Entegris Inc (ENTG) 2003 Q4 法說會逐字稿

Good day everyone and welcome to the Entegris 2003 fourth quarter earnings release conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Heide Erickson, director of investor relations.

Please go ahead, ma'am.

Thank you, Rochelle.

Good morning and thank you for joining us to discuss Entegris' fiscal 2003 fourth quarter and full-year results. Joining me today is Jim Dauwalter, President and Chief Executive Officer, and John Villas, Chief Financial Officer.

To start off, let me preface our remarks with a Safe Harbor statement. Certain matters we may discuss other than historical information may include forward-looking statements. Actual results could differ materially from the forward-looking statements we make. Additional information concerning the factors that could cause results to differ is contained in the 10-K we filed November 2002, along with more recent filings. Additional or changed factors that may also be mentioned on this call will be included in the Form 10-K to be filed for our fiscal year 2003.

We may also refer in this call to non-GAAP financial measures as defined by the SEC in regulation G. Reconciliation of the non-GAAP financial measures to the comparable reports that result of operations under U.S. GAAP will be made available on the investor's page of our website, at www.Entegris.com and is included in our press release.

This morning, John will take you through the numbers and Jim will present his perspective of the business, and how Entegris is positioned. Finally we'll take your questions.

We'll end the call by about 9:30 a.m. Eastern time, now I'll turn the call over to John Villas, Entegris' Chief Financial Officer.

Thank you Heide.

I am pleased to report that Entegris has achieved annual profitability for the 37th consecutive year. This was a challenge given the difficult industry conditions we faced throughout the year.

We focussed on what we could control, including operational efficiencies, cost reductions, managing our assets and integrating two key acquisitions in the life sciences and semiconductor markets. By doing so we ended the the year with $105 million in cash and generated more than $30 million in cash from operations over the last 12 months. With this cash, we invested more than $60 million in new markets, acquisitions and engineering, research and development. These investments enhance our leadership position in materials integrity management and position Entegris for the future.

During the fourth quarter, we continued to grow our sales into new markets. Life sciences, services and fuel cells and we delivered on our overall top-line sales expectations. We also improved operations as we began the transition to a build-to-order manufacturing process.

From an asset management perspective, this significantly reduces inventory and frees up cash, which is essential to allow us to invest in the future of Entegris. However, as we discussed during our prerelease conference call two weeks ago, we didn't achieve all of our financial expectations for the fourth quarter. Specifically, earnings per share, which were down due to lower growth than operating margins.

Let me walk through the numbers. Starting with the stop line. There were no surprises in fourth quarter sales, semiconductor market sales increased 2% from the 2003 third quarter and generated 76% of overall sales.

Our wafer handling products performed well again. Last quarter we saw a strength in the 150-millimeter and below products. This quarter it was our 200-millimeter wafer carrier products that were strong.

Other areas that are starting to show strength, were Entegris' chemical container and fluid handling products. The fluid handling components are primarily sold to the OEM community. Sales to this part of the semiconductor industry are still well below peak sales levels but conditions seem to be firming. Wafer shipper and micro environment sales which include our (INAUDIBLE), declined slightly from the third quarter to the fourth quarter. We anticipated this because of our significant growth in shippers during the third quarter and fewer 300-millimeter FABS equipping their lines over this summer. Over all shipper demand continues to be solid and 300-millimeter demand is poised to grow.

Data storage market sales accounted for 12% of overall sales, sequentially from the third to fourth quarter, sales declined by 8% and anticipated. Key players in the industry have implemented form factor and process changes over the last few quarters. As customers change this diameters or thicknesses we generally see an increase in demand until our customers' production lines are filled. We are currently in the absorption stage of this kind of change, therefore, we expect a slight sales decrease in our 2004 first quarter for data storage products.

Our services market generated 8% of overall sales, a 2% sequential gain from last quarter. This increase is primarily due to sales of equipment used to clean our wafer and disk carrier and shipping products. We expect fewer equipment installations next quarter and, therefore, it's a slight sequential sales decline for 2004 first quarter.

The last two markets I'd like to talk about are life sciences and fuel cells. Approximately 4% of Entegris' overall sales come from the life sciences market. Sales rose 19% from the third quarter and we continue to see increasing opportunities in this market.

The fuel cell market, which is an emerging market and one that we are investing in for the long term, accounted for much less than 1% of sales. We are still in the research and development mode as we help our fuel cell customers to move from concept to commercialization.

On a geographic basis, Entegris' total fourth quarter sales in North America were 41%, in Asia Pacific 23%, in Europe, 19%, and in Japan 17%. Sales in Japan were more robust than last quarter because of strong wafer shipper product sales, while sales in Asia Pacific declined primarily as 300-millimeter data storage and cleaning equipment related products generated lower sales compared to the previous quarter as anticipated. Sales in North America and Europe were both up slightly from the third quarter. We estimate that sales four our unidriven products comprise about 55% of total fourth quarter sales.

On an annual basis for fiscal 2003, sales increased in all markets. Life sciences generated the most significant growth followed by services and data storage. On an annual basis, life sciences was 3% of overall sales, services was 8%, and data storage was 13%. Semiconductor remains our largest market with 76% of our overall sales. Our diversification efforts are taking hold. And we continue to make progress in expanding our materials integrity management expertise into new applications and new markets.

On a geographic basis, annual sales to North America were 41% in fiscal 2003, compared to 47% in the prior year. Asia-Pacific sales increased from 21% to 26%, Europe was up slightly to 17% versus 16% last year, and Japan remains steady at 16% of total sales in the last two years. Unit driven sales for the full fiscal year were approximately 60% in 2003 compared to about 70% in 2002, largely due to our two acquisitions in 2003 which are primarily capital spending driven product offerings.

Before I talk about overall sales expectations for next quarter, let me remind you that we don't carry any meaningful backlog because we ship most of our products within two weeks or less after receipt of order. As I mentioned, we believe sales to the data storage and the services markets will be slightly lower in our first quarter 2004, compared to the fourth quarter.

We see positive indicators emerging in the semiconductor industry but we're still cautious and anticipate first quarter 2004 sales to be flat with fourth quarter's level. Quote activity is building but project timing visibility is limited. All combined, we anticipate 2004 first quarter sales to be down slightly from the fourth quarter.

Fiscal 2003 gross margin was 39.7% compared to 40.4% in 2002, a higher percentage of overall sales are now generated from Entegris' new services, life sciences and fuel cell markets. We are still in an investment mode in these markets. Our goal is to achieve similar operating margins but we don't anticipate similar gross margins.

During the fourth quarter, the gross margin was 33.6%, down from 43.5% during the 2003 third quarter. What happened during the fourth quarter? About 500 points of the third to fourth quarter margin decline related to inventory management. About 200 points stem from moving to facilities, 150 points related to product mix, 70 points related to impaired manufacturing assets and about 50 points was due to increased radical carrier manufacturing costs.

I'll explain the inventory management portion in greater detail, but first I'll touch briefly on the other issues. First, we moved our polymer material manufacturing from Entegris' Texas facility to Malaysia and we closed our San Jose, California facility and consolidated a cleaning equipment operations into our Gilroy, California service center. These moves resulted in expenses that affected us more than anticipated during the quarter, however they should reduce quarterly fixed cost by several hundred thousand dollars starting in our fiscal 2004 second quarter.

Second, we experienced higher costs, including temporary labor expenses, to meet customer expectations for the radical carrier products that we acquired at the end of February. We are now caught up with the accelerated customer demands and should see production costs decline for these products in the first quarter 2004.

Third, product mix also had an impact on our gross margin including the strength of our new markets, as well as the sales mix in our traditional markets. And finally, we incurred a charge for impaired manufacturing assets that will no longer be used in our production facilities.

That brings me to the inventory-related gross margin decline. Currently we are in the process of moving our manufacturing closer to a build-to-order model. This has enabled us to significantly reduce our inventories as we don't need as much safety stock. However, it led to under absorption of fixed manufacturing costs during the quarter. The under absorption accounted for a little more than half of the inventory-related decline, the other half is due to management tightening inventory reserve parameters.

This was a prudent step because of increased operational efficiency, improved inventory controls and rapidly changing market requirements.

While these factors had a negative near term impact on our fourth quarter results, they strengthened our asset management and Entegris' position for long term success. Our goal is to continue reducing inventories as we become even more efficient in our operations.

At this time we are working toward inventory reductions with the goal of reducing inventories to the the 30 to $35 million range. At 2003 fourth quarter end, we carried $38 million in inventory. Most of these reductions should flush through the P&L during fiscal 2004. That means that margins will be around the 40% range next quarter. Let me point out, though, if semiconductor and data storage industry conditions significantly improve and we can sell a higher percentage of our sales into these markets, we would expect gross margins to improve to above 40%.

On an annual basis, SG&A expenses rose from fiscal year 2002 by $6.7 million to $80.3 million in fiscal 2003. Increased costs stem from higher sales commissions, cost of acquired businesses, amortization of intangibles from acquisitions, and higher expenses as we shifted from a distribution arrangement to a direct sales force in Japan, as well as investments in our new markets.

SG&A during the fourth quarter totaled $21.3 million versus $20.3 million in the third quarter. As you know, SEMICON West, the largest trade show of the semiconductor industry, is in our fourth fiscal quarter, and that always results in some additional expenses. In addition we reorganized our semiconductor market, sales and marketing organization into a customer-focussed structure. Which meant the elimination of about a dozen positions. We expect first quarter 2004 SG&A expenses to be flat to slightly down from this quarter.

During the fourth quarter we invested $4.8 million in engineering, research and development. That's up slightly from the previous quarter.

For fiscal 2003, we invested $17.8 million in ER&D compared to $17.4 million in fiscal 2002. We firmly believe that it is essential to invest in developing new products, materials and solutions that solve our customers of problems. That's how we intend to not only maintain our market leadership position, but to gain share. Very few companies in the industry have the financial ability to invest at similar levels during all industry conditions.

We did book at $214,000 benefit related to the favorable termination of a lease obligation at a previously closed facility. And other income during the fourth quarter was $721,000 compared to an expense of $349,000 during the third quarter due to the sale of some noncore assets during the fourth quarter. We recorded a tax benefit of $3.4 million for the fourth quarter, most of which was related to a foreign tax benefit, export-related tax benefits and a one time benefit due to a refund from a claim filed several years ago that was resolved in our favor.

At this time we anticipate an effective tax rate of 35% for our 2004 fiscal year, with large fluctuations still possible, depending on our profitability level. We reported net income of $2.3 million or 3 cents per share for the fourth quarter 2003, consistent with our preliminary results release of September 18th. For fiscal 2003, we reported net income of $1.3 million or 2 cents per fully diluted share, and delivered our 37th year of annual profitability.

In both fiscal years we had charges in connection with the closure of manufacturing facilities, in 2003 we also had a charge related to the impairment of our equity investment in Mettron Technology stock. Therefore, on a pro forma basis, net income for fiscal year 2003 was $5.6 million or 7 cents a share compared to $2.4 million or 3 cents a share in 2002, this was truly a significant accomplishment given the ongoing challenging industry environment.

Our balance sheet continues to be very strong. Cash and investments on hand are now $105 million up $6 million from the 2003 third quarter. We generated more than $10 million in cash from operations during the last quarter, and generated cash during every quarter in the last fiscal year for a total of more than $32 million in fiscal year 2003. Our customers know that Entegris has the financial strength and staying power to withstand, thrive and invest even in difficult industry conditions.

Accounts receivable totaled $52.6 million, up $1.4 million from last quarter, primarily because of strong sales in Japan where receivables typically have longer payment terms.

Inventories declined sequentially by $6.9 million in the 2003 third quarter to the fourth quarter. As I indicated before, we expect inventories to continue to trend downward over the next several quarters to the $30 to $35 million range. Year-over-year inventories also are down slightly. Keep in mind though we had two acquisitions in fiscal year 2003 which added about $3.5 million in inventory to our balance sheet at the end of our second quarter 2003.

Depreciation and amortization expense was approximately $6.8 million for the quarter, and $27.2 million for fiscal year 2003 compared to $28.2 million in fiscal 2002.

Capital expenditures were $4.3 million for the fourth quarter, and $13.4 million for the year. This compares to $19.6 million for fiscal 2002. For fiscal year 2004 we expect to invest about $20 to $25 million in total capital expenditures. As in prior years, every capital project goes through a rigorous review process which gives us the opportunity to adjust spending as necessary.

In summary, we feel positive about our performance this year and our financial position going forward. Specifically, we reported our 37th year of annual profitability, continued to make progress in operational efficiencies and are managing our assets wisely while we continue to expand and grow. I am confident that our market focus and position, along with our financial strength, will lead us to even stronger growth in both our current and new markets.

Now, I will turn the call over to Jim. Jim?

Thanks, John.

John just gave you a thorough explanation of our financial position, and our expectations. As I reflect on last quarter and last year, I believe we are on the right track to become an even more efficient company with increasing growth and potential.

Let me acknowledge, though, we fell short by not communicating sooner about our efforts to reduce inventories and move to a build-to-order manufacturing model. Are we doing the right things for the long-term success of Entegris? Absolutely. Our ability to reduce inventories and to move to a build-to-order manufacturing model demonstrates the progress we've made in increasing operational efficiencies.

During the last quarter, we've been very diligent in managing our resources and as a result, we've generated cash from every quarter during the last year. I'm particularly proud that we achieved another year of profitability. We became even more efficient in our asset management and we succeeded in strengthening our core business while expanding our reach into new markets for future growth. These accomplishments were only possible with our employees all around the world working together as one team. And I'm proud to lead and be a part of this successful team.

We are managing the company for long-term success. Let me bring you back to our five-year strategic goals which we introduced at the beginning of fiscal '03. First, is to grow revenue to about $700 million; Second, is to have new market efforts contribute at least $150 million to our revenue stream; Third, to be the top three players in all markets we serve; Fourth, generate an even greater percentage of revenue from newly developed products and services, in all existing markets; and finally, make operations a competitive weapon.

We've made progress on each of those goals in fiscal 2003. And let me go over some key examples of how I believe we've generated momentum during this year that will help us perform even better in fiscal 2004.

First, to generate $700 million in revenue by the end of '07. This past year we reported $250 million in sales. We obviously have a way to go, and while we're still cautious about near-term semiconductor market order increases in the first quarter, we do expect the momentum to build in our core markets during fiscal 2004. But just like in 2003, we'll not rely on market improvements alone. Our goal is to again develop and take advantage of opportunities in all markets we serve, particularly where we can grow share.

Our second strategic goal is to have our new markets contribute $150 million to our revenue stream. Today, almost $30 million of our annual sales are derived from Entegris' new markets of services and life sciences. Services grew by about 25% year-over-year, without the benefit of an acquisition. In life sciences, we acquired a company in January of this year. This acquisition has more than met our expectations.

Our concern in the life science market is not if we can grow, it's if we can scale operations fast enough to meet customer demand, and that's a challenge that we look forward to.

Third being one of the top three players in all the markets we serve. We are the leader in materials integrity management products and services in the data storage and semiconductor industries, and we take our leadership responsibilities seriously. Regardless of the market, our customers do rely on us to execute well during all stages of an industry cycle. In 2003, we strengthened our leadership position in the semiconductor market by acquiring the wafer and radical carrier product line from Asyst.

Our fourth strategy is to have a higher percentage of sales generated from new products and services, again, we're making progress. We added numerous key new patents through innovation and acquisition. Today we have 170 U.S. and 275 international patents in place, we have 12 new U.S. patents pending of which six are innovations focussed on our new markets. Entegris has a broad product offering and a significant intellectual property protection. We believe this will continue to distance us from our competition.

That brings me to our last goal of making operations a competitive weapon. We've made sizable improvements over the last year. We've cut average lead times by about 7%. For some of our strategic products the lead time was reduced by up to 25%. That's significant and shows the progress we've made. On average, most of our products are shipped in less than two weeks after receipt of order. Our reduction in lead times allows us to respond ever more quickly and that's under all industry conditions.

We also continued with our lean Sigma event and estimate that we've cut operating costs or avoided adding costs to the tune of $4 million on an annual basis. This includes the step changes we have made in improved cycle time and reduced space requirements. In other words, we can respond faster, increase output of quality products while using less space and fewer resources. The progress on these fronts has helped us to move to a build-to-order manufacturing model while reducing inventories.

During fourth quarter, we were pleased with how efficient we were in implementing this manufacturing model with certain product lines. As John said, we'll continue with the rollout. This success is a credit to the inventiveness and the hard work of the Entegris employees, and increasing manufacturing efficiencies will remain a focus in 2004.

If I were to sum up what we've been talking about over the last 30 minutes, it would be that our financial outlook for the first quarter is going to be similar to last quarter from both a sales and earnings perspective. It's the individual income statement items that are going to be a little different.

Fiscal 2003 has been a year of improving our position. We increased our market share and completed some strategic acquisitions. We're well-positioned for an industry upturn but we don't have the visibility to predict the timing or the strength of an upturn.

From my perspective, we're a better company today because we've scrubbed the organization. We've closed additional plants, we realigned people, we've also taken a hard look at our inventory and we're in a superb position with our ability to generate cash and our low-debt burden. To top it off we have some upside from new markets we've invested in. I'm confident we'll participate in market improvements because of our strong market share and our ability to meet customer expectations. All combined, we're in a great position to leverage our infrastructure, and deliver increased shareholder value.

With that, we'll open it up to questions.

Thank you. The question-and-answer session will be conducted electronically.

If you would like to ask a question, please press star followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star followed by the digit 1 to ask your question. And we'll pause for a moment.

And our first question will come from Brett Hodess with Merrill Lynch.

I'm wondering if you could talk a little bit about when you're through moving to the build-to-order model, what the margin structure will be for the businesses, excluding the new businesses where we know the margin structure a little different. Would you expect to be able to get to a gross margin level that's equal to or above where you were, you know, when those businesses were in a higher utilization rate in the last cycle?

Well, Brett, this is John, we started to undertake this build-to-order manufacturing model, we expect that that will be transpiring over the next 12 to 18 months.

There will be some costs flushing through the P&L as we discussed as a result of that move.

We certainly have been working very hard on efficiencies. Closing facilities, getting more efficient in general. So I would expect that on our core semiconductor and data storage products, that even with the competitive pressures in the marketplace which are always there that we should be able to get back to historical kind of gross margins. That doesn't mean it's going to be easy, but I would anticipate that, absolutely.

Okay.

And then secondly, when you look at the new product areas, now they're actually, as Jim pointed out, $30 million for life sciences and services, was that sort of the annual run rate number those are at now? And when you look at those businesses, although you say that gross margins will be a little lower than operating margins eventually will be in line with the other product lines, is there a revenue run rate eventually that you think you get to that those businesses start to have the similar margin leverage to the core product lines?

Brett, this is John again. Actually, the sales for the year for those two markets were just about $30 million. As you recall we did do a life sciences acquisition about midyear. So I would say the current run rate is actually a little bit higher than that $30 million kind of run rate.

The second part of your question was related to how high we think those sales could go. I guess we do have a goal of getting $150 million in revenues from new products and services, these are obviously two key components of that. We anticipate that over time, there might be additional opportunities for us to leverage our materials integrity management expertise into some other markets.

So how high can those sales go from services and life sciences? I would say they'll be key contributors to that $150 million objective. And in terms of gross margin, I'm not sure if you asked that or operating margins.

Right.

We don't anticipate those businesses to get to the similar gross margin profiles, because of the nature of the businesses. But we do anticipate that they should be able to get to corporate operating margin averages that we would expect throughout the rest of our business.

Okay. Thank you.

Thank you.

Thanks, Brett. Next question?

I'm sorry, Jim Covello with Goldman Sachs will have our next question.

Good morning. Thanks very much.

My question is again on gross margins. I know part of the answer is going to depend on what the revenue ramp looks like, but assuming beginning in calendar Q1 '04, revenues begin to ramp linearly, how long is it going to take to work through the excess inventory or to work down the inventory according to the new model? In other words, when is the negative drag on gross margins going to end? Thanks.

Jim, this is John.

As I just mentioned I think we would anticipate that to be about a 12 to 18 month process. We obviously took a big bite at the apple during this last quarter and we would expect over the next 12 months to bring the inventories down in that 30 to $35 million range. I would say for now we would anticipate things to be pretty well flushed through the end of our fiscal '04.

Okay. That's helpful. Thanks very much. One quick follow-up question.

On the revenue guidance, the essentially flat to down a little bit revenue guidance, in the semiconductor business, can you give us a little bit of an idea of how that breaks down geographically? Thanks.

I think geographically, Jim, it's pretty consistent with what we've seen during the last quarter. Asia-Pacific was down a little bit last quarter from the previous quarter. Japan was a little bit more robust. So I don't think it changes very drastically by region. It should be in a pretty consistent range of 40 to 45% North America, call it 20 to 25% Asia-Pacific, and about 15%-plus for both Europe and Japan.

And Jim, we've kind of been talking about the robustness of the industry and, you know, we got some of that kick-start in our third quarter. And you know, we're just very -- watching very closely this first quarter because it isn't quite at that same level that we saw things picking up earlier on. And so that's why we're paying particular attention to that.

Terrific. Thanks very much.

And we'll move on to Stuart Muter with Adams, Harkness & Hill.

Good morning. A couple of questions for John.

One, I didn't catch if you provided any R&D commentary for Q1, and second, could you provide some comments on other income? It looked like it was up this quarter.

Yes, Stuart, we didn't give any particular guidance on R&D for Q1 of '04.

I would expect it to continue to be in that historical range that we've been the last couple quarters since we closed on those acquisitions. Generally in that 4 1/2 to $5 million kind of range. So that's where it's been pretty tight in that range. As far as other income, yeah, we did have some pretty nice positive impact there, as we sold some noncore assets that have been on our balance sheet for a while. And those resulted in some gains that we did not expect to be reoccurring.

Okay. You think it's going to tick down to, you know, interest and other income, pretty much net out?

Yeah, I think in that line historically, Stuart, we've had a small positive from interest income and we've generally had -- run a small positive to a small negative in the other income, other expense area. So it should be back in that kind of historical range.

Thanks, John.

Thank you.

And as a reminder, please press star followed by the digit one to ask your question.

Next we'll hear from Vijay Rakesh with Berean Capital.

Hi, I was wondering if you could shed some light on the 300 millimeter transition? I know you mentioned strength on the 200 millimeter wafer (INAUDIBLE) business, I was wondering if you see the (INAUDIBLE) picking up in the first half of '04?

The second part, if you could update us on the services segment. I know you mentioned in the news release that service equipment sales in 1Q '04 would be down. I'm not sure what that.

This is Jim.

With regards to 300 millimeter, with the acquisition of the Asyst product line and the combination of the Entegris products, we do have the broadest product offering and really are in a leadership position with regards to market share. And we're well-equipped to respond to whatever the market releases.

With our Number 1 position, we respond to the needs of the customers and it's a matter of where they're at in the ramp, and at different times we're receiving orders from different players. And until the order comes in, it's often times hard to predict exactly where that's going to be in any given quarter. But as the industry is suggesting there should be some strength there and we should see stronger sales. But that will really be moderated by the CAPEX spending of the companies.

Okay.

On the services side, we think that that's going to be down this next quarter, primarily because of some equipment orders. And they kind of can come in again as capital is released for that kind of product and it's a matter of timing. And we continue to expand our on-site, off-site services model but it's primarily the equipment side of things that will have that go down a little bit this next quarter.

Okay. Great. Thanks.

Okay. Vijay one other thing, I think it's important to note as well, as we mentioned, services revenues are up over 25% year-over-year without any acquisitions. So the services model we're taking to our customers seems to be really resonating with them and I think we can continue to have good traction there. But this quarter, as Jim mentioned, will be a little bit off because of the lumpiness in the equipment side.

Okay. Great. Terrific.

Thank you.

And next we'll move on to Darice Liu with C.E. Unterberg, Towbin.

Good morning. Can you talk a little bit about your current design line activity and pipeline in your new markets, life sciences and fuel cell?

It's within the -- this is John, within the fuel cell market I think we are definitely getting specked in and having some success there. Really our customers, and we're working with them as we talked about from concept to commercialization. So we're really working hard as they get to the next level of making products or producing products that will have higher volumes or we should be able to play. So fuel cells right now are still very much emerging and we are certainly not seeing significant business there but we still remain optimistic about the future going forward.

On a life sciences perspective, we have seen good bookings there. As Jim mentioned, our real issue there is can we handle all the business and ramp up capacity. So it's really not a question of getting orders. We are getting those orders, we're seeing a good level of business coming in there, and so we're very excited about that.

And Darice, I'd just add that on the fuel cell side that's really about positioning. We're leading some industry consortiums, some of our technology, six new patents are in that area, but it's really us becoming experts in that space and providing early leadership there, but it's still a long-term investment for us.

Okay.

In regards to utilization rates, historically you've told us that utilization rates of 100% weren't really application to Entegris. With your new build-to-order model, how does that change your utilization model?

I think, Darice for the near term we're going to have utilization rates that should be down from where we had been.

If you recall we've mentioned our practical capacity maximum is in 70 to 80% range as we haven't been in obviously for quite some time. But as we bleed off inventory, our utilization rates will drop, that's why more of our fixed costs will flow through the P&L rather than being capitalized into inventory.

So I would say for the next several quarters, we should see utilization rates down a bit, but in the meantime, over the last several quarters and years, we've been working hard on our lean Sigma programs, increasing operational efficiencies, and so our utilization rates are off even a little bit more because of the efficiencies we've been able to gain, but we've also been taking some of those fixed costs out over time as well.

Okay. And quick housekeeping. What was the head count at the end of this quarter?

Right around 1650, I think, 1700 people.

Okay. Thank you.

Thank you.

Thank you.

And we have a final question from Theodore O'Neill with A. G. Edwards.

Wow, I get the final question, that's great.

Hey, Theodore.

Hey, John, in terms of talking about the semiconductor business in the next quarter, in terms of your being sort of tentative about that, and sort of hedging what the situation is, is that because you've gotten false starts from your customers over the last, you know, quarter or two? Or are you getting specific customers have asked you, or specifically told you that they don't see anything out here near term that's going to improve?

Theodore, I'll take some of that question.

I think it's realistic based on the visibility and whether there are false starts or inconsistent starts, they maybe those are similar words but that's a little bit of the unknown that we have on that. And we are seeing more quoting activity, but those are all early signs of strength. And some of the OEM activity seems to be improving. But all the talk hasn't actually turned into purchase orders.

Theodore, we actually did see a, an increase, as Jim mentioned, in our third quarter where our unit driven products certainly were up for wafer shippers, we saw 300 millimeter hitting quite a bit. The wafer shipper unidriven kind of products are still very solid.

Could they pick up some more? That's possible but we have limited visibility because of our very short lead times.

300 millimeter business is very lumpy, and with our acquisition now of the Asyst WRC line we have a little bit more of a capital equipment spending component into our semiconductor business which makes things a little bit more lumpy or choppy. And we are seeing good order levels, they're just not ramping up as many people, I think expect in the industry. So I think it's back to timing and into which quarters orders will fall, and consequently we can also ship during that quarter.

Okay. Thank you.

Thank you.

And we do have another question in the queue from Glenn Yeung with Smith Barney.

Good morning, it's Karen Wang.

Hi Karen.

Hi. Just a question on gross margins, again, as you're working through the inventory ( INAUDIBLE) Q1 how should we expect to see the gross margin progression over that time, is it sort of a linear sort of improvement and just within those businesses that are affected?

And then can you talk about what your longer term just, you know, refresh our memory about what your longer term gross margin targets are by segment, if possible?

Karen, we've pretty much given guidance for the first quarter, we expect gross margins to be around that 40% range. I think the gross margins beyond that will be very contingent on revenue levels and sales mix. So we're really not giving guidance on that at this time.

If revenues can ramp and if the sales mix is appropriate, we absolutely feel we can do better than that. In terms of our longer term gross profit margin target, again, dependent on revenue levels and sales mix we would expect to be able to get back to close to historical levels or at historical levels in our core semiconductor and data storage markets. And then our new markets will see lower gross margins but we want to get to corporate average operating margins.

So that's a roundabout way of saying, I guess we anticipate our gross margins to be at peak levels probably down a little bit from where they were in previous peaks because of our sales mix. But we expect operating margins, we can get back to core averages based on the sales levels.

Okay, thanks.

There are no further questions. At this time I'd like to turn the call back over to Mr. Dauwalter for any additional or closing remarks.

Okay. Well thanks for taking time to join us today.

I'd like to close by reiterating that we see some great opportunities to leverage our infrastructure and to expand our markets and to make Entegris an even more efficient company and I look forward to our next update.

I'd also like to remind you or invite you to visit us here in Minnesota for our fourth annual investor and analyst day on October 8th, if you have interest in that, please call Heide Erickson and she'll give you additional information on that subject. So thanks for tuning in today and have a good day.

And that concludes today's conference call. Thank you for your participation. And you may now disconnect your line.