Bill Seymour; Vice President, Investor Relations, Treasury and Corporate Communications; Entegris Inc
Toshiya Hari; Analyst; Goldman Sachs Group, Inc.
Atif Malik; Analyst; Citigroup Inc.
Aleksey Yefremov; Analyst; KeyBanc Capital Markets Inc.
Welcome to the Entegris fourth quarter and full year 2024 earnings conference call. (Operator Instructions)
I would now like to turn the call over to Bill Seymour, Vice President of Investor Relations.
Good morning, everyone. Earlier today, we announced the financial results for our fourth quarter of 2024. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements.
Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in today’s news release as well as on the IR page of our website at entegris.com.
As we referenced in last quarter’s call, we have combined our MC and AMH division. The name of the new division is Advanced Purity Solutions, or APS. To assist you in your modeling, we have provided in the appendix of the earnings slides recast financials for this new division going back eight quarters.
On the call today are Bertrand Loy, our CEO; and Linda LaGorga, our CFO. With that, I’ll hand the call over to Bertrand.
Thank you, Bill, and good morning. I am pleased that we were able to cap off 2024 with strong performance. In the fourth quarter, our revenue excluding divestitures grew 11% year-on-year and was above our guidance range. This performance was driven by highest quarterly sales for Materials Solutions in over two years and all-time high quarterly sales for Advanced Purity Solutions. Profitability was also solid in the quarter. Gross margin and EBITDA margin were within guidance, and non-GAAP EPS was above our guidance.
Looking at the full year. Our semiconductor customers with significant exposure to advanced logic and AI performed very well, but the rest of the industry remained weak throughout 2024. In addition, there were no significant technology node transitions in logic or memory, which limited our opportunity to further increase our content per wafer.
With this industry backdrop, I am very pleased with our overall results. During the year, excluding divestitures and the impact of currency, our revenue grew more than 5%, yielding an estimated market outperformance of 3 to 4 points. Sales of our Materials Solutions divisions were up 11% for the year, excluding divestitures. For AMS, growth was particularly strong in CMP consumables, advanced deposition materials, and selective etching chemistries.
For additional context, I would like to highlight that last year, CMP slurry revenue grew 14% and CMP pads grew 24%. We are also encouraged by new ethical POR positions, including more than doubling our slurry content from N3 to N2. This performance is a testament to the great work the team has done since our combination with CMC. There’s still more to be done to harvest the full benefits of the CMC deal, but the team is making excellent progress.
Advanced Purity Solutions division sales were flat in 2024 driven by difficult comparisons from the significant backlog we were working through during 2023 and mirroring the performance of the overall semi market. Strong growth in advanced logic and advanced packaging for APS was offset by weakness in mainstream and memory. However, APS ended the year strong, as expected, with sequential growth in most product areas.
Moving back to our consolidated results. From a profitability point of view, both our gross margin and EBITDA margin were up in 2024, excluding divestitures. Our EBITDA margin expanded more than 100 basis points year-on-year to reach 28.7%, slightly above our target commitment.
We were able to improve our bottom line leverage while increasing our R&D investments by 14% in 2024. These investments are critical to winning new POR positions, such as moly deposition, moly etch in next-generation 3D NAND, and partofus photoresist filters in advanced logic. These new POR wins drive the increase of Entegris content per wafer and ultimately fuel our top line market outperformance.
There are a few additional items I would like to highlight. Last year, we paid down almost $625 million of debt, a portion of that coming from the proceeds of the divestiture of the Pipeline and Industrial Materials business in early March 2024. Debt reduction will continue to be a focus area for us in 2025, and Linda will expand on that shortly.
Our new facility in Kaohsiung, Taiwan continues to make progress. We have completed qualifications for products, including drums, tubing, deposition materials, and some liquid filters. We expect to complete most of the remaining critical product qualifications by the end of this year.
We are also progressing rapidly at our new Colorado site. Related to that, in December, we finalized an agreement with the US Department of Commerce that provides us up to $77 million in funding under the CHIPS and Science Act. Tools have started to go into the facility, and we expect to initiate customer qualifications in the second half of this year.
Moving on to 2025. As we enter the year, we have yet to see evidence of a significant semi market rebound. And our customers’ visibility outside of advanced logic and AI-driven applications continues to be limited. In that context, for the full year 2025, we expect the market, based on our unit and CapEx mix, will be up between 1% and 3%. We believe that this is a prudent view of the industry at this point in the year until we see concrete evidence of a sustained market recovery across major end markets.
On top of this industry growth, we expect to outperform the market by 4 to 5 points in 2025. This outperformance will be largely driven by additional content opportunities in new logic and memory nodes. This outperformance also includes the negative impact of the latest restrictions on sales to China, which we estimate to be an annual incremental loss of revenue of $30 million to $40 million in 2025.
Putting it all together, we expect our sale 2025 will be approximately $3.4 billion at the midpoint of our guidance range, up approximately 6.5% on a pro forma basis. We expect EBITDA will be slightly above our target model or just over 29% of revenue, and we expect non-GAAP EPS to be at or above $3.25.
Let me now turn the call over to Linda. Linda?
Linda Lagorga
Good morning and thank you, Bertrand. Our sales in the fourth quarter of $850 million were up approximately 11% year-over-year, excluding the impact of divestitures. On a reported basis, our sales were up approximately 5% year-over-year and sequentially. Foreign exchange negatively impacted revenue by $4 million year-over-year and negatively impacted revenue by $2 million sequentially in Q4.
On a full year basis, FX negatively impacted revenue by $23 million, reducing our 2024 sales growth by almost 1 point. Gross margin on a GAAP and non-GAAP basis was 45.6% in the fourth quarter, within our guidance range. Operating expenses on a GAAP basis were $237 million in Q4. Operating expenses on a non-GAAP basis in Q4 were $188 million, in line with our guidance. Adjusted EBITDA in Q4 was 29.2% of revenue, also in line with our guidance.
The GAAP tax rate in Q4 was approximately 9% and the non-GAAP tax rate was 12%. The lower-than-expected tax rate was driven by favorable income mix. GAAP diluted EPS was $0.67 per share in the fourth quarter. Non-GAAP EPS was $0.84 per share, above our guidance range.
Sales for our Materials Solutions division in Q4 were $361 million, up 14% year-on-year, excluding the impact of divestitures. Sales were up 4% sequentially. The largest contributors to the sales increase both year-on-year and sequentially were CMP consumables, advanced deposition materials, and etching chemistries. Adjusted operating margin for MS was 21.7% for the quarter. The 100 basis point sequential margin increase was driven by operating expense leverage.
Sales for the new Advanced Purity Solutions division in Q4 were $491 million, up 9% year-on-year and up 6% sequentially. From a product perspective, the year-on-year sales increase was driven by fluid handling, wafer handling, and gas purification. The sequential sales increase was driven by growth in liquid and gas filters and dispense pumps used in advanced packaging applications. Adjusted operating margin for APS was 27.9% for the quarter. The modest sequential increase in margin was primarily driven by volume leverage.
Moving on to cash flow. CapEx for the year was $316 million, in line with our expectations and was approximately 10% of sales. We expect to spend approximately $325 million in total CapEx in 2025, in line with our ongoing target of approximately 10% of sales.
Full year free cash flow was also $316 million, and free cash flow margin was almost 10% in 2024. This is a significant improvement relative to the last few years, which were negatively impacted by the industry downturn and higher CapEx spending from our KSP and Colorado investments.
We are committed to improving our free cash flow margin. We have actually made free cash flow a compensable goal for the management team and the rest of the organization starting this year. We expect our free cash flow margin to return to the mid- to high-teens percent in the next few years, similar to our prepandemic levels. This will be driven by EBITDA leverage in line with our target model and working capital optimization.
Looking at our capital structure. During the fourth quarter, we paid down $150 million of the term loan from cash on hand, which means to date, we have paid down $2 billion of our total debt since the close of the CMC acquisition in July 2022.
At the end of the year, 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. The blended interest rate on our debt portfolio is approximately 4.9%. And since the term loan is fully hedged, currently, 100% of our debt is fixed.
We will continue to use our free cash flow to pay down debt, and we remain committed to reducing our leverage. Based on the timing of our cash flows, including CapEx, our debt repayment will be weighted to the second half of 2025. We expect to meet our gross leverage commitment of below 4 times before the end of the year.
Moving on to our Q1 outlook. We expect sales to range from $775 million to $805 million. This equates to year-on-year revenue growth of approximately 7% to the midpoint, excluding divestitures; gross margin of 45.5% to 46.5%, both on a GAAP and non-GAAP basis; GAAP operating expenses of $236 million to $240 million; and non-GAAP operating expenses of $188 million to $192 million, up slightly at the midpoint compared to Q4 2024.
We expect the EBITDA margin to range from 28% to 29%; net interest expense of approximately $50 million; non-GAAP tax rate of approximately 15%; GAAP EPS to be $0.38 to $0.45 per share; and non-GAAP EPS to be $0.64 to $0.71 per share. We also expect depreciation to be approximately $53 million in Q1.
And in addition to the annual outlook Bertrand shared, I’d like to provide a few additional modeling items for the full year 2025. We expect net interest expense will be approximately $200 million for the full year, down modestly compared to 2024. And we also expect the non-GAAP tax rate to be approximately 15% for 2025.
I’ll now hand it back over to Bertrand for some closing remarks.
Bertrand Loy
Thank you, Linda. In closing, in this dynamic industry environment, I am very proud of our team’s resilience, steady execution, and the strong quarter we ended the year on. As we enter 2025, I believe we have taken an appropriately prudent view of the industry given the continued lack of visibility outside of advanced logic and AI applications.
We remain focused on delivering strong market outperformance and profitability, improving free cash flow, and paying down our debt while funding critical investments that improve our long-term competitiveness and position us for the upturn.
Looking further out, we continue to have high hopes in the strong long-term growth outlook of the semiconductor industry. In addition, the industry’s technology road maps continue to be opportunity-rich for Entegris that our customers drive for more complex device architectures and further miniaturization.
The resulting process complexity is making our expertise in material science and materials purity increasingly valuable. And the R&D investments we are making are positioning us very well for the upcoming technology node transition, all of which are expected to generate incremental content per wafer opportunities and fuel our market outperformance in the years to come.
Before we open the line for questions, I would like to announce that Bill Seymour, our VP of IR and Communications, recently announced his decision to leave Entegris to pursue a new opportunity at the end of Q1. I would like to take a moment to recognize Bill for the quality of his work and his invaluable advice over the past six years. Linda and I will miss him greatly.
With that, operator, let’s open the line for questions.
Operator
(Operator Instructions)
Toshiya Hari, Goldman Sachs.
Toshiya Hari
Hi, good morning. Thank you, Bill, for all the help over the past several years. My first question is on the market outlook and your outperformance, Bertrand, so the market growing 1% to 3%. I was hoping you could delineate between the wafer start side of the house and the CapEx side of the house, what you’re thinking. And if you can sort of provide a little bit of color by application, that would be really helpful. And then the outperformance of 4 to 5 percentage points in the past, I think you’ve talked extensively about M2 and molybdenum. I’m curious what the key drivers are for you guys in ’25.
Bertrand Loy
Sure. So when it comes to the market assumption for 2025, as we said in the — in our comments, visibility continues to be fairly limited outside of advanced logic and AI-related applications. So as we start the year and without any concrete evidence of a rebound across the industry, we think it’s prudent to assume wafer starts being up in the low single digit and the industry CapEx to be essentially flat, right?
So if I want to double-click on those two components, wafer start, low single digit. We expect, obviously, very strong wafer starts in advanced logic and everything that is AI-related. But as of right now, as I mentioned, I think there is very limited visibility in mainstream and traditional memory. So that’s what’s behind the wafer start assumption.
When it comes to CapEx, probably no surprise to you. We expect elevated WFE in advanced foundry and advanced packaging. We expect increased spend in NAND ahead of some expected technology transitions. But that’s going to be offset by slow WFE pretty much everywhere else and then slower new fab construction projects in 2025.
So when it comes to the outperformance, as you know well, Toshiya, the performance — the outperformance of Entegris is really driven by how many nodes are taking place in any given year, and of course, the more, the better. And the other big driver is the timing of those node transitions. So in other words, when those nodes are already put in high-volume manufacturing. And for us, the sooner, the better, right?
So when you look at 2025, the good news is that we expect a lot of important node transitions. In logic, we’re going to be obviously watching carefully N2, 18A. And then in 3D NAND, we expect to see the adoption of moly as a replacement to tungsten in 300-plus-layer devices. Now so that’s — those are the important node transitions that we will be watching.
And then if you think about that from a timing point of view, all of those transitions are really expected in the second half of the year. So it’s good, but not as good as if they were happening in the first half this year, obviously. In other words, we’re not getting the full benefit of those transitions in 2025.
The other final point maybe on the outperformance is, as I mentioned in my comments, remember that 1 point of top line growth is expected to be taken away by the recent China restriction. So that’s the context for the overall top line outperformance in 2025 of 4 to 5 points. And just to be clear, our long-term outperforming goal remains [3 to 6], as we have mentioned many times before.
Toshiya Hari
Great, that’s really clear and really helpful. And my follow-up, maybe one for Linda. Interesting comments around working capital optimization and sort of your aspirational goal to improve free cash flow margins to sort of the mid- to high teens. I was hoping you could sort of expand on what the key initiatives are internally. You gave guidance for CapEx for calendar ’25, but how we should be thinking about CapEx perhaps in ’26 and beyond. And again, is it primarily inventory when you speak to capital improvements? Or is there something else going on? Thank you.
Linda Lagorga
Absolutely. Thanks for that question, Toshiya. Very excited, and free cash flow is going to be a very high priority, as I discussed during the call. And as I mentioned, it will be a compensable goal for the team. We really made a lot of progress in 2024 with the 10% outcome for free cash flow margin. And think about it, it’s a very significant improvement over 2023 being about 5% and 2022 being negative.
So to address your point, CapEx, we still, over time, think of it as about 10%. So that would be somewhat stable. Therefore, the drivers are going to be that EBITDA leverage as we get that growth and the market recovers, and then working cap. So clearly, inventory can have the biggest impact. The team did a good job again this year with some improvement in our days on hand, and we’re going to continue to drive that. We also made some improvement on the other metrics like payables.
So overall, we’re going to just keep optimizing our working cap overall and continue to drive more cash flow from the working cap. And as we said, we expect this to return to the mid- to high teens, which is our prepandemic levels over the next several years.
Toshiya Hari
Thank you.
Operator
Melissa Weathers, Deutsche Bank.
Melissa Weathers
Hi there, thank you for letting me ask a question. So, Bill, best of luck on your new endeavors. I guess, for my first question, can we dig a little bit deeper into the March quarter guidance? You now only have two segments, but are there any moving pieces that we should be contemplating? It seems like it’s a little bit below what you’ve seen historically in that quarter. So any moving pieces within the segments for March would be helpful.
Bertrand Loy
So I can certainly start and describe a little bit about the drivers behind the top line. I think we think — we view our guidance at the midpoint to be pretty much in line with normal seasonal market decline. I mean we expect sequential decline in wafer starts, frankly, across all customer segments in Q1. And we also expect a fairly slow start to CapEx in the first quarter of the year. And we expect that to, frankly, impact most of our product lines and our two divisions.
So I think we think that our guidance is pretty much in line with normal seasonality. And if you look at it against Q1 of last year, it’s actually up 7%. So it’s in line with the overall growth target that we have for the year.
Melissa Weathers
Got it. Thanks for that. And then I wanted to call out one thing that you mentioned in your slides and in your prepared remarks, some momentum in the advanced packaging side of things. You haven’t spent too much time focusing on this part of the business, and I know it’s a strong grower for the industry right now. So could you give us a little bit of color on how you’re supporting that industry, what trends you’re seeing and maybe how much it could grow this year?
Bertrand Loy
Well, thanks for asking that follow-on question, Melissa. I was hoping that somebody would. And certainly, as we’ve been mentioning over the last two years, advanced packaging has been historically a very, very small part of our portfolio. But as we have said, we’ve been working very closely now for two years with customers to better understand their technology road maps and to develop solutions for the emerging process challenges that they are facing.
I mean they’re all trying to drive additional automation, greater process precision in advanced packaging, and we have solutions to help them do that. So today, in 2024, advanced packaging-related revenues are approaching about $100 million. So it’s not so small anymore. And by the way, we expect that part of our business to grow significantly in 2025 as more investments continue to pour into advanced packaging capacity.
So today, from a product standpoint, most of the opportunities are within Advanced Purity Solutions, so think about carriers for thin and thick wafers. And the other side of the opportunity would be around fluid management solutions, in particular, high-viscosity dispense parts.
But we still have opportunities in Material Solutions as well. And we have actually very successfully introduced some dielectric service in these processes. It’s still smaller set, single digits of millions of dollars of revenue in 2025, but we expect that to grow rapidly. Actually, for that particular platform, we expect that to grow by a factor of 3x in 2025. So as we’ve said many times before, I mean, it’s been historically a small part of our business. We’ve been focusing on it. We are uncovering a lot of new opportunities, and it looks very, very promising going forward.
Melissa Weathers
Thank you.
Bertrand Loy
Thank you.
Operator
Bhavesh Lodaya, BMO Capital Markets.
Bhavesh Lodaya
Hi, good morning, Bertrand. Let me also extend thanks to Bill and best wishes moving forward. Bertrand, you mentioned some very strong numbers for CMP pads and slurries for 2024. Could you add some more detail around what factors drove that? Was it [China-related] new fabs, some other drivers? And then do you see this as a leading indicator for some of your other platforms for this year?
Bertrand Loy
Yes. So I think, again, I mean, overall, very, very pleased with the way our Material Solutions platform has been performing, and in particular, very pleased with the CMP suite of product. I think it’s actually a great success story and a story that really validates all of the expectations that we had when we chose to combine with CMC Materials, right?
If you think about the types of revenue synergies we were expecting to generate, it came down to cross-selling opportunities, engaging with the customer differently, and creating a pipeline of innovation-driven opportunities, and then more broadly, trying to really drive a solution-selling strategy across the materials platform.
And in 2024, we started to see evidence of success. So as I mentioned, slurry and pads grew very significantly. But post-CMP cleans did as well and so did CMP filters, Actually, all of those CMP products, that suite of CMP products, grew in the high teens or higher in 2024. So again, the cross-selling strategy is absolutely working, and we expect to see more momentum going in 2025.
As I said, we’re also engaging differently and better with our strategic customers with a great focus on innovation. We mentioned the progress in slurry content in advanced foundry. And I was just mentioning in the previous question what we have accomplished in terms of uncovering new opportunities in advanced packaging.
And then finally, when it comes to solution selling, we believe that the proof point will be on the success that we expect to see in moly deposition, moly etch, in 3D NAND applications. And at some point in time, as moly gets adopted in logic, we expect to see also the introduction of moly-polishing solutions. And that’s kind of new opportunities for Entegris.
So feel very good about the progress that we’re making. I think it’s validating the value of this combination, and I’m very pleased with the way the team has been coming together and executing in [2025 — ’24].
Bhavesh Lodaya
Got it. And as a follow-up, currency has moved in the wrong direction? Do you hedge some of that? And if possible, could you quantify the year-over-year impact for 2025 earnings based on where things stand? Thank you.
Linda Lagorga
Bhavesh, can you repeat that question? Sorry, it was blurred.
Bhavesh Lodaya
Yeah. Just the impact of how FX has [changed]. I mean over the past few months, it has gone in the wrong direction for some of the Asian currencies. If you’re able to quantify that for this year.
Linda Lagorga
So the good news is as we — the way we have our facility set up in our manufacturing, a lot of the costs are hedged location. So really, when we quantify the FX as we do, we mentioned the FX impact on a revenue line. But as you go down to gross margin, there can be a slight delay, but overall, a minimal impact on the gross margin line. So that’s why you don’t hear about it gross margin as much from a cost perspective.
Bhavesh Lodaya
Thank you.
Operator
Timothy Arcuri, UBS.
Timothy Arcuri
Hi, Bertrand, so I would go back to what the TAM is growing this year. So I heard your assumption on CapEx. I think you said flat. I mean all the equipment companies are guiding up at least 5% WFE. So I know that you use CapEx to [knock] WFE, but it seems like, certainly, WFE is going to grow this year, likely even higher than mid-single digits.
So I guess, where is the assumption that CapEx is only flat coming from? Is there going to be a big mix shift? Is sort of underlying your assumptions a big mix shift from CapEx toward equipment this year? Is that what’s actually happening?
Bertrand Loy
Yeah. So Tim, the assumption we’re using right now is the WFE will be up in the low single digits, and then construction will be essentially down in the low single digits. So that’s — the net effect of that is that assumption for CapEx.
As we said, there are different views of how the market could evolve this year. When we talk to all of our customers, and that includes all of the large equipment makers, I think there is really not perfect visibility in the second half of the year. And we’re choosing maybe to be a little bit more prudent than some. But I think based on what we went through in 2024, we think it’s a prudent way to approach the ’25.
So I think — I mean, for you, I think the key takeaway — I mean, remember that we are breaking down our annual in two components. One is the industry component, and we understand that they have different opinions around that. And then the other component is the outperformance. The one piece we really control is the outperformance, and that’s really our commitment to outpace the industry by 4 to 5 points.
I’m sure that our views of the industry will evolve as we gain more visibility and as we progress through the year. And hopefully, there will be a basis to be a little bit more constructive, a little bit more optimistic over the industry assumptions as we proceed in the year. But honestly, there is not enough visibility as of right now.
Timothy Arcuri
Yeah. I guess just the degree that you outperformed depends on what your assumption is for the underlying market. That’s why I was asking. But — so I had a question, Linda, on gross margin for December. So you came in at the high end on revenue, but gross margin was at the low end. I know that the gross margin is being guided up a little bit for March, but was there something specific that happened in December that caused that because you think the gross margin could have been a touch better?
Linda Lagorga
Yeah. Overall — first, it’s a good opportunity to just talk about gross margin overall, and I will answer your question around December. Just broadly speaking with our gross margin, think of that as part of our cost structure, part of our annualized cost structure and in the context of our Analyst Day target model, which delivers the 40% flow-through.
So when you think about December, it was primarily product mix. So — but over time — I want to take a step back and talk about the overall 2024 gross margin. We had a 2024 gross margin of 46% for the year, up 70 basis points year-over-year ex-divestitures. And we achieved that gross margin expansion while running our plants at the appropriate levels. So it was a really great performance by the team.
And to give you some color as we look into 2025, we expect gross margin to be up about 25 to 50 basis points, and there’s puts and takes in that. We’ve talked about the puts and takes as it relates to ’24, and they’re similar in ’25. You have volume leverage. We’re going to continue to focus on productivity. And we will have some of the inefficiencies related to Taiwan and Colorado.
But again, think about the gross margins and the puts and takes as we look into ’25 similar to ’24, that this is all in the context of our Analyst Day target model. And we’re going to make sure our cost structure works with our Analyst Day target model, which is in line with, when you look at ’25, our full year guidance for ’25 and the 40% EBITDA flow-through.
Timothy Arcuri
Okay, Linda, thank you.
Operator
Christopher Parkinson, Wolfe Research.
Harris Fein
This is Harris Fein on for Chris. I know you said $30 million to $40 million of impact from the new China restrictions. Maybe if you could just give a little bit more color on where exactly that’s affecting you, that would be helpful.
Bertrand Loy
Yes. So I mean, I think it’s going to impact both divisions. I’m not going to specifically assign the decline to a more — higher degree of specificity. But I think the restrictions are essentially adding 30 of our domestic customers to the entity list. And the result of that is that it’s going to limit our exports of US-made products to those customers. So we are complying with the new rules as that impact of $30 million to $40 million of annual revenue loss, which is about 1 point of growth. And as I mentioned earlier, again, our outperformance target of 4 to 5 points is inclusive of the impact of the China restrictions.
Harris Fein
Got it. That’s helpful. And then regarding the ramp of the Taiwan facility and the early impacts of Colorado, in the past, you’ve quantified what sort of gross margin drag you expect just from underutilization as the asset ramp. Maybe how long do you think it will take to get to what you would consider a normal operating rate in Taiwan? And any early thoughts about the impact on Colorado for 2025 gross margin would be helpful.
Linda Lagorga
Yes. Thanks for the question. Again, I would think about gross margin for 2025 in the context of our overall guidance and the target model. As I mentioned earlier, there’ll be puts and takes, but we did include any inefficiencies relative to ramping Colorado and KSP in our guidance.
Even with these headwinds, we do expect that gross margin in ’25 to expand a bit 20 to 50 basis points. But as we look forward with KSP and Colorado and the ramp inefficiencies, we do expect this to be mostly behind us by the second half of ’26. But again, circle back to the target model and think of the inefficiencies as encompassed in that target model and our guidance.
Operator
Atif Malik, Citi.
Atif Malik
Thank you for taking my questions, and Bill, you will definitely be missed. I have two questions. Bertrand, on the last earnings call, you guys had talked about some supply constraints that impacted your September and December quarter. Are those supply constraints completely behind you? Or there some lingering effect on the March quarter?
Linda Lagorga
Thanks for following up on that. Much appreciated. So good news, the supplier issues we discussed last quarter are essentially behind us. So on the contaminated batch of HCL impacting the liquid filtration products, this was resolved in Q4 as we expected. And then on the valve constraints impacting the gas purification platform, this is improving and expected to be resolved in Q1 as planned.
Most importantly, we continually look to reduce our supply chain risk and minimize single-source suppliers and also work very hard to have our suppliers close to our manufacturing facilities where possible. And the team has made great progress on this over the last two years, and we’ll continue to work to optimize our supply chain.
Atif Malik
Thanks, Linda, And then a follow-up for you on tariffs. I know you guys are mostly US manufacturing. But should there be any impact from the tariff situation, particularly in China, from any of your supply chain sources?
Linda Lagorga
So we’re closely monitoring any impact on tariffs from the America First Trade Policy directives across Canada, Mexico, China. We’ve completed our assessment on the newly announced tariffs, and they’ll be immaterial impact to our raw material costs.
Over the last several years, as I just mentioned, we’ve been bolstering that resiliency in the supply chain and establishing local supply chains to better serve our regional customers, and — which this strategy is helping us mitigate some of the impact of the tariffs. But we’ll continue to evaluate the impact as new information comes out and evaluate that impact on our business.
Atif Malik
Thank you.
Operator
Charles Shi, Needham.
Charles Shi
Hi, good morning. I have a question, a little bit higher level, on the wafer starts side. So 2024 looks like the MSI, that’s something reported by the third parties, are going to be a down year. But you just — you did expect MSI wafer starts to be up for you. But this year, the third party seems to be forecasting pretty much close to 10% MSI growth. But Bertrand, you are seeing a little bit lower wafer starts growth.
Mind if you walk us through where the disconnect between what you see and what the third-party reports come strong and I suppose really think about ’26 and beyond — I mean the first thing that people are going to look at is the third-party forecast for MSI going forward.
Bertrand Loy
Sure. I think we had the beginning of that discussion in a previous call, but what third-party reports track are really the shipments of bare wafers from the wafer growers to the fabs. And that’s what that MSI index tracks. And typically, there is a pretty good correlation between wafer starts and MSI, except when you have very high levels of wafer inventories sitting in the fab. It was the case in ’24, and that’s why MSI was is essentially reported as being down. There was — and you can track that with — or you can correlate that with the reports from the wafer growers.
But the flip side of that is that you’re going to — we expect to see the reverse of that play out in 2025 as those inventories have been consumed and safety stocks get rebuilt, we expect shipments of bare wafers to exceed the actual wafer start activity in the fabs.
So to put that in context, as I said, I think our wafer start number for 2024 is low single digit, 1% to 2%, essentially for ’24 compared to an MSI number that is negative mid- to high single digits. And we expect to see the flip side of that in 2025 with MSI number, to your point, probably in the high single digit, maybe even in the low teens. The actual wafer start is expected to be a little bit less than that.
Charles Shi
Thanks. The other question, right, the annual guidance you provided plus the Q1 guidance seems to imply ’25 is going to be another second half-weighted year for you and — because last year it was second half-weighted. I would say, probably [48 to 52] split between first half and second half in ’24. Based on the current visibility, do you expect something similar in that range or less second half-weighted or more second half-weighted? And what will be the reasons?
Bertrand Loy
Yes. It’s a good question. I think we expect certainly steady quarterly sequential growth through the year. And we expect the level of outperformance to increase in the second half of the year as we benefit from some of the node transitions I was mentioning in advanced logic and 3D NAND. So second half certainly would be stronger than the first half.
Charles Shi
Thank you.
Operator
Aleksey Yefremov, KeyBanc.
Aleksey Yefremov
Bertrand, I’ll maybe ask you a longer-term question. Any views on the level of outperformance in 2026? Do you think you’ll stay at about this level, a little higher, or lower versus what you’ve see in ’25?
Bertrand Loy
So Aleksey, let’s go through ’25 first, and then I will comment on 2026. But as a backdrop, I would say that I’m very, very pleased with the progress that we’ve been making, developing the suite of solutions I was mentioning in 3D NAND in particular. And as those device architectures become more challenging, I would expect the magnitude of the moly deposition opportunity, the moly etch opportunity to continue to grow.
So — but let’s first see a few of the large memory makers transition away from tungsten to moly for the word line, and then let’s see how the industry is also starting to adopt moly etch as a wet chemistry and moving away from the dry etch process that they are currently using. I think we’ll have a lot more data points later in 2025. And I think I would be in a much better position to answer your question.
Aleksey Yefremov
Thanks, Bertrand, and I also wanted to wish best of luck to Bill and thank him for all the help. And for my second question, I want to ask you about China. I think now about 20% of sales — and I believe in the past, you were talking about China being 20% to 25%. So perhaps you were looking at some growth in China. With these latest restrictions, how do you think this evolving? Do you think China is still a growth market? Or you’ll be around the 20% mark?
Bertrand Loy
So the way we think about it is that — first of all, you’re right. I mean, today, in 2024, China represents about 21% of our revenue. It’s up from 16% in 2023. So we’ve seen the growth we were expecting to see in China. Clearly, we are facing some new headwinds from those regulations. So we’d expect that to be deterrent to additional growth in 2025. But I would expect China to continue to be a growth area for us.
We have a large number of mainstream fabs that are starting operation, and I would expect them to continue to process more and more wafers over time. And we have done actually a really good job at staying competitive in China. We continue to create significant value for customers and helping them improve their device performance, helping them improve their yields. And I expect China to continue to be a growth market for us as more mainstream fab increased their productions domestically.
Thanks a lot.
Operator
John Roberts, Mizuho.
John Roberts
Thank you and best wishes as well, Bill. If you split your business, Bertrand, into advanced logic and AI versus mainstream, how would you characterize mainstream? Is it stable? Is it declining still, declining single digit, double digit?
Bertrand Loy
Yeah. I mean clearly advanced logic for us has been an area of significant growth last year, and mainstream was an area of weakness. I think you will see when we file our 10-K evidence of that as we report our revenue with our largest customer. So — and I expect that to continue — that trend to continue in 2025. We expect advanced logic to remain very strong driven by our AI application. And I expect at least the beginning of the year to be relatively muted for mainstream logic. So that ratio will continue to tilt toward advanced logic, which is positive for us because we have actually a much larger content per wafer opportunity in advanced logic as compared to mainstream logic.
John Roberts
Thank you.
Operator
Mike Harrison, Seaport Research Partners.
Michael Harrison
Hi, good morning, best wishes to Bill. Wanted to see if we could discuss the margin cadence for the year. The EBITDA margin for Q1, it looks like maybe a little bit of a seasonal dip. And I believe that typically, you guys have some incentive comp payouts or equity payouts during Q2 that would lead Q2 EBITDA margin to be relatively weaker as well. But maybe just kind of discuss what our expectations should be in terms of the cadence and some of the key margin drivers for the second half of the year.
Linda Lagorga
Mike, thank you for that question and very good memory back to last year. So you are right that the timing of our equity awards are in the second quarter. So the way I’d recommend thinking about it is look at that cadence in 2024 of how margins played out and expect a very similar pattern in 2025.
Michael Harrison
All right, thank you. And then was hoping — we talked a little bit about the CMC consumables, and it’s great to hear that you’re seeing good momentum there. Was hoping we could talk about silicon carbide opportunities within CMP. I think last year, you had expected a really nice pickup in silicon carbide, but maybe it wasn’t as good as you anticipated, but still a growth year in that part of the business. Where did we end the year in terms of revenue or, I guess, relative to your expectations? And what should we be thinking for growth in silicon carbide, CMP consumables for 2025?
Bertrand Loy
Yes. So you’re right, I mean, silicon carbide was a very significant growth factor in 2023 compared to 2022. We were hoping to see significant incremental growth in 2024. It just didn’t happen. And I think you follow this industry closely and you understand that most players in the industry didn’t really grow very much in 2024, and that did impact our opportunity there. So essentially, our revenue for silicon carbide applications were flat year-on-year.
Having said that, that remains a very promising area because we are enjoying a very significant share for slurries and pads and planes. And this is another example of where this solution-selling approach has been working really well. I mean, as you know, our customers are really trying to move from 6-inch to 8-inch silicon carbide substrates. Key to that transition will be to have the right total cost of ownership, and our solutions are uniquely enabling that.
I mean we have slurries offering much better removal rates, think about something 40% to 50% better than competitors. We have CMP pads that have superior lifetime, essentially lasting about 30% longer than the alternatives. And all of that translates into a significant improvement in cost of ownership in the range of up to 50% to 60%.
So I think we are very well positioned. We just hope that this industry actually recovers quickly. And if and when it does, you’re going to start hearing us talk more about those SiC opportunities because we are very well positioned there.
Michael Harrison
All right, thanks very much.
Operator
Thank you. The question-and-answer session has concluded. I will now turn the program back over to Bill Seymour for closing remarks.
Bill Seymour
Thank you for joining our call today. Please reach out to me directly if you have any follow-ups. Have a good day, and you can now disconnect.
Operator
Thank you. This concludes today’s Entegris’ fourth quarter and full year 2024 earnings conference call. Please disconnect your line at this time, and have a wonderful day
