Entegris Inc (ENTG) 2004 Q2 法說會逐字稿

Good day everyone, and welcome to the Entegris 2004 second 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, ma'am.

Thank you, Matt. Good morning and thank you for joining us to discuss Entegris’ fiscal 2004 second quarter results. Joining me today is Jim Dauwalter, President and Chief Executive Officer, and also John Villas, Chief Financial Officer.

To start off, let me preface our remarks with the 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 Form 10-K we filed in November of 2003. Additional or changed factors that may also be mentioned on this call might be included in the Form 10-Q to be filed in April 2004 or other documents previously filed with the SEC.

We also may refer in this call to non-GAAP financial measures as defined by the SEC in Regulation G. Reconciliation of non-GAAP financial measures to comparable reported results of operations under U.S. GAAP will be made available on the Investor's Page of our Web site at www.entegris.com and are included in our press release.

This morning John will take you through the numbers and Jim will give you an update on the business of Entegris. Finally we'll answer your questions. We will end the call by 9:30 a.m. eastern time. Now I'll turn the call over to John Villas, Entegris' Chief Financial Officer.

Good morning, and thank you, Heide.

This was a solid quarter for Entegris. The semiconductor market recovery was strong and we focused on meeting customer demand and execution. Sales in our other markets were about what we expected and we delivered an improving bottom line.

For the second quarter of our fiscal year 2004 we are reporting the following results: Sales of $80 million, up 16% from the previous quarter, and 46% from the second quarter of fiscal 2003. A per diluted share profit of 7 cents compared to 2 cents in the previous quarter and 1 cent during the year ago second quarter and we generated $14 million in cash from operations. We now have $112 million in cash and short-term investments.

I am pleased with these results and believe that we will be able to increase our leverage even more as we are past the initial push of ramping our manufacturing organization. Before I go into more detail on leverage, I'd like to turn your attention to sales.

The increase in sales from quarter to quarter is all related to the semiconductor market. As you might recall, last quarter we mentioned that the order momentum in the semiconductor market picked up considerably, particularly in November. That momentum accelerated in the later part of December.

Semiconductor market sales rose from the 2004 first quarter to the second quarter by about 26% and generated 79% of overall sales. Our unit-driven product lines like wafer shippers, test, assembly and packaging products saw improvements in line with our expectations.

But our capital spending driven sales such as wafer and radical carrier and fluid handling products saw much more significant improvement which exceeded our expectations.

Sales for 150 millimeter and smaller wafer sizes grew because of replacement business. 200 millimeter product sales accelerated due to replacement business, conversion to higher technology products and the general industry recovery. Finally 300 millimeter product sales also increased significantly.

During the quarter we received orders for more than half of all customers with 300 millimeter fabs for our 300 millimeter Front Opening Unified Pods. Jim will go into more detail on the momentum in this market later in the call.

Data storage market sales accounted for 11% of overall sales. Sales in this market declined by about 4% which was in line with our expectations.

Current indications are that there is an inventory buildup of hard disk drives in the channel. Therefore, we anticipate sales in this market to decline slightly in the near term. However, the overall growth outlook remains positive in this market.

Our Services market generated 5% of Entegris' overall sales a 7% sequential decline from last quarter. This decrease is related to fewer recognized sales of equipment used to clean our wafer, disk carrier and shipping products and is all timing related.

We anticipate next quarter sales to improve from the 2004 second quarter because of scheduled equipment sales.

Life Sciences was responsible for approximately 4% of Entegris' overall sales. Sales in this market declined about 11% from the previous quarter after significant increases during the 2004 first quarter. This was within the range of our expectations and for the third quarter we anticipate sales to remain at this level.

We are investing for the long-term in the emerging fuel cell market which accounted for less than 1% of overall sales. We are making great inroads with the industry leaders in fuel cell technology and have formed close alliances with these leaders. The fuel cell market has great prospects in future years.

On a geographic basis Entegris' second quarter sales for all markets in North America totaled 35%, in Asia Pacific 30%, in Europe, 17% and in Japan 18%. Sales in all geographic regions increased. Sales to Europe and Asia grew over 30% followed by Japan with 14% quarter to quarter increases and North America which grew by 3%.

Let me point out though that semiconductor market sales were particularly strong in Asia Pacific, North America and Europe while data storage market sales were strong in Japan. We estimate our unit-driven products comprised slightly less than 60% of total second quarter sales.

As I mentioned before our smaller wafer size products showed considerable strength. These sales fall into the unit-driven sales category since they are primarily replacement products which are not considered capital expenditures. In addition, reduced sales for equipment and the Services and Life Sciences market generally fall into the capital spending driven category.

During the second quarter the gross margin increased to 43.5% or 340 basis points over the 2004 first quarter.

We invested in expanding our flexible resources, specifically in manufacturing during the quarter to address the rapidly increasing demand, and that added some additional costs, Jim will get into more detail later. We anticipate improved gross margins next quarter.

SG&A expenses were $23.3 million in the 2004 second quarter, up $2.3 million from the previous quarter. With higher sales and profitability year-to-date employee incentive payouts and charitable contributions are increasing.

In addition we changed the component of our long-term equity-based incentive programs by issuing fewer stock options in exchange for restricted stock grants. Under current accounting rules we are required to expense these grants over their four-yearfull year vesting period.

This was a first step in our effort to anticipate some of the new option expensing rules and to keep our compensation expense in line with peers and competitors in our market.

For the 2004 third quarter, we expect SG&A expenses to be up on a dollar basis from this quarter as we anticipate higher sales and profitability. This increase should be about half of what we saw from the first to second quarter 2004.

During the second quarter we invested $4.8 million in engineering, research, and development, compared to $4.6 million in the first quarter. Quarterly we generally invest about $5 million in engineering, research and development of new products, materials, and solutions in all market conditions.

We are anticipating and solving our customers' problems. That's one key reason why we are the market leader in the materials integrity management. As sales increase ER&D expenses will decline as a percent of sales.

Operating income was 8.2% of sales this quarter compared to 2.7% in the 2004 first quarter. That means that more than 60 cents of every additional sales dollar in Q2 over Q1 dropped to gross margin and more than 40 cents on the dollar to the operating margin line.

Next quarter we expect ER&D expenses to stay essential flat and SG&A expenses to increase somewhat on a dollar basis with both categories declining as a percent of sales. We also anticipate improvements in gross margins. That means we believe we will see even better leverage next quarter.

Other income during the second quarter was $500,000 compared to $600,000 during the 2004 first quarter.

Just as in the first quarter we sold a portion of our Metron Ttechnologies stock holdings. In addition, we recorded a one-time gain on the sale of property and equipment in the second quarter.

We recorded a tax expense of $2.2 million for the second quarter which equates to an effective tax rate of 30.2% for the quarter. That's down from last quarter's 33.9% rate. Based on our current analysis of the company's fiscal 2004 projected tax position, we anticipate the effective tax rate for the full 2004 fiscal year to be about 31%.

We reported net income of $5 million, or 7 cents per diluted share for the 2004 second quarter. That's up 5 cents or $3.4 million from the first quarter.

Our balance sheet continues to be very strong. Cash and investments on hand are now $112.3 million, up $11.4 million from the 2004 first quarter. We generated more than $14 million in cash from operations during the second quarter.

Short and long-term debt at the end of the second quarter was $24.4 million, flat with the previous quarter. Accounts receivable totaled $63 million, up $7.1 million from last quarter, primarily because of the acceleration in sales as the quarter progressed.

Days sales outstanding actually decreased from 65 to 62 days from the first 2004 second quarter. Finished goods inventory in our global facilities was up slightly from last quarter because of equipment that is shipped but isn't recognized as revenue yet.

Overall inventories increased by $4.9 million to $44.3 million from the first to the second quarter. This increase is all related to increased raw materials and work in process inventory as we ramped production throughout the quarter.

Accrued liabilities increased by $5.7 million from the previous quarter to $27.6 million. Primarily as we accrued incentive pay and because of deferred additional equipment revenue.

Depreciation and amortization expense was approximately $6.5 million for the quarter and capital expenditures were $6 million. Our plan is to spend about 20 to $25 million in total capital expenditures in fiscal 2004.

Before I hand the call over to Jim I'd like to say that I am pleased with our financial performance this quarter particularly in the context of the strong semiconductor market recovery. We showed leverage in our business model, managed our balance sheet, and continued to generate cash. We are ready to take advantage of the opportunities ahead of us. Now, I will turn the call over to Jim.

Good morning.

And I concur with John. This was an exciting quarter for Entegris.

We focused our efforts on meeting customer demand, we exceeded expectations, and we generated significant top-line growth. We're now seeing the semiconductor market momentum that we've been anticipating, and as a company we're well positioned to meet demand and seize new opportunities.

I'm also pleased that after extending our flexible resources to meet rising demand in the first part of the quarter we're starting to experience leverage in our business model and once again generating significant cash.

There are things that we can do to make even more progress on margins and I'll speak to that a little later. But overall I'm very proud of our execution and our accomplishments.

Let me first expand on the sales and order flow information John provided earlier, and then I'll talk about what we're doing to improve efficiencies and why we believe we can improve our leverage in the next quarter and beyond.

You might remember that two quarters ago we talked about increased quote activity and last quarter we mentioned increased order activity. As you've already heard, those orders are now hitting our top line and we can talk about our increased sales activity in the semiconductor market.

Our unit-driven semiconductor market sales rose in line with our expectations. We saw sales improvements in the mid single digit percentage range from first to second quarter.

Sales particularly for our wafer shipper products are related to wafer starts. Generally increases in wafer starts in the mid single digit range indicate very nice growth.

The story this quarter, however, was the demand for our capital spending driven products. Our fluid handling products and wafer and radical reticle carrier product lines are primarily dependent on capital spending in the semiconductor industry.

In these product lines, sales grew around 40% from the first quarter. That's significant, and it surpassed our expectations.

Order momentum started to build in our semiconductor capital equipment product groups when we talked to you during our mid-December conference call, but it didn't really take off until the latter part of December. In fact, compared to orders in our first quarter, some product orders tripled. And that's huge.

And while this ramp is not hot, it's not overheated from our perspective, and that's why we are optimistic about next quarter. Just as in this quarter our third quarter sales will be based on continued strength in semiconductor capital spending.

Operating margins were up nicely from our first fiscal quarter to our second quarter. And I believe we can do even better.

With dramatic order increases for some products during the quarter, we had to ramp production very rapidly. In particular, many of our production employees worked overtime and we had to expand flexible resources in manufacturing.

During periods where we are adding and training a large number of people, efficiencies are not yet optimized and we incur expenses at a somewhat higher level than normal. We are now at a staffing level that is approaching current demand.

Our goal is to smartly expand flexible resources such as temporary employees, to deliver the service level our customers expect and require while maintaining operational efficiencies. During the second quarter, we started seeing month to month improvement in efficiencies, which gives me confidence that operating margins will show a nice improvement during the next quarter.

Ramping production to demand is an ongoing challenge. We have enough press capacity, but the key is hiring and training employees at a pace that the manufacturing organization can absorb.

In addition, we continue to look for ways to become more efficient. Such as moving to a build to order manufacturing model which we implemented in 2003.

Many of our products have a variety of order options. For example, the front opening unified pod, the 300 millimeter wafer carrier, can be ordered with various features including different kinds of flanges, colors, laser markings and handles.

That's why in many cases we don't stock a fully finished product and expect to sell it to all customers. Instead, we employ the build to order model and focus on meeting unique customer demands.

But even in an industry recovery, we'll continue to manage our finished goods inventory carefully. We don't expect any additional meaningful impact on our income statement based on the build to order manufacturing model in fiscal 2004.

Another example of how we improve efficiency is the move of the production of our fFront oOpening sShipping bBox, or FOSB, to Japan. That was an announcement we made in February.

FOSB is the industry term for a 300 millimeter raw wafer shipper. We are the only provider of a FIMS compatible product that is universally compatible with fab automation systems.

We expanded our facility in Japan to accommodate this added capability. The move made sense since a majority of 300 millimeter raw wafer manufacturers are located in Japan.

The facility incorporates both molding and assembly areas including a class 1000 clean room and critical support functions. We're excited about the growth opportunities in this market.

Our polymer Services group also underwent a significant change that addresses our customers' requirements. We completed the move of this group into our Malaysian facility.

Polymer Services reclaims products such as chip trays or certain data storage products and regrinds and reprocesses them for use in the production of new products. Since most of these recycled raw materials are used in products we manufacture in Malaysia, moving the polymer group made good sense.

We focus on providing the best value to our customers, and that includes offering manufacturing infrastructure and support services to the major geographic regions we serve.

During strong periods of semiconductor growth, we tend to talk less about data storage and our new markets of Services, Life Sciences, and Fuel Cells. However, I can assure you that we continue to focus on creating opportunities in these markets as well.

In the data storage market, we recently renewed or signed multiyear contracts with almost half of the top media and substrate manufacturers in the world. In Life Sciences, you may have seen our press release yesterday announcing a follow-on order from Novocol pharmaceutical.

That order is a key example of the value-added solutions we can bring to the market by combining our fluoropolymer-based products with our stainless steel design fabrication and clean-in-place capabilities.

In the Services market we continue to expand our on-site customer offerings and our equipment sales to clean data storage wafer and radical reticle carrier products are doing well. Finally the fuel cell market, we're starting to see small but repeat production orders.

Entegris is the leader in materials integrity management in the semiconductor and data storage markets. And this quarter shows that we're fully participating in the recovery.

All indications are that the momentum in the semiconductor industry will continue for the foreseeable future. Therefore, we expect next quarter to show sales gains of about 10 to 12% from the just reported quarter.

The key driver for this growth will be our capital spending-driven products in the semiconductor market which we anticipate will grow at a faster pace than the corporate average. We also anticipate that during the next quarter, we'll see additional leverage as sales increase.

Let me remind you, ramping production from one quarter to the next by about 40% for nearly half of our product line was no small feat, it required overtime and the hiring and training of employees. It takes a few weeks before an organization can run efficiently at the new production levels.

With the improved operational performance we saw as the last quarter progressed, we would estimate operating margins for our third fiscal quarter to be in the 11 to 13% range.

In conclusion, I'm very excited about Entegris' short and long-term prospects. Today we're seeing a semiconductor rebound and with it improved financial performance.

Sales this quarter increased by 16%, operating income increased by over 500 basis points. Earnings were up 5 cents per share.

As a market leader, we're well positioned to grow sales and leverage our business models even more and we expect to report increased sales, earnings, and leverage next quarter. Beyond that, our efforts in new markets are opening additional opportunities.

Entegris has a strong balance sheet with $112 million in cash, a dedicated worldwide team and an infrastructure that's balanced for success. Bottom line, we like what the future holds for Entegris.

And now we'll open it up for questions.

Thank you, sir. To ask a question on today's conference please press the star key followed by the digit one on your touch-tone telephone. Again, it is star one to ask a question. If you are on speakerphone equipment please be sure that your mute function is turned off so your signal can reach us. Again, that is star one. We'll take our first question from Brett Hodess with Merrill Lynch.

Good morning. Congratulations on the strong results in the quarter.

Thanks, Brett.

A couple of questions. First, on the demand side, with the Cap Ex growing as quickly as it's growing right now, historically I believe you've seen your unit-driven side of the business lag your Cap Ex side. If you can remind us, perhaps it's maybe one or two quarters, so would you expect maybe in the following quarter to see more of acceleration on the unit side as well?

Well, Brett this is Jim. Actually, a lot of the unit demand picks up first when they start shipping wafers, and then the Cap Ex starts kicking in, so the initial kick that we had on unit demand with regards to wafer shippers happened back a couple of quarters ago.

The one thing that we are seeing some activity in and they're starting to look at it a little differently is 200 millimeter and below, a lot of the, what used to be Cap Ex expenditures I think the industry is now viewing more as unit demand, or is coming out of their expense budgets, so it's a little harder for us to measure that but I don't think we're going to get a real big kick on the unit demand, at least at this time.

Sorry for getting it backwards, then. But then on the other hand you said like wafer shippers, mid single digits, good growth for the current time. Do you expect that that would stay in that kind of range?

Yeah, I think that it will be in that kind of range, Brett. The one thing that I think we'll all have to watch is at what capacity are those wafer drawer facilities at and how much more can it grow as a result of that.

Secondly you did a great job on operational efficiencies as you laid out and will be gaining more margin there leverage going forward. Can you talk at all about the pricing environment? Clearly some of the products don't have a lot of competition, but is there any opportunity to offer, you know, more features, et cetera, and get some pricing leverage in this environment?

Well, we're always looking at how we can keep our ASPs up, and one of the ways that I think is most effective for us is in our new product offering, offering either advanced materials or better solutions to product. In general, anytime things start getting heated up there's less pricing pressure only because delivery becomes more of an issue than price.

But as a leader with the market share that we have in so many of these products, we also have, I think, a responsibility to our customers to be somewhat diligent in how we go about doing any pricing activity.

And then final question. You noted that the build to order transition has pretty much been completed and shouldn't have impact on the, I guess the P&L this year going forward. I'm wondering if you could you give us an idea, now that you've completed that, how that affects your ability to ramp up, say versus previous cycles. Are you able to ramp more quickly with, you know, less cost than you've added in the past because you do have the shorter cycle times that build to order implies?

Brett, this is John. Yes, I think that's absolutely true. We are seeing better response times. It does require us to be smart about which components we're going to have on hand. We are building up a bit of our raw materials and work in process to handle the increasing demand but on finished goods we are really building to the customer orders and specifically those product lines that are highly assembled products.

So I think we have the right pieces in place to respond quickly with the tremendous increase in orders we saw this quarter, we're able to respond to customers' demand, and the impact on the financials, I think, are positive, not only short-term but longer term because in past cycles we tended to ramp up so quickly that we, in effect, overbuilt some of our finished good inventory which required reserve adjustments and write-offs in subsequent periods and my sense this time is that we're being much more efficient, much smarter about that and we're really not building up finished goods inventories and really overshooting some of the demand.

Thank you.

Next question, please.

We go next to Steve O'Rourke from Piper Jaffray.

Good morning. There's some speculation that this capital spending cycle is measured by orders, it levels off for or declines in the second half of the year. Are you seeing any signs of this?

I think right now, Steve what we're seeing is continued good strength in the capital spending driven products such as our fluid handling components, sensing and controls, our wafer and radical reticle carrier products, 300 millimeter FOUPs, so our visibility typically is very short, we can control only what we see and we do have a high turns business with pretty minimal levels of backlog. So our sense is that the business continues to be strong and the order levels are there.

You spoke of a ramp in capital spending that's not overheatingoverheated, so to speak. Do you see that this ramp profile is significantly different than prior cycles?

I don't think that it's a whole lot different in prior cycles given where we're at in the cycle. I think the one thing that still remains as somewhat of an unknown is the length, but right now we don't appear to have any of our customers out there attempting to do panic buys or, as the OEMs, you know, five, six of them all working for the same order, and we have double bookings, so that's why we meant that while it's hot, it doesn't appear to be overheated right now.

So typical signs of overheating would be things like double booking or double orders?

Yeah, which we don't always know but that is, as you really get towards the end of the cycle, actually, is when more of that happens than at this time because I think people are still being ramping up their own facilities and capabilities and, therefore, I think our working off of actual orders, not potential orders.

And we see a lot of our sales for our fluid handling component line which goes to the OEMs through our distribution channel and in the past that has heated up very rapidly and very quickly and we're not seeing that kind of a ramp rate in this cycle.

Okay. And Japan was the one region that I don't think you highlighted for semiconductor segment growth quarter-over-quarter in your comments. What are you seeing here?

We're trying to pull out some of the data here, Steve. I think what we saw was good strong sales in Japan. It continues to be an area that's been recovering for quite some time. So we think that it was up actually you know not quite as much this past quarter. Doesn't mean it wasn't strong. It was good. It just wasn't quit as powerful as what we saw in North America, Europe, and in particular Asia Pacific. So if we down play it a little bit it really wasn't intentional. It's just the other regions, semiconductor-wise, were very, very solid.

How do you see Japan performing next quarter just as far as trend goes?

We think it continues to be increasing, the activity level there is strong, we're seeing good levels of spending, we're seeing customers willing to spend on new technology products and do some fab conversions, so 300 millimeter activity is good, so it still feels quite strong, quite robust.

Thank you.

We go next to Stuart Muter from RBC Capital Markets.

Hi, good morning. Nice quarter. A couple of questions for Jim. First, with the upturn here are you seeing a change in the level of interest in the semiconductor services business?

Actually, no, there continues to be interest in that. Sometimes when fabs get busy they actually are looking for outside resources to even further support some of their internal activity. The product is obviously being used more, and with more uses means more inspection and cleaning and recertification, so that has not in any shape or form declined. Probably as a percentage for us it will not look at strong because of the Cap Ex-driven products we've talked about earlier are kind of carrying the day right now.

Okay. So you know, is it a fair summary to say that business interest hasn't declined it's really what we're seeing with the decline is really just the lumpy nature of the business?

Yeah, I think that's a good way to summarize it.

Okay. One more question, if I could sneak it in. Kind of following up on some of your earlier comments from the wafer manufacturers. Do those guys give you a little bit better visibility than the chip manufacturers?

Well, I would say in general they do, just because of the number of them, and the close relationships that we have with them, because of the importance of our product to them. If they don't have shippers they obviously can't get their product out, and so I think that we have pretty good visibility from them and again the touch points that we have from all of the growers surely helps.

Okay. Thank you.

Thank you.

We go next to Avinash Kant from Adams Harkness & Hill.

Good morning, Jim. The question for you I had was, you did talk about the two kinds of business in the first wafer driven and the Cap Ex driven businesses. What kind of growth, if you could maybe or at least qualitatively you could talk about in the coming quarter you see in the materials driven businesses that you have at this point?

Thank you, Avinash, this is John. In the unit-driven products, the wafer shippers, test assembly packaging, the chemical containers in our semiconductor market we continue to see reasonable growth levels again next quarter. The growth that we will see will continue to be primarily from our capital spending products for the device manufacturers in the form of our wafer radicalwafer reticle carrier products and our fluid handling components which simply go to the OEMs. Those will continue to carry the day and unit-driven will again be up quarter-over-quarter we anticipate.

Particularly do you have a relationship with or something that you could point to that kind of indicates how your materials-driven business really varies based on wafer stocks, worldwide wafer stocks or at your customers, maybe? Do you have some kind of relationship? What is kind of 101?

We watch closely unit demand and square inches of silicon, and as a result of that, we typically see our unit-driven business over a longer period of time, follow that very closely. And so that's really, I think, the one indicator that you can keep looking at, would be unit consumption and square inches of silicon.

One more housekeeping question, actually. You did talk about the tax rate for the year 2004. What should we expect in terms of tax rate for '05, and if the SG&A you talked about is going to be growing roughly half of what it grew from Q1 to Q2, is it going to be stabilizing next quarter onwards?

Avinash, for the tax rate I guess we've just given guidance for this full year, we expect it to be in that 31% range. We are not at this time going to give guidance on the '05 tax rate that will really be dependent on the market conditions, the sales and profitability. We have, I think, reduced our tax rate due to efficient tax planning and tax strategies and be dependent on the mix of where the profits are coming from internationally but I would anticipate it shouldn't be too dissimilar from where we're at in '04.

As far as the SG&A we gave guidance in the call that said our SG&A will be up again next quarter because of improving sales and profitability levels but we anticipate the increase will be about half of what it was this last quarter.

After that do you expect it to stabilize?

For SG&A?

Yeah.

We do have incentive payouts tied to sales and profitability so but it can continue to increase but I would anticipate the rate of growth to certainly slow as we saw as we're guiding for this next quarter.

Yeah, that's exactly what I wanted to find out. Thanks so much.

As a percentage of sales it will continue to decline as sales are increasing and that's where we obtain additional leverage.

Thanks so much.

As a reminder to ask a question please press star one on your touch-tone telephone. We go next to Theodore O'Neill with A.G. Edwards.

Thanks very much. Jim, last time that we had this many units of chips flowing through the world's factories back in 2000 and you guys were putting up quarters that were like $100 million revenue level, and as I understand it, one of the issues is a mix of wafer shippers and the prices between 150 millimeter and 200 millimeter, and 300. It's changed from then until now, and the pricing associated with those. And as I understand it, the 200 millimeter wafer shippers were not more expensive than 150 but the 300 millimeter wafer shippers are more expensive. Can you talk to us a little bit about what you're seeing in terms of pricing for wafer shippers at 300 millimeter relative to 200 and how you see that mix playing out over the next couple of quarters?

Yeah, the one part of your question, Theodore, that I want to get at is the, kind of the peak last time when units were going through at this pace, and there were some other things that were happening as well. There was a lot more activity with regards to bricks and mortar, new facilities going up, new fabs, and there was a lot more OEM activity as a result of that, and the need to fill the orders that they had. So we still are not, with regards to some of those Cap Ex products, seeing that kind of peak, so I think that's the difference between the last peak and what's occurring right now.

With regards to wafer shippers, and the pricing of wafer shippers, there really hasn't been any significant movement of price on those from what has been in place for the last couple of years. The pricing obviously is higher on the 200 and 300 millimeter-type products, just because of the function and what all they're supplying and the size of it, and the ASPs on those products have been holding their own.

So are the ASPs on a 300 millimeter wafer shippers a multiple that matches the areal density of the wafers or higher or lower?

Yeah, it does, Theodore, and part of the reason why is, remember we go back into the fab and OSHA standards and all of the robotic handling that's required because we went from 13 pounds, or 13 pounds is the OSHA limit, and we now have a 17 pound product, and so that means a lot of robotic interfaces and overhead cranes come into play, so it's a totally different kind of product. It has the FIMS compatible door to work with the load stations and all of the automation that goes with it. So just like the FOUP is a totally different product than the 200 millimeter wafer carrier, so is the 300 millimeter FOSB in comparison to the 200 millimeter wafer shipper.

Okay. So unlike some of the equipment companies then, as you move to 300 millimeters it's actually a fairly decent benefit for you, moving to 300 from 200?

Yes, that's correct.

Thanks very much.

We go next to Vijay Rakesh with Next Generation Equity.

Good morning, guys. Congratulations on a good quarter.

Thank you.

My question was on the Services segment, considering the [inaudible] increase in Cap Ex and [inaudible] fabs coming on line, do you see this segment to kind of get traction towards the end of the year and what do you see in that segment?

In the Services segment we continue to see promise there with our on-site offering, off-site as well as our equipment sales, in particular this quarter. For the second quarter the equipment sales were down a little bit and that's just related to timing of the equipment shipments and acceptance by customers, so we continue to see strength in that Services business and we would expect third and fourth quarter sales to be improved over our second quarter levels. So it continues to be a model that we're going to pursue. Strategically it makes great sense both for us and for our customers, so we're very encouraged by the promising outlook there.

And going back to the Cap Ex and semiconductor sales and visibility, if you look out to the end of your fiscal year, do you see kind of semiconductor sales to be kind of growing about the same rate for next two quarters, next quarter and the one after that?

Really, Vijay, our visibility again continues to be pretty low. We have a high turns [inaudible] business. So what we see is continued very good strength in our business levels, the momentum is there, we anticipate next quarter will be up 10 to 12% and we are optimistic that the full fiscal year will reflect positive results, but to quantify it at this point in time is something we really just can't do with the visibility we have.

Great. Thanks.

Thank you.

Again, to ask a question that is star one on your touch-tone telephone. We go next to Darice Liu from C. E. Unterberg, Towbin.

Good morning guys. Great quarter. Just a few questions. Following up on Brett's question regarding the build to order model, I understand impact on gross margins in the future quarters is basically nil but I was wondering if there was any impact this quarter?

Hey, Darice. This is John. We had some impact certainly in our first quarter and significant impact in our fourth quarter of last year. This quarter impact was pretty negligible at all because of the fact that we were simply working so hard to meet customer demand when semiconductor sales are growing 26% quarter-over-quarter, our global supply change chain is really focused on meeting customer demand and going in and tweaking the models and trying to reduce the safety stock level that was really not a focus this past quarter.

Okay. And do you see any shift next quarter in terms of geographical or 300, 200 millimeter strength?

No, Rright now, it seems to be holding its own across all fronts, and I think that's part of the cycle when you really are, as an industry, going through what it is right now, it seems to get healthy everywhere.

Okay. And lastly, I know that you guys have been working hard to better penetrate Japan. Is there any update in terms of market share?

I think our market share in Japan continues to be strong. We now own our distribution and manufacturing network there 100%. That's been positive as we can get closer to the customers. The 300 millimeter wafer shipper, wafer grower market is very strong in Japan. We've added capacity in Japan and have certainly worked hard to get our 300 millimeter FOSB better qualified at those wafer growers. So I think that is really the focus right now is on wafer shipping front and the FOSB 300 millimeter FOSB with the wafer growers in Japan. And it's progressing very nicely.

Good to hear. Thanks, guys.

Thank you.

Again, star one for questions. We go next to Patrick Coe from Moors & Cabot.

Thanks a lot. Congratulations, guys. I just wanted to get a little clarification on some of the, I guess, the flexible capacity that you're talking about and meeting demand. It sounded like you did a great job in this past quarter. Can you apply some of the lessons you learned this quarter going forward and even get better efficiencies off of it?

Well, that's surely our intent. As I mentioned earlier the, you know, as you get production ramped up it takes a little time to absorb it and get people trained and functioning in the right areas and hopefully we're able to back off some of the overtime and so, yeah, you get, once you get into heavy exercise it seems every day you get a little better at it, and I think that's true in the case of our manufacturing facilities as well.

So you're also definitely getting some support from your suppliers as well meeting this demand?

Yes. We really haven't had any significant issues from our supply base, and our logistics people and our global supply chain group is watching that closely, but right now we're for the most part holding our own.

Okay. Great. And then this is kind of a high-level perception from your view from talking to your customers. Do you sense a more rational natural type of buying in this cycle versus previous cycles?

Yes, right now that's why I said, while it's hot it doesn't appear to be overheating. We haven't had any, I haven't had any threatening calls at home yet.

Great. Thanks a lot.

Thank you.

We go next to Glen Young with Smith Barney.

Good morning. It's Karen Wang. Congratulations on a great quarter.

Hi, Karen.

Couple of questions. You talked about data storage being a little bit weaker this quarter and expect it to decline slightly next quarter. Can you sort of talk about how that looks throughout the rest of the year? I know your visibility is pretty limited. Maybe how you expect the inventory issues in the channel to work out.

Hi, Karen. Yeah, we anticipate that this next quarter will be down a little bit but the business continues to be very positive from a long-term perspective. Again, our visibility is pretty short there.

We are signing contracts with these major customers, so locking in our demand, so to speak, from them, so really it's going to be driven by consumer products, what kind of spending is going on in that marketplace, so right now it feels a little bit soft but we're very optimistic about the long-term market growth. So when it turns back up again during this calendar year I guess it would be hard to predict right now.

Any particular customers where you're seeing specific issues, or is it more of an industry issue?

Yeah, Karen, it's Jim. It's not a customer issue, it is just, it's the buying cycle and depending on inventory levels and that type of thing. So it's overall industry and not us, not a customer specific event.

Then I guess just looking back at the model, you've talked about 60% of every sales dollar rolling down to the bottom line, or rolling down to operating income. Does that change now that you switched to a new option, now that you've changed your comp structure and what should we think about in terms of shares outstanding and how that ramps throughout the year?

Karen, this is John. Yeah, the option expensing certainly has an impact to us. I would not characterize it at this point in time as significant or highly material. We do see continued leverage in our business, over 60 cents of every additional sales dollar this past quarter got to the gross margin line and over 40 cents to the operating margin line.

We anticipate as we are now ramping and getting more efficient we should see even more leverage in our model going forward. We continue to have a target of 20% operating margins at $100 million in sales. The incremental sales from now to that point in time we'll have to see a very strong leverage in, and that's our goal, and I believe we can achieve that.

So the impact of the stock option, or the stock grants, isn't that significant. In terms of the actual shares outstanding, you know, the number of shares issued under the restricted stock grants was just a couple hundred thousand shares, so it was not, it's not overly dilutive and the growth that we've seen in our shares outstanding should be pretty consistent with what we've had in the past.

Okay. Thanks.

We go next to follow-up from Steve O'Rourke from Piper Jaffray.

Hi, just a quick question. Do you plan to further consolidate facilities?

You know, we're always looking for the right facilities and the right location with the product offerings that we currently are offering, and so we'll always be looking at that. Right now there isn't anything on the immediate radar screen, particularly the time when we're taking care of customer needs and wanting to make sure we don't disrupt that supply chain.

The whole focus on consolidation of facilities, you know, centers around what we've termed the centers of excellence, and we will continue to move product into the regions that our customers are concentrated in, but there is no plans for any significant moves right now.

So with that would you anticipate over the course of time you'd be moving some facilities and manufacturing more and more to Asia? Is that a fair assumption to make long-term?

I think that surely is a possibility if that's where the customer base is and it's the type of product that we have confidence that we could make in whatever region of the world it might be. It's not just a facility, you know, we have to keep in mind that currently we have facilities in Malaysia and Japan already, and we'll just continue to watch that.

We've moved production to those specific facilities over the past period of years. We have more production in Malaysia than ever before. Japan we just expanded to handle 300 millimeter wafer shipping demand so we are certainly moving the capacity and moving the resources to where the customers are and where the demand is being driven from.

Fair enough. Thank you.

Thank you.

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 comments.

Thanks. And thank you all for taking the time to join us today.

I'd like to close by reiterating that we see great opportunities to take advantage of the improvements in the semiconductor market conditions and expand our markets and leverage our infrastructure. Feel free to call Heide Erickson if you'd like additional information or if you have questions related to this quarter's financial performance. Again, thank you for your interest in Entegris and I'd like to wish you all a great day.

That does conclude today's teleconference. Thank you for your participation. You may disconnect at this time.