

Thank you.

Aleksey Yefremov (Managing Director and Equity Research Analyst)

I actually have first question for Linda. What's your best guess when this inventory adjustment process would be over and any number that you could put on the actual impact on gross margins that this process is having right now?

Linda LaGorga (CFO)

Yeah, thanks Alexei for the question. I'm not going to quantify it because it's a balancing act. It's about optimizing gross margin and inventory. This is a very important working cap. Optimization is a very important lever for free cash flow. We've talked about free cash flow this year. It's a real goal for us as an organization. We want to continue to improve our free cash flow. We want our free cash flow margin. What we're targeting this year is in the low double digits in 2025. Over the next several years we do expect our free cash flow margin to return even to the mid to high teens % to the pre-pandemic levels. This inventory management is an important lever for that and we'll continue to balance it this year.

Aleksey Yefremov (Managing Director and Equity Research Analyst)

Okay, thanks.

Bertrand, do you see any specific signs of a pull forward of demand among your customers? I mean it sounds like it's hard to really call what's pulled forward or not, but do you have any strong suspicions as to how much that could be in Q2?

Bertrand Loy (CEO)

It's very hard to quantify and to track. Alex saying. We've been obviously asking that question repeatedly to our sales team. I'm sure that has been a factor, but I don't think it was a material impact to our Q2 results.

Aleksey Yefremov (Managing Director and Equity Research Analyst)

Okay, thanks a lot.

Bertrand Loy (CEO)

Thank you.

Operator (participant)

This does conclude today's question and answer session. I will now turn the call back to Bill Seymour for closing remarks.

Bill Seymour (VP Investor Relations)

Thank you for joining our call today. Please reach out to me directly if you need anything else. You may disconnect. Thank you.

Linda LaGorga (CFO)

Thank you.

Operator (participant)

This concludes today's Entegris second quarter 2025 earnings conference call. Please disconnect your line at this time and have a wonderful day.