Entegris Inc (ENTG) Q2 2021 Earnings Call Transcript

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Entegris Inc (ENTG 0.06%)
Q2 2021 Earnings Call
Jul 27, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to Entegris' Second Quarter 2021 Earnings Release Call. [Operator Instructions]. At this time for opening remarks and introductions, I would like to turn the call over to Bill Seymour, V.P. of Investor Relations. Please go ahead, Sir.

Bill Seymour -- VP Investor Relations

Good morning, everyone. Earlier today, we announced the financial results for our second quarter of 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. Since 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 a reconciliation table on 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 Greg Graves, our CFO.

With that, I'll hand the call over to Bertrand.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Thank you, Bill and good morning to all. We are very pleased with our second quarter performance and I want to start by recognizing the phenomenal job done by our manufacturing and supply chain teams. During the quarter, sales grew 27% year-on-year and 11% sequentially. Our growth was strong across all 3 divisions as we benefited from a robust industry conditions and increasing demand for our products and solutions. We experienced strong flow through on our sales and margins improved nicely leading to record operating income and EBITDA for the quarter. In addition, non-GAAP EPS was up 42% year-over-year and 21% sequentially.

Let me provide a little bit more color on our revenue performance. From a product standpoint, we continue to benefit from the growing demand for our leading unit-driven solutions, especially in strategic areas like liquid filtration, which is up 24% year-to- date and advance deposition materials, which is up 28% year to date.

Another highlight of the quarter was obviously of CAPEX driven product lines, which are following the trend of the robust industry CAPEX. Growth was especially strong in the fluid handling, wafer handling, and gas purification product lines, which in the aggregate grew 37% in the first half. in addition, our Aramus high purity bags, which are used for COVID-19 vaccines worldwide recorded to stronger sales than planned. We now expect that Aramus sales will reach approximately $50 million this year. It is also worth noting that the unique characteristics of the Aramus bag specifically high purity and high structured integrity are of increasing interest for use in other non-COVID biologics.

I am also very pleased to share that during the quarter, we made an additional $3 million contribution to the Entegris Foundation, which funds stem scholarships for women and individuals of under represented communities. The first round of these scholarships were awarded for the upcoming school year.

During the first half of this year, we achieved organic growth of approximately 25% impressive, considering the various production and supply chain constraints, the industry and Entegris have faced. Our manufacturing and supply chain teams have done an amazing job and have been instrumental in delivering these great results. However, in this constrained industry environment, every day is a battle and likely will be for a while. That said, we remain confident about our execution going forward. On that note, last quarter we outlined three main issues we've been addressing and I'm pleased to report that we've made solid progress.

The first area was labor constraints in some of our US manufacturing locations. During Q2, we were able to alleviate most of that pressure by adding production head count and by moving many of our operations to a 24/7 work schedule. In addition, we expect to bring new production equipment online in Q3 which will bring additional capacity to certain critical product lines. The last area relates to industry freight capacity and component availability and we expect these constraints to ease as we progress through the second half of this year.

Looking at the full year, our outlook for the industry and Entegris has improved again. The semi market looks increasingly strong across the logic, memory, and mainstream segments driven by improving demand trends in areas like mobile phones, high-performance computing, IoT, and auto. For the full year 2021, we now expect the market based on our unit CAPEX mix will be approximately up 17% compared to our previous expectation of up 13% to 14%. Demand for solution set is very good, and our order book continues to be at a record level. As a result, we expect to outperform the market and now expect our sales growth for the full year 2021 to range from 21% to 22% compared to our previous expectation of up 17% to 19% finally, we expect the EBITDA flow through to be in line with our target model and now expect full year 2021 non-GAAP EPS to exceed $3.30, which is starting to approach the 2023 EPS target of greater than $3.55, which we communicated in our Analyst Day last year.

Looking further ahead, the long-term fundamentals of the semiconductor market are very encouraging. Positive secular demand trends have become increasingly evident driven by accelerated digitalization, 5G, and high performance computing to name just a few. In addition, the pace of new transitions for both logic and memory has quickened in recent years and device architectures all becoming much more complex. This is great news for Entegris because the unique set of capabilities we have built around process materials and materials purity, will be the key enablers of these new chip architectures and this will translate into our rapidly expanding served market and increasing Entegris content per wafer. And with 70% of our revenue, unit driven or recurring in nature, we expect our business model to be more resilient across cycles as it has proven to be the case over the past decade.

Finally, I want to take a moment to thank our customers for the trust and confidence they placed in Entegris and Once again thank the Entegris teams around the world for their incredible work. Now let me turn the call to Greg. Greg?

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Thank you. Bertrand, and good morning everyone. I also want to recognize the great work of the broader Entegris team for delivering a record quarter in what continues to be a dynamic environment. Our sales in Q2 were $571 million, up 27% year-over-year and up 11% sequentially. GAAP and non-GAAP gross margin were both 46.4% gross margin was essentially in line with our guidance, as higher volumes were slightly offset by the negative impact of mix. We expect gross margin to be approximately 47%, both on a GAAP and non-GAAP basis in Q3 and we continue to expect gross margin will be approximately 46.5% for all of 2021.

GAAP operating expenses were $126 million in Q2, and included $13 million of non-GAAP items from amortization of intangible assets, integration, and other costs. Non-GAAP operating expenses in Q2 were $114 million. OpEx was above our guidance range, but lower as a percentage of sales both year-over-year and sequentially. OpEx for the quarter included the $3 million discretionary contribution made to the Entegris Foundation that Bertrand previously referenced. We expect GAAP operating expenses to be approximately $129 to $131 million in Q3, we expect non-GAAP operating expenses to be approximately $116 to $118 million. Q2 GAAP operating income was $139 million, non-GAAP operating income was $152 million or 27% of revenue, up significantly, both year-on-year and sequentially. Adjusted EBITDA was approximately $174 million and exceeded 30% of revenue. Moving to below the operating line. Our GAAP tax rate was 15% and our non-GAAP tax rate was 17% for the quarter.

For Q3 we expect both our GAAP and non-GAAP tax rates to be approximately 19% for the full year 2021, we continue to expect both our GAAP and non-GAAP tax rate to be approximately 18%. Q2 GAAP diluted EPS was $0.65 per share. Non-GAAP EPS of $0.85 per share was up 42% year-over-year and 21% sequentially.

Turning to our performance by division. Q2 sales of $180 million for SCEM were up 23% year-over-year and up 8% sequentially. Growth was primarily driven by specialty gases, advanced deposition materials, and advanced coatings. Adjusted operating margin for SCEM was 25% for the quarter up 400 basis points sequentially.

The increase in operating margin was primarily related to higher sales volume and a benefit from the sale of some non-core intellectual property. Q2 sales of $228 million for MC were up 24% from last year and up 10% sequentially. MC has performed very well across all product lines so far this year with growth especially strong in liquid filtration and gas micro contamination. Adjusted operating margin for MC was 34% for the quarter. Q2 sales of $173 million for AMH were up 36% versus last year and up 16% sequentially. It's worth noting that AMH has the greatest exposure to industry capital spending and this was evident in very strong sales of wafer handling and fluid handling products.

As Bertrand referenced, sales of our Aramus high purity bags continue to be very strong. Adjusted operating margin for AMH was 24%, up significantly, both year-over-year and sequentially. The margin increase was primarily driven by the higher sales volume. Second quarter cash flow from operations was $82 million and free cash flow was $40 million. CAPEX for the quarter was $42 million. We continue to expect to spend approximately $225 million in CapEx this year. Consistent with our capital allocation strategy, during Q2 we used approximately $11 million for our quarterly dividend and we repurchased $15 million of our shares.

Now for our Q3 outlook, we expect sales to range from $575 to $590 million. We expect GAAP EPS to be $0.76 to $0.81 per share, and non-GAAP EPS to be $0.84 to $0.89 per share.

In summary, we continue to execute very well even in the midst of a dynamic supply chain environment. The industry outlook has become incrementally more positive for this year and beyond. Our solution set is increasingly more critical to industry roadmaps, as evidenced by our topline outperformance. And finally, we continue to demonstrate the leverage in our unit driven business model.

Operator, we'll now open up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. We will now take our first question from Toshiya Hari from Goldman Sachs. Please go ahead.

Toshiya Hari -- Goldman Sachs

Hi guys, good morning and thanks so much for taking the question and congrats on the strong results.

Bertrand, I had, I guess one, two questions, and one quick clarification for Greg. First of all, in terms of the big revenue beat in Q2, obviously it was a very strong beat within the context of your Company's history. I feel like you've come in toward the high end, sometimes above the high end, but this was above and beyond what many of us expected, so was this kind of conservatism in hindsight, or was it better supply, better operations internally, what drove the significant revenue beat in Q2?

And then for the full year you're raising your market forecast from 13 to 14 to 17 it would be helpful if you could differentiate between how you're thinking about CAPEX versus wafer starts? And then I got a quick follow-up. Thank you.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Sure. Just. Good morning Toshiya. Let me start with your question on Q2, I mean the short answer to your question is that we were indeed, probably a bit too conservative and our Q2 guidance. In retrospect, I mean, we expected very strong demand for our products going into Q2 and we saw just add across the board, so no real surprise here, but on the flip side of that, we experienced a very severe supply issues in Q1 and we were probably a little bit too conservative. As a result of that in our forecast for Q2. And as I mentioned in my preliminary remarks. Our supply chain and manufacturing teams have done a phenomenal job in Q2 exceeding our expectations. Moving mountains to secure supply lines, to increase output in Q2 and our results in Q2 really showed out.

When it comes to your second question on the annual guidance, the key industry has continued to strengthen through the quarter right. And it is clear that we are expecting at this point, all fabs to operate at full capacity for the balance of the year. And the capacity plans, of all of our customers have also firmed up and being confirmed. So right now, the way you get to that blend of 17% for the full year is wafer starts up about 14% and CAPEX slightly in excess of 25% and again CAPEX for us is really the full industry CapEx as opposed to for WFE.

And you said, you had a follow-up question Toshiya?

Toshiya Hari -- Goldman Sachs

Yeah, I do. Thank you. I guess around EUV clearly there seems to be very strong momentum in terms of adoption of the technology, the big logic company here in the US seems to be accelerating its efforts all 3D RAM companies at this point it seems to be on board as it relates to the technology. So I guess my question is if you can kind of rewind the clock and sort of speak to what you've seen in the foundry space as it relates to EUV how that's benefited your business and what your expectations are going forward as it relates to the EUV ecosystem that would be super helpful. And then one last quick clarification for Greg. You talked about selling non-core IP and SCEM, if you can quantify the positive impact from that in the quarter from an EBITDA perspective, that would be helpful. Thank you.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Yes. So Toshiya on EUV. We are indeed very excited to see the adoption broadly of this technology. As you know this is an enabling technology to find of features and more complex architectures and our solution set is really thriving on greater process complexity. This final the features, greater the need for very advanced purity in the materials from the chemistries used in the process. So all of that is going to create conditions for greater Entegris content per wafer and I think it's great to see across memory and logic much more ambitious technology roadmaps now with final features, which Entegris will benefit from. So I think again great news and certainly 2021 is a breakthrough year for EUV and that's very positive for us.

I will turn to Greg to talk a little bit more about the impact of this sales of IP, which relates to some cleaning chemistries. And so, go ahead, Greg.

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Toshiya, that -- it actually relates to some cleaning chemistries that we acquired the IP for when we are that -- we acquired as part of the ATMI transaction. we retained the right to use the IP, but it's not IP that we've used leading on an absolute exclusive basis so we sold it to another industry participant. That showed up as a, believe it or not as a credit in the accounting mandated that show up in the credit in our SG&A line and it benefited the SCEM division. It was low single digit millions.

Toshiya Hari -- Goldman Sachs

Helpful. Thank you so much!

Operator

We will now move to our next question from Sidney Ho from Deutsche Bank. Please go ahead, your line is open.

Sidney Ho -- Deutsche Bank

Thanks for taking my questions and congratulations on a good quarter. Bertrand, you addressed some of this in your prepared remarks, but is there any chance you can quantify what the impact on revenue was for the first half from a supply constraint and perhaps what you expect in the second half, but do those missed revenue go to a competitor or do you think they will come back to you at a later time?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Yeah. So let's just say that I mean, the supply constraints issue is really a challenge that the entire ecosystem is facing and that includes our competitors as well. So the real solution for us and for our customers is that we increase our capacity as quickly as possible and that's really what our customers want and need from us, and this is really what we've been very focused on. I will not be quantifying the delta between supply and demand, it is true that we were supply constrained in Q2. I expect some additional supply limitation going into Q3, and I would expect, most of that to be alleviated as we get into Q4. So again, the teams are very focused on reducing that gap to the minimum possible. So ask me the question again at the end of the year and I will tell you, if there is a gap left. But again, it's fair to say that as of right now in Q2 and going into Q3. Demand is exceeding supply for us.

Sidney Ho -- Deutsche Bank

Okay, great. I'll ask that question to get in 3 months. My second question is, I know that you don't disclose revenue by region in your slide deck anymore. I know it's in the SEC filings. So just curious how your revenue into China has been? And can you double click on that and give us a sense that the regulator split between domestic versus multinationals; as well as memory versus foundry versus mainstream; and do you guys see any signs that your customers may be building up some buffer stocks? Thanks.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Yeah. So, I mean if you think about the regions. First of all, all regions had record revenue with growth year-on-year and sequential growth as well. I think specifically on China, we had a big quarter in China exceeding 60% growth and just a function of a number of different factors. I mean, I remember the first half of last year, it was an easy comparison. Right. A lot of our customers were in a very significant slowdown early in the year, last year and then as you recall, we had a number of shipments that had been on hold pending, getting the required export licenses and I'm pleased to say that we, in Q2 of this year, we've been able to get approval on all the necessary licenses to release the holds on our US made products. So again, so those are two important factors driving the China revenue and then the last one is that, there's been a lot of investment in China over the last two, three years and a lot of new capacity has been coming online and that has been driving obviously greater consumption of our consumable products.

Sidney Ho -- Deutsche Bank

Great, thank you.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Sure.

Operator

We'll now move to our next question from Patrick Ho from Stifel. Please go ahead.

Patrick Ho -- Stifel

Thank you very much and congrats on the nice quarter and outlook. Bertrand, maybe first qualitatively. I know you don't want to give guidance over future quarters but given some of the industry dynamics that we're seeing today, as you mentioned, the strong demand environment. Some of the supply constraints that are still there. What's your visibility like, I guess in both the your units as well as CAPEX driven products. Are you getting visibility longer than you typically would? And how does that help you in terms of quote alleviating some of the supply chain issues that you have?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

So, Patrick, we commented on the visibility in the last couple of quarters and I would say that the visibility remains very good and probably better than normal. So that's important, obviously as we make capacity decisions, as we make procurement, and planning decisions as well and that's really what the team has been very focused on and will continue to be focused on which is making sure that we secure access to the right level of suppliers and then we've been working very closely with our supply chain partners and then making sure that internally we unlock as much new capacity as we can and we talked about how we were intending to do that in Q2 and it was really mostly about hiring and training new operators. I think we've made a lot of good progress in Q2 and we are exiting Q2 with much greater capacity than we started the quarter and then in Q3, we are counting on a number of new levels with new membrane surface treatment equipment coming online, new cleaning capacity for our liquid filters coming online, and that's going to benefit our liquid filtration product lines as we get into the second half of the year, and we are also expecting to get new high purity drum capacity in Q3 and that's going to help our AMH division. So we are very focused on short-term capacity additions, mid term capacity additions, and then of course we talked about our longer-term capacity plans with this big investment in Taiwan as well. So we are very focused on that. And as you said, it's because we have a high degree of confidence in our growth strategy. Short term, but also for many years to come.

Patrick Ho -- Stifel

Great, that's helpful. And my follow-up question, you gave a good description on some of the opportunities on EUV. The industry is also progressing forward toward gate all around or formats of that nature, your--one of your large customers talked about it yesterday. How do you see the opportunities for gate in the long run because that is quite materials intensive. Does that provide another impetus for both the SECM Group and micro contamination control what are some of the incremental opportunities you see there as you start working with your customers on that architecture?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Your question is right on, Patrick, I mean we are very excited about what we see on the roadmap, those new architectures will be requiring highly engineered materials that are not used by the industry today. And that we are very focused on developing with our customers, as you know those gate all around structures or features will be introduced at Atomic levels in terms of dimensions and that's going to require much greater leverage of purity throughout the process. So again, a lot of reasons for us to be extremely excited and bullish about our prospects and about the roadmap and what it will mean in terms of Entegris content per wafer for the years to come.

Patrick Ho -- Stifel

Great, thank you.

Operator

We'll now move to our next question is from Amanda Scarnati from Citi. Please go ahead.

Amanda Scarnati -- Citi

Hi, good morning. The first question I have is, on this component constraints that you said might be easing toward the end of the year. Are you seeing any specific issues with sourcing materials, you've been hearing about the chemical supply chain is getting increasingly more tight across the board. Are you seeing any specific issues there or do you expect that to be progressing nicely throughout the rest of the year?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Yeah, Amanda. It's a good question. I think that's one of the reasons why we, we want to remain fairly cautious in our outlook, simply because I think we have control in the various initiatives that we can take internally to increase our own manufacturing capacity and our --but we have less of a control on what our supply chain partners, will be able could you. And again, they are making a lot of very promising commitments but again, that's not something that we control directly. So I think that there are many reasons for us to believe that the situation will ease as we progress throughout the year, but that's something that we're going to be obviously very focused on and we're trying to help our supply partners in any way we can. And again, as I was saying, I think that's the reality that is across the ecosystem.

Amanda Scarnati -- Citi

Great! And then as a follow-up in the Aramus bag division, you mentioned that you expected to reach about $50 million this year, with all of that COVID related, are you starting to see any revenue generation outside of the COVID vaccine?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

So Amanda, I would say that the revenue, we expect to generate in 2021 will be mostly COVID related. The good news, however, is that the opportunity pipeline is starting to have a slightly different shape, with a lot more non-COVID related opportunities. So, if you take that statement at a context of the recent investment in new capacity, I would say that this capacity will be filled with COVID related opportunities probably for the next 18 to 24 months. And then I would expect a smooth transition to non-COVID opportunities in the out years.

Amanda Scarnati -- Citi

Great, thank you.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Sure!

Operator

We'll now move to our next question from David Silver from CL King. Please go ahead.

David Silver -- CL King

Yeah, hi. Thank you. I had a question -- my first question would be on the capacity constraints, either for yourselves or for your customers. But, firstly in your opening remarks, you did talk about new capacity additions coming on in the 3rd quarter maybe to relieve some bottlenecks. I was wondering if you might be able to detail that, and then maybe Bertrand, from a broader perspective. I mean we, there's a number of stories obviously for a long time now about shortage conditions or chip production being limited by various constraints. From your planning perspective, do you believe that the "shortage conditions" or the nears full out operating conditions in the industry. Is that going to last well into 22, 2022 beyond that, maybe it'd be over by the end of the year. How are you planning for the duration of what some people say it would be sold out industry conditions among chipmakers? Thank you.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Yeah. So those are really good questions, broad questions. We could probably spend a lot of time discussing them. I'm going to try to be [Indecipherable] in my answer. I think when it comes to our capacity improvement plans I cited a few new initiatives, as we get into Q3 impacting, positively impacting our liquid filtration output and positively impacting our high purity drum output and that's what we're going to be very focused on working with our customers to qualify those new pieces of equipment or those new production lines. And as I was mentioning, we're continuing to hire a lot of new operators train them, move aggressively. Most of our work centers to 24/7 work schedules and all of that will have a nice positive impact on our capacity.

When it comes to visibility, as I was saying, we have a good visibility for the balance of the year It never really extends far beyond that you said that when we think about 2022. All indications are that it should be another positive year for industry. I mean, we expect a lot of new capacity to come online. We expect our fab customers to run more wafers at the leading edge where we have higher Entegris content per wafer. I will not quantify those statements. We will do that in January, February time frame as we always do and we report earnings for the year and when we guide for the next year. But as we sit today based on what we are hearing from our customers. We expect 2022 to be another good year for the industry and for Entegris.

David Silver -- CL King

Okay. And I'm going to follow up that overly broad question with kind of a more targeted one. But I wanted to focus on your AMH segment, it's your smallest segment but year-over-year or sequentially that was the segment that has shown the strongest growth and there is certainly some elements in there I consider the wafer handling element may be more CAPEX driven potentially lumpy. And then the Aramus portion of the growth is going to be more, I don't know secular I guess, but in your 3rd quarter guidance, you've kind of some at the midpoint, your revenues are due to be up slightly, but then I'm just wondering about your anticipated contribution from your AMH segment. In other words, will that potentially lumpy contribution on wafer handling and maybe some other products there continue or is this the case where some of that lumpiness may make recede for the balance of the year. Thank you.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

I can start and then Greg, maybe can add to that, but in terms of the revenue performance of AMH as you mentioned, remember that this is the one division that has the most exposure to CAPEX. So as you would expect in that context, growth was particularly strong in our CAPEX driven platforms with AMH. So product lines like FOUP, fluid handling solutions, sensing and control, but frankly we also saw strength in our wafer shipping business which is more of a unit driven business for them. Even in the smaller diameter 2 hundred-millimeter fabs are producing at very high levels right now and that's benefiting some older generation products. And of course, we've talked about the positive Impact of our Aramus bags for biologics. So I think that the performance for AMH which is up 32% year to date. I would expect actually that level of performance on an annual basis. Again, mostly because of the strength in the industry CAPEX and the positive impact of the Aramus bags. And then on the bottom line, Greg, I don't know if there's anything you want to add to that?

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Yeah. No, I would just say, David you'd asked about as it relates to our guidance. I mean we would expect that business to be up slightly similar to the overall broad based guidance Bertrand mentioned some areas where the business has performed well. He also mentioned earlier in the call EUV. The EUV part of that business has done quite well and then profitability the team has executed well, but it's also our business probably with the highest of our fixed cost leverage, both on the the cost of goods sold line as well as operating leverage because they've got a relatively relative to the other two divisions lower, much lower ER&D spend and so that you're seeing that level see margins in 24% range like we saw in the most recent quarter.

David Silver -- CL King

Very good. Thanks very much. Appreciate it!

Operator

We'll now move to our next question from Paretosh Misra from Berenberg. Please go ahead.

Paretosh Misra -- Berenberg

Thanks and good morning. Can you talk about your growth that you saw in a logic versus memory, in the first half of this year. And any color, any expectation that you have for the second half in terms of which of these you think would be the bigger growth driver in the second half?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Yeah, so, Paretosh, the --I mean if you think about logic, foundry old fabs are really running at full capacity right now and we are seeing obviously a lot more wafers being produced at the 10 nanometer and below. So that's good for us. Year-to-date that particular set of customers is growing in the mid teens. And we would expect that growth rate to increase in the back end of the year, because there will be new capacity at the leading edge that is expected to come online and that's going to actually create favorable conditions for a pickup in revenue, in liquid filtration and deposition materials and surface prep chemistries as well. So again, good performance year-to-date. But I think that I would expect an acceleration in the back end of the year.

Paretosh Misra -- Berenberg

Got it, thanks. That's useful. And then with regard to the SCEM business, can you just provide a bit more color on your mix in this quarter and what was the mix a tailwind for margins on a sequential basis or a year-over-year basis?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Do you want to take that Greg? or I'll take it.

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Sure, I'll take it. Yeah. So with that within the SCEM business. I mean, mix was slightly positive. It was not a significant factor the I mentioned in the prepared remarks, the margin did benefit from an IP sale, which had a several basis point impact on that operating margin for the most recent quarter. But I'd say the mix was generally consistent with what we've been seeing.

Paretosh Misra -- Berenberg

Got it, thanks. And my last question is on your filtration business. Do you Alcatel your filtration micro contamination products to other chemicals companies just to help them purify their products and if yes, then anyway you could quantify as to what percentage of sales go through those channels?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

So, yes, the short answer is yes, we are selling bulk filters to a broad array of chemical manufacturers examples of products would be photoresist obviously, but also IPAA and all sorts of different chemistries used in the manufacturing process of semiconductors. This is a segment that has been growing very fast and is growing in importance for us because the degree of purity required in bulk chemicals, it is becoming increasingly more stringent and that has opened up opportunities, not just for our liquid filters, but also increasingly for our high purity drums. We don't disclose and we don't intend to disclose those types of market statements, of market segments. So I don't really intend to break that down for you today. But I would say that this is certainly a big area of growth for us.

Paretosh Misra -- Berenberg

Thanks for that. Thanks. Bertrand. That's all I had. Thank you.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Sure, thank you.

Operator

We'll now move onto our next question from Chris Kapsch from Loop Capital Markets. Please go ahead.

Chris Kapsch -- Loop Capital Markets

Yeah, hi, good morning. And kudos to you and your team on execution. I was hoping you might...

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Thank you.

Chris Kapsch -- Loop Capital Markets

Are you able to further characterize your continued outperformance relative to the industry, let's say, I guess maybe into the second half of this year and into next year. And if, excluding the effective, the Aramus bags, do you see the outperformance be more pronounced in equipment product lines or in consumables?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

So thank you, Chris and for the nice comment I would say that if you think about the RMS product line, it's contributing a soft 2% of growth year-to-date. I think it will contribute the stronger or a full point of growth on an annual basis, so the rest of the outperformance is in fact mostly unit driven. And I gave you some in my preliminary remarks citing in particular deposition materials growing at 28%, which is about twice the rate of wafer starts or also mentioning our liquid filters growing at about 24% year to date. So again two very important product lines to recall that those are areas where we have invested a lot in R&D. Over the past year. So it was important for us to see the results and we are seeing results frankly that are exceeding our expectations in many cases.

Chris Kapsch -- Loop Capital Markets

That's helpful and actually the follow-up was done on that metric you gave on advanced deposition materials, the 28% growth. I'm curious about, if you could get more granular on that in terms of logic versus memory, I think you said advanced logic sales were up mid-teens. So maybe that was part of the answer, but was this strong growth in advanced deposition, was it more a function of ramping nodes in logic, foundry or is it really most pronounced in the migration within the memory sector in 3D NAND to architectures with the deeper layers? Thank you very much.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

So this year, it has been mostly a memory story remember that a lot of our customers have transition now 128 layers and then some of them have been transitioning to 176 layers and all of them are actually taking steps to transition two hundred plus layers going into 2022. So with those transitions, we saw a number of new opportunities for deposition materials opening up, we saw new opportunities for selective etching chemistries as well. And those are the trends that have been driving our SCEM business. So it's mostly memory this year. I would expect logic to play a bigger role in the next years at some of those new molecules are more widely adopted in the another logic architectures. I think it's going to be more of a 22-23 event with memory continuing to drive the SCEM growth in 2021 and 2022.

Chris Kapsch -- Loop Capital Markets

Very helpful color. Thank you.

Operator

We will now move to our next question from Timothy Arcuri from UBS. Please go ahead.

Timothy Arcuri -- UBS

Thanks a lot. I had 2 questions. Bertrand first for you. I know you're talking to customers all the time. And do you see any signs of them stockpiling an inventory of your products at customers. I know we've heard more of that happening during the second quarter. I'm just wondering if you can sort of handicap whether or not you think this has happened.

Bertrand Loy -- President, Chief Executive Officer, and Board Member

So, Tim, it's a fair question. Something we're constantly looking at especially in the very sharp ramps and especially at a time when we are capacity constrained, so obviously something that we are paying very close attention to, I think there may be a little bit of that in China for the reasons that we all know but putting China aside, I think that the demand for our products are really driven by the very strong level of fab activity right now. If, I mean, do you. I don't know about you but I mean, we've-- it's hard to find electronics. I will give you just an anecdote but I think it's telling, I mean, we've been hiring a lot of new members of our teams and it's really hard to get them PC on time. if you talk to any one of our customers, they are running at very low levels of inventory for their finished products and in many cases for the Entegris products for their raw materials, they claim to be below what would be their are normal inventory levels. So I think that right now. This is not a risk, and I don't think that there is really a lot of excess inventory in the channels I don't think there is any. I think we are below normal levels.

Timothy Arcuri -- UBS

Got it! Okay, thank you for that. And Greg for you, I had a question on gross margin drop through. I mean, you did a great, great job in June. Don't get me wrong but the margins came in line and if I look at the gross margin drop through over the past 3 years, you've done 50% more revenue and the gross margins basically hasn't really changed much over that period. So I'm just wondering what can change to make the drop through a bit better. I know you've been investing and in capacity, but also we should see some leading edge wafer addition and that should help gross margin. I would think as well due to mix. So can you talk about the drop through and should it get better going forward? Thanks.

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

So first of all, on the gross margin in the most recent quarter. As I said in their prepared remarks, really, I mean the higher volumes were offset by the negative impact of mix and that emanates itself, primarily in the MC business. With regard to sort of the longer-term trends. If you look over the last several years, our capital spending has been up pretty significantly as we add capacity and we add capability, we'll continue to do that. What I would say is, I would expect the margin to have an upward bias, but I've always said, think of this as a business where do I think we can do 47 48 type margins. Yes. But I don't think long term, this is a business where you're going to see margins in the '50s. I wish I could say it differently, but I watched and you're highlighting at I mean watch that over a long period of time. I mean, our customers are going to let us margins where they are, maybe slightly above where we are.

Timothy Arcuri -- UBS

Okay. Yeah. Greg, thank you.

Operator

We will now take our final question from Mike Harrison from Seaport Research Partners. Please go ahead.

Mike Harrison -- Seaport Research Partners

Hi, good morning. So Bertrand, we talked a little bit about the supply and demand tightness and your view that the demand is outstripping supply right now and we're in this broadly inflationary environment. So, are you seeing that your pricing is increasing at all as a component of the revenue growth you're seeing, either in response to inflation or as a result of this tight supply demand environment?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

So look, we are obviously watching all of those trends and we're going to continue to adjust our strategies to mitigate potentially negative factors to a margin. I don't think we want to go into the details of our mitigation strategies or pricing strategies on this call, but the punch line as Greg was mentioning just a second ago is that, we expect our margins to continue to steadily improve and that's really a function of the greater value that we are contributing to our customer roadmaps. So obviously a lot of moving pieces right now as you said, we are very focused on that and we don't think that it will have any lasting negative impact on our bottomline performance.

Mike Harrison -- Seaport Research Partners

All right. And then in the AMH segment, the margin there looks like it's a record in terms of that 24%, 25% number. I know that when you did your Investor Day last fall, you had actually reduced the longer-term margin target. I believe to a 20% to 22% number. So how should we think about the sustainability or maybe long-term margin potential of that AMH segment?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

I think the points you make are all sort of right on. And as you point out, I mean we're operating at the 24% range in Q2 which is a very good, a good margin which reflect strong execution, strong operating leverage do I think it atlonger term I mean what I commit to that 24 longer-term, I mean we're down at a point now where we're prepared to change our longer term targets that we've laid out, but at these revenue levels. The business should be able to sustain margins above the targets that we talked about back in November. Mike, I mean if you look at really all of the many of the metrics in our business. I mean the industry environment has proven to be strong, much stronger than we laid out in November. So in many cases were sort of out ahead of where we would have thought we would be at this point.

Mike Harrison -- Seaport Research Partners

All right. And then, Greg, maybe a question for you. The unallocated expense number look, relatively high north of $13 million. I think it's, first time it's been a double-digit number in some time. What drove that. And can you give some guidance on what we should be modeling for unallocated expense in the second half?

Bertrand Loy -- President, Chief Executive Officer, and Board Member

So what drove it in the most recent quarter was the $3 million contribution Bertrand referred to what's driven it overall it would be higher trends in compensation costs related to the higher performance that we've had as a business. Honestly, I don't --when we have model and put our our plans together. I don't really focus on that unallocated number so I don't --but I would say generally it's an SG&A number and our goal is to hold SG&A growth well below sales growth on a percentage basis.

Mike Harrison -- Seaport Research Partners

All right, thanks very much.

Operator

Ladies and gentlemen, there are no more questions. [Operator Closing Remarks].

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Thank you.

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Thank you

Duration: 57 minutes

Call participants:

Bill Seymour -- VP Investor Relations

Bertrand Loy -- President, Chief Executive Officer, and Board Member

Gregory B. Graves -- Executive Vice President and Chief Financial Officer

Toshiya Hari -- Goldman Sachs

Sidney Ho -- Deutsche Bank

Patrick Ho -- Stifel

Amanda Scarnati -- Citi

David Silver -- CL King

Paretosh Misra -- Berenberg

Chris Kapsch -- Loop Capital Markets

Timothy Arcuri -- UBS

Mike Harrison -- Seaport Research Partners

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