Entegris Inc (ENTG) 2004 Q4 法說會逐字稿

Welcome to this Entegris 2004 fourth-quarter earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Ms. Heide Erickson, Director of Investor Relations.

Good morning and thank you for joining us to discuss Entegris' fiscal 2004 fourth-quarter and full year results. Joining me today is Jim Dauwalter, President and Chief Executive Officer, and John Villas, Chief Financial Officer. To start off let me preface our remarks with a Safe Harbor statement.

Certain matters we 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 in November of 2003. Additional or changed factors that may also be mentioned on this call might be included in the Form 10-K to be filed November 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 and Regulation G. The conciliation of non-GAAP financial measures to comparable reported results for operations under GAAP will be made available on the investor 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'll answer your questions. We'll end the call by 9:30 AM Eastern time. Now I'll turn the call over to John Villas.

We wrapped up a very successful fiscal 2004 which ended on August 28th. We passed some significant milestones and achieved many goals we set for ourselves. For example, we reported annual revenues of $347 million, the highest level ever; ended the year with a record $133 million in cash and investments; achieved through our ability to generate cash. We delivered cash flow from operations of $48 million and free cash flow of $27 million for the year and invested $20 million in engineering, research and development; the majority being used to maintain and grow our leadership position in existing markets. These are substantial achievements which we plan to build on in 2005 and all of which led to an unprecedented 38th year of annual profitability, unmatched by any other publicly traded company in the semiconductor equipment and material space.

In the fourth quarter of fiscal 2004 we executed well, even with the softening in market conditions, and reported fourth-quarter sales within our guidance range. As we all know, news from the semiconductor market over the last several weeks has been more cautious because of concerns of an inventory absorption period and the resulting lower anticipated near term capital spending. With our short lead times of generally 4 weeks or fewer, this started to impact us late in our fourth quarter.

For the fourth quarter Entegris reported sales of $99.5 million, about flat sequentially with the previous quarter but up 39 percent from the year earlier fourth quarter. A per diluted share profit of 12 cents, even with the prior quarter sequentially, but a 9 cent increase over the 3 cents reported in the year ago fourth quarter. And $21 million in cash generated from operations and just over $10 million in free cash flow. We now have $133 million in cash and short-term investments.

With that, I'd like to turn your attention to sales. Sales in all our markets for the fourth quarter were comparable with the third quarter of 2004. Semiconductor sales were up 1 percent and data storage up 3.5 percent and services down just over 1 percent. Fuel Cell recorded a very strong sales increase, but on a dollar basis it's still not a large figure. The gains were offset somewhat by a sales decline of 6 percent in the life sciences market. As a percent of sales, semiconductor accounted for 81 percent of the total in the fourth quarter; data storage and services 7 percent; life sciences 4 percent and fuel cell 1 percent. These percentages are similar to what we reported last quarter.

On an annual basis total sales for fiscal 2003 to 2004 grew by 38 percent. Annual sales for all markets rose year-over-year. The most improved on a percentage basis was fuel cell followed by life sciences which more than doubled; semiconductor annual sales improved by 43 percent, which is above current industry growth rates. Services sales rose 15 percent and data storage posted year-over-year annual sales growth of 5 percent. We are pleased with these sales gains, particularly because we believe we maintained or strengthened our position in the markets and the customers we serve in almost all major offerings.

Let me give you a bit more color on the quarter. In the semiconductor market our material consumption driven product sales increased in the low single digit percentage range after the very strong fiscal 2004 third quarter where we recorded double-digit percentage increases, fourth-quarter sales were slightly weaker than we anticipated primarily due to inventory builds by some semiconductor manufacturers. However, mid single digit growth is generally where the average quarter-to-quarter market growth for materials driven products has been.

Fluid handling sales, which primarily stem from demand from the OEM community, were up nicely across all product lines. We continue to see expedited requests from our customers, reflecting strong demand for our fluid handling solutions. Historically we still see 1 or 2 quarters of strength in this product offering even after the OEM community announced its order slow down. Sales improvements were offset by declines in our wafer carrier products.

You might remember that during the third quarter customers requested accelerated 300 millimeter product shipments. This shifted sales from the fourth quarter to the third quarter. Wafer carrier product sales can result in significant quarter-to-quarter fluctuations because orders generally are larger than our average order size, particularly as new fabs are being built out. All combined this translated to similar semiconductor sales levels sequentially from the third to fourth quarter.

On a geographic basis, Entegris' fourth-quarter sales in North America totaled 39 percent; in Asia-Pacific 30 percent; in Europe 15 percent; and in Japan 16 percent. From the fiscal 2004 third quarter to the fourth quarter, sales in Japan increased by 20 percent primarily because of stronger demand for wafer shippers and data storage products. North American sales were up by 6 percent mainly due to strong fluid handling product demand for semiconductor capital equipment applications.

Sales in Europe decreased by 9 percent and Asia-Pacific by 7 percent from the third to the fourth quarter largely because of softer demand for our wafer process handling products in those geographies. On an annual basis Entegris' sales in North America accounted for 38 percent of the total; Asia-Pacific for 30 percent; and Europe and Japan both for 16 percent. Sales from fiscal 2003 to 2004 increased in all geographic regions. Asia-Pacific sales rose by 64 percent; Japan by 44 percent; North America and Europe both grew by 28 percent. You will note the shift of our overall sales into the Asian region is accelerating. Many of our customers' semiconductor manufacturing facilities last year were built in Asia.

Gross margins during the quarter were 44.4 percent compared to 45 percent during the third quarter, but up from 33.3 percent during the year ago fourth quarter. Product mix across multiple markets resulted in slightly lower gross margins during the fourth quarter compared to the third quarter. SG&A expenses were $26.3 million in the 2004 fourth quarter, up slightly sequentially from the 25.5 million reported in the third quarter and 21.3 million during the year ago fourth quarter. Some SG&A increases from the third to the fourth quarter are typical since the largest semiconductor trade show falls into the fourth quarter.

Year-over-year SG&A expenses rose because of higher profitability which resulted in increased performance-based incentives. In 2003 we had no payouts related to the operating performance of the Company. In addition, 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. Lastly, we went through extensive preparation to be Sarbanes-Oxley 404 compliant which added additional cost.

During the fourth quarter we invested $5.4 million in engineering, research and development compared to 5.3 million in the third quarter. On an annual basis we invested 20.1 million in ER&D compared to 17.8 million last year. Investment is vital to keep a technical competitive edge in our traditional markets. We invested over $4 million in engineering, research and development in our new markets in 2004 which was in line with our expectation.

During fiscal 2004, 15 new U.S. patents were issued to Entegris and we have 71 outstanding patent applications, up significantly from fiscal 2003. Today we have a total of 178 U.S. patents. Our intellectual property has always been important, but in this rapidly changing technology world it's becoming even more significant.

Operating income was 12.6 percent of sales during the fourth quarter compared to 13.7 percent during the third quarter, and an operating loss of 2.9 percent for the prior year period. For the fiscal year operating income was 10 percent of sales, up from a 0.4 percent operating loss in fiscal 2003. We recorded a tax expense of $3.8 million for the fourth quarter which equates to an effective tax rate of 30.1 percent. On an annual basis we recorded an effective tax rate of 31 percent. Based on our current analysis of the Company's fiscal 2005 projected tax position, we anticipate the effective tax rate to be about 32 percent.

Entegris reported net income of $8.9 million for the 2004 fourth quarter and 9.2 million for the third quarter for 12 cents per diluted share for both quarters. This compares to net income of $2.3 million and 3 cents per share during the 2003 fourth quarter. For the fiscal year earnings grew from $1.3 million or 2 cents per diluted share in 2003 to $24.8 million or 32 cents per diluted share in fiscal 2004. In 2005 we will continue to focus on improving the financial performance of our new markets and to increase the leverage we have in our business model.

We currently have a global workforce of about 2,200 people; 21 percent of this workforce, or nearly 500, are contract employees allowing us to respond very quickly to changes in demand. Our balance sheet continues to be very strong, cash and investments on hand are now $133 million, up 13.4 million from the 2004 third quarter. We generated over $21 million in cash from operations during the fourth quarter and 48 million during the full fiscal year. Short and long-term debt at fourth-quarter end was about $27 million primarily at international locations with very favorable lending conditions. Short and long-term debt decreased by $1 million sequentially from the previous quarter.

As we announced in today's press release, the Company's Board of Directors has authorized us to use up to $25 million of our current cash on hand to repurchase Entegris stock. We believe that repurchasing stock is a prudent use of our cash. Overall inventories decreased by $1.7 million to 45.2 million from the third to the fourth quarter, compared to fiscal 2003 year end inventories increased by $7 million.

This increase is all related to raw material and work-in-process inventory as we ramp production throughout the year. This points to the disciplined inventory approach that we implemented at the end of last fiscal year where we established our build to order manufacturing model across multiple product lines. Inventory turns in fiscal 2004 were at 4.7, a significant increase from 3.9 turns in fiscal 2003.

Depreciation and amortization expense was approximately $6.3 million for the quarter and capital expenditures were 5 million. For the year we had depreciation and amortization expenses of 25.5 million and capital expenditures of $21.2 million. This compares to lower capital expenditures in fiscal 2003 of 13.4 million and depreciation and amortization of $27.2 million. Our plan is to spend about $25 million in total capital expenditures in fiscal 2005. As always, we have flexibility to adjust our spending to reflect business conditions.

Fiscal year 2004 was a very successful year for Entegris. We achieved an unmatched record of annual profitability, reported record sales levels, managed and leveraged our assets wisely, and continued positioning ourselves for future expansion. I am confident that our market focus and financial strength will lead us to increasing growth opportunities in both our current and new markets. Now I will turn the call over to Jim.

Good morning to all. As John just stated, we achieved many financial milestones during the last year. These are positive indicators of Entegris' strength. Another achievement I'm particularly proud of is our success at leveraging materials integrity management expertise across multiple sectors and markets. We're extending our expertise into new but related areas and this will ultimately drive opportunities for the Company. At the same time, we've maintained or gained market share in almost every major product area we serve. This again underscores the value we bring to our customers and our ability to differentiate Entegris from our competition.

Our goal is to be number one or two in every market we serve. The only market leaders to have the financial strength to invest in new technology for the long run, they attract top talent and they're the organization that key stakeholders want to be associated with including customers, employees, suppliers and shareholders.

Let me give you some examples of the progress we made last year. In the semiconductor market we grew our materials consumption driven products, such as wafer shippers and ultra pure chemical drums, by more than 35 percent from fiscal 2003 to 2004. This compares to IC unit growth of about 31 percent for the same period according to VLSI. In other words, we grew faster than the market. However, we're not relying on our past successes and continue to enhance our position.

Specifically, we've increased our 300 millimeter FOSB wafer shipper capacity in Japan to accommodate future demand. We rolled out a Smith Equipment compatible 300 millimeter FOSB in 2004 which we believe will become an increasingly important product offering in 2005. Earlier this month we announced our joint venture with Mitac-Synnex Group, the leading electronics manufacturer and distributor in Taiwan, to form Entegris Precision Technology. We will now manufacture an Entegris FluoroPure 200 liter high purity drum specifically for the Southeast Asian market in Asia. Up to this point we've served this market with our drums manufacturers (ph) in the United States. We believe that the additional capabilities and capacity we're developing will be essential to serve the growing Asian market.

In the capital spending product area we also saw significant successes. Year-over-year sales grew by about 60 percent compared to growth of almost 50 percent in the semiconductor capital equipment sector, according to SEMI, for the 12 months ended in June. Again, we outpaced the market. You might remember, we acquired the wafer and reticle carrier line from a major competitor in March of last year. We absorbed the acquisition and achieved quarter-to-quarter sales increases that exceeded 40 percent from the first to the second quarter and second to third quarter of 2004.

Our operations performed remarkably well. Was the performance perfect? No. Can we improve more? Yes. Did we maintain our leading market share north of 50 percent? Absolutely according to industry data. These numbers alone don't tell the full story.

In our fluid handling product lines we've gained traction in flat-panel manufacturing facilities. For example, we won four projects in Taiwan alone including one of the top three flat-panel manufacturers. We're providing fluid handling products for chemical distribution units and valve manifold boxes destined for flat-panel display facilities. Entegris' fluid handling products were chosen for their known reliability and performance. The fluid handling products provided were manufactured in both our U.S. and Japanese facilities.

Additionally, sensing and control products -- part of what we call fluid handling systems -- are now recognized as necessities for precise and accurate corrosive fluid measurement and controls in IT wet process applications. While analogous (ph) sensing and control capabilities have been widely available and high purity gas applications, Entegris introduced leading-edge flow measurement and control technology developing a market for sensing and control in wet process applications involving CMP slurry, corrosive chemicals and deionized water. This has allowed us to unprecedented OEM access, particularly to the Japanese equipment community, and increased our sales opportunities for our entire fluid handling product line.

We're also leveraging our materials integrity management expertise across other markets. In fuel cells we've developed a surface treatment for bipolar plates, a unique patent pending technology. We're now looking at applications particularly in the semiconductor market where we believe this technology could create significant performance improvements for our customers. Entegris' materials integrity management expertise doesn't only transfer from semiconductor to our new markets but vice versa, strengthening our entire organization as well as our technical platform in the process.

During the last year we invested in our new markets of fuel cell, life sciences and services. We did so in a very deliberate, measured way and there are many successes that we can point to. Life sciences sales more than doubled this year and we made progress in all our major product areas. We are now providing a unique set of engineering services that has allowed us to broaden our presence and deepen penetration into key accounts.

In services sales increased by 15 percent. We expanded our capabilities through an acquisition in Europe and verified our services model. Entegris has attracted new customers in 2004 and we have a very high renewal rate in our on-site services offering. In many cases these renewals result in an expansion of our responsibilities under the new contract, acknowledging the value we bring.

In the fuel cell market customers are now coming to us, recognizing our expertise. Let me pick just one example out of the three primary fuel cell markets of stationery, portable and transportation we currently serve. The majority of fuel cell cars that will enter the market over the next year will have Entegris components.

Yes, there will only be 100 or so fuel cell cars compared to millions of fossil fuel powered cars that will come to market, but Entegris' fuel cell market growth is not dependent on how quickly the technology is adopted over the next few years. We're just tapping into this market and, even with much of the spending coming out of ER&D budgets, we anticipate significant growth. Overall fuel cell sales for the quarter were just about 1 percent. We're investing for the long-term in this market and so far our efforts have met or exceeded all our expectations.

I'm very optimistic about Entegris' prospects. We're strong in our markets and taking continuous steps to reinforce and enhance our position. I'm also very optimistic because of the opportunities I see in migrating our materials integrity management capabilities to adjacent markets. Will there be short-term ups and downs? Probably, yes. But as I've told you, and as I'm telling our employees, we need to focus on what we can control and that is how we perform.

For our fourth quarter uncertainty in the semiconductor market resulted in more cautious customer spending, particularly in the final weeks of the quarter. Overall semiconductor market conditions remain generally positive despite the current inventory absorption period. Utilization rates are very high at fab levels; therefore we expect sales in our materials consumption area to remain relatively stable during the first quarter of fiscal 2005. We don't anticipate 300 millimeter demand to shift significantly during the next quarter, but we do see 200 millimeter fabs and smaller wafer size fabs reducing some of their spending.

In addition, while there's significant strength for fluid handling spending, we're cautious because of the news from the OEM community reporting slower order rates during the last few weeks which could impact us during the next quarter as well. We anticipate sales in the life sciences, global services and fuel cell markets to be flat to slightly up depending on project timing during the next quarter and broad economic conditions. We expect data storage sales to be up slightly since historically the industry has seen demand grow in the latter part of the calendar year after the historically weak late summer and early fall months.

All of these factors lead us to expect Entegris' total sales will be down about 10 to 15 percent for the first fiscal quarter 2005 compared to the fourth quarter 2004, and up 24 to 31 percent from the first quarter of 2004. Operating margins should be in the 8 to 10 percent range and earnings per share between 6 and 8 cents depending on sales levels and product mix. In fiscal 2005 we'll remain focused on further penetrating and improving the financial performance of our new markets, successfully managing our current products and new products introduced in our traditional markets, continuing to focus on increasing operation efficiencies and taking advantage of market consolidation opportunities should they arise.

Let me emphasize by saying that I firmly believe that Entegris today is a stronger company than we've ever been. Why? Because our balance sheet is stronger and we made great progress in leveraging our materials integrity management expertise into all markets with innovative technologies. The credit for these successes goes to our values driven culture and committed employees around the world. As always, we're focusing on what we can control and are managing the Company for long-term success and market leadership. This strategy will ultimately benefit all our stakeholders. And with that we'll take your questions.

(OPERATOR INSTRUCTIONS) Brett Hodess, Merrill Lynch.

A couple questions. First, you commented on most of the markets -- what did you see -- since you had some strength in LCD with the fluid handling, what are you seeing in LCD at this point, Jim?

With regards to the flat-panels?

Flat-panel market.

Right now our focus is on the fluid componentry, we really don't have the process set that we have for silicon in the semiconductor industry just because they haven't really standardized on a lot of plates yet. I think they're going to get there. So our focus is primarily on the facilities with the fluid componentry. And because we don't have a lot of market share there, there's opportunity for us and in general I see the flat-panel stuff pretty solid from the touch points we currently have. We're not nearly as connected as we are in semiconductor.

Secondly, when you look at the drop-off of 10 to 15 percent this quarter, it sounds like when you go through the product lines everything is pretty stable except for the big drop in the 200 millimeter and in the fluid component side going into the OEMs. How much visibility do you have on the OEM side of the business at this point?

First of all, we have a high turns business and our visibility is relatively low. So that's always a little difficult for us. And you know how quickly we're turning our business. But a lot of it has to do with I think just the kinds of things that we're hearing from that community. The good side of it, Brett, is that we haven't seen any irrational buying during this cycle and therefore I don't think there's a lot of -- or if there's any kind of duplicate orders out there. So, what business is there we think is solid.

And with regards to the 200 millimeter business -- 300 millimeter business. The 200 millimeter obviously is the work horse in the industry, but I think we're seeing some spending going down in there -- at least at the current moment. And 300 millimeter is kind of lumpy. We haven't seen anything pulled back, but at the same time it's kind of when it fits for us.

My final question is as we think about the next few quarters in terms of -- obviously the dip this quarter and maybe low visibility moving into the quarter or two beyond that -- is your plan to keep the R&D pretty stable in this low to mid $5 million range or how should we think about that? And then on the SG&A side, can give us a little color on how that would scale with revenues at this point?

On ER&D spending, certainly that's very important for our lifeblood and our future. We think we can flex that somewhat with our sales level, so that does have some of that built into it. We have obviously gotten to very high sales levels the last couple of quarters approaching 100 million. So we have ramped up some of our investment and spending there. But we think that that can come down a little bit.

As far as SG&A, there are a lot of incentive-based performance-based charges that go into that SG&A line and that really is dependent on our profitability. We do charge all of our incentive payouts to our SG&A line. So we're constantly monitoring our costs and we'll respond to market conditions. I think we've shown the capability in the past to be very responsive and we'll take care of those lines as needed and respond.

Actually I had one more quickie. On the 25 million CapEx for the coming year, can you outline what the key areas of investment are for us?

We'll continue to invest in new technologies and new products for our customers, tooling is always very important for us. We're working on next generation products already for many areas where we already have tremendous share to stay ahead of our competition. We are considering some expansion into other -- into the Southeast Asia market because that's where our customers are. But again, we'll be responsive to market conditions and we have shown a capability in the past to ratchet that spending down if the sales level in the business doesn't sustain itself.

Thank you.

Jim Covello, Goldman Sachs.

A couple quick questions, the first one on gross margin. I'd like to come at it from a couple different angles. Is the Company happy with the gross margin performance? What kind of gross margin should we be thinking about going forward? What kind of incremental levers can you pull depending on business conditions for gross margins? That would be real helpful, thanks.

I'm going to answer part of that. Are we happy with the gross margins? I don't know if a company is ever extremely happy with its gross margin. I think we're pleased with how certain product offerings responded and our semiconductor products -- we're very pleased with the gross margins there. Part of what we have to take into account when we look at gross margins is the investments that we're making in other markets that we think are extremely important as we spread our wings further over the materials integrity management sector. John, you can answer the other part.

Yes, we do feel as though we can make some improvements there. We're always focused on operating efficiencies. And so I think we can do even better in our core markets, traditional markets of semiconductor and data storage and we have a very heavy emphasis this next year on improving our margins and really we look hard at the operating margin line as well because that's ultimately what's going to drive earnings per share. We need to grow those new market sales, get better performance out of those markets in terms of growth so we can leverage our infrastructure.

Our traditional core market businesses are really performing at very high levels and -- but we can do even better there. So how do we think about that going forward? It will be dependent on product mix, we have targets -- internal targets are certainly higher than what we're performing at right now. And we'll be working to achieve those.

That's very helpful, thank you. Then my follow-up question would be just around -- you referenced some of the weakness -- or some of the inventory build at your customers. Where do think the customers are in terms of inventory depletion and how long do you think that might take to work its way through?

Are you talking about their inventory and not our inventory?

Both would be helpful.

With regards to their inventory, we don't have a lot of visibility there. You probably have a better feel for that and we kind of rely on some of the comments that we hear from you guys with that regard. With our products, we don't think there is any significant inventory buildup for any of our product offerings including the wafer drillers. Again, as I said to Brett, we haven't seen any irrational buying behaviors over the last 6 months that would suggest there's been inventory buildup, but rather our products have been consumed.

Okay, maybe one final one then. A couple of your customers, bigger customers, have publicly announced that they're cutting their wafer starts -- somewhat significantly. Have you seen that, have you felt the effects of that in the business? Is that why you're guiding down or is that still yet to be contemplated in the business?

I don't think with regards to wafer starts that that has affected us directly. Maybe indirectly they're saying they don't need as many products because they're planning on that. But we really haven't felt the impact of that yet. It all starts with the growers for us, and when the growers are buying product that means that someone is consuming wafers and we really haven't seen any significant variation from the grower business level at this time.

That's really helpful, thank you guys so much.

Avinash Kant, Adams, Harkness & Hill.

I just wanted to check a few numbers, I might not have gotten them right. By any chance did you give the percentage of business that you derived from the materials and the CapEx related side?

No, Avinash, we did not. We have historically been in that 50 to 60 percent range driven by units and 40 to 50 percent driven by capital spending and we're in those kinds of ranges right now.

It’s dependent on the cycle to some degree.

I might have missed the CapEx and the depreciation number. I think the CapEx was 5 million.

For the quarter our capital expenditures were 5 million, for the year capital expenditures were 21 million and depreciation/amortization for the quarter was 6 million, just over 6 and for the year 25 million.

And service was what percentage of the revenue -- service?

I'm sorry?

What percentage of the revenue came from the service side?

From the services side, for the quarter it was about 7 percent, semiconductor 81, data storage and services 7, life sciences 4, and fuel cell 1.

One final question, in terms of your December guidance I know that you did talk about weakness on the equipment side. What kind of wafer start growth, or decline or numbers that you are modeling at this point when you talk about the next quarter, the fiscal Q1 guidance impact?

We expect wafer start to be pretty flat. Our third quarter over our second quarter we saw pretty high increases. This last quarter we saw much more moderate increases in the low single-digit percentage range. So what we're seeing right now is for our wafer start-driven product like the shipper products for sales to be pretty even in our November quarter compared to the August quarter.

Thank you.

Vijay Rakesh, Next Generation Equity Research.

Hi, guys. Just wondering on your guidance you said 300 millimeter was pretty flat and 200 millimeter was dropping off. Do you expect the 300 millimeter orders to come back in the next quarters or so where it kind of replaces the 200 millimeter demand or it's still going to be soft?

No, our 300 millimeter business we've talked about as being somewhat lumpy because of the potential size of the orders. And at the same time I just would mention again that how we get 300 millimeter business. We've talked about when an OEM equipment manufacturer gets an order they basically get an order for the full amount and ship it. When we get notified of a facility expansion or a new facility, our 300 millimeter business will come in as the facility ramps.

And so we could still be supplying 300 millimeter products this quarter to fabs that were maybe facilitated and started 6, 9, 12 months ago. So it spreads out over a longer period of time for us. But still when they hit it creates somewhat of a lumpiness and that's why we're just suggesting that it's probably going to be flat this quarter.

Vijay, the 200 mm product, the capital spending really was a leading indicator I would say a year ago. We started to see some very strong spending in 200 mm. The capital expenditures there we expect to be down at least this next quarter. It's hard, again, with our visibility to go beyond that. But 200 mm unit products, the wafer shippers, is still a very strong predominant workhorse for the industry and with our very great share there that's why we continue to be seeing good levels of business on the 200 mm unit side.

Sure, but probably going forward 200 mm is probably shrinking as a -- I mean in terms of capacity addition or CapEx spending I guess?

Yes. I guess that was probably thought of the same way a year ago as well, but we did see very strong spending at 200 mm and even 150 mm as customers wanted to ramp up production quickly. It may be easy to do that at the 200 millimeter and less levels. And we still have opportunities with the leading technology products to go back in and actually refurbish a lot of those 200 mm and below fabs with our products that they can get very rapid paybacks on. A lot of the new -- the 200 millimeter facilities also will be mini environment or SMIF environment, so we have great share there. We still feel very good about 200 mm and below. We're certainly not writing it off on the capital spending side.

Also when you look at your newer segments what kind of growth are you looking at on the life sciences and the fuel cell -- life sciences side of the business for '05? And what are the target models for gross margins and operating margins? I mean the long-term target margins?

I think in the next year we would expect modest growth in those areas, perhaps significant growth as it relates to any one of the areas. But overall they're not going to be significant needle movers for Entegris. But we're continuing to execute on our plan and bring materials integrity management into some of these other markets.

Fuel sales was certainly up a tremendous percentage because of the smaller base. And in terms of our operating margin targets, we really want to get these businesses performing similar to the levels that we have within our traditional core markets. We're not there yet but we want to work hard towards that.

So what would be the target margin model and the operating margin that you're looking at for the Company and for the segment if you would like to break it down?

The target operating margins targets are near term here more like 15 percent, longer-term as we grow we want operating margins in the 15 to 20 percent range. There will be some variability between the different markets that we're serving, but that's the corporate average that we're working towards.

So by year end '05 you'd expect it to get to about 15 to 20 percent?

I think that will be contingent on sales levels and what kind of strength we see in the semiconductor market. That's still 80+ percent of our sales and that mix is going to continue to be there for some time and we'll just be dependent on the mix across all these markets.

Great. Thank you very much.

Tim Summers, Stanford Financial Group.

I just wanted to follow up and clarify an issue. You mentioned a couple of your markets would be flat to up slightly in the first quarter. You mentioned the consumables business was probably going to be flat. Could you drill down a bit more? What product lines or segments do you expect to be down first quarter over fourth quarter?

Within the semiconductor group, while 200 mm is still absolutely the workhorse, we do think that the spending dollars that companies have for that -- those particular lines will not be at the same level they've been. I think in general our conversation this morning has really been reflecting with all of our touch points and kind of concurring with all of the things that so many of you that follow the industry so closely have been saying. And I think our touch points are concurring with the same conclusions that you guys have been coming to.

A lot of negative news flowing around from the OEM community and some of the sub component suppliers. So while we see good business levels, strong business levels in our fluid handling components at this time, we are cautious about that particular product offering.

So based on those comments, is it reasonable to assume that your capital spending component of your semiconductor business quarter over quarter might be down 20 percent or more?

Again, the lumpiness of it, that is just -- at this time it's just difficult for us to speculate on.

Those are drivers which are certainly impacting our guidance for this next quarter. But we really want to emphasize that for the long-term we continue to see spending for new technologies and we have investments that will help us continue to grow -- or, we've been growing faster than the market over the last 12 months, so we think we can maintain that kind of pace. We'll be responsive to how the market reacts and adjust our business accordingly.

And a lot of our capital dollars really go into new product development and R&D for the future. When you enjoy the market penetration and the leadership that we have in a lot of our offerings, it's important that we absolutely be the leader in next technologies.

Okay, good. If I can follow-up with one additional question. Metron Technology announced several weeks ago that you and they were renegotiating the distribution agreement. Not knowing exactly where that's going to go, could you at least partially quantify what the impact on your fiscal '05 results could be of this change in relationship?

There's a lot of dynamics going on right there. Of course, we know who they've been purchased by and, as a result of that, that will have some type of an effect on our negotiations regarding the renewal of the contract and that's pretty dynamic right now. We're having great discussions with Metron on that and it's a little early to tell. I do not anticipate that there's anything with regards to the transaction that Metron is doing that will have an effect on our business. Rather we see it as some opportunity. And of course, the other thing is the fact that positively at some time we should get a hit to our cash position as a result of us being taken out of our ownership role in that company.

Our main focus will be to take care of our customers and we'll use the appropriate distribution channel to make sure that that's done and we're working through many different solutions and Metron is certainly a key component of that at this time.

Thank you very much.

Stuart Muter, RBC Capital Markets.

Going back to the wafer growers -- back to the wafer growers -- comments you made earlier. Any more color could you provide on the mix of 200 to 300? Do you think 200 mm wafers starts might ease a little bit but 300 will keep growing? Or what are you seeing in terms of the mix there from the wafer growing companies?

I do think that 300 mm is going to keep growing because fabs are still ramping and they aren't at full capacity yet. I think there is obviously room for more growth on the 300 mm side. Just as I said, 200 mm is still that workhorse and in fact it's still growing. Some of the charts that we share when we do presentations and so forth talk about over the next couple to 3 years 200 mm continuing to grow primarily at the -- not only in true growth but also at the expense of some of the other wafer sizes -- the smaller wafer sizes. So we think there's good opportunity for both the 200 mm wafers and 300 mm wafers at the grower level.

Thanks, Jim. And a question for John. John, I think you mentioned that life science was down 6 percent sequentially. Could you guys comment on what's occurring there? Is it just lumpiness?

Yes, Stuart, life sciences was down about -- and that really relates to the lumpiness in our clean in place technology product that we service to that industry. It's very much a project based business so it does have lumpy characteristics to it and when we can bill those customers for the revenue. So we don't see any long-term trends developing here. We had a great year last year in life sciences. Our sales had doubled year-over-year. So we're very pleased with the progress we're making there and we think we can improve and grow that business.

Okay, very good. Thank you.

Jesse Pichel, Piper Jaffray.

How should we look at the gross margin of the CapEx driven piece of your business versus the materials piece? What's the outlook there, the gross margin impact from the mix shift going forward?

In our semiconductor market, which is 80+ percent of our business, our gross margins are pretty consistent across the unit driven product as well as the capital spending product. Obviously there's more variability or volatility in some of those capital spending products, but we really don't see a huge shift there. We get very good absorption rates when our production facilities are running at higher levels of capacity, so our gross margins there are pretty consistent.

So it really depends on the mix in a particular quarter, but over longer-term historical averages we get very good margins there. We really look to constantly deleveraging our assets and we've done some good rationalization over the last several years and made the tough decision to close some facilities. So we're always looking at how to improve that and make sure that we're appropriately positioned.

Are the 500 contractors you referred to specifically assigned to the CapEx driven business lines? And would that be located in the gross margin or is that more of an SG&A cost?

Those contractors or temps are really primarily spread throughout the organization but certainly, Jesse, a great bulk of them are hitting the cost of goods sold line because they are people that we brought on board to handle the higher levels of business that we experienced over the last several quarters.

And finally, can you give us some idea of how large the fluid handling component of your business is?

Well, it’s in our semiconductor group. 80 percent of our total sales are within semiconductor, fluid handling is driven more by capital spending particularly with the OEM community with the component. But there's also a unit driven element to that as well because we have some chemical containers and other products that are driven by increases in uses of chemicals. Within our total fluid handling business -- we also have another very successful product line there, our sensing and controls that we acquired 3 years ago has performed very, very well for us in the industry ramp. So with our semiconductor business, it's in the range of 25 to 35 percent.

25 to 30 percent of the 80?

Yes.

And that's the whole offering that John just described -- the fluid handling.

Yes, the containers, the componentry and the sensing and control products.

That's great. And finally, could you give us some more color on Japan? It looks like you had very strong sales there and what part of your business is really selling into Japan and what's the outlook there for Japan? And also on China, if you could comment on that? Thank you very much.

With regards to Japan, the strength coming out of there was really across all of our markets. They had some real success on the fuel cell side. They had some success in the life sciences side. But then both process and shipper type products to the semiconductor side of our business was stable and up as well. And of course, data storage was probably the biggest mover this last quarter.

With regards to China, we're in every facility in China whether it be 150 millimeter, 200 millimeter and the upcoming 300 millimeter facility. So we feel good about our market position and how we are addressing that market and we'll continue to watch that to make sure that we're aligned with our customers to support them accordingly.

That's great. Thank you very much.

At this time we have time for one more question. We'll go ahead and take that from Patrick Ho, Moors & Cabot.

I just wanted to follow-up on the gross margin question that Jim asked earlier. You mentioned that product mix was obviously one of the biggest influences to gross margin. How much of it would you characterize as partly related to fixed cost absorption, particularly over the next few quarters?

Generally, Patrick -- again, this is not going to be true across all of our product lines -- but about half of our cost of goods sold is fixed as we look at facilities and depreciation of equipment. Highly technical and trained invaluable employees that we are making sure that we have in all market conditions. So that's about as specific as I can get on the absorption rate there.

Actually that was pretty helpful. And I guess just a question on the outlook on the regions going forward. Would it be fair to characterize that you'd probably see maybe a sharp decline in the Asia-Pacific region or do you think that can hold up relatively well even in a weakening environment?

Overall for us I think at least at this time with the visibility we have, worst-case it's probably flat. We still have a lot of business yet to take care of over there, particularly because of what I said earlier about how long it takes to sometimes fill out a facility with our 300 mm product offering.

That is where a lot of the capital spending is going on, so it does have some lumpiness to it. But it certainly also, there’s a tremendous amount of wafer starts. So for us that's great news with our unit driven product such as our wafer shippers.

So I guess -- could I fairly characterize that the regional outlook could be relatively flat if Asia-Pacific is going to be flat like for all the regions?

We just said sales will be down about 10 to 15 percent, so we can't really say that all regions are going to be flat. The OEM community is still, for our fluid handling components, is strong in North America. In Asia I guess we would say it's -- 200 mm spending and below is dropping off. So that I think is going to lead to some decline in Asia. But again, we saw Asia-Pacific heat up very, very strongly as things started to improve there. So when we look at annual trends, Asia-Pacific was up 64 percent for us year-over-year and the long-term trajectory there is still very, very solid.

And we really don't anticipate losing share and so what business is there we're well positioned to support that and take care of the customer.

Great, thanks a lot.

That does conclude the question-and-answer session today. At this time, Mr. Dauwalter, I'll turn the conference back over to you for any additional or closing remarks.

Thanks to all of you for taking the time to join us today. I'd like to close by reiterating that we see great opportunities to further strengthen our position and expand our reach in our core markets and leverage our materials integrity management capabilities across multiple markets. I'd also like to invite you and remind you to visit us here in Minnesota for our fifth annual investor and analyst day next week, Tuesday, on October 5. You can contact Heide Erickson if you'd like additional information related to the analyst investor day or if you have questions related to this quarter's financial performance. Again, thank you. We appreciate your interest in Entegris and I wish you all a good day.

That does conclude today's Entegris fourth-quarter earnings release conference call. We thank you very much for your participation and have a good day. At this time you may disconnect.