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Versum Materials, Inc. (VSM) Q4 2017 Earnings Conference Call Transcript

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Versum Materials, Inc. (NYSE: VSM)
Q4 2017 Earnings Conference Call
Nov 9, 2017, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Versum Materials Fiscal Fourth Quarter and Full Year 2017 Earnings Conference Call. Participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a touchtone telephone. To withdraw your question, you may press star and two. Please also note, today's event is being recorded.

At this time, I would like to turn the conference call over to Ms. Nahla Azmy, Head of Investor Relations. Ma'am, please go ahead.

Nahla Azmy -- Head of Investor Relations

Thank you, Jamie. Thanks everyone for joining us today for our Fiscal Fourth Quarter and Full Year 2017 Earnings Call. We hope you have had an opportunity to review the press release we issued earlier this morning. We've also posted the presentation for today's call at the Investor Relations section of our website at versummaterials.com. We encourage you to review these documents.

On today's call, we will begin with prepared remarks from Guillermo Novo, our President and Chief Executive Officer; and George Bitto, our Senior Vice President and Chief Financial Officer. Following their remarks, we will have a Q&A session.

Some of the matters we will discuss on this call, including our 2018 financial outlook and guidance are forward-looking and are subject to known and unknown risks and uncertainties, including those described in today's press release, our Form 10-K, and our other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed in this call.

During today's call, we reference certain non-GAAP financial measures. We include reconciliations with the non-GAAP financial measures to GAAP in our news release and in the presentation posted on the Investor Relations section of our website.

Versum Materials assumes no obligation to update the information presented on this conference call. An archive of the webcast will be made available on our Investor Relations section of our website.

And now, with that, I'm pleased to turn the call over to Guillermo.

Guillermo Novo -- President and Chief Executive Officer

Thank you Nahla, please turn to Slide 5. We are pleased to have you join us to review our fourth quarter and full year 2017 financial results, bringing a strong finish to our first year as an independent company. I will also provide an update of our 2017 initiatives, 2018 priorities, and our outlook and continued confidence in the semiconductor industry and in our performance in the years ahead.

Just briefly, I'd like to begin with Versum's key highlights. Versum is a premier global supplier of materials and equipment to the semiconductor industry. We have leadership positions in profitable and complex space. Innovation, quality, and reliability, and customer intimacy are core to how we create value for our customers.

As one of the largest and most diversified specialty materials suppliers to the semiconductor industry, we have the global infrastructure and technical and commercial capabilities to support our customers and deliver sustained profitable growth. All of this enables our strong financial profile, characterized by exciting growth prospects, high margins, low capital intensity, and strong cashflow generation.

Please turn to Slide 6. At Versum, there's no compromise on safety. We see our safety performance as an important indicator of our operating discipline. I'm happy to report we improved our performance and delivered record results in 2017.

Please turn to Slide 7. Starting with the fourth quarter highlights, we delivered strong results with sales up 19% and adjusted EBITDA of 20% over prior year. Our Materials segment, sales of $217 million were up 13% and gross profit margin was steady at 46%.

Advanced Materials delivered another robust quarter with high double-digit sales growth driven by strong demand and share gains in legacy products and innovation wins from technology migration in both Logic and Memory. We continue to benefit from our strong position in Logic and our expanding market position in Memory.

Process Materials delivered healthy growth with double-digit volume increases from strong demand in Asia, offsetting price headwinds in NF3 and product line exits. Capacity constraints in NF3 and WF6 limited our upside potential from increased V-NAND demand and the move to more layers.

Delivery Systems and Service segment delivered a very strong fourth quarter. Sales of $77 million were up 38% and gross profit margin of 30% was driven by higher sales and productivity, offset by less favorable equipment and project mix.

As for Fiscal 2017, our results were also strong with sales of $1.1 billion, up 16%, and adjusted EBITDA of $372 million, up 14% over prior year. We completed our first year as an independent company with record results and, equally important, this performance marks the fifth year of continued improvement in our financial and strategic performance.

All three Advanced Materials platforms contributed record performance in 2017. Advanced Deposition delivered robust growth from underlying demand, share gains, and POR wins in 10-nanometer. Our planarization platform continued its growth acceleration from innovation and advanced oxides and barriers, coupled with underlying strong demand in copper, post-cmp cleans, and wafer polish. Our new products have been well-received by customers to address the requirements in more selective off-site applications in Advanced DRAM, V-NAND, and FN Fab.

Lastly, Surface Prep and Clean demonstrated solid growth, but more importantly, gained traction with more environmentally friendly wet cleans for applications in 7-nanometer logic. Further, with the acquisition of Dynaloy, we have been able to accelerate the launch of new-formulated cleans with key customers in advanced packaging processes.

Process Materials delivered strong volume growth, especially in Asia. The team loaded our capacity expansions and overcame headwinds from capacity constraints and softer pricing in a few key products. The strength of our diversified portfolio and our productivity actions allowed us to grow and continue to deliver strong margins.

DS&S benefited from record industry wafer capital investments and our strong alignment with the major CapEx investors, especially in Korea and China. They captured significant growth by leveraging their position with key customers, executing to meet customer timelines and requirements, and by continually innovating to address new customer needs.

Megasystem Services, with its stable long-term contract base, delivered steady growth from expansions with our existing customers and some gains at new customers.

I'm proud of the accomplishments of our leadership team and dedicated employees whose relentless focus and drive enabled us to thrive in a year of significant change for our company.

To recap, we drove topline growth with robust volume performance across both business segments while continuing to deliver strong margins, we maintained costs in line with our expectations, we generated strong cashflow and increased our cash-in-hand, and we advanced both our organic and inorganic growth strategies.

Please turn to Slide 8. This slide highlights the priorities we set for our first year as a public company. To reiterate, we had targeted four pillars: Building a Results and Customer Oriented Culture, Delivering Profitable Growth, Enhancing Productivity, and Transitioning to a Standalone Company. I'm happy to report that we advanced our objectives in all these fronts.

In culture, we saw greater ownership and accountability which is translating into improved performance. We enhanced all aspects of our partnership with customers from R&D, operational, and commercial activities and our investing to make sure we have the infrastructure and capabilities to create value for them.

On profitable growth, we delivered on our stated financial commitments, strong revenue, and adjusted EBITDA growth, with sustained margin quality, translated into strong cashflow. We also complemented our organic growth with inorganic investments, specifically, Dynaloy and NuMat.

Productivity enhanced our financial performance as we optimized and fully loaded our capacity. We invested in our global commercial infrastructure while maintaining costs in line with expectations.

Transitioning to our stand-alone infrastructure and capabilities has been in-line with our plans with no major surprises. Most of the remaining separation items are linked to the implementation of our new ERP system and we are on-target to complete the transition off the remaining air products TSAs during the second quarter of Fiscal 2018. It's been a busy and productive year for our team. We still have important work ahead and are very excited about the continued growth prospects.

Please turn to Slide 9. 2017 was a record year for our industry with estimated fiscal MSI growth of 11% and WFE of 37%. Let me share with you some of the major industry trends that impacted our business and performance.

Although there was a lot of exciting developments across all parts of our industry, 2017 was a year for the Memory market. In a world of big-data, demand for big-storage is heightened. This together with the growth of V-NAND and its move to 64 layers, has had a very positive impact on demand of many materials. On the equipment side, memory investments in Korea have outpaced other regions.

Logic also delivered a strong year in terms of both growth and innovation. The move to 10-nanometer kicked in demand for new materials that will transition to 7-nanometer RAMs in 2018. IOT, automotive, and industrial semiconductor demand is sustaining higher utilization for existing materials and fabs operating at legacy nodes.

China has been at the center of a lot of activity for our industry. CapEx investments by multinationals and local players are increasing demand for specialty gases, materials, and delivery systems. Early stage growth by local players in China created opportunities for existing legacy materials that supported older nodes. Overall, the macro environment was very positive for materials and equipment suppliers to the semiconductor industry.

Please turn to Slide 10. Let me share with you some of the high-level drivers we see impacting semiconductor materials in 2018 and beyond. Unlike the past, growth is coming from many types of applications as technology is now playing an ever-increasing role in our lives. The growth we're experiencing in IT manufacturing is due to the broadening use of technology into many market segments, including automotive, industrial, medical, data analytics, and consumer applications.

Although we expect some moderation in the growth in the Memory market, we still see four key drivers impacting semiconductor materials. Although pace may have changed, Moore's Law continues to drive the shift to new nodes and the need for new enabling materials. Strong bit demand growth will continue to fuel underlying growth in Memory, first increasing the demand for legacy materials, then driving the need for new materials as structural complexities increase.

Internet of Things, or IoT, will continue to drive underlying growth and extend demand for legacy materials. Near-term investments in China will continue to drive significant equipment growth which will translate into future demand for legacy materials. As the Chinese industry develops its production capabilities for more advanced nodes, the profile of the material requirements will change.

What does this mean for the future? MSI growth is expected to remain in the 4% to 6% range through 2019 and to be a multiple of approximately 1.5 times the underlying GDP. WFE is likely to have another record year in terms of investment, driven by Memory in China. The question is more about the year-on-year growth expectations relative to the record spending in 2017. Current expectations are that 2018 WFE will be flattish versus this past year.

I'll give more color during my closing but, for now, sufficed to say that we are very excited about the prospects for our industry and the implications for material suppliers. Materials will continue to be a critical enabler to the advancement of the semiconductor industry and we see more opportunities for organic growth in our portfolio. As such, we will be increasing our organic growth investments during the next year to ensure we're well-positioned to benefit from these exciting, profitable growth opportunities.

With that, I'll turn it over to George to go through a more detailed review of our financial performance and guidance. George?

George Bitto -- Senior Vice President and Chief Financial Officer

Thank you, Guillermo, and welcome to everyone on the call. Please turn to Slide 12. We posted strong fourth quarter results, bringing to conclusion a very successful Fiscal 2017. This performance was driven by the continued robust semiconductor market, our strong business position to key customers in both of our segments, and continued focus on our overhead cost structure, including those costs related to the implementation of our standup activities.

As a reminder, for comparison purposes, 2017 results for Versum reflect operations as an independent company, while 2016 results are presented on a carved-out accounting basis, including allocated governance costs from our products.

Now, regarding the fourth quarter, sales of $295 million increased 19% from the same quarter a year ago, driven by strong volume growth in both our DSS and Materials segments. Gross profit margin of 42% was down slightly from prior year due, in part, to less favorable segment mix given our strong DSS results.

The quarter also saw slightly higher operating costs in the Materials segment. Overhead costs of $44 million, including selling and administrative and research and development, were favorable to prior year, contributable to lower standup infrastructure costs compared to prior years' carved-out accounting basis.

We delivered adjusted EBITDA growth of 20% and continued strong adjusted EBITDA margin of 32%. The key margin drivers were volume growth from both operating segments, modestly favorable currency, and the aforementioned favorable overhead costs. These offset weaker price mix in some of our Process Materials product lines, particularly NF3, and the less favorable segment mix given the strong Delivery Systems results.

GAAP operating income was $70 million for the quarter, GAAP net income was $45 million, diluted earnings were $0.41 per share. Excluding the $10 million of pre-tax separation and restructuring charges which, as you recall, are associated with the relocation of our personnel and R&D facilities to Versum sites and our ERP implementation costs, adjusted net income was $52 million and adjusted diluted earnings per share was $0.47.

Remember that, on both a GAAP and an adjusted basis, net income and EPS are not directly comparable to prior year due to $12 million of interest expense this year associated with debt incurred to capitalize the company versus, basically, zero interest expense last year.

For the fiscal year, sales of $1.1 billion increased 16% from Fiscal 2016, again, driven by strong volume growth in both DSS and Materials and the gross profit margin of 43%. Sales exceeded the increased guidance that we provided in the third quarter earnings call. Overhead costs of $171 million were up from prior year, largely driven by higher costs related to standing up the company. We delivered adjusted EBITDA of $372 million, up 14% from last year and maintained strong adjusted EBITDA margins of 33%.

Topline and loading benefits from the robust volume growth in both segments and modestly favorable currency offset unfavorable price mix, less favorable segment mix, and higher costs associated with becoming independent. This adjusted EBITDA was at the higher end of the guidance rates from last quarter of $365 to $375 million. GAAP operating income was $300 million for the year, GAAP net income was $193 million and diluted earnings was $1.76 per share.

Pre-tax separation and restructuring charges of approximately $25 million were consistent with our expectations. Excluding these restructuring charges, adjusted net income was $209 million and adjusted diluted earnings per share was $1.91 per share. Again, both GAAP and adjusted net income and EPS were not directly comparable -- we had $47 million of interest expense this year versus, basically, zero last year.

Our effective tax rate was approximately 21% for the year, at the low end of our expected 20% to 25% range and net income attributed to non-controlling interest was approximately $7 million per year. Now, please turn to Slide 13 for discussion of the Materials segment.

For the quarter, Materials sales of $217 million were up 13% versus last year, reflecting a volume increase of 15%. Double-digit volume growth in both Advanced and Processed Materials and favorable currency, offset somewhat by unfavorable price mix in some products in Processed Materials.

The segment delivered strong adjusted EBITDA of 15% from the same period last year, with an adjusted EBITDA margin of 37%, benefiting from the volume increase in currency, offset by price mix and slightly higher operating costs. For Fiscal 2017, Materials sales of $830 million were up 10% versus last year, reflecting a strong volume increase of 12% with double-digit volume growth from Advanced Materials and high single-digit volume growth from Processed Materials.

In addition to strong underlying market fundamentals, our AM business continues to deliver innovation driven through growth. Adjusted EBITDA of $318 million, up 7% versus prior year, benefited from strong volume performance and favorable currency, offsetting higher costs associated with becoming an independent company and unfavorable price mix.

Now, please turn to Slide 14, the Delivery Systems & Services segment. For the quarter, DSS delivered another excellent quarter with sales of $77 million and 38% increase over the prior year, primarily from robust equipment sales. Segment-adjusted EBITDA for the quarter was $18 million, up 30% from prior year quarter and margin was 24% with the higher equipment sales and loading benefits offsetting less favorable product mix.

For the year, DSS posted record sales of $294 million, a 38% increase over the prior year, with equipment up significantly and our Services business delivering solid growth from expanding our activities, primarily, in our existing customer sites.

Segment-adjusted EBITDA of $73 million was also up 38% from prior year, driven primarily by the higher equipment sales. Adjusted EBITDA margins remained at 25%. DSS business is well-positioned with key players and continues to innovate to drive performance.

In the Corporate segment, adjusted EBITDA for the year of negative $19 million is favorable to prior year by $4 million. Our governance costs within the Corporate segment were consistent with our expectations.

Please turn to Slide 15 to review our cashflow and leverage performance. Consistent with our financial profile of health EBITDA margins and low capital requirements, we generated strong free cashflow, further strengthening our balance sheet and increasing our investment flexibility. For Fiscal 2017, cash flow from Operations totaled $263 million and this included approximately $25 million of pre-tax separation and restructuring costs.

Capital expenditures and acquisitions were $77 million, including $25 million associated with our restructuring activities and $13 million for the acquisition of Dynaloy. Due to the timing of spending, this restructuring capital is approximately $15 million less than what we expected to make in 2017 with the balance shifting to 2018.

Free cashflow, defined as cash from operations less capital expenditures and acquisitions, was $186 million, bringing our year-end cash balance to $271 million. This increased level of cash-on-hand provides us the financial flexibility to drive growth through additional organic investments and to continue our pursuit of value-enhancing inorganic opportunities.

Leverage for the business, represented by net-debt to adjusted EBITDA, has fallen to below two times, based on our Fiscal Year 2017 adjusted EBITDA of $372 million, improvement from 2.7 times at this time last year. In part due to our financial leveraging profile, in September, we were able to complete the successful repricing of our existing $569 million term loan B. Under the amended term loan, the interest rate was reduced 50 basis points to live more plus 2% with no live more floor.

Now, please turn to Slide 16 to discuss our updated financial guidance. Coming off our strong initial year of operations in Fiscal 2017, we are initiating guidance for Fiscal 2018. As noted earlier, underlying out outlook are external industry forecasts for growth in global GDP in the 3% range, MSI in the 4% to 6% range, and wafer fab equipment spending in the minus 1% to minus 4% range though both MSI and WFE are reflected on a fiscal year basis.

For sales, we are estimating a range of $1.18 to $1.23 billion. This represents 5% to 9% year-on-year growth. It reflects continued strong volume growth from Materials AM business and market outperformance from the DSS segment, offsetting PM's limited volume growth due to capacity constraints and the full year pricing impacts from Fiscal 2017.

Adjusted EBITDA for the fiscal year is estimated to be in the range of $295 to $415 million. This represents year-on-year increase of 6% to 12% from Fiscal Year 2017. Note that this adjusted EBITDA guidance excludes $15 to $20 million in non-GAAP charges, including restructuring costs associated with the final stages of implementing our own IT infrastructure and relocation of our research and development and administrative activities.

We estimate capital spending to be in the range of $110 to $120 million. This includes $20 to $25 million of remaining spending for setting up our IT infrastructure and relocating our R&D assets, including the $15 million shifted from Fiscal 2007.

As Guillermo will discuss, we have a number of new, organic capital investment opportunities which are expected to provide additional future growth. Maintenance capital is estimated to remain in the 1.5% to 2% sales range. For the fiscal year, depreciation and amortization is expected to be $50 to $55 million. Our effective tax rate is expected to be in the 23% to 25% range and net income attributable to non-controlling interest is expected to remain approximately $7 million for the year.

In conclusion, with all our activities this year, we are extremely pleased with our 2017 financial performance and are excited about our prospects to deliver continued growth in Fiscal 2018. Now, let me turn the call back over to Guillermo.

Guillermo Novo -- President and Chief Executive Officer

Thank you, George. Please turn to Slide 20. In addition to George's comment about guidance, let me add some color on a few key items for 2018. Innovation is at the core of our industry and the values materials create. Innovation will continue to be a major growth driver for our business. We have a robust portfolio of POR wins and we'll be investing to support HPM RAMs for new products, including advanced deposition precursors, new CMP slurries, new cleans targeting advanced copper and advanced packaging, and our new NuMat ION-X product line targeting dopant gasses.

We're also increasing our investment to support organic growth. As we've indicated in the past, organic growth is the best quality growth for our customers, our company, and our shareholders. The good news is that we see more opportunities to organically grow and strengthen our business. In addition to the normal growth and maintenance CapEx and our stand-alone restructuring activities, we expect to invest an additional $60 to $65 million in 2018 on several large projects that enhance our position in Korea and improve our costs and capacities position in key products.

Let me give you some examples. As part of our focus on expanding our market position in Memory, we are accelerating the localization of our Advanced Materials footprint in Korea. First, we're strengthening our technology capabilities in Korea. We have just completed our new advanced deposition lab and have started our project to build a planarization lab to allow us to build the same depth and speed of customer collaboration we provide in other geographies.

Secondly, we're building new local production capabilities in planarization and advance deposition. We recently put in place local planarization SPM capabilities at our Pyeongtaek plant so that we can more effectively collaborate and innovate with our customers in Korea. We will now be investing in HPM capabilities to enable local high-volume supply of our products.

Equally important, we see exciting growth opportunities in our advanced deposition area and will be investing in several projects to localize production of both legacy and new precursors. This investment will allow us to expand our market participation in Korea and across Asia.

We expect these investments will help us grow in Korea and they will benefit our business globally. POR wins with other companies will help us expand our business in both China and the USA.

The second investment focus is to ensure we have world-class competitive supply positions. We have started several projects to expand capacity, improve costs, and drive productivity. The conversion of one of our NF3 plants at our hometown site in the US, to move it to lower cost, process technology has already started and should be completed in mid-calendar year 2018.

Additionally, our WF6 capacity expansion is also already underway. We have other similar projects to drive cost improvement and capacity expansions that we will be executing. These investments will position us to target a market potential of $500 to $600 million where we currently are not participating. We expect profitability to be in line with our current business profile.

Our capacity constraints for NF3 will be a slight headwind in the first half of 2018. Although NF3 pricing has stabilized, we will have some carryover impact from 2017 in terms of softer pricing in mix. For 2018, we plan to more than offset this headwind through increased productivity and by leveraging the strength and diversity of our overall portfolio. Once our hometown NF3 conversion is in place, we will see both a cost improvement and incremental volume that will allow us to resume our growth momentum for this product line.

On the Delivery Systems front, although WFE is expected to be flattish, our DS&S business should deliver healthy growth in 2018. For 2018, we're also building our local footprint in China that will better allow us to support CapEx investments by multinationals and local customers.

Please turn to Slide 21. As you can see, we're excited about the future that lies ahead. It is critical that we stay focused and drive execution of our strategy. Our priorities for 2018 are to stay focused on safety -- which is an important driver for operational excellence; advance our culture on accountability and customer focus, drive initiatives, and deliver profitable growth -- that means meeting our 2018 financial targets; and driving continued topline growth with strong margins, delivering strong cashflow, deploying capital prudently to grow both organically and inorganically to ensure we create significant value in all our investments; to complete the full standup activities by Fiscal Second Quarter; and, finally, supplement growth with inorganic opportunities or partnerships that fit with our business strategy and accelerate our growth. As we move forward, we will update you on our progress on all these fronts.

Please turn to Slide 22. Finally, to conclude, we are capturing strong growth and maintaining our robust business model that continues to deliver solid growth, low margins, low capital intensity, and strong cash flow. Equally important, Versum is well-positioned to benefit from the industry's exciting secular growth trends. This concludes our prepared remarks so, with that, let's open it for Q&A. Operator?

Questions and Answers:

Operator

Ladies and gentlemen, we'll now begin the question and answer session. To ask a question, you may press star and then one using a touchtone telephone. If you're using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and two. Once again, that is star and one to ask a question.

Our first question today comes from Neel Kumar from Morgan Stanley. Please go ahead with your question.

Neel Kumar -- Morgan Stanley -- Vice President of Equity Research

Hi. I had a question of Materials volume growth. If volumes were up 15%, and Processed Materials was flattish because of capacity constraints, does that mean Advanced Materials was up in the 30% type range?

Guillermo Novo -- President and Chief Executive Officer

Good morning, Neel. So, our growth in Advanced Materials was clearly in the high double-digits. We have different segments within -- some were above that, some were slightly below -- but, overall, very strong growth in our overall Advanced Materials. In PM, we did deliver more growth in the mid-single-digits in terms of sales but higher single-digits in terms of volume. So, overall, it's been a pretty robust portfolio of performance during the year.

Neel Kumar -- Morgan Stanley -- Vice President of Equity Research

Okay. That's helpful. And then, also, your guidance for next year implies roughly 6% to 12% gross EBITDA year-over-year. Can you talk about any particular areas where you see the greatest opportunity for variance and what would take you to both the lower and upper ends of your guidance?

Guillermo Novo -- President and Chief Executive Officer

If you look at, overall and, in Advanced Materials is a pretty health portfolio PORs that we have so we're excited about the wins. Obviously, the ramp race in some of the newer technologies is something... those are the nodes that tend to grow after, then MSI, so that is an area of variability but we're well-positioned and excited about that part of our portfolio. In the PM side, I would say, overall, with V-NAND, especially, we see a lot of growth and demand, especially as they're starting to move to higher number of layers.

The industry, right now, is trending 64 as the norm and already starting to go into 96 and above so I think it'll be pretty good. I think the issue for us in NF3, that is going to be what happens in the backend of the year. As I've mentioned in my comments, pricing has stabilized. The issue now is how does supply demand balance going to balance out during 2018? The V-NAND investment has gone in, already, and we see the demand picking up, especially toward the backend of '18.

So, the supply demand balance will be more favorable to us in the backend so there could be some positive moves in that area but we're assuming a more conservative view on some of those supply demand dynamics.

I think, in the DS area, we still are very well-positioned although the market is flattish. It really depends on the customers and where you're positioned so we're in a good position with the big investors at this point in time, especially looking at Korea and China. And I think, with our new plan in Korea, that we're also well-positioned, as well -- not just for '18, but really into '19 where a lot of the investment's going to be going on.

Neel Kumar -- Morgan Stanley -- Vice President of Equity Research

Thank you.

Operator

Our next question comes from Patrick Ho from Stifel. Please go ahead with your question.

Patrick Ho -- Stifel Financial Corp. -- Managing Director, Research Technology

Thank you very much and congratulations. Guillermo, maybe, first off, following up your discussion on the Korean investment that you're making today in the localization there, can you discuss a little bit about the efforts in China? Because, as you just mentioned, that's a region that's also growing. What are some of the localization and what are some of the, I guess, CapEx efforts that are going to be going into China, specifically?

Guillermo Novo -- President and Chief Executive Officer

Okay, so good morning, Patrick. So, two things: in our industry, as you well know, getting PORs with customers is a key driver, especially on the innovation front and then those PORs get carried forward, geographically, wherever they have their plants. So, having the infrastructure to innovate in Korea has a benefit for the Korea market, but also has a benefit around the world, especially, I would say, China -- the biggest volumes, right now, would be in the Memory area in China -- so it is critical for us to be positioned there.

So, if you look at China, it's really a story of the multinationals and how well-positioned we are there and then with the local industry. I think, with the multinationals, positioning ourselves to be getting the PORs, innovating with them, is critical and I think some of these investments reinforce that and they're all investing very heavily.

I think the other side of it is going to be the local players and how they develop. Right now, a lot of the volume is still on older nodes -- it's a lot more of the legacy products -- and we are looking at how we plan out our supply position as they develop and grow. And, as they develop technology to go into newer nodes, then the needs will also grow.

So, first phase for us right now is to put the DS and that capability in China -- and that should start up in 2018 -- so that positions us well with the cycle that they have which is heavy in '18 and into '19. And we need the incremental capacity to supply the industry so the timing is very good for us. And then this is kicking off our whole process, probably, when we talk about '19 and '20, you'll hear us talk more about what investments we want to do on the materials side.

Probably, PM would be the first phase and the AM part of it is the volumes are smaller -- these are more specialized products -- those are going to be segment platform-specific on what we decide to do there.

Patrick Ho -- Stifel Financial Corp. -- Managing Director, Research Technology

Great, that's helpful. And maybe, as my follow-up question, in terms of some of the PORs that you've talked about -- especially on the Advanced Materials side of things which, obviously, sets you up particularly for products like 3DNAND and some of the leading-edge devices that we're talking about -- have you seen any competitive responses yet, given your POR wins?

Because, typically, these are areas where there have been other leaders in some of these segments. Have you seen any backlash yet? And then, maybe, hypothetically, what would be your response if you start seeing pricing pressures in some of those areas?

Guillermo Novo -- President and Chief Executive Officer

Well, two things: it varies by segment and, as that position, we're probably the leader in the market by a significant margin so we have a pretty broad portfolio. If you look at deposition, there are very few very large, large products. It's a very broad portfolio and, if you look at our organosilane, especially organometallic portfolios tend to be much more nicher or specialty products.

So, we have a number of products that we're covering and, those products, we've been working with OEMs and customers for years so we do have visibility and those things have been in the works for a long time. And they're technology driven so our technology was selected and that's really how we win. I would say, on other areas, it's the same thing: the answer always comes back down to technology.

We're not competing with two products, we're not competing on price, per se, we're competing on value and our offerings tend to be different using different technologies, different formulations, different tools that we have in our tool box and that's how we compete, just like everybody else competes with their toolbox. And we've been spending a lot of time the last few years developing that toolbox of core technologies that we're now leveraging to drive the growth in new products.

Patrick Ho -- Stifel Financial Corp. -- Managing Director, Research Technology

Great, thank you.

Operator

Our next question comes from Mike Harrison from Seaport Global. Please go ahead with your question.

Michael Harrison -- Seaport Global -- Wall Street Analyst

Good morning, this is Jacob on for Mike. My question is on the DS&S segment. I appreciate that MSE is expected to be flat down for at least the next year but, just looking at your backlog and order activity going into 2018, do you see that flat compared to last Q for you, specifically, or any changes in that regard?

Guillermo Novo -- President and Chief Executive Officer

No, as I indicated, as the overall market is trending flattish to down, we see our business delivering growth. We're very well-positioned in all the big CapEx spenders -- so, you look, still there's going to be significant investment in Korea, there's going to be significant investment in China and even in 10 and 7-nanometer, you'll probably expect more investments -- so our expectation is that we will deliver growth in 2018.

Michael Harrison -- Seaport Global -- Wall Street Analyst

Got it. And then, on the Megasys side of DS&S, what sort of opportunities do you see for that business coming up in 2018 in terms of winning some of these new projects or new, bigger projects, I guess?

Guillermo Novo -- President and Chief Executive Officer

This is a much more of an on-site materials-handling service we provide for our customers. We've concentrated around a few geographies -- we've actually gained some new business so the business has started to grow again -- but that's not an area that provides... It's not MSI-driven. It's really specific needs and specific customers. The biggest decision is does a customer want to self-perform or do they want to outsource this because they believe that they can get more value in terms of the handling, the quality, the safety of managing all of these materials? So, it'll be steady growth but it's not at the same level as the rest of our portfolio.

Michael Harrison -- Seaport Global -- Wall Street Analyst

Alright. Thank you for answering my questions.

Operator

Our next question comes from Toshiya Hari from Goldman Sachs. Please go ahead with your question.

Toshiya Hari -- Goldman Sachs -- Managing Director

Yeah, great. Good morning and thanks for taking my questions. I guess my first one is probably for George on gross margins. I was a little bit surprised to see the move down on gross margins, both on a sequential basis and a year-over-year basis. And you guys talked about pricing, and NF3, and product mix, and DS&S, but I was curious if there were any other drivers that drove down gross margins sequential and year-over-year basis?

George Bitto -- Senior Vice President and Chief Financial Officer

Yeah, good morning. First of all, thanks. As we said, you did see pricing impacts and, as I mentioned, on the fourth quarter in the Materials side, we did see slightly higher operating costs, primarily in yields and distribution. And, when you look at overall margins, as I said, the fact that DSS performed strongly creates, basically, a negative segment mix which, if I recall, the estimate is around 0.5% on overall margin. But I think those would be the two pieces. We did see slightly higher materials cost in the fourth quarter. It comes and goes. You're going to have some of that. I don't think it's a position going forward, but we also have mixed results that drive margin, as well.

Guillermo Novo -- President and Chief Executive Officer

Just to add a comment, if you look at mix is probably the biggest driver. It could be across segments but it's also within product lines. We mentioned NF3. Actually, the NF3 margins has held up because of all the productivity and our cost structure so it's really more the mix. Because we're capacity constrained in some products, mix has a big impact in how the overall portfolio... That's why we tend to talk in terms of a range because of that mix impact.

Toshiya Hari -- Goldman Sachs -- Managing Director

Got it. Thank you. And then, as my follow-up, I had a question on China, as well. Can you give us an update in terms of how big the region is, in terms of percentage of overall revenue, and, I guess more importantly, how big is local China within that? And, lastly, when you think about profitability of that business in China but, specifically, the local China customers, could that part of the business be significantly higher or lower, relative to your corporate average in terms of gross and/or operating margins? Thank you.

Guillermo Novo -- President and Chief Executive Officer

Yeah, I would say, we tend not to go into details on customers or customer groups for specific reasons but what I would say, China's obviously been growing very fast -- the multinational volumes is where we see the more significant volume at this point in time just because of their own positions in the market to drive growth in all the investments that they've done. So, if you look at Memory, obviously, there's been a big growth area -- Logic will probably start picking up more and more as some of the new investments really start wrapping up more. The local business has also been growing but, for our views, not at the same level in this first wave as the multinationals which is still the vast majority of the volume in China.

So, I think it is a story of two Chinas in terms of being positioned to service the needs of the multinational players, and where they're going, at the speed that they're moving, and then really participating with the local players. And that might be supply right now in some of the older nodes but, in the future, like we're doing with Korea, I foresee sometime in the near future we'll also need to have collaboration capabilities from an innovation perspective as they start really driving to more advanced nodes.

Toshiya Hari -- Goldman Sachs -- Managing Director

Got it. Thank you very much.

Operator

Our next question comes from Ian Zaffino from Oppenheimer. Please go ahead with your question.

Ian Zaffino -- Oppenheimer & Co. -- Managing Director

Hi, good morning, guys. This is Mark on for Ian. Thanks for taking my question. So, I guess my question is just in regards to the next step in Processed Materials. I just wanted to dig a little bit more into the major drivers of the headwinds realized in the quarter and what the expectations are going forward. And then, I guess, to add onto that, I guess, will there be continued pressure going forward into the 2018 quarters or should this reverse going forward? Thank you.

Guillermo Novo -- President and Chief Executive Officer

So, as you said, if you look at the mix, clearly, there was some practicing softening, especially in NF3. A lot of new capacity of NF3 came up to be able to support the growth of, especially V-NAND, but the growth of the market. So, right now, if you look at the supply demand balance, the supply side came in first and demand, now, really is going to start picking up during 2018. So, I look at it simply, if you look at our Delivery System sales, that's a leading indicator of what's going to come in the future. Those investments are now in and it's starting to ramp so, by the end of the year, we see utilization rates really start to pick up.

So, the question really is going to be how does every player move? There's still going to be growth, and demand, and new capacity that will be needed. I think every player in the industry needs to define how they want to play the game. We're not the market leader in this space. We have a very clear strategy of supporting our core customers, making sure that we stay relevant in terms of share and position, and staying the low-cost producer in the space and I think we're achieving that. As I indicated, our issue, right now, is a timing issue for a few quarters in '18 until the new capacity and the lower cost in capacity comes in.

And, when we do that, we'll be back into growth. I will say this does not replace the discussions that we had about need for future capacity in NF3 in Asia. That's still something that we're working on and we'll let you know when we make a decision on where we want to locate that.

Ian Zaffino -- Oppenheimer & Co. -- Managing Director

Okay, great. Thank you guys very much.

Operator

Our next question comes from Edwin Mok from Needham. Please go ahead with your question.

Edwin Mok -- Needham & Co -- Equity Analyst

Great. Congrats on a good quarter. Thanks for taking my question. First, is just, on common, you talked about capacity constraint on PM -- if you look at AM or DSS, do you expect any seasonality in the December quarter on the fiscal first half of the year due to all the holidays?

Guillermo Novo -- President and Chief Executive Officer

So, let me first start with DS&S. I don't see it being seasonal -- it's chunky because of the orders and the project design. So, I think that drives, as we've said in other calls, a little bit of variability quarter-on-quarter. Because, a lot of these, you don't just finish 100 units and ship them -- if the order is for 500, you have to wait until you have the 500 to ship so it does come in a little more chunks.

But we don't expect seasonality -- we have a strong portfolio of projects that we're working on so we're confident right now on the demand for Q1. I think the Advanced Materials, there has tended, historically, to be seasonality with our Q1 and Q2 being the softest. The last few years have not followed that, necessarily -- I think now, with some of the new product launches from our customer's customers that's creating some demand out there. So, again, we're seeing that the trend of, probably, last two years where it's been stronger than the historical is probably what we see right now.

Edwin Mok -- Needham & Co -- Equity Analyst

Great, very helpful. And then, on the capacity expansion that you mentioned, I guess, two questions: first is, is it fair to say that a majority of that expansion created focused mostly on the PM part of the business or did I get that wrong? And you mentioned some of the POR wins that you have, right. Is this maintenance CapEx for US, or reflect upon this POR -- meaning, if your customer already won this POR, you expect that you need to have this capacity to deliver for those POR orders or is it more for future? And then, I guess, the last part of that question: CapEx is roughly around 2 times you mentioned -- did I do my math correctly -- is that the new level that we should expect as you go beyond the fiscal year?

Guillermo Novo -- President and Chief Executive Officer

Okay. So, I'll let George answer the last part on the maintenance CapEx but, to your other question, first, the majority of the investment inquiry is for AM and it's planarization and deposition for 2018. As I said, in the future, where we put our next NF3 capacity in Asia is still not decided. We could put it in Korea, or we could put it in China, or other parts of Asia. We're still working on that. But that's in 2019 and beyond number. For '18, the majority of that money is either going into Korea for AM or some PM products -- also in Korea, but not as big from an investment perspective -- and then hometown that we're bringing it up to global competitiveness in NF3 and capacity of WF6. But the Korea is definitely an AM play. We actually have a very strong footprint already in PM in Korea.

George Bitto -- Senior Vice President and Chief Financial Officer

And, Edwin, this is George on the backend of your questions. Yeah, maintenance capital is consistent with history for us. We think around 2% of sales are normal maintenance. Maintenance plus growth is, call it, 4% of sales. And, as Guillermo said, what we have this year is the opportunity to invest in some other exciting growth opportunities which brings the total up to the numbers we forecasted. You do the math, this year, it's going to be about 4 to 1 in terms of growth to maintenance.

Edwin Mok -- Needham & Co -- Equity Analyst

Okay, great. Maybe I didn't ask that middle part of the question correctly. Guillermo, since you mentioned that it's maybe for AM for planarization and dep, I assume that's based on POR wins that you guys have secured previously and now the customer's granting volume and, therefore, you need US capacity? Or is it more due to localization because you want to move some of that capacity from, let's say, from US to Korea because your customer asked to localize? I'm just trying to understand that.

Guillermo Novo -- President and Chief Executive Officer

Yeah. No, I apologize. I didn't answer that question correctly. So, too, it varies by platform, I would say, in the deposition side. Depending on the products -- some of these like the organometallics or some of the newer smaller nicher products -- but, in general, it impacts the advanced deposition. You get the PORs and the CapEx to supply comes with it so risk tends to be lower and it is really supporting all the work and investment that you've made.

I would say, in the formulated products, being it planarization or cleans, these plants tend to produce many different products so it's a combination of we believe we have technology, customers are excited with some of the work that we're already doing with them on several different fronts, but we're making an investment there that is not just for the immediate but also taking into account for the future. And, as I said, one of the big investments is technology which is broad-based. I think that will help us, not just in Korea, but in other parts of the world.

Edwin Mok -- Needham & Co -- Equity Analyst

Great. I just have a quick one just to wrap up. On DS&S, you mentioned that you look for WFE to be flat to down but I think some of the big calendar-year companies are talking more 5% to 10%. Is that just due to timing of fiscal versus calendar?

Guillermo Novo -- President and Chief Executive Officer

I think there is some impact when you go from calendar year to fiscal year numbers but, overall, everybody is still saying it's going to be a record year so the question now is really more the year-on-year growth that the industry's going to see. I think, from our side, the number that we're quoting aren't ours -- that's what the industry's quoting.

We're looking at our outlook based on where we see our projects where we're seeing a lot of activity and we are very well-positioned where a lot of the capital is going so we do think that we will be able to deliver growth. Probably, the first half of the year looks very good, very strong -- the second half of the year in '18 is going to depend on how well all these other projects continue to go, especially in China and in other areas.

Edwin Mok -- Needham & Co -- Equity Analyst

That's fair. I don't see any way that anybody has that visibility, anyway. Thanks. That's all I have, thank you.

Operator

Our next question comes from Chris Kapsch from Loop Capital. Please go ahead with your question.

Christopher Kapsch -- Loop Capital Markets -- Senior Equity Research Analyst

Yeah, let's see -- it looks like it's afternoon -- good afternoon. I wanted to just follow-up on the growth rate anticipated in '18. You called out, I guess, industry forecasts of MSI growth looking like 4% to 6%. Presumably, your consumable demand and growth rate should exceed that. Just wondering if you could parse that out by business segment -- AM versus PM? I'm assuming that the AM growth above MSI growth will outdistance PM, given your discussion about constraints in some PM products, but can you just provide some quantification around your outperformance and then the growth rates by business line relative to MSI? Thanks.

Guillermo Novo -- President and Chief Executive Officer

Yeah, so, as we look forward, AM will grow faster than PM, as you said, for basic reasons, right now, is our own capacity constraints in PM and the strong portfolio that we have in the AM right now in terms of innovation. So, you're correct in how you framed the outlook. Do I look further and just more normal, I'd say we did have capacity constraints, in general, PM -- the Processed Materials tends to draw a line with MSI, as we've said in the past, and V-NAND has changed that a little bit because now it's not just MSI.

The wafers that go into a little more layers to consume more materials so the PM formula growth in V-NAND has changed. And then, AM, although we have that same underlying dynamic because of innovation and participation in newer nodes that tend to grow faster, that tends to have the potential for higher growth and newer, more differentiated products.

Christopher Kapsch -- Loop Capital Markets -- Senior Equity Research Analyst

Just more specifically, in AM, if the MSI forecast is 4% to 6% -- let's say it comes in at 5% -- how many basis points of growth do you anticipate your AM business can outperform the industry's MSI growth?

Guillermo Novo -- President and Chief Executive Officer

Well, what we've said in the past is -- and not just in AM, in our overall portfolio, we've said -- that we can be 1.5 to 3 times GDP or MSI levels on growth and that's still what we believe... It depends on the portfolio that we have, it depends on timing of what's happening in that specific year -- if it's a year of high innovation, we'll be in the higher end of that, if it's a year of lower innovation, we'll be on the lower end of that range -- but that's the range we look at.

Christopher Kapsch -- Loop Capital Markets -- Senior Equity Research Analyst

Okay. And if I could just follow-up, specifically, on NF3. And, so, I guess that everybody understands this transition to 3DNAND is more material, and more layer, and, therefore, more material-intensive. Can you just talk about the order of magnitude, how important or maybe just the way the consumption of NF3 and, to a lesser extent, maybe, WF6 scales with this transition? Is it more important the transition from 2D to 3DNAND, itself, or do you also see a commensurate benefit with the layers are increased from 64, to 96, to, ultimately, 128, hopefully? Just order of magnitude of how demand for your process gases scale with that transition?

Guillermo Novo -- President and Chief Executive Officer

Okay. So, I would say two things: obviously, we like both -- greater wafer starts in the area and we like to move to more layers -- because you're going vertical, putting buildings instead of one-story floors on houses on the chip and that's going to consume more layers. I think the answer's going to say it depends on the material.

Some materials are going to benefit much more from the layer move than from the volume growth of wafers, others will be different. Even if we look at NF3, WF6, etching gasses, the multiples of growth vary significantly in product by product. But I do think that the number of layers is having a significant impact in the overall material growth in the near-term. I think the other benefit it has is, as the cost performance of V-NAND chips grows and penetrates more markets, that'll drive, also, more of that wafer growth underlying volume.

Christopher Kapsch -- Loop Capital Markets -- Senior Equity Research Analyst

Okay. And then just, finally, sneak one last one in, thank you, is related to this commentary about stabilized pricing. Are you talking that the pricing for NF3 stabilized in the September quarter versus the June quarter or are you saying, during the September quarter, you saw some stabilization so that, even with some hangover drag from lower pricing in '18, it actually is a very recent phenomenon that the pricing stabilized? Thanks.

Guillermo Novo -- President and Chief Executive Officer

Yeah. No, we've seen the pricing stabilized now for a period of time. If you just look at the demand, it's a supply demand balance of utilization rates and the demand outlook for, as V-NAND starts to ramp and grow in the back end of the year, we do believe that it's stabilized and it's more of that carryover. Again, I don't have a crystal ball on how the pricing will move forward but I think what I can say is the supply demand balance is moving more in favor. As a supplier, the demand is now the bigger driver -- by the end of the year, it'll be much tighter in several important products, including NF3.

Christopher Kapsch -- Loop Capital Markets -- Senior Equity Research Analyst

Thank you.

Operator

Our next question comes from Kieran de Brun from Credit Suisse. Please go ahead with your question.

Kieran de Brun -- Credit Suisse -- Associate Equity Research

Hi, thanks for taking my question. This is Rohan. I'm calling for Kieran. Just a question on, also, for 2018, can you talk about what are some of the factors that could lead to the guidance coming in at the low end versus coming in at the high end for next year?

Guillermo Novo -- President and Chief Executive Officer

I think, at the higher end, it's really more about, the industry, will it accelerate? This year, we had some positive surprise of the industry so it's really going to be about the industry and how all these new technologies really drive growth. And I think the other side is, the ramps of new technology, how do they go? There's been some delays in the ramps for this year. As they pick up, I think they can have both positive and negative impact but probably more on the positive side as they begin to ramp. The move to 7-nanometer and how quickly that goes could also be a big positive.

On the negative side, right now, this is a pretty broad-based... Industry has changed now. It's going to so many different areas. Probably, I don't expect to see significant macro surprises. I think, then, it's really more about each company and what positions you have. We've spoken of our headwind in NF3. We're managing it. It is not a surprise for us. We managed it well this year -- I think we'll manage it well into next year and we're well-positioned to solve that -- so we don't expect major surprises at this point in time.

Kieran de Brun -- Credit Suisse -- Associate Equity Research

Thank you. And then could you just talk about the trends that you've seen in the WF6 model and is that a driver for you?

Guillermo Novo -- President and Chief Executive Officer

It's a driver. It's much smaller and we get less questions and it's a much smaller impact. I think it's very similar in terms of the supply demand dynamics to NF3. Probably, we're seeing that became a little bit longer in terms of the capacity as in WF6, in the last few quarters, and it's probably going to get tighter than NF3 in the backend of the year just because of the volume. For example, that's one that the use rates relative to NF3 are different -- they're higher. And I think that's going to be picking up, especially the backend, which is when we're bringing in our new capacity in hometown so I think the timing is going to be very good for us.

Kieran de Brun -- Credit Suisse -- Associate Equity Research

Thank you. That's all I have.

Operator

Our next question comes from David Silver from Morningstar. Please go ahead with your question.

David Silver -- Morningstar, Inc. -- Equity Research Analyst

Oh, hi, thank you. First question I have might be for George. So, when I look at your consolidated income statements, the topline grew 16% for the full year but your R&D grew 3% and your SG&A was up 14%. So, I guess I was scratching my head and I was wondering is there some disruption or is there some reason that R&D did not move up more in line with either your revenues or your admin growth? And then, secondly, I'm just wondering if we might see more leverage on the SG&A line, let's say, post mid-2018 when the TSA, your transition is concluded? Thank you.

George Bitto -- Senior Vice President and Chief Financial Officer

Okay. Yeah, a couple things, David. I think you've hit on a couple items. I'll take them in different parts. SG&A grew as it did mainly because we're moving from carbonic counting and air products to our own standup cost structure and that's a big driver and I think the SG&A costs now start to get more into the representative range. Realize, as well, to your other point, we did have higher tech services costs this year, meaning our technology worked in SG&A as opposed to R&D -- so SG&A was a little higher, R&D was a little lower.

And then, finally, as we've talked about, our restructuring activities around R&D are moving off of existing air products sites to our own sites and so, during that, you have some disruption and some staffing gaps. And that also caused for a lower R&D relative to the sales line. What you will see, as Guillermo mentioned, is we are investing in R&D. You'll see the full impacts of that staffing plus the impacts of our investment in Korea technology next year and so I would expect R&D to grow at a faster rate next year than it did this year.

Guillermo Novo -- President and Chief Executive Officer

And I'll add, if we're doing things correctly, sales should grow fast in R&D on a leading... So, if our products come in and grow, that should be the way we want to see it. And then the question is do we have a need to further invest in R&D to support more growth? But I think the delta is that our innovations are working and we're setting faster growth on the topline to the resources.

David Silver -- Morningstar, Inc. -- Equity Research Analyst

Thank you for that and I'm going to warn you in advance that this next question might be a little wordy. But I'm listening to a lot of the discussion that's going on here and I had a question, maybe, for Guillermo, about your philosophy of growth and your prioritization. So, over the last couple of calls, you've discussed, obviously, organic growth and, in your CapEx spending, you've discussed the tuck-in acquisitions and, I guess, a broader industry trend was the technology migration and the transition is, maybe, some of your larger customers preferring to work with a narrower and tighter group of collaborators or suppliers.

And I'm just wondering, from your perspective, can you continue to move strongly in each of those directions or should I look at the rise in your CapEx budget and say that reacting to the PORs and your existing customers' demand has to take priority? And then, the last point, but in your refinancing that was completed, here, are there any meaningful limitations on your ability to, maybe, do M&A or incrementally expand your CapEx budget beyond what you've laid out? Thank you.

Guillermo Novo -- President and Chief Executive Officer

No problem. So, first, let me answer the last question. No, there's no restrictions for us to do M&A and we are well-positioned and, obviously, looking at opportunities in organic M&A type or partnerships that will support and strengthen our portfolio. I think, if you look at growth, the first message I would say is -- which is very positive -- we're more excited about organic growth than we probably were a year ago. And this is just a lot of newer technologies that we've been working on are working, they're being well-received, especially in the Advanced Materials area, so I see that as a very positive.

If we get POR wins, we don't react to it to build... It is part of the fun -- we're developing the materials, this is part of the investment process that we have -- that's why, for me, the R&D investment is the bigger investment. In many of these products, the supply side of it, once you have the PORs, you know the materials are coming in, and that's less of a risky part of the investment. And, in general, this is a lower CapEx driven business in terms of the amount of CapEx needed for some of these newer products. So, I think it really comes down to our innovation engine -- how we see that growing and how well-positioned we are -- and I think that's going very well.

And the second part is the industry's actually done well so we are expanding capacity. The growth of V-NAND, both on the investment side with CapEx and on the demand of materials, did catch the industry by surprise a little bit, a year, year and a half ago. That is driving demand and I think that we're well-positioned and we're reacting accordingly to those areas. If you look at longer-term, what's going to drive growth? As George said. need of capital and we will continue to fund organic growth -- that's R&D -- and capital needed to support our business.

This is a very high return business in terms of returns on assets and capital employed so we don't see anything changing in our basic model. The long-term, what's driving bigger investments beyond the norm is going to be just success of technology, closing gaps that we have -- and I think that we're closing the gap that we had in Korea on our Advanced Materials business -- it's about capacity constraint, and fixing some of the costs in some key products in PM. And I think the next one that will come in the coming years is China and how we need to invest to support China.

David Silver -- Morningstar, Inc. -- Equity Research Analyst

And just one last question, thank you, at the very end of your prepared remarks -- and I'm going to try and quote you accurately, I apologize if I don't -- but you mentioned $500 million to $600 million of opportunities in the areas where, quote/unquote, "you don't currently compete." And I was wondering if you just might be able to qualitatively discuss one or two of those. Thank you.

Guillermo Novo -- President and Chief Executive Officer

So, we're entering several new markets that... We're very large in planarization. I've said in prior calls and meetings, we don't have a strong position in Korea so that's a big market for us. We have the technology, we have the products -- we need to be able to supply and innovate locally. There's new deposition materials as customers are moving to a higher number of layers in Lokai and in Heike that we're working with our customers with and that we're very excited about. So, it's pretty broad-based, I would say, in terms of what's driving the growth. The NuMat ION-X is a large market that we don't participate in. So, there's a lot of excitement from our side on what the potential is for us in these areas and that's why we believe that investing organically is probably the best investment that we can make at this time.

David Silver -- Morningstar, Inc. -- Equity Research Analyst

Okay. Thank you very much.

Operator

And, Ladies and Gentlemen, as we are over the allotted time for today's Question and Answer Session, we have time for one additional question. This comes from Curt Siegmeyer with Keybanc. Please go ahead with your question.

Curt Siegmeyer -- Keybanc Capital Markets -- Senior Research Associate

Hey, guys, thanks for squeezing me in. Just, in terms of the productivity potential that you guys touched on, could you just talk a little more specifically about what levers you could pull in the event that your mix shifts negatively on you in 2018?

Guillermo Novo -- President and Chief Executive Officer

So, we've shown, I think, during 2017 what we can do with productivity, getting our costs down in our products -- all of them -- the fabs, all of the bottlenecking that we've done, all the investments we've done to prove our capacity has been very efficient in terms of it's been in existing plans, really getting, probably, the most efficient type of investing we can do. And, on top of that, our six signa teams are... our Manufacturing team hasn't been able to even get increased capacity yield productivity in our plant.

So, I think, across our whole manufacturing network, they've been working in multiple fronts to get productivity. I would say in '18 and it'll happen more toward the back end. It's also about technology. We talk a lot about product technology but we're investing in process technology, too. I think the conversion of our hometown plant, for example, to the technology we've practiced in Korea for NF3 is a huge productivity driver for us that will bring significant benefits and positioning us -- mostly for 2019 but it'll have an impact in '18, too.

Curt Siegmeyer -- Keybanc Capital Markets -- Senior Research Associate

Great. Thanks again for fitting in my question.

Operator

And, Ladies and Gentlemen, that will conclude today's Question and Answer Session. I'd like to turn the conference call back over to Nahla Azmy for any closing remarks.

Nahla Azmy -- Head of Investor Relations

Thanks, Jamie. I just wanted to bring your attention that Versum Materials will host its 2018 Annual Meeting of the Stockholders at 9:00 a.m. Mountain Standard Time on Tuesday, January 30th, 2018. This office is located at 8555 South River Parkway, Tempe, Arizona. So, with that, I'll turn it back over to Guillermo for his final remarks.

Guillermo Novo -- President and Chief Executive Officer

Well, thank you again for your time and interest in Versum. We really do appreciate your support and look forward to continuing our dialogue around our business and the very exciting industry that we're in right now. So, thank you very much for your time and I look forward to seeing you in the near future.

Operator

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your line.

Duration: 119 minutes

Call participants:

Nahla Azmy -- Head of Investor Relations

Guillermo Novo -- President and Chief Executive Officer

George Bitto -- Senior Vice President and Chief Financial Officer

Neel Kumar -- Morgan Stanley -- Vice President of Equity Research

Patrick Ho -- Stifel Financial Corp. -- Managing Director, Research Technology

Michael Harrison -- Seaport Global -- Wall Street Analyst

Toshiya Hari -- Goldman Sachs -- Managing Director

Ian Zaffino -- Oppenheimer & Co. -- Managing Director

Edwin Mok -- Needham & Co -- Equity Analyst

Christopher Kapsch -- Loop Capital Markets -- Senior Equity Research Analyst

Kieran de Brun -- Credit Suisse -- Associate Equity Research

David Silver -- Morningstar, Inc. -- Equity Research Analyst

Curt Siegmeyer -- Keybanc Capital Markets -- Senior Research Associate

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