Entegris Inc (ENTG) 2004 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone. And welcome to Entegris 2004 first quarter earnings release conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Heide Erickson, Director of Investor Relations. Please go ahead.

Thank you. And good morning to all of you for joining us today at Entegris's first quarter 2004 conference call. Joining me today is Jim Dauwalter, President and Chief Executive Officer and John Villas, our Chief Financial Officer. So start off, let me preface these remarks. 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 facts that could cause results to differ is contained in the 10K revised November of 2003. Additional or changed factors that may also be mentioned on this call and might be included in the form 10Q to be filed in January of 2004. We also may refer in this call to nonGAAP financial measures as defined by the S.E.C. and regulations D. Reconciliation of the nonGAAP financial measures comparable to operation under U.S. GAAP will be made available on the investor's page of our web site on www.entegris.com and are included in our press release. This morning, John will take you through the numbers, and Jim will present his perspective on the business and how Entegris is positioned. Finally, they'll answer your questions. We'll end the call at about 9:30 a.m. eastern time. With that, let me turn the call over to John Villas, our Chief Financial Officer.

Thank you, Heide. I am pleased to report that sales and earnings this quarter were in line with our expectations. We generated over $2 million in cash from operations and maintained our focus on increasing efficiencies. In short, we executed on what we promised and continue to focus on the short and long term success of Entegris. For the first quarter of our fiscal year 2004, we are reporting the following results. Sales of $68.7 million compared to $54.2 million a year ago. A 27% increase. A per diluted share profit of 2 cents compared to a per share loss of 8 cents a year ago, and the generation of about $2 million in cash from operating activity. We now have about $101 million in cash and short term investments. With that quick overview, I'd like to turn our attention to sales. Sales rose significantly in the last weeks of the quarter. The momentum in the semiconductor market picked up considerably, particularly in November, and the strength continues as we speak. Semiconductor market sales decreased from the 2003 fourth quarter to the 2004 first quarter by about 6% and generated 74% of overall sales. Our unit-driven product lines like wafer shippers, test assembly products and containers saw increase in sales. Our wafer process sales were weaker than in the fourth quarter largely because of the timing of 300 millimeter fab build outouts. Except for some of our longer lead time products such as flow meters and flow controllers. The good news is that the activity in all our semiconductor product areas is building, particularly in the capital spending driven products. At this point, let me clarify something. The semiconductor industry is showing strength, and while equivalent manufacturers are predicting immediate and sizable order increases, Entegris's growth will be more gradual and occur over a longer period of time. We anticipate sales in the semiconductor market to improve more than the corporate average. Jim will talk about this in more depth later in the call. Data storage market sales accounted for 14% of overall sales. Sequentially from the fourth to first quarter sales increased by 14%. Customers accelerated projects and ordered more products than anticipated. However, we do expect a slight sales decrease in our next quarter. The data storage market has been a very strong performer for us over the last quarters, and we have very high market share in this market. Our continued investment in new product development will help to fend off growing competition and address the ever changing needs of our customers. Our services market generated 7% of Entegris's overall sales, an 18% sequential decline from last quarter. This decrease is all related to fewer sales of equipment used to clean our wafer, carrier, and shipping products. We expected this decline and anticipate next quarter sales to improve slightly from the 2004 first quarter as more equipment is scheduled to ship. We achieved some milestones this quarter in our new life sciences market. Life sciences was responsible for approximately 5% of Entegris' overall sales. Sales rose about 40% from the 2003 fourth quarter. This was a record quarter for our clean and place product offerings. We are pleased with this progress. The lead times in this market are longer, particularly as it relates to our clean and place product offering. Here lead times can extend from 16 to 18 weeks from order to shipment. This gives us quite a bit of visibility. For next quarter, we anticipate sales to remain at this stepped up level. We are investing in the long term in the emerging fuel cell market, which accounted for less than 1% of sales. We are still in the research and development mode as we help our fuel cell customers move from concept to commercialization. We are very encouraged by the activity in this market and our ability to gain customer confidence.

On a geographic basis, Entegris' first quarter sales in north America totaled 40%, in Asia pacific 27%, in Europe 15%, and in Japan 18%. Sales in Asia pacific increased while sales to Japan were relatively flat versus the fourth quarter. In both Europe and North America sales declined sequentially, largely because of fewer 300 millimeter fab buildouts. We estimate the unit driven concepts comprised 60% of total first quarter sales compared to 55% of the previous quarter.

During the first quarter, the gross margin was 40.1%, up from 33.3% from the 2003 fourth quarter, about what we expected. We anticipate next quarter's margin to improve to 41 to 43% of sales.

SG&A expenses were $21 million in the 2004 first quarter, slightly down from the previous quarter. Over the coming months, I anticipate these costs on a dollar basis to increase as sales and profitability increase. I also would like to point out that we will continue implementing the provisions of the Sarbanes-Oxley act, which will add administrative costs. For the second quarter 2004 we expect SG&A expenses to be slightly up from this quarter.

During the first quarter, we invested $4.6 million in engineering, research and development, compared to 4.8 million in the fourth quarter. We continue to believe that it is essential to invest in developing new products, materials, and solutions that solve our customers' problems. That's one of the ways we will maintain our market leadership position and gain share.

Other income in the first quarter was $557,000 compared to income of $721,000 during the fourth quarter. In the first quarter, we sold some of our Metron technology stock holdings. We recorded a tax expense of $841,000 for the first quarter, which equates to an effective tax rate of 34%. Based on our current analysis of the company's tax situation, we anticipate the effective tax rates for the full fiscal year 2004 to be similar.

We reported a net income of $1.6 million, or 2 cents per share, for the first quarter of 2004. Our balance sheet continues to be very strong. Cash and investments on hand are now $100.9 million, down $4.2 million from the 2003 fourth quarter. Short term debt at the end of the first quarter was $10.7 million. That's down $5.7 million from the previous quarter, largely because we paid down $5 million of the remaining $14 million we borrowed earlier this calendar year when we acquired a wafer and radical carrier product line. Our strong cash generating ability allowed us to pay down all of the debt we took on as a part of this acquisition while maintaining our cash position above $100 million.

During that 2004 first quarter we generated more than $2 million in cash from operations. Accounts receivable totaled $55.9 million, up $3.3 million from last quarter, primarily because of the acceleration in the last weeks of the quarter. Finished goods inventory in our U.S. facilities, where we are focused on implementing our build order and inventory management processes declined by about $2 million sequentially. Overall inventory increased by $1.2 million to $39.4 million to the first quarter of 2004. Work in process inventory rose by more than $2 million as we rose production the latter part of the quarter. We do expect inventories to continue to trend downward over the next several quarters. However, as sales accelerate, we will remain focused on reducing finished goods inventory, but this reduction might be offset by increases in raw materials and work in progress.

Accrued liabilities decreased by $4 million from the previous quarter to $21.9 million, primarily as we paid out year accrued end incentives. Depreciation and amortization expense was approximately $6.6 million for the quarter and capital expenditures were $3.5 million. For fiscal 2004 we expect to invest about 20 to $25 million in total capital expenditures.

We executed this quarter on what we promised and delivered the results. The semiconductor industry is picking up, which is a good sign for a solid second quarter. We continue to make progress on 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 core and newer markets.

Now I will turn the call over to Jim.

Thanks, John. John just walked you through the details of the financials. I also am very pleased about our financial position. We have done the right things to leverage our business model, take costs out, increase efficiencies, and prepare operations to respond quickly for accelerated sales. We are the leader in materials integrity management, in the data storage and semiconductor industries, and we continue to gain traction in our new markets. Entegris is a multifaceted company. We're successfully expanding our expertise into multiple markets, which increases our opportunities in the future. The other good news is that Entegris is ready for the increase in semiconductor industry activity.

Last quarter, I talked about increased quota activity. This quarter I can talk about increased order activity. And by the end of our second quarter, we expect to talk about our increased sales activity in the semiconductor market. Entegris is in very good position. The market momentum in semiconductor is building, and we have growth opportunities in our new markets, and we have worked hard to increase efficiencies throughout Entegris. These things are in place to leverage our business model.

As we continue to improve our efficiencies, we focus on providing the best value possible to our customers. Proof of this is the recognition we're receiving by our customers as a key supplier. This recognition is only possible with our employees around the world working together as one team. And the credit for all our accomplishments belongs to team Entegris.

But as we all know, all this hard work is rewarded when sales increase and leverage kicks in. As John mentioned, I'd like to expand on the timing of Entegris' semiconductor sales as the momentum in this market picks up. There is a significant difference in how our sales flow compared to peers in this industry because of our broad product offering in both unit and capital spending driven sales. Our unit driven sales are directly related to how many wafers the growers produce and how many wafers are processed within the fab. Examples of products in this category are wafer shippers and drums that handle ultra-pure chemicals. Increases in utilization rates generally result in higher demand for these unit driven products. And as John already said, we continue to see steady gains in sales for our unit driven product lines.

For our capital spending related sales, increases are driven more by fab buildouts. Let me give you two examples. One for our 300 millimeter FOUPs or front opening unified pods, and the other for our fluid handling products. 300 millimeter FOUPs are primarily sold to new fabs. As a fab is being built, we secure our 300 millimeter FOUP business. Generally, we know about a month after the equipment manufacturers if we're going to be the leading or sole provider of FOUPs within a fab. However, unlike equipment companies, our product shipments are spread over months as fab production ramps. We generally deliver our first FOUPs around the time production equipment is being installed. At that point, our customers need the FOUPs to start qualifying the equipment. As the line ramps, more wafers are processed, more FOUPs are required, and consequently we ship additional products. As lines are added, the process repeats itself. A case in point is the new 300 millimeter fab that is just starting to run wafers.

We recently shipped our initial FOUPs, and we anticipate by the end of the summer of 2004, we'll have shipped between 4,000 and 6,000 FOUPs necessary to support this portion of a fab ramp. While every customer is Different, it's key to note that our revenue stream is steadier and not as front end loaded compared to equipment companies. Also keep in mind we're already working on production improvements on our 300 millimeter products to keep pace with technology upgrades. Remember, in the 200 millimeter market, many customers have upgraded their entire 200 millimeter wafer carrier population because of the value proposition of our next generation product offering. Our goal is to do the same for 300 millimeter fabs. Another example of a capital spending driven product line is our fluid handling offering.

Let me focus on the fluid handling products sold to front end equipment manufacturers. The OEMs in the semiconductor industry. Once an OEM receives an order from a fab, we generally get orders from our fluid handling products up to a month after that. If our distributor has the product in stock, Entegris may not see the order directly. Assuming a distributor does not have the product, we would expect to ship the order within a few weeks or sooner. What does that mean? We have later order visibility for the fluid handling products than the OEM, but we ship our orders and recognize sales prior to OEM shipping their equipment. My goal in providing you with these details is to give you some sense that our revenue stream is much steadier than that of equipment manufacturers, and we generally benefit from an improvement in capital spending about a quarter after our OEM peers see increases in their orders.

Currently, all indicators are very positive. We see heightened industry activity in the semiconductor market. Our unit driven product sales continue to improve. And orders for all our product lines are building. We would anticipate unit driven sales increases from the first to the second quarter in the mid single digit percentage range at or above industry IC unit growth levels. Levels for our capital spending driven sales are more direct to forecast since it is tough to anticipate when our customers will require shipments. Today, we expect sales increases to be more significant in our capital driven compared to our unit driven product offering.

For the next quarter, we expect companywide sales to increase by about 5 to 10%. The semiconductor market will be the most significant contributor to the sales increase. The overall growth is moderated by sales expectations for the other markets we serve as John discussed earlier. Even as sales rise, our engineering, research and development expenses should remain in the 4.5 to $5 million range. Sales, general and administrative expenses should remain fairly stable with the exception of incentive payouts. Depending on sales mix, we should see 50 to 60% of every sales dollar dropped to the operating margin line. That's a business model with significant leverage and something we've been diligently working on. We'll continue to work on moving closer to a build to order manufacturing philosophy. As sales increase, the impact should be less visible since we can both ramp production and draw down inventory to satisfy demand. Our goal is to continue to reduce finished goods inventory even as sales increase.

I said earlier that team Entegris has worked hard to increase efficiencies and to keep our customers' needs at the forefront of our efforts. Our customers have recognized us for these efforts, and in October we received the supplier of the month award from one of the largest fabs in the world for our on-site service team. Areas highlighted were technical training support, and customer service. Our customers are recognizing that our services offering creates significant value for their businesses. In addition, we underwent a regularly scheduled audit by one of the largest IC manufacturers in the world to assess our processes, systems, and results in all areas related to production. We received improved marks in all areas from our previous audit. One of this customer's key parameters is continuous improvement. The results indicates that we do have good linkage to our customer satisfaction goals, and we're very pleased about the results. Our continuing concentration on improving processes and efficiencies is being recognized.

I firmly believe that Entegris is a better company today than it was even a year ago. So what are the key takeaways? First, Entegris is well positioned to take advantage of the improving semiconductor market conditions. Second, we are increasing our opportunities in our new markets. And, third, we're in a great position to leverage our infrastructure. And all of that will help us deliver increased shareholder value both in the short and long term. With that, we'll now 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 do so by pressing the star key followed by the digit 1 on your touch tone telephone. If you are using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you'd like to pose a question at this time.

We'll go first to Darice Liu of C.E. Unterberg & Towbin. Your line is open. Please check your mute button. Hearing no response, we'll go to Glenn Young of Smith Barney.

Thanks. Good morning, everyone. Couple of questions here. If we first look at the consumables or wafer side driven businesses, I wonder if you're seeing any sign that that business, well moving to higher levels, may be in a position where it might have to plateau, just given the sort of capacity utilization numbers we're seeing in the chipmakers. They're obviously getting very tight here. I wonder if there's any room for that business to continue to grow.

Glenn, this is John. As you know, that business is always a steady performer for us because of the wafers that are produced, the units that are being consumed, with our broad market share and leadership there and what we've been able to provide to our customers. We're pretty in tune to that. I would say we'll continue to see increases in that. It's not increasing at the same levels as the capital spending driven products, but we do expect those products to increase next quarter in the mid single digit kind of range. What we can see near term we do continue to see growth there.

Pretty steady stuff, huh?

Yeah.

Okay. And then on -- you say you're seeing orders pick up late into the quarter, and I just wonder if you see any granularity where those orders are coming from. And you talk about being a little bit less visibility on the fluid handling side. I wonder if you have any thoughts as to what kind of inventory the distributors actually have today.

Glen, this is Jim. You know, with regards to where we see the business activity, it's pretty much in line with what I think you and everyone else are observing and a good portion of that activity currently is the buildout of facilities in Asia. And with regards to the overall effort of products, you know, we're seeing that not only in the 300 millimeter line, but in kind of across the board.

Okay. Then just one other thought on SG&A, picking up here a little bit, and I may have just missed the details in your commentary. Are we looking at SG&A ticking up relative to sales. I.e. it's really commission dollars that are taking it up, or are we looking at structural increases in SG&A, and if so, why is that?

Glen, this is John. Basically, we look at some increases related to sales and profitability. So there is certainly a tremendous amount of leverage there. Structurally, no, we aren't looking at changes other than there are costs associated with the implementing the provisions of the Sarbanes-Oxley act. Those are not hugely significant but they are going to result in some increasing costs. By and large, the increases are related to the incentive piece as sales and profitability increase.

Are there any, you know, payments that you have deferred compensation payments that you need to make at this point?

No.

So when I think about SG&A going up, it's going up less than sales is going up?

Absolutely. Glen, as we talked about, you know, with the leverage we have in our business model, we expect 50 to 60% of every sales dollar to fall to the operating margin line. So, yeah, we are very comfortable with our infrastructure, investments in ERD and SG & A category should be up nominally in SG&A as sales grows.

Glen, you also asked about fluid handling. Our -- we think our position there is with our distributors is that, while they don't have a lot of inventory, that, of course, is the first thing that does get taken down. And it more -- you know, our visibility occurs more as we actually get even increased ramp from the OEMs, as I described and where we fit in on the cycle.

Okay. Thanks very much.

Thank you.

We'll go next to James Covello of Goldman Sachs.

William Franklin for James Covello. Couple of quick questions. First, has the inventory issue from last quarter been completely flushed out from reduction of this quarter with the finished goods inventory? Also, if you could give a little bit more color into the business pickup into the life sciences area, maybe talk about what you're seeing on the horizon that gives you confidence to see that that business will stay at these levels for the next few quarters or so. And also a headcount number if you can. Thank you.

This is John. I'll take the first part and maybe the last part of your question. On the inventory piece, we did see declines in our finished good inventory, particularly in the United States. But inventories did increase, particularly near the end of the quarter as the order activity picked up in the areas of raw materials and work in process. So I would say that we took the biggest cut at it in the fourth quarter. We did still have some impact to our gross margin line as we took finished goods inventory down this quarter. We're continuing to drive those down, but as the inventory level -- as the business levels pick up, that gets a little bit to be a tougher balancing act. Our overall goal is to continue to work hard on reducing inventory. So it's a long answer, but I'd say shortly the finished goods are down, whip is up, and we'll continue to work on finished goods. With respect to headcount, I think worldwide we're at about 1,850 employees or thereabouts. And I'll let Jim comment on the life sciences sector.

On the life sciences front, we did have a great quarter, something to the tune of 40% over last quarter. As far as going forward with that product line, it's primarily our clean in place product, and that has lead times of 16 to 18 weeks. And so we're pretty confident with that visibility that we could see a repeat quarter for that part of our business. Some of the success we're seeing in this area is the fact we're able to utilize Entegris' infrastructure and get closer to our customers and have more customer contact now that we own that part of the clean in place market with the acquisition of ESC. So we're pleased with that front.

Thank you very much.

Thank you, William.

We'll go next to Robert Stern of Needham and company.

Yes. Good morning. Can you assess for us the margin impact of the reduction in inventory. In other words, because there was a couple quarters ago there was a lack of overhead absorption because of the inventory liquidation. What's the -- what was that margin impact in the first quarter, and what will it be in the second quarter?

Rob, this is John. We expect, as we mentioned in our fourth quarter -- actually, it wasn't a couple quarters ago. But for fourth quarter, the underabsorption of inventory management was a detractor by 5, 6, 700 basis points to our gross margin line. Anticipate that this quarter -- what I would say for this quarter is it was much less because we didn't reduce inventory by nearly the levels we did in fourth quarter. So we're talking probably the magnitude of 100 to 150 basis points. I would say going, forward if we can continue to reduce inventory, we can see similar impacts. But we will also somewhat have to talking about product mixes as well as the business shifts. With the newer markets not having the same gross margins at the traditional core markets.

In the life sciences, you kind of indicated -- I think you're saying it will be flat in sort of absolute terms in the current quarter?

That's correct.

)5 Do you have any sense of whether that would be increasing in the remainder of the year? In absolute terms. And as a percentage.

Well, as a -- in absolute terms, yes, we'd anticipate that should have some continued growth. We stepped it up to quite a higher level in the first quarter. I think we've indicated we expect that business could essentially double this year over what we did last fiscal year. In percentage terms, I think it will be dependent on what the growth is in semiconductor. As we mentioned, we expect that market to grow by more than the corporate average of 5 to 10% by the second quarter. In absolute percentage terms, it may not continue to be at the 5% kind of pace, dependent on what the other markets do.

Thanks.

Thank you, Rob.

We'll go next to Brett Hodess of Merrill Lynch.

Good morning.

Hey, Brett.

Can you update us on what your utilization rate is. Also, on the build to order change. I know the margins get hurt as you take the inventory down there. Also, part of the build to order change is I believe much faster cycle time. Shouldn't that start to play into some margin improvement as you ramp up your utilization?

Brett, this is John. I think the utilization rate was pretty consistent with where we were at last quarter, maybe up just a little bit. Again, we are in the -- we feel we have the capacity worldwide with our present facilities and equipment set to do 4 to $500 million in revenues on an annualized basis. So utilization rates are still at the half of what we essentially could do if we were going full bore. In terms of the built to order, yeah, we should realize faster cycle times, and that is something that we are rolling out as we work through the different product offerings and product sets so that it will be, I think, affected over time, and as we can turn product more quickly and get it out the door, that should result in improving cash flow. And, yes, perhaps some margin improvements.

And my follow up question is on the 300 millimeter side, I know that, as you explained, Jim that some more spread out business, but can you give us a feel for how the competition is going now for 300 millimeter products groups and other products. Are you seeing the competitive environment tougher? Easier? And what you think your win ratio is at this point.

Well, you know, with the acquisition of WRC, we clearly have the broadest product offering of everyone out there. It's not only hoops, but it's all the other related products that support the transportation and protection of 300 millimeter wafers. Our competition today is basically coming out of Japan, and we will continue to watch and monitor them. We feel real good about our market position and the wins that we're getting. We're not without someone out there that we have to pay attention to, and we're doing just that.

And does the currency effects of the weaker dollar help you against the Japanese competitors?

A lot of the companies that we deal with in this space have dollar budgets. So typically it doesn't affect their budget line as much as perhaps, if they're Japanese customers and they're converting yen to dollars, that wouldn't at the current time be positive. But for the most part, the Asian customers are tied directly to the dollar.

We have -- as you recall, Brett, we are a premium pricer because of our product offering and the capabilities that we do have. So it could have some impact, but I would agree with Jim. It's not very substantial.

On that note, is the pricing premiums holding pretty stable as you start to see the demand pick up?

Yeah. We're -- you know, our whole product offering is more than just the product, but the value and the history and the support and the service that we provide. And so, yeah, we're able to maintain that differential pretty consistently.

Very good. Thank you.

Thank you.

Thanks, Brett.

We'll go to Stewart of Adams, Harkness and Hill.

First a question for Jim. On the data storage segment, that was surprisingly strong again this quarter. Is that largely still the smaller form factor change, or could you comment on what's driving that?

For the most part, it was the 95 millimeter product offering. And some of the 65. It isn't the real -- the small product that we've talked about in the past, where it could be more consumer driven, and it has a lot to do with the buildout and the capacity that the customers currently seek. I think C-gate's doing very well right now, and it's somewhat cyclical as to when they need new product from us to replace product that's been in their system.

The consumers continue to be a key driver in this market, and as Jim mentioned, they had positive impact in this quarter.

One more question, a follow-up from some of Brett's questions about the FOUPs. But specifically on the new full pitch, how is that coming along in terms of customer acceptance?

We're real excited about the potential of that product, and we continue to provide product to the customer base for evaluation and feel that we're right on track with where we want it to be at this time.

Excellent. Thank you.

Thanks, Stewart.

We'll go next to Darice Liu of C.E. Unterberg & Towbin.

Good morning. Can you hear me?

Yes.

Fabulous. Just a couple of follow-up questions. In regards to build to order model, you mentioned last Q that this second phase that you're in right now will last about 12 to 18 months. As revenues continue to ramp up, how do you expect this to impede your time schedule for completing this inventory flush model?

This is John. It certainly makes it more difficult because, as the industry ramps, semiconductor in particular, we need to be ready to meet our customer's demands and needs, and we simply have very short visibility, short lead times, and we need to be responsive. So with the efficiencies we've gained, we feel as though we're able to do that. It may impede it somewhat. I think we would expect this build to order to be something we thought would have impact on the gross margin line for a few quarters, not necessarily four to six quarters or 12 to 18 months. So I would say we're monitoring it closely. The primary emphasis will be on the customers and what they need and the product that they'll be requiring from us as the industry picks up momentum and as we see increases in our orders.

So when do you think gross margins will return to historical norms?

Well, it would be dependent on how you define historical Norms. We are, I think, a different business than we were in the last up cycle with the new markets we've entered, the diversification in the services area and life sciences, in particular. When do gross margins return to historic norms, I would say it's dependent on product mix. We still have very good share and good margins in our traditional core markets. So we'll just take it one quarter at a time. We're obviously seeing an improvement in this quarter as well as what we're forecasting for next quarter.

We think semiconductor could be certainly at the same levels that it was in the last cycle, but, again, we are a different business with new markets now.

Your new markets, though, are about 5 to 6% of your total sales. If that remains at that level and if revenues continue to ramp up, if you could somehow pinpoint a range of when you think margins would return.

Well, our services business was 7 or 8% of sales. Life sciences was 5%. Fuel cells is still less than 1. So it is actually more than 5% of our business. So the second part of your question, Darice?

Well, if that was the case, with everything holding steady as it was this quarter and with revenues ramping up mostly in the semiconductor group but also still with your inventory model change, when do you think margins would probably return to historical -- to, you know -- if things were flattish as they were right now.

Well, it's going to be a revenue and sales mix dependent. So we estimated that gross margins will be at 41 to 43% on a 5 to 10% increase in sales. I think that's dropping 60 cents kind of 50 to 60 cents to the gross margin line on that increase. So we will see leverage as we get into the higher sales levels if semiconductor industry stays strong. I would expect us to get back into historical norms, broadly, when the higher sales are. I don't know that I can be more specific than that.

That's fair enough. Can you give us the product update, particularly your next genesis as well as the back end tape and reel product as you mentioned during the analysts event.

We continue to work on new product introductions, and that's something that's in the works. But we probably would just assume not reveal that information at this time.

And just one quick question. 200 millimeter and 300 millimeter strength. Can you break down what you saw this quarter and what you're seeing for the next quarter.

Certainly for this first quarter we just reported, 200 millimeter was stronger for us since 300 millimeter was down a bit. As we mentioned, some of the capital spending is lumpy, some of the fab buildouts and how the orders flow into us. Jim went into some detail on it. It can be sporadic in different quarters. 200 millimeter was a greater contributor in our first quarter and I would anticipate 300 millimeter being a stronger contributor relative to first quarter in the second quarter just because of that ramp and increase in capital spending we're feeling.

Okay then. Thank you.

Once again, if you would like to pose a question, please press star 1. We’ll go to Theodore O’Neil of AG Edwards.

Thank you. I would like to go back and talk about the unit driven business for a moment. If I look at the WSTS data for September of this year, the industry shift 8.9 billion integrated circuits, which is a 10% increase from the previous peak in September of 2000. And indeed the October numbers continued with that, with the weekly shipment number that was another new record. So if you look at the units that are actually being shipped out there, we're above the 2000 levels, and I was wondering if you could comment on -- to the extent that you can recall what it was like back then, how the unit driven business is or isn't matching, from your perspective, the absolute number of chips, which is at a new record now. Are you seeing ASP pressure in that particular part of your business? Or is that, in an absolute sense higher than it was in this particular quarter in 2000?

Well, you know, there's really a lot of factors out there that affect that. We went from 150 to 200 millimeter. There's more 300 millimeter wafers producing chips. And we've also had shrinks. And so all of those can affect the number of shipper units that we would supply. And at the same time, the industry be able to produce more chips. So it's a combination of all those things that has some effect.

So you're saying the wafer start number may indeed be lower than it was in September -- in this quarter in 2000 even though the unit number of semiconductors is higher?

Yeah, that's basically what is more than likely happening.

Fair enough. Thank you.

Thank you.

))z Operator: We'll go to Samir Dasay of Willowcreek capital.

A couple of questions. First, can you describe the typical seasonality you would see in the February quarter historically. It usually incorporates a few holidays. And what you're seeing this year in regarding shut downs versus previous years.

Samir, this is John, we would say there is certainly a bit of seasonality with the holidays, particularly in North America and Europe. And then with the lunar new year that occurs in January. But we still feel positive about the order rate that we're seeing. We're not seeing a lot of shutdowns. In fact, we plan to be working our facilities through the holiday season. You know, generally it does fall off a bit, just because of the pure number of days we have to ship product. But I would say, typically, right after the first of the year, things are generally pretty robust for us into that February time frame.

Okay, great. And the second question was regarding the life sciences business. I think you mentioned it grew 40% sequentially. Was that in line with what you expected, or did that surprise you, that growth rate in the quarter?

I think that was pretty much in line with what we expected. As we mentioned, the lead times are fairly lengthy here for this clean in place product offering. We had a good backlog heading into the quarter, and we anticipate that the sales levels for this next quarter, the second quarter, will be about flat because, again, with the visibility we have, it's a little bit easier to see.

Great. Thanks.

At this time, you can press star 1 if you'd like to pose a question. We'll go to Robert Stern of Needham and Company.

In the life sciences business as I remember it, you bought that cleaning business, of course, because it was a good business, but also because you wanted it to help you grow the tubing and other components for the life sciences business. So I'm just wondering, being that your comments seem to be oriented towards the growth in the cleaning business, how you're doing in penetrating the life sciences business with components.

Well, you're right on with some of our original intentions on picking up that company, but the other part of it, of course, was to get us closer to our customers. And it surely has done that. The clean in place business, prior to Entegris acquiring it, didn't have nearly the focused sales and marketing approach that we've been able to provide. So with that, we have really seen significant increases on that front. As it relates to the fluoropolymer product line, we are getting through the clean in place offering more opportunities to present that product, but, of course, that's tied directly to FDA-controlled processes. And so it's a much longer sale and one that we continue to position ourselves. But it hasn't got nearly the same volume as what we've been able to increase on the clean in place product line.

So would it be fair to say you're making headway but you haven't seen the results yet in terms of revenues?

Yes. That would be pretty accurate. We're -- you know, making headway and getting it introduced and getting smaller prototype lines in, but it's not got near the traction that the clean in place product line has.

Thank you.

You bet.

And at this time, there are no other questions in the queue. Mr. Dauwalter, I'll turn the conference back over to you for any additional remarks.

Thank you. It is encouraging to finally be able to speak about a lot of positive fronts that we're seeing on the semiconductor side of things. It's refreshing to be able to share some of that with you all. We'd also like to thank you for taking time and joining us today. And I'd just close by reiterating that we do see great opportunities to take advantage of the improvements in the semiconductor market and also expand our markets to leverage our infrastructure. Please call Heide Erickson if you'd like additional information or if you have questions related to this quarter's financial performance. And, again, thanks for your interest in Entegris, and I wish you all a blessed holiday season and a successful 2004.

And that concludes today's conference call. We thank you for your participation. You may disconnect at this time.