Entegris Inc (ENTG) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to Entegris 2004 third-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.

Thank you. Good morning and thank you for joining us to discuss Entegris's fiscal 2004 third-quarter 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 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 July of 2004 or other documents previously filed with the SEC.

We may also refer on 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 investors page of our website, at www.entegris.com.

This morning, John will take you through the numbers and Jim will give you an update on operational highlights. Finally, we will answer your questions. We will end the call by 9:30 AM Eastern time. Now, I will turn the call over to John Villas.

Thank you, Heide. This was another exciting quarter for Entegris. The demand for our products and services from the semiconductor market exceeded our expectations and we focused on meeting customer demand and execution. We made progress in our new markets and managed our balance sheet effectively.

For the third quarter of fiscal 2004, we are reporting the following results. Sales of $98.6 million, up 23 percent from the previous quarter and 40 percent from the third quarter of fiscal 2003; a per-diluted-share profit of 12 cents compared to 7 cents in the previous quarter and 5 cents during the year-ago third quarter; and $11.1 million in cash generated from operations. We now have $120 million in cash and short-term investments.

With that, I would like to turn your attention to sales. Sales in all our markets increased with the exception of data storage, which I will address a little later. In the semiconductor market, sales rose from the 2004 second quarter to the third quarter by 28 percent and generated 82 percent of overall sales. From last year's third quarter, sales in the semiconductor market are up 50 percent. We have every indication that we are not only participating in the semiconductor market recovery, but that we are improving our market position. Jim will go into more detail on this later in the call.

We saw significant increases, from our consumables materials-driven productlines like wafer shippers and test, assembly and packaging products. Quarter-to-quarter sales increased more than 11 percent for these products, particularly related to the strength of our wafer shipper sales for 150 millimeter and below wafer sizes. Our sense is that fabs with leading-edge line width constraints in 0.2 Micron and below caused overflow demand for the smaller wafer sizes. The capacity for smaller wafer size fabs is already in place and can ramp faster than 200 and 300 millimeter wafer sized facilities. The strength across all wafer sizes demonstrates how robust the semiconductor market recovery is. We have no indication that this increase is related to a buildup of inventory.

For our fluid handling and wafer and medical carrier products, which respond to increases in capital spending, sales increased 30 to almost 50 percent from the previous quarter. The buildout of 300 millimeter fabs accelerated, and some customers requested shipment of product earlier. This was the primary reason we had higher-than-expected sales. We believe that the strength in the semiconductor market is sustainable.

Data storage market sales accounted for 7 percent of overall sales. Sales in this market declined by about 23 percent from the second quarter. This decline is due to the well-publicized overbuild of hard disk drives at the customer level. Until this industry inventory issue has been resolved, we don't anticipate any pickup in sales. Longer-term, the overall market growth outlook for data storage remains positive, particularly as consumer products are increasingly starting to use disk drives to store data.

Our services market generated 7 percent of Entegris's overall sales, a 58 percent sequential increase from last quarter. This increase is related to the sales of equipment used to clean our wafer, disk carrier and shipping products. We anticipate next quarter's sales to remain at these levels.

Life sciences generated approximately 8 percent of Entegris's overall sales. Sales in this market increased about 8 percent from the previous quarter. This was within the range of our expectations and we anticipate sales to remain close to this level during the fourth quarter.

The fuel cell market accounted for less than 1 percent of sales. As we have said in previous quarters, we continue to make great inroads with the industry leaders in fuel cell technology and we are forming close alliances with these leaders. This quarter, we also saw increased sales levels. The fuel cell market has great prospects in future years and we are carefully investing in this market.

On a geographic basis, Entegris's third-quarter sales for all markets in North America totaled 37 percent; in Asia-Pacific, 32; in Europe, 17; and in Japan, 14 percent. Sales to Asia-Pacific and North America grew over 30 percent, followed by Europe with 22 percent quarter-to-quarter increases. In Japan, sales decreased by 3 percent, all related to the weakness in the data storage market. We saw sales increases for all of our materials consumption-driven products except for data storage. As a percent of total third-quarter sales, we estimate our materials-driven product sales to be slightly above 50 percent.

During the third quarter, the gross margin increased to 45 percent, or 150 basis points, over the 2004 second quarter of 43.5 percent. Our core market, the semiconductor and data storage, are again approaching historical peak gross margins, while sales are still below peak levels. With a stronger than anticipated ramp this quarter, we experienced some inefficiency that we are addressing during the current quarter.

We are also working on a continuous basis to improve the performance in our new markets of life sciences and fuel cell and our services expansion. At this stage, our diversification efforts are not yet at adequate profitability levels.

Shifts in sales from different markets have an impact on our gross margin. In addition, products with a higher material content reduce the magnitude of leverage we can gain in sales volume increases. In other words, products that have a higher variable cost component, such as materials and labor, will show less sequential increases in leverage than products with lower variable costs. Overall, we are encouraged by the gross margin improvements we are making from quarter to quarter.

SG&A expenses were $25.5 million in the 2004 third quarter, up $2.2 million from the previous quarter. Year-to-date sales and profitability were higher than anticipated, which increased performance-based commissions and incentives as we achieved new thresholds. With increased net profitability, charitable donations also increased, consistent with our long-standing practice of giving back to the communities in which we live and work.

During the third quarter, we invested $5.3 million in engineering research and development, compared to $4.8 million in the second quarter. Quarterly, we generally invest about $5 million in engineering research and development of new products, materials and solutions in all market conditions. This quarter, we had higher investments because of ER&D expenses in the development of our tape and reel offering. As sales increase, ER&D expenses will decline as a percent of sales and we would expect quarterly ER&D expenses to be around the $5 million level going forward.

Operating income was 13.7 percent of sales this quarter, compared to 8.2 percent in the 2004 second quarter. That means that over 50 cents of every additional sales dollar in Q3 over Q2 dropped the gross margin and almost 40 cents on the dollar to the operating margin line. We anticipate operating income in the next quarter to improve if sales increase.

We recorded a tax expense of $4.3 million for the third quarter, which equates to an effective tax rate of 31.8 percent. That is up from last quarter's 30.2 percent rate due to increased profitability. 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 and the fourth quarter to be about 32 percent.

We reported net income of $9.2 million, or 12 cents per diluted share, for the 2004 third quarter. That is up 5 cents, or $4.2 million, from the second quarter. From the 2003 third quarter, net income increased by $5.2 million and earnings by 7 cents per diluted share.

Our balance sheet continues to be very strong. Cash and investments on hand are now $120 million, up $7.5 million from the 2004 second quarter. We generated $11.1 million in cash from operations during the third quarter. Short and long-term debt at the end of the third quarter was $27.7 million, up $3.3 million from the previous quarter. We shifted some of our short-term debt to long-term debt to take advantage of low interest rates. The additional debt was used to invest in the expansion and upgrade of our facility in Japan, primarily to accommodate 300 millimeter FOSB wafer shipper production.

Accounts Receivable totaled $73.1 million, up $10.1 million from last quarter, primarily because of the acceleration in sales as the quarter progressed. Overall inventories increased by $2.6 million to $46.9 million from the second to the third quarter. This increase is almost all related to raw material and work-in-process inventory as we ramped production throughout the quarter. Finished goods inventory was up slightly from last quarter because of equipment that has been shipped but not yet recognized. Inventory turns continue to increase, and are now at 4.76, up from 4.32 during the 2004 second quarter.

Accrued liabilities increased by 5.2 million (ph) from the previous quarter to $32.8 million, primarily as we accrue performance-based incentives. Depreciation and amortization expense was approximately $6.1 million in the quarter and capital expenditures were $6.6 million. Our plan is to spend about $20 million to $23 million in total capital expenditures in fiscal 2004.

Before I hand the call over to Jim, I would like to say that I am pleased with our financial performance this quarter. Sales were very strong. We managed the increase in sales remarkably well and improved our market position. In addition, we managed our balance sheet and continue to generate cash. Entegris is responding to today's customers' needs. We're working further strengthen our market position in our core markets and diversify into new markets. I am excited about the near- and long-term opportunities for Entegris. Now I will turn the call over to Jim.

Thank you, John. Good morning to everyone. I have to agree with John -- this was a great quarter for Entegris. From the second to the third quarter of this year, sales increased 23 percent because of continued strength in the semiconductor market. Year-over-year, sales increased significantly by 40 percent during the third quarter. This performance reflects our leadership position in the semiconductor market and our ability to respond to customers' increasing demands. We are participating in our product lines at all levels, and in most cases, we believe we're growing faster than market drivers would indicate.

I'm also pleased at the way we use our flexible resources in meeting rising customer demand during the quarter. Credit also goes to our worldwide manufacturing employees, who have worked hard to inject continuous improvement into the Company's manufacturing processes.

Our short-term successes are very important. However, we continue to pay attention to developing the long-term opportunities for Entegris. In a moment, I will highlight two key initiatives for the future -- the acquisition of SNEF and our advanced materials science programs, which include our research on the use of single-wall carbon nanotubes in our polymer products. But first, I will focus on the quarter and expand on the sales and order flow information John provided.

We anticipated our sales to be strong this quarter, but they even exceeded our high expectations. This was especially true for capital-expense-driven products, most notably our wafer carrier products used by semiconductor manufacturers. The broad-based gain was from products across all wafer sizes, a good indicator of the continuing strength in the semiconductor industry. We were pleasantly surprised that our customers accelerated some 300 millimeter projects, requiring products earlier than we had anticipated.

As John indicated earlier, our materials consumption-driven semiconductor products sales also increased more than we expected. In particular, sales for our wafer shipper products tracked with wafer starts. Increases in wafer starts in the mid single digit range generally point to very solid industry growth. We have seen these sales increases since the fall of 2002 in our materials consumption-driven sales, including wafer shippers, with the exceptionable of a little absorption phase during the fall and winter of 2003. Since then, we've seen steady increases in our materials-related products sales.

We have no indications that the trend of the increasing material consumption is slowing. To us, that is a key indicator of the strength of the semiconductor market. As our numbers show, we are participating in improved semiconductor market conditions. Even better, we believe that in most of our major product areas, we are gaining a larger percentage of our customers' spending.

To characterize the overall semiconductor market conditions, demand for our products remains strong, and we believe that we will continue to see very good results for the foreseeable quarters. We've responded quickly to mounting demands without meaningful increases in lead times. I credit this success to the work we've done to enhance manufacturing efficiencies. It also helps that our semiconductor customers seem to be spending proportionate to demand. That means we have not seen double ordering.

I am confident that we can generate annual sales of $400 million to $500 million without any significant new investments in expanding manufacturing capacity. We will continue to evaluate where we produce products and the location of our service capabilities. This is essential in keeping our costs under control and meeting our customers' requirements.

Now I will comment on the leverage in Entegris's business model. Operating margins rose nicely from the second fiscal quarter to the third. Our core markets of semiconductor and data storage are again achieving gross margins similar to those during the peak of the last semiconductor cycle, even though we are not yet at the peak sales level we achieved in fiscal 2001. We're investing in our new markets of life sciences and fuel cell, and are expanding our services offerings. As we have said before, these markets are not yet achieving average corporate performance results. That is why on a corporate-wide basis, we're not yet meeting our performance objectives as (ph) sales level is around a $100 million range.

But you can trust me. The growth and profitability of Entegris's new markets is something that we are paying close attention to. In addition, significant increases in sales during a ramp create inefficiencies. That's where we believe we can make headway and further grow our operating leverage in future quarters.

We will remain vigilant in reducing costs throughout the entire organization and at the same time, building efficiencies and flexibility. In all of these efforts, we will not lose sight of what has made Entegris successful -- meeting and exceeding our customers' expectations and providing continuous innovations that reduce their cost of ownership.

Now let me discuss some longer-range programs. Last quarter ,I talked about having moved our FOSB capabilities to Japan and our polymer services reclaim and reprocessing group to Malaysia. During the third quarter, we acquired the precision parts cleaning business of the French-based company SNEF. This allows us to establish our European off-site service center of excellence. We can combine SNEF's success in the European market with Entegris's experience in materials integrity management. Having our service offering close to our customers minimizes their risk and ensures a reliable service flow.

Service is becoming increasingly important for our semiconductor customers worldwide. We will continue to expand our capabilities as appropriate to meet their growing requirements. Establishing small, flexible service centers of excellence will be part of this initiative to reduce the cost of ownership for our customers.

Our work in advancing materials integrity management to help launch new products and services for our customer also encompasses fundamental research. In mid-May, we announced a joint agreement with Carbon Nanotechnologies to develop and commercialize new and improved polymer products with CNI's single-wall carbon nanotubes. While this is a longer-term project, we believe that we can successfully integrate carbon nanotubes into the materials used in our products. Our goal is to offer customers polymer-based products that are stronger, stiffer, and conduct electricity and dissipate heat better than any current polymer. All that, with more predictable and precise performance.

Entegris has a history of developing new materials that create significant performance gains for our products. For example, at the beginning of the fiscal year, we introduced a ceramic-filled polymer, which creates a new class of high-temperature materials that are clean, tolerable, dimensionally stable, chemically resistant and electrostatic discharge safe. These new materials give us additional business, particularly for head trades used in the data storage industry. They also have potential for our other markets, and we have a patent pending on this material. Few if any of Entegris competitors have the reputation and the capabilities to work with such sophisticated materials. That is what separates Entegris and makes us a leader in materials integrity management.

Let me now comment on our outlook for the fiscal fourth quarter. The gains in our third quarter sales underscore our leadership position. Market conditions in the semiconductor industry remain healthy and we do not expect any significant change over the next few quarters. For our fiscal fourth quarter, we again anticipate delivering strong performance. At a minimum, we expect sales to remain at third-quarter levels, with a possible increase of up to 5 percent. We anticipate operating income to improve if sales increase.

I hope my comments have conveyed to you why the Entegris management team is excited about our short- and long-term prospects. The semiconductor market remains strong. Sales this quarter rose by 23 percent from the second quarter. Operating margins improved to 14 percent. We generated $11 million in cash and we increased our inventory turns. We are well positioned to meet our customers needs and our position in the semiconductor market is strengthening. Beyond that, our efforts in new markets are yielding additional opportunities. Bottom line, the future looks very promising for Entegris, both in the near- and long-term. And we will now open it up to questions.

Thank you. (OPERATOR INSTRUCTIONS) Brett Hodess.

Good morning. A couple questions. First, given the strength that you saw this quarter, you talked about some of the inefficiencies maybe holding gross margins back a bit. So even if your revenues are flat in the coming quarter, it sounds like you might be able to make some improvements in margins as you work on those efficiencies?

We are constantly working on inefficiencies and trying to improve our manufacturing process. As Jim mentioned, we will be vigilant in reducing our costs and constantly evaluating that. There was certainly an impact this quarter with product mix that had an impact with some of our data storage sales off. So there are a number of moving pieces in this very diverse company and the markets that we serve.

We do feel great that we performed well in this incredible ramp that we saw this quarter, and our traditional core markets in semiconductor and data storage, we are back to close to historical margins, even thought we're not yet back at the peak sales level that we've seen in '01.

Well, that's my point. If you look at the margin performance, it was very good this quarter, and even on the low end of your guidance, it sounds like there could be some margin performance in the next quarter. Based on your comments that semis remain strong and data storage and life sciences may be around the same level in the next quarter -- is that correct based on your initial comments?

Yes, we indicated that sales should be pretty flat compared to this quarter, similar to this quarter, with some upside of up to 5 percent. So yes, we are constantly focused on the improvements there, and if sales increase, we should see improving margins.

The next question I had, you committed, John, that some of the products have higher material content. I was wondering if you could outline those productlines which tend to have the higher material content so we can understand how that plays into the mix.

Actually, I talked about higher material and labor content. And that would be related to some of our capital spending-driven products. We look at some of our fluid-handling components that have high levels of resin input to them, as well as high levels of assembly. So as we see those sales increase, particularly in products lines such as those, that does results in maybe a little bit less leverage than some of our other product lines where there is less material as a percentage of sales and very little labor assembly required.

And then my last final question is, when you look at the consumable -- the run rate side of the business, this quarter being up 11 percent, is it your view that -- it sounded to me like Jim was saying that wafers were up maybe mid single digits, and so the fact that you were up 11 percent would be one of the things that played into your observation that you're gaining share. Is that the correct read on that?

It is really across the whole broad product offering, Brett. But in some areas I think there is some change here (ph). There are also some greater ASPs because of the product mix, particularly in the semiconductor side of our business. And so those are really the driving factors there.

Great, thank you.

Jim Covello.

A couple quick questions. First, I wanted to clarify a little bit on the margin comment, saying you are approaching previous peak margins even though revenues are not quite at the previous peak. (technical difficulty) with that. There may be a mistake in my model, but in August of 2000 I had you at about $96 million in revenue and 54 percent gross margins. Is that a mistake or am I missing something?

I think, Jim, our peak gross margins were in the low 50 percent range. We never were at 54 percent. I think the peak was right around 50 to 51 percent, when we were at $100 million to $105 million in revenue. So I think there is perhaps an error there.

Okay, but then we're talking about reaching the previous peak, which is low 50s versus the 45 today. What is the disconnect there?

Basically, we have our sales are at lower than peak levels, and we said that our gross margins are approaching similar peaks to what we saw in the last cycle. So our semiconductor, our data storage markets, we are approaching those kinds of 50 percent gross margins, even though we are at quite a bit lower sales levels, up to 15 percent lower sales levels, now than we were in the last peak. So we think we are making progress in our new markets and our operating margins are, again, for some of these core markets are similar to what we saw in the last cycle.

Okay. And I don't want to drill on this too much, but at the peak operating margins for the last cycle, I had you at 28 percent. And this is about 8 percent or so this quarter -- recognizing it is going higher. Are those numbers right also?

Twenty seven, 28 percent was our last peak, and we are -- again, with our historical semiconductor data storage core markets, again, we are not back at those peak kinds of levels in sales, so we are not at those peak margins just yet. But we are approaching them and it's really the new markets that we are seeing are having impact on our margins.

Got it, okay. Final question on the share count. I noticed the shares went down this quarter. Can you talk a little bit about that and then what your projection for shares would be going forward? Thanks so much.

I guess just a lower share price during the quarter, Jim, has an impact on the common stock equivalent; so going forward, that will move a little bit depending on what happens with our stock price and whether or not some of the options are in the money.

Robert Stern.

Yes, good morning. Obviously, your guidance for sales is basically flat to up 5 percent. And it seemed that you implied in your comments that wafer starts are growing and that your materials consumption-related businesses could be up sequentially. And I am wondering therefore if you are not looking for some downtick in the wafer carriers and whether there isn't some absorption period, since you had a strong quarter for wafer carriers in the third quarter, whether wafer starts have to grow into that before wafer carriers are ordered again?

I think that is a pretty accurate comment, Robert. And when we think about our Q2 to Q3 ramp of roughly 23 percent, it really was a result of we got a bigger ramp this quarter, particularly in the 300 millimeter, than we had anticipated. And kind of our guidance, if we are able to sustain the sales at that 98 to $100 million this fourth quarter, given the fact that we grew 23 percent, if we could have had two 12 percent quarters, that would have been wonderful. But we really have to respond to the customers' demand and with shipping most of our product within a couple of weeks, it's kind of make it happen when they need to have it happen. So that really is what's going on. It's not the wafer shippers' side so much as some of the more CAPEX-driven, particularly 300 millimeter.

Could you update us on what's going on with tape and reel?

Tape and reel is continuing to move forward. We have some data sites in place, and we are really working on the whole disruptive technology side of it. And we are just going to continue to work hard on that front of it and think in the upcoming quarters it may be gain some traction, but we are still working on that introduction.

Okay, thank you very much.

Avinash Kant.

Two quick questions. The first one was about the 300-millimeter projects. You did mention that you've seen some pull-ins from clients and they are pulling in projects. Is that a trend that you see throughout the quarter and even going forward?

The second question I had was you have talked about not a significant change in business levels for the next few quarters. What gives you the visibility? If you could talk about that, that would be nice. Thanks.

I'm not sure if there is ever a historical trend. Each cycle has always got its own characteristics. And I think the 300 pull-in was really about some of the demand and some of the customers just speeding up their need to release some of their 300 millimeter projects. And with our materials integrity management position and our broad product offering we have on that front, we were fortunate to be able to participate in that part of the ramp.

The other part of your question was visibility for the next quarters. Again, with our touch points and the pervasiveness in the industry, while we don't have a huge backlog -- in fact, we typically are roughly 1-to-1 -- we do see a lot of bits and pieces out there from a variety of customers, on both a geographic basis as well as a technological basis, and everything out there appears to be pretty solid. It isn't just one customer or one product type or the result of pricing of memory or something like that. It is pretty pervasive across the industry.

But there isn't any one thing that says we're just going to have a repeat quarter where we grow 23 percent like we did this past quarter. But it does feel like we can surely maintain the level of business that we have been at.

Thank you so much.

Good morning. I had just one question. Assuming that some of the impact on the margins, especially gross margins, operating margins, were coming from the newer markets, I was wondering if you could give us some guidance on the services and the life sciences for the rest of calendar '04.

Guidance in what respect? In terms of margins or sales?

Margins and sales.

We continue to be pleased with our progress in our new markets of life sciences, services, as well as fuel cells. We are seeing growth in sales in that market is well. So those new product offerings, those new opportunities that we are into, we have expectations that those margins are going to improve. We are watching them very closely. We will be vigilant in reducing costs throughout the organization as needed to make sure that we're getting to the operating margin targets that we've established for our new markets.

In terms of sales and the visibility there, trends are positive. We do anticipate that we will continue to make inroads into those new markets and show increases in sales. When semiconductor ramps like it did this last quarter, going up 28 percent quarter-to-quarter, that kind of masks some of the growth that we're seeing and the positive news in these new markets. But it is there and it is positive and we are pleased with the progress.

Considering that those two segments, services and life sciences, are about 15 percent of your quarterly revenues, are the margins significantly lower than the corporate average, or close to the average? And do you expect to bring it to the corporate average by the end of calendar '04?

They certainly are below the corporate average. I would say they are -- (indiscernible) term significantly below would be a pretty accurate one, because we are doing very well in our core markets of semiconductor and data storage. So we are working on improving those margins. Will they be at the corporate average by the end of calendar '04? I don't expect that. We are working on our plans and our budget for next year, and we are working hard to make sure that we can get to those kinds of margins, and we're really about positioning now and getting ourselves in the right mode with our customers, and we're pleased with how it's progressing but we need to improve the margins.

Great. Thank you so much.

Tim Summers.

I was wondering if you could attempt to quantify the amount of business that was pulled into this quarter that you did not expect to get.

Tim, this is John. We expected the quarter -- we gave our guidance to be 88 to $90 million in sales, basically, off of the second quarter sales of $80 million. We did see some better increases in some of our consumable-driven products than we anticipated, so that certainly added to the improvement over our guidance. But it was certainly primarily related to the capital spending products, particularly 300 millimeter. So I would say that that was in the magnitude of several million dollars that had a positive impact on this quarter.

As a follow-on to that, in your press release, you mentioned you don't expect significant change over the next couple of quarters. Does that at least implicitly suggest that revenue in the first quarter of fiscal '05 might be flat to up 5 percent from the fourth quarter?

I don't know whether we have really given specific guidance on that, Tim. I think what we are trying to say is that we see positive signs in the industries that we serve, the markets we serve. In semiconductor, we think the strength that we have seen is sustainable. It is a market that moves very rapidly. We saw an incredible ramp this last quarter, 23 percent up in one quarter. There was a lot of acceleration of orders, particularly for 300 millimeter.

So the second half of the year, I guess, is going to be unfolding here in the next several months, and we're just positive about the momentum and particularly as we see the consumable-driven products such as wafer shippers and our test, assembly and packaging doing so well, that just gives us good feelings about how the momentum is playing out here.

It is more of an industry comment than a company-specific comment?

I think that would be an accurate assessment.

Stuart Muter.

Good morning. A question for John. Just hypothetically, if sales are flat in August, and then let's say they are flat in November, then I would expect operating margins to increase because you had planned to reduce the inefficiencies. Could you help me understand what the improvement in operating margins would be under that scenario?

That's a great question, Stewart. We are working hard to improve our cost structure and to reduce those inefficiencies. When we're ramping as rapidly as we did this last quarter, we can see some inefficiencies, particularly with our cost of goods sold area. So we are planning to improve our operating income. I don't know if I can quantify it for very directly, but we have some targets in place and we certainly would plan to improve that operating income. But it's going to be difficult with the diverse product offering that we have and the markets that we serve. We continue to see sales growth in some of our newer markets; that could have an impact. But we are working hard to -- it's difficult to be very specific.

Okay, is it fair to say that the actions that you're undertaking to improve the inefficiencies would show up in that scenario in the November quarter? (multiple speakers) improvement?

Absolutely. I think by then, we should really have gotten some of these kinks, if you will, of the system and that we should see improvement there.

Okay. And the scenario for you to see improvement would be kind of a flat or a steady growth, not a big pickup. Is that fair to say, as well?

Currently, that's clearly what we are seeing based on the visibility we have right now.

Fair enough. Thanks, Jim and John.

Patrick Ho.

Congratulations. A few questions. Just on the efficiency question again, as you are improving, is it in the material side of things or is it in the manufacturing process, or what is the biggest swing factor that will allow you to continue to improve on these manufacturing efficiencies that you have talked about?

Patrick, it is a little bit of a combination of everything. Manufacturing clearly would be a good portion of it, but it also has indirectly to do with materials as it relates to the success ratio of converting those materials into quality finished products. So it is really a combination of the two and the assembly of the component tree as we continue to -- we really started to shift gears from products that were more single-shot parts, where we just are able to shoot a plastic component, versus some more complex assembled products. And with that comes somewhat of a learning curve for some of our operations, but we think we've got some room to make some improvement there.

I guess what I'm trying to imply also -- if you potentially see another relatively healthy pull-in quarter for August, that you've got some of these efficiencies where again you will be able to meet that demand?

We're real confident on that front, absolutely.

Second question, again related a little bit to the industry visibility. What gives you confidence that you're not seeing double ordering and any inventory buildup?

Well, we try to stay as close to our customers as we can. And one of the advantages of having a services offering and having on-site people in the fabs is that you really get a sense for how the product is being used and where it is being used. And the kinds of products that are being ordered and our ability to respond wouldn't (ph) suggest that there is any inventory buildup of our products. And from all the sources that our experts in this area, we haven't heard any signs of finished product becoming an inventory issue. And fabs are pretty much running at capacity and there is no sign of inventory buildup on finished components, at least that we are aware of at this time.

Great. And final question, what is your tax rate outlook for 2005?

Great question. We have certainly been working hard strategically over time to reduce our effective tax rate. We have seen in the last peak our effective tax rate as high as 38 percent; on an annual basis, it was in the 35 to 36 percent range. So for our next year it will be dependent on sales and profitability levels, obviously. But I am confident that we have been able to do some things very well here to strategically improve our effective tax rate. So I would put it as up a few percentage points from where we are at as the profitability increases, but I don't think we will be back at the same levels we were in the last cycles, which was 35.5 to 36 percent.

Something like a 33 would work out well right now?

Thirty three to 34, perhaps, I think would be a good range.

Thanks a lot.

Jesse Pichel.

A couple of questions. You made good improvement there in the inventory turns and days inventory. Do you think you can further improve that number looking forward for the next couple of quarters?

Jesse, I think we are very pleased with our inventory management. We moved to that build-to-order model last year in our fourth quarter. The increases that we've seen in our inventories at this time are really all related to raw materials and work in process. I have been very pleased with how our finished goods inventories have remained pretty flat throughout this ramp. So we're targeting higher inventory turn levels. We always have that objective for our global supply chain or our manufacturing organization. So it will be a continued area of focus.

Can you quantify that turns target for us?

I don't know if I can give you a real specific. We obviously made a quantum leap this quarter, going from 4.3 turns to 4.8. It would certainly be our objective over time here, particularly if sales get increased, to get that up over 5 turns.

Also, in what geography was the 300 millimeter pull-in on the equipment side?

Really, it was pretty broad-based. Sales were up quite a bit, particularly for that product offering in Asia-Pacific. It was up in all regions around the globe, but I would say Asia-Pacific, which would be Asia excluding Japan, would be the most predominant area where we saw that.

Without listing the 300-millimeter fabs, everyone is aware of where they are, and they are all performing quite well right now.

Okay. Moving on to the data storage business, how much of the drop this quarter was ASP related?

We don't think very much of that. We've, I think, done a nice job of maintaining that pricing. It's a very aggressive market that we serve, but we bring a lot of value to our customers. They understand the capabilities that Entegris brings. It was really related to units and just a decline units. Our customers have gone through a lot of changes over the last year to 1.5 years with form factor and process changes. We've been there and responding; that's been good for us. And this quarter, I think, it was just really related to digestion and the inventory issues that are existing in that disk drive industry.

Are you referring to inventory in the channel or inventory at the manufacturers?

Primarily at the manufacturers, yes, with the disk drive customers that we serve.

So your customers are seeing a slowdown there in their production?

Yes, I think that's what we've been hearing for the last couple of months on that front.

And the two largest disk drive customers are expanding capacity in Singapore and China. And I was wondering are you working with them on supplying them in their new operations?

We have had facilities in Japan for 25 years and in Malaysia for several years now. And that's where we are taking care of the Asian customers for the most part with regards to data storage. We also have some subassembly work being done in China as well. But we are working closely with them to make sure that we are aligned with their specific needs.

Thank you.

(OPERATOR INSTRUCTIONS) John Lopez (ph).

Asked and answered. Nice quarter.

There are no more questions at this time. I will turn it back over to you for any additional or closing remarks.

Thanks. This is Jim, and we will conclude with just thanking you for taking time to join us today, and also a reminder that we would like to invite you to visit us at Semicon West. I think everyone is aware that is coming up in the next few weeks. It is the largest semiconductor equipment and materials trade show in San Francisco. A tour of our trade show display and the show floor, I think will give you a really good perspective about the depth and the breadth of our materials integrity management offering in the semiconductor market, and it will become obvious as to what sets Entegris apart from the competition. So with that, if you have any additional questions or want more information, please contact Heide Erickson, and we thank you for your interest in Entegris and I wish you all a good day. Thanks.

Thank you. That does conclude today's conference. You may disconnect at this time.