Entegris (ENTG) Q4 2021 Earnings Call Transcript

Entegris (ENTG -5.98%)
Q4 2021 Earnings Call
Feb 01, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for holding, ladies and gentlemen, you're online for this Entegris fourth quarter 2021 earnings release conference call. At this time, we are still gathering additional participants. We will get started momentarily. We thank you for your patience and ask that you please continue to hold.

Please stand by. We're about to begin. Good day, and welcome to the Entegris fourth quarter 2021 earnings release conference call. Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Bill Seymour, VP of investor relations. Please go ahead, sir.

Bill Seymour -- Vice President, Investor Relations

Good morning, everyone. Earlier today, we announced the financial results for our fourth quarter and full year 2021. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties and actual results could differ materially from those projected in the forward-looking statements.

Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC and Regulation G. You can find reconciliation tables in today's news release as well as on the IR page of our website at entegris.com.

On the call today are Bertrand Loy, our CEO; and Greg Graves, our CFO. With that, I'll hand the call over to Bertrand.

Bertrand Loy -- Chief Executive Officer

Thank you, Bill, and good morning to all. I will start by saying that I am extremely pleased with our fourth quarter results, which capped off another record year for Entegris. I'm very proud of what our team achieved in 2021, especially in light of the challenging operating environment we faced throughout the year. During the fourth quarter, sales of $635 million grew 23% year on year and 10% sequentially.

Our growth was strong across all three divisions as we benefited from robust industry growth and record demand for our products and solutions. EBITDA margin increased significantly to over 31% of sales and non-GAAP EPS of $0.96 was up 35% year over year. These fourth quarter results exceeded expectations and were driven in large part by our team successfully fighting through many of the supply chain hurdles that impacted us last year. Looking at the full year 2021, we achieved record sales of $2.3 billion, up 24%, all three of our divisions experienced strong top-line growth and delivered significant margin expansion in 2021.

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

Gross margins increased, albeit modestly due to the COVID-related cost pressures, but we once again showcased the leverage in our model with EBITDA up 29% and non-GAAP EPS up 35% year on year. During 2021, we allocated $489 million of capital, which included reinvestments in our business of $211 million in capex and $168 million in R&D, and we'll return $111 million to shareholders in dividends and buybacks. On top of that, we repaid $150 million of net debt. Our 2021 corporate social responsibility program was another highlight for the year.

Some of our accomplishments include publishing our first CSR annual report, contributing an additional $3 million to the Entegris Foundation, which is focused on providing stem scholarships to women and individuals from underrepresented communities. To date, Entegris has contributed $5 million to the fund with the goal of investing more than $30 million in stem scholarships and internships by 2030. During the year, the percentage of diverse members of our board of directors increased to almost 40%, well on our way to our 2030 goal of 50%. And from an ESG ratings point of view, we increased our EcoVadis rating to silver and our MSCI score to an A rating.

On the M&A front, we completed the acquisition of BASF's Precision Microchemicals business, which we have already migrated to our SAP platform. We are currently running 100% of our global operations on one single instance of SAP, which allows greater end-to-end process optimization and visibility. These advantages have served us very well in the past two years as we have effectively managed complex supply chain risks very effectively across our global platform. With all of our recent tuck-in acquisitions integrated into SAP, this provides, obviously, a great foundation for the future integration of CMC Materials.

Which then leads me to our pending acquisition of CMC Materials. As I said, when we announced this transaction, we have long had tremendous respect for CMC Materials technology, its team, and its reputation for operational excellence. We are very excited about the potential of this transaction to meaningfully expand our served markets, enhance our customer relationships, and create new value for our customers. As a reminder, the combined company will have a resilient business model with approximately 80% of unit-driven revenue.

And we expect the transaction to be significantly accretive to non-GAAP earnings in the first year following close. We continue to expect the transaction will close in the second half of 2022 once we satisfy all of the customary closing conditions, including approval by CMC Materials shareholders and approvals on the United States and certain foreign antitrust and competitive laws. On that point, last week, the mandatory waiting period on the U.S. antitrust laws expired without any objection to the acquisition.

And the date for the CMC shareholder vote to approve the transaction was set for March 3rd. In addition, we have started to focus on integration planning so we can hit the ground running immediately after the close. During the period between sign and close, we will be spending a great deal of time analyzing the various parts of CMC's portfolio of businesses to assess their respective long-term strategic fit to the combined platform, actively identify areas of revenue synergies, and potential candidates for sale. No final determination has been made as of today on this final point.

And of course, as you know, until closing, Entegris and CMC will continue to operate as two completely separate businesses. Wrapping up 2021, our excellent operating performance short cased the strength of our team's execution in our highly differentiated, unit-driven business model. As I said throughout last year, given the persistent supply chain issues, I cannot say enough how proud and grateful I am of the dedication, resilience, and perseverance of our team. Looking ahead to 2022, semi-market demand is expected to remain very strong driven by robust chip demand and high industry capex.

All of this bolstered by accelerated digitalization, smartphones, IoT, and high-performance computing, to name just a few. The semiconductor industry ecosystem was tested in 2021 and responded well given the circumstances. We expect 2022 will likely be another year where the industry will struggle to meet the strong demand. And while the supply chain issues are expected to ease, we expect they will persist to some degree, for most of 2022 as a result of the lingering COVID-induced supply chain inefficiencies.

Looking at our business, we expect our sales growth in 2022 to range from 15% to 17%. Let me unpack that for you. To start, for the full year 2022, we expect the market based on our unit capex mix will be up approximately 10%. And given our strong position and wins in the new logic and memory nodes, we expect to outperform the market by approximately three to five points, consistent with what we laid out during our recent Analyst Day.

In addition, we expect a little bit more than two points of growth from the impact of the BASF Precision Microchemicals business acquisition and continued growth in our life sciences high-purity bag business. We also expect EBITDA flow through to continue to be in line with our target model, and we expect to achieve a full year 2022 non-GAAP EPS in excess of $4.10. To be clear, the guidance I just provided does not include the impact from the pending CMC acquisition. In summary, this is an exciting time for Entegris.

We have increased conviction in the secular growth of the semiconductor market, demand for our products and solutions continues to be at record levels and our relevance in the value chain has never been higher. In addition, the pace of no transitions for both logic and memory continues to be strong, and device architectures are becoming much more complex. This is great news, as you know, for Entegris because the unique set of capabilities we have built around process materials and materials purity will be key enablers of these new chip architectures. And as we have laid out, this will translate into a steadily expanding Entegris content per wafer.

Finally, I want to take a moment to thank our customers for the trust and confidence they place in Entegris. And once again, thank the Entegris teams around the world for their incredible work and grit in such dynamic times. Now let me turn the call to Greg. Greg?

Greg Graves -- Chief Financial Officer

Thank you, Bertrand, and good morning, everyone. Our fourth quarter capped off another record year for Entegris. Our sales in Q4 were $635 million, up 23% year over year and up 10% sequentially. GAAP and non-GAAP gross margins were both 46.5%, above our guidance and up 90 basis points sequentially.

For the full year, gross margins were just over 46%, up versus 2020, driven by volume leverage, which more than offset the well-documented headwinds from COVID and the related supply chain inefficiencies. We expect gross margin to be approximately 46.5% both on a GAAP and non-GAAP basis in Q1. We also expect gross margins will improve throughout the year and be approximately 47% for all of 2022. GAAP operating expenses were $136 million in Q4 and included $17 million of non-GAAP items from amortization of intangible assets, transactions, and other costs.

Non-GAAP operating expenses in Q4 were $119 million. We expect GAAP operating expenses will be $150 million to $152 million and non-GAAP operating expenses will be $126 million to $128 million in Q1. Q4 GAAP operating income was $160 million. Non-GAAP operating income was $177 million or 28% of revenue, up 39% year on year and up 16% sequentially.

Q4 adjusted EBITDA was approximately $200 million and over 31% of revenue. EBITDA margin for the year was over 30%, up over 100 basis points compared to 2020. Moving to below the operating line. Our GAAP and non-GAAP tax rate was 20% for the quarter, higher than our guidance of 18.5%, in part driven by less favorable geographic income mix.

For the full year 2022, we expect both our GAAP and non-GAAP tax rate to be approximately 17%. It's worth noting for modeling purposes that the first quarter typically has the lowest tax rate of the year. To be clear, we have not assumed any impact from potential tax reform in the 17% tax rate guidance. Q4 GAAP diluted EPS was $0.87 per share.

Non-GAAP EPS of $0.96 per share was up 35% year over year and 4% sequentially. Turning to our performance by division. Q4 sales of $188 million for SCEM were up 11% year over year and 7% sequentially. Growth was primarily driven by advanced deposition materials, formulated cleans, and selective etch chemistries.

As we referenced last quarter, SCEM was the most impacted by supply chain constraints during the year. Adjusted operating margin for SCEM was 25% for the quarter. The sequential increase in margin was driven primarily by the higher volumes. The significant year-over-year margin increase was driven by the volume improvement and the impact of a discrete inventory valuation adjustment taken in Q4 of 2020 that did not recur in Q4 2021.

Q4 sales of $259 million for MC were up 26% from last year and up 15% sequentially. Growth was strong across all product lines in MC in 2021, especially in liquid filtration driven by strong traction in advanced logic and memory nodes and in gas filtration and purification which benefited from strong activity in new fab construction and strong demand from our OEM customers. Adjusted operating margin for MC was 36% for the quarter, up year over year and sequentially, also driven primarily by higher volumes. Q4 sales of $198 million for AMH were up 30% versus last year and up 6% sequentially.

Year-on-year growth was strongest in wafer handling and fluid handling. In addition, sales of Aramus products significantly contributed to the growth in AMH during 2021. Adjusted operating margin for AMH was 23%, up slightly year over year and up over 100 basis points sequentially. The AMH margin improvement was driven primarily by higher volumes.

Fourth quarter cash flow from operations was $116 million and was $400 million for the full year. Free cash flow was $39 million in Q4 and $190 million for the full year. Our 2021 free cash flow reflects our choice to invest in new capacity to support future growth and in working capital to support customer demand and protect our supply chain. Capex for the quarter was $77 million, and for the full year was $211 million.

Consistent with what we outlined in the Analyst Day, in 2022, we expect to spend approximately $500 million in total capex with $225 million for our new facility in Taiwan. 2022 is expected to be our peak year for overall capex spending. During Q4, we distributed approximately $11 million for our quarterly dividend, and we repurchased $17 million of our shares. As we said when we announced the acquisition of CMC Materials, we are suspending our share buyback program, but we are maintaining our quarterly dividend, which we have recently increased $0.25 per share.

Now for our Q1 outlook. We expect sales to range from $630 million to $650 million. We expect GAAP EPS to be $0.81 to $0.86 per share and non-GAAP EPS to be $0.96 to $1.01 per share. In summary, I would like to express my gratitude to the entire Entegris team for a great year in 2021 and look forward to another record year in 2022.

I would also like to take this opportunity to say we look forward to closing the CMC acquisition and welcoming our new colleagues to the Entegris team. Operator, we'll now open up for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] We'll take our first question from Toshiya Hari with Goldman Sachs. Your line is open. Please go ahead.

Toshiya Hari -- Goldman Sachs -- Analyst

Good morning. Thank you so much for taking my question and congratulations on a very strong year. Bertrand, as my first question, I wanted to ask about your 2022 outlook. You mentioned that expectation for the market is for the market to be up 10%.

Can you differentiate between MSI wafer starts and the capex side of your business? And perhaps more importantly, you noted that you expect your outperformance to be somewhere in the 3% to 5% range on an organic basis. I was hoping you could unpack that for us a little bit, which segments, which product areas do you expect to be the biggest drivers? And then I have a quick follow-up.

Bertrand Loy -- Chief Executive Officer

Yes. Good morning, Toshiya. So 10% indeed is the blend for the industry going into 2022. We are expecting MSI to be in the mid-to-high single digits.

And right now, we are thinking about capex to be in the mid-teens for 2022. So the outperformance, as you know, will be driven mostly by many more transitions that we expect both in logic and in memory. The timing of those node conditions is still something that needs to be confirmed by some of our customers. And that's why we have this range of about three to five points of outperformance, and that's really more of a function of the timing of those node transitions.

The products that will be driving that outperformance are products that we've been discussing, most recently with you during our Analyst Day in early December. So the surprise here. It will be our advanced liquid filters. It will be our new deposition materials and our selective edge chemistries for the most part.

I mean, we expect all products to do well, but those three platforms will be the ones leading the outperformance in semiconductor applications. And as we mentioned, outside of semi, we expect our IT bag offering to continue to grow strongly in 2022 and to contribute about one point of growth in 2020. And you said you had a second question, Toshiya.

Toshiya Hari -- Goldman Sachs -- Analyst

Yes, I do. Thank you for that response, Bertrand. And then my second question is on gross margin, perhaps one for Greg. Sorry if I missed this, but what were some of the key drivers in the Q4 beat? Revenue obviously came in above.

So I'm guessing volume. But to the extent, there was anything else, if you could speak about that that would be helpful. And then expectations for Q1 and how to think about the balance of '22 from a gross margin perspective. I'm sure there's a lot going on in terms of cost inflation on the negative side, higher volume mix, and perhaps pricing on the positive side.

But if you can discuss the puts and takes, that would be super helpful. Thank you.

Greg Graves -- Chief Financial Officer

Yep. So for the quarter, I mean, you're right. I mean, the additional volume certainly helped us on the gross margin. I mean, and that was the primary driver.

That was offset by -- we didn't -- our mix was not as good as we initially expected. And then we continue to experience a number of sort of supply chain inefficiencies as well as you mentioned, higher material inputs. But given the volumes we had, we were able to offset all of those things. As we go into 2022, our margin expectation for Q1 is 46.5%.

Our margin expectation for the full year is 47%. The primary drivers there. We expect, a, improving mix and b, the higher volumes will certainly play into it. We're -- there's no hiding the fact that we are facing headwinds on in a number of categories on the raw material input side.

But like we expect that we'll be able to overcome them -- and then we do continue to experience inefficiencies around supply chain-related things related to COVID, things like labor, specifically absenteeism is creating a little better headwind for us as well. And not enough. Pricing, we have implemented selective pricing increases and Bertrand might want to comment a little bit more on that.

Bertrand Loy -- Chief Executive Officer

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

Greg Graves -- Chief Financial Officer

I would just summarize by saying, overall when I look at 2021, I was pretty pleased with the margin. I mean the stability of the margin through the year, I mean we were plus or minus about 40 basis points to 46%. Every quarter of the year, we didn't experience. And we had our fair share of headwinds for sure.

And so I don't view that 46% as kind of a steady-state type margin at all. But I mean, our team really performed well. We avoided any sort of major catastrophic things that would negatively impact the margin in a quarter. So like I said, overall, felt quite good about it and feel good about our operational capabilities as we move into '22.

Toshiya Hari -- Goldman Sachs -- Analyst

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

Greg Graves -- Chief Financial Officer

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

Toshiya Hari -- Goldman Sachs -- Analyst

Very helpful. Thank you so much.

Operator

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

Sidney Ho -- Deutsche Bank -- Analyst

Thanks and all that. I'll add my congratulations to the team. First question I have is on the revenue outlook, just following on the previous question. Thanks for all the details.

Well, now every company in the supply chain, in the semi-cap supply chain has talked about very strong demand. Last quarter, you mentioned you expect exiting the year, you have unmet demand of roughly $50 million. Can you give us an update there from what you've seen -- do these revenues just get pushed out? Or will customers able to satisfy the demand from a different supplier?

Bertrand Loy -- Chief Executive Officer

Yes. So, Sidney, I think obviously, with the strong finish that we had in Q4, we have reduced significantly the difference between the actual demand for our products and the constraint demand for only unconstrained demand for our products. So there's still a number of lingering supply chain issues, and we are going to be obviously very focused in 2022 with the goal to permanently put the supply chain limitations behind us. But we expect to see some lingering impact of those supply chain issues in the first half of 2022.

And we have obviously taken that into account in our Q1 guidance and our full year guidance.

Sidney Ho -- Deutsche Bank -- Analyst

Great. Maybe just follow up, Bertrand. So based on the comments you just mentioned, does that mean the revenue profile this year will be more back-end loaded than the normal year, which I think typically is what 48-52 kind of split in the past five, six years?

Bertrand Loy -- Chief Executive Officer

Yeah. That's correct. You should expect a fairly steady increase throughout the year. We don't expect any meaningful seasonality at this point in the year.

So expect a steady growth throughout the year.

Sidney Ho -- Deutsche Bank -- Analyst

OK. Great. Maybe a follow-up question is related to CMC Materials deal. I understand it's probably too early for you to talk about any financial projection post close.

But based on the disclosure and the perspective, it looks like the deal came together pretty quickly. Can you talk about what gives you confidence about the deal and the premium that you paid? And how should we think about the timing of all these regulatory approval process for countries that listed there? You talked about U.S. obviously, but also particularly around the antitrust concern given the combined portfolio addressing the entire CMP process. Thanks.

Bertrand Loy -- Chief Executive Officer

Look, Sidney, I think as we said in the prepared remarks, we are obviously very focused as a team on moving the process along, and we are very pleased with our progress so far. I talked about the S-4 filing becoming effective last week. The date of the CMC shareholders' vote is now set for March 3rd, which is, frankly, very fast, and that's evidence of the quality of the work by both teams. Last week, we also received HSR clearance in the U.S., which actually confirms our view that the two platforms are very complementary, where virtually no competitive overlap, something that we described to you when we announced the transaction in mid-December last year.

And as we've said, integration planning is for swing. So I mean that, all of that tells you that the joint teams are very busy and very effective. And that's the reason why we continue to expect to be in a position to close the transaction in the second half of 2022. And I'm not going to go into a lot of updates by country on the regulatory front because I would be speculating and I just don't want to be speculating.

Sidney Ho -- Deutsche Bank -- Analyst

OK. Thank you very much.

Operator

Our next question will come from Kieran De Brun at Mizuho. Your line is open. Please go ahead.

Kieran De Brun -- Mizuho Securities -- Analyst

Hi. Good morning. I think you mentioned during the fourth quarter, your tax rate was a little bit higher than expected due to regional sales mix. Can you just parse out which regions saw stronger demand during the quarter? And what your outlook is as we progress throughout '22 by region? Thank you.

Greg Graves -- Chief Financial Officer

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

Kieran De Brun -- Mizuho Securities -- Analyst

Perfect.

Greg Graves -- Chief Financial Officer

I mean, they're obviously were differences through the year. I mean if you look at -- in the current quarter, Taiwan was up 12%, Korea was up 7%. I mean all on a sequential basis. North America was up 6%, but the tax rate really isn't driven directly by the revenue.

Kieran De Brun -- Mizuho Securities -- Analyst

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

Bertrand Loy -- Chief Executive Officer

Yeah. I can talk about the supply issues at high level, and then, Greg, if you want to add to it on the margin front. But I mean the truth is that if you go back and look at 2021. I mean the supply issues impacted all three divisions in different degrees at different times during the year, but all divisions were impacted.

As we exit 2021 and as we into 2022, as I mentioned, we're still dealing with a few lingering supply chain issues. I think the most significant is probably indeed in our SCEM division, and we've talked about specifically the availability of substrates for coating solutions. That has been a constraint for us through 2021 and I think we'll likely remain a pain point in the first half of the year. But the other two divisions are still facing some level of supply chain issues as well.

I mean for microcontamination, it's mostly around component availability for liquid filters. That remains a concern. And then for AMH, the attention will be on materials availability and price capacity. So again, it's been a hard fought for year.

I think the team has done extremely well, and I'm very thankful for the work done by ARP teams and our supply chain partners. But we're not entirely out of the woods. And that's why, as I said, I think our focus in 2022 will be to make systemic improvements to permanently put those supply chain limitations behind us and the margin efficiencies that goes with that. But Greg, I don't know if there's anything you want to add on the margin front specifically.

You may be on mute, Greg?

Greg Graves -- Chief Financial Officer

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

Kieran De Brun -- Mizuho Securities -- Analyst

Great. Thank you very much.

Operator

I'll move next to Patrick Ho with Stifel. Your line is open. Please go ahead.

Patrick Ho -- Stifel Financial Corp. -- Analyst

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

Bertrand Loy -- Chief Executive Officer

Well, it's something that we've been monitoring, obviously, very closely through 2020 and 2021. I think there was a view early in 2021 that are not of the input price increases that we saw were mostly transient. And as we progressed deeper into the year in 2021, it became apparent that some of those increases were here to stay. And that led us to take some action on the pricing front.

We have never been opportunistic when it comes to pricing. We have always been very strategic and deliberate in what we're doing. And that's what we did in 2021, trying to find an offset for some permanent increases in certain types of commodities that we're buying. And again, as we said, given the lead times for some of our products, we won't expect to see the benefits of those price increases until probably later in 2022.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. That's helpful. And maybe, Greg, just as a follow-up question. When looking at your 1Q guidance on opex, it's still below the percentages that you highlighted at your Analyst Day.

Should we expect opex to kind of steadily rise as we progress through 2022 to kind of get to the target model that you've talked about at your Analyst Day?

Greg Graves -- Chief Financial Officer

I mean, opex in Q1 will be lower than the other second, third, and fourth quarter. We continue to really focus on making the investments in the R&D. And so we'd expect to see continued increases in R&D, and we continue to work hard to do what we can to keep the SG&A line relatively -- it's not going to be flat, but certainly growing at considerably less than revenue. That would be our goal as we move through the year.

But like -- but your point is it does move up as we move through the year.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great, thank you again, and congrats.

Greg Graves -- Chief Financial Officer

Thank you.

Bertrand Loy -- Chief Executive Officer

Thanks, Patrick.

Operator

We'll go next to Aleksey Yefremov with KeyBanc. Your line is open. Please go ahead.

Aleksey Yefremov -- KeyBanc Capital Markets -- Analyst

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

Bertrand Loy -- Chief Executive Officer

It's a good question, and that's something that we will obviously paying close attention to. As of right now, we don't see any significant risk, but that certainly is something to watch for. And that's why, again, we were putting that outperformance range at about three to five. Three points of outperformance would be if some of those node transitions get delayed a bit.

And five points would be what you should be expecting if the node transitions announced by a number of logic and memory customers take place on time.

Aleksey Yefremov -- KeyBanc Capital Markets -- Analyst

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

Bertrand Loy -- Chief Executive Officer

I think I said mid to high, so it's a little bit higher than mid. But look, I mean, this is -- I mean we typically continue to update you on our views about the industry, both in terms of capex growth and with the start growth, we will obviously do that in 2022 as well as we have greater visibility. I think it's fair to say that, as we mentioned, during the Analyst Day, we have a high degree of conviction in the secular growth potential of the semiconductor industry. Most of our customers, fab customers have their capacity essentially fully committed for the year.

So we expect a high degree of fab utilization, which is obviously very good for us and should, to your point, lead to very healthy levels of wafer starts. So for now, our projection is mid-to-high single-digit for wafer starts. And if it's better than that, then we will update our guidance accordingly.

Aleksey Yefremov -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

We'll go next to Amanda Scarnati with Citi. Your line is open. Please go ahead.

Amanda Scarnati -- Citi -- Analyst

Good morning. Can you just quantify the growth by leading edge versus the support you've been getting from greater utilization on the lagging edge? And how that ties into sort of what your expectations are going forward?

Bertrand Loy -- Chief Executive Officer

Yeah. I mean it's the -- good morning, Amanda. First and -- it's not something that we track in that fashion, Amanda. So I don't want to try to make up numbers on the fly.

But I just want to confirm what is embedded in your question, which is we have seen strength across wafer sizes. So our 200-millimeter business had a great year in 2021. We expect a similar type of performance in 2022. And as we've said throughout the year, we expect, again, strength across all segments, be it memory and logic.

So we expect to see growth everywhere. But in terms of the outperformance, the outperformance will be driven by the leading edge and will be driven by the greater Entegris content per wafer that we expect to enjoy as more customers in 3D NAND, for instance, transition to higher account architectures or in logic and foundry when more wafers are produced at smaller line weight. So again, I think the setup for the year for 2022 is actually pretty positive for us across segments.

Amanda Scarnati -- Citi -- Analyst

And then could you just talk about sort of the deposition chemicals that you've highlighted in the past as being a big driver on 3D NAND. Can you talk about the traction that you've been gaining on that? It's part of the strategic rationale, I think, for the CMC deal. have conversations changed at all since you've announced that deal?

Bertrand Loy -- Chief Executive Officer

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

Amanda Scarnati -- Citi -- Analyst

Certainly. I appreciate that. Thank you.

Operator

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

Paretosh Misra -- Berenberg Bank -- Analyst

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

Bertrand Loy -- Chief Executive Officer

Yes. So China is about a 50% country for us. I mean, so very stable at that level now for quite a number of years. The competitive landscape has not really meaningfully evolved over the last three years, and we compete mostly with foreign competitors.

Paretosh Misra -- Berenberg Bank -- Analyst

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

Bertrand Loy -- Chief Executive Officer

Yes. I think we have become more disciplined and more strategic in our pricing practices that applies to setting the price right for the new products that we introduced when we have an opportunity to capture some of the value that we create for our customers. But that discipline extends also to managing pricing over the life cycle of the products. And that price erosion, in many cases, it's been managed more effectively over the last few years as well.

So the net portfolio of that is that in 2021, we didn't see the price erosion that we would typically see we did see in the past.

Paretosh Misra -- Berenberg Bank -- Analyst

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

Bertrand Loy -- Chief Executive Officer

Yes. So first of all, the performance in SCEM was really driven in 2021 by a very, very strong performance in deposition materials, which grew 26% year on year. The other areas of growth were specialty gases and specialty coating in spite of the supply chain issues that you're mentioning, which grew in the mid-to-high teens. Graphite did recover.

Graphite grew in the high teens in 2021. Graphite is not back to pre-credit levels quite yet but is in a healthy situation. If you go back three years ago, our graphite business was both a headwind from a top-line growth standpoint and a headwind from a margin standpoint. That's no longer the case.

It grew again in the high teens and the margins are favorable. So I think, again, a lot of good foundational work took place in SCEM during 2021.

Paretosh Misra -- Berenberg Bank -- Analyst

Thanks for the color, Bertrand, and good luck with everything.

Bertrand Loy -- Chief Executive Officer

Thank you.

Operator

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

Mike Harrison -- Seaport Research Partners -- Analyst

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

Bertrand Loy -- Chief Executive Officer

Yes. Yes. It's true that so much has happened in 2021 that we almost forgot how we got to that strong finish. And you're right that we made very significant and steady progress throughout the year in terms of adding manufacturing capacity.

For context, in 2021, we added about 1,500 manufacturing jobs at Entegris. And to your point, we are running most manufacturing cells at 24/7 right now. We also successfully added a number of new PCs of equipment in the second half of the year. That came online really smoothly.

Once again, kudos to our ops teams. And I was particularly helpful to our liquid filtration product lines, and we can obviously see the results of that output maximization focus in the Q4 results. So as I said, I think we are in a very good place as we start 2022 in terms of internal capacity. We have a few projects for 2022 that will be required for us to be able to fulfill the demand for the strong demand we expect for 2022.

But of course, the focus is also around the large investment we're making in Taiwan. The investment that will be very important to add capacity required for demand we expect -- the strong demand we expect for our products in 2023 and beyond as we presented during the Analyst Day. So a lot of good work by the upstreams in 2021, but 2022, and 2023 will be two busy years for our upstreams as well.

Mike Harrison -- Seaport Research Partners -- Analyst

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

Bertrand Loy -- Chief Executive Officer

Yes. I mean I think it's a very -- first of all, remember that we needed and we need to add capacity because we expect very strong growth across a number of product lines. So we have already today a significant manufacturing capacity in the U.S. The second-largest country for us is Taiwan.

So it was a very natural choice for us to decide to expand manufacturing presence in Taiwan, which was not sufficient, I mean, to be clear. So that is really the basis for that decision. And then we expect a lot of growth and a lot of new opportunities on the island. And so finally to your question about the correlation between the size and the capex level.

I mean it has to do with the desire to really invest in state-of-the-art manufacturing capabilities. We want to bring a new level of automation, cleaner manufacturing processes. The goal is to shorten our lead times and to be obviously, better manufacturers than our competitors. And we also have very ambitious environmental goals with this investment.

Just -- for example, we expect to be reusing and recycling 85% of the water that we consume on the site. So all of that obviously requires some level of upfront investment, but I have no doubt that if we pay off big dividends over time.

Mike Harrison -- Seaport Research Partners -- Analyst

All right. Thanks very much.

Operator

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

Josh Silverstein -- Wolfe Research -- Analyst

Good morning, guys. I was just going to stick with the Taiwan facility. You mentioned capex of about $500 million this year with about half of that coming from that facility alone. Would you expect the kind of stand-alone Entegris capex to stay at that level in 2023 before potentially falling off in '24? and then along the same lines, you mentioned potentially a $500 million-plus revenue number when fully ramped up.

How long will it take that facility to ramp up to that level?

Bertrand Loy -- Chief Executive Officer

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

Greg Graves -- Chief Financial Officer

Yeah. I'm on mute. And can you -- I caught the revenue part, but what was the -- I'm sorry. The first point?

Josh Silverstein -- Wolfe Research -- Analyst

Just on the spending level. This year is about $500 million, roughly kind of half of that from the Taiwan facility. Would you expect capex to remain at that level in 2023? I know the facility has played for initial output next.

Greg Graves -- Chief Financial Officer

OK. Yes. I'm sorry. I got it.

I got it. Yes. I'm sorry, I didn't fully understand. No.

So our expectation is that 2022 will be our peak spending year for overall capex, it will also be the peak year for what we spend in Taiwan. So when we look forward, we would expect by 2024 our free cash flow levels will be back to the levels that we saw in 2020.

Bertrand Loy -- Chief Executive Officer

And when it comes --

Greg Graves -- Chief Financial Officer

As capex as a percentage of revenue comes down.

Bertrand Loy -- Chief Executive Officer

And when it comes to the revenue picture, -- we expect the bulk of the customer qualifications to take place in the first half of 2023, and we expect to start ramping up high volume production in the second half of 2023. So expect this [Inaudible] to really continue to ramp into 2024 and 2025. I

Josh Silverstein -- Wolfe Research -- Analyst

Got it. And then last one for me. I know you were being a little bit quiet around potential asset divestitures around the transaction. But would you still consider any sort of small bolt-on deals like the BAS kind of $750 million acquisitions while you're going through this process?

Bertrand Loy -- Chief Executive Officer

I think it's fair to say right now that the focus for us would be number one, to not allow the CMC integration to be a distraction and to execute on the strong organic growth plan. And I think that statement probably applies for France at CMC Materials as well. Next priority will be to work on integration planning and be ready, day one after close to hit the ground running. And I think it's going to leave us with very little time to really think about additional small M&A, at least for the foreseeable future.

Josh Silverstein -- Wolfe Research -- Analyst

Great. Thanks, Bertrand.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Bill Seymour -- Vice President, Investor Relations

Bertrand Loy -- Chief Executive Officer

Greg Graves -- Chief Financial Officer

Toshiya Hari -- Goldman Sachs -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Kieran De Brun -- Mizuho Securities -- Analyst

Patrick Ho -- Stifel Financial Corp. -- Analyst

Aleksey Yefremov -- KeyBanc Capital Markets -- Analyst

Amanda Scarnati -- Citi -- Analyst

Paretosh Misra -- Berenberg Bank -- Analyst

Mike Harrison -- Seaport Research Partners -- Analyst

Josh Silverstein -- Wolfe Research -- Analyst

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