Entegris Inc (ENTG) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to Entegris' 2005 first-quarter earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions I'd like to turn the call over to Heide Erickson, Director of Investor Relations.

Good morning and thank you for joining us to discuss Entegris' fiscal 2005 first-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 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 2004. Additional or changed factors mentioned on this call might be included in the Form 10-Q to be filed in January 2005 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 operation under GAAP will be made available on the investor’s 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 operating 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.

Good morning, everyone. We wrapped up a quarter in which we've just reported sales of $90.6 million compared to 68.7 million a year ago, a 32 percent increase when compared to 99.5 million in the 2004 fourth quarter, which was about what we expected. A per diluted share profit of 8 cents compared to 2 cents a year ago and 12 cents in the 2004 fourth quarter and the generation of about $7 million in cash from operations. We now have about $139 million in cash and short-term investments.

The area where we did not perform to our expectations was in gross margins, but, as I will detail later, we had a mix of circumstances that impacted gross margins. First though, I'd like to turn your attention to sales. First quarter sales in all of our markets except services declined from the fourth quarter of 2004.

Semiconductor sales were a bit stronger than we anticipated while our data storage and life sciences markets were slightly weaker than we expected largely because of timing issues. As a percent of sales, semiconductor accounted for 81 percent of the first quarter and data storage 8 percent, services 8 percent, life sciences 3 percent and fuel sell less than 1 percent. The percentage breakout is essentially the same as in the 2004 fourth quarter.

On a geographic basis, Entegris' first-quarter sales in North America totaled 36 percent and Asia-Pacific 33 percent; in Europe 14 percent and in Japan 17 percent. Sales declined in the 2004 fourth quarter in all geographic regions by about 15 percent except in Japan. In Japan total Entegris sales were down only 6 percent largely because of relative strength in the semiconductor market aided by displacing a competitor in a 200 mm fab with our leading-edge technology wafer carrier. As a percent of total sales, sales in North America and Japan increased while Europe and Asia-Pacific declined.

In the semiconductor market our material consumption driven product sales were down slightly. Sales for our test assembly and packaging products increased almost 10 percent while sales for ultra pure chemical containers and wafer shippers declined in the mid single digit percentage range. The process in wafer shippers is related to utilization rates at the fab level and inventory buildup at the wafer grower level for 200 mm and smaller sized raw wafers -- where wafer growers are storing these raw wafers inside our wafer shippers. We do not believe there are any inventory issues for 300 mm raw wafers.

For our capital spending driven products sales decreased from 2004 fourth quarter for our 200 mm and below wafer handling and fluid handling products. However, 300 mm related product sales remained strong. In addition, our highly engineered fluid sensing and control products did very well during the quarter. Over the past few weeks some of the larger semiconductor capital equipment companies have announced anticipated order declines for the December or January quarters of up to 35 percent. This will impact our fluid handling sales particularly during our fiscal second quarter which ends February 26, 2005.

In the same quarter we also have two major holiday periods, Christmas in the U.S. and Europe and the lunar new year at the end of January in Asia. Given current market conditions we anticipate some fabs to close for a few days, impacting second-quarter sales. We expect sales for our unit and material driven productline to decrease in the mid single digit percentage range while our capital spending driven sales are anticipated to decline in the double-digit percentage range. But overall, well below the 35 percent drop expected by some equipment manufacturers. Overall we see semiconductor sales declining by about 15 percent.

Data storage market sales accounted for 8 percent of overall sales. Sequentially, from the fourth to the first quarter, sales decreased by 3 percent. Demand this holiday season for rigid disk media has been described by our customers as robust, particularly for consumer products. For us this translated into much stronger sales and bookings momentum toward the end of our quarter. Therefore all indications are that our data storage business will have a solid second quarter 2005 with improving sales.

Services sales increased slightly from the fourth quarter of 2004 and generated 8 percent of Entegris' overall sales. We have seen strong demand for our cleaning equipment and continue to expand our services offering in the semiconductor, life sciences and data storage markets. We anticipate fiscal second-quarter 2005 sales to be flat depending on acceptance timing for some of our cleaning equipment.

Life sciences generated approximately 3 percent of Entegris' overall sales. Sales declined 19 percent from the 2004 fourth quarter. The lead times in this market are much longer, particularly for our clean in place equipment offering and these orders are coming in larger increments. To give you some perspective, lead times in life sciences growth (ph) for large greenfield construction can extend over 1 year from our first engineering services sales to the delivery of our clean in place kits. Lead times for facility expansion or upgrades can extend 16 to 18 weeks from order to shipment.

The good news is our order book is firming up nicely. For example, earlier this week we announced a multi-million dollar order from a leading biotechnology company in Northern California. Life sciences sales will be lumpy because of these large projects and a long order cycle. But we are executing on the orders and have many opportunities that we believe will come to fruition. This gives us quite a bit of visibility. We believe life sciences sales for next quarter will remain at this level but increase significantly during the second half of our fiscal 2005. In fact, order levels over the last 4 weeks have been as high as sales during the entire 13 weeks of our first quarter.

As we have said in the past, we are investing for the long-term in the emerging fuel cell market which accounted for less than 1 percent of sales. This market is performing above our expectations. We are confident we can achieve our growth targets even though the market is still in a research and development mode by enabling our fuel cell customers to move from concept to commercialization. We are deepening and expanding our relationships with key fuel cell manufacturers and developers and continue to earn customer confidence.

Gross margins during the quarter were 40.8 percent compared to 44.4 percent during the fourth quarter of 2004. We anticipated some margin erosion as sales declined. Three primary areas negatively impacted this quarter's margin more than we anticipated -- product mix, inventory aging due to declining sales and under absorption of manufacturing costs. Let me explain each area.

Product mix across our different markets but also within our markets can have a significant impact on margins and generally we have consistently higher margins in our unit and consumption based products because of more automation and less volatile order patterns. In addition, our core markets of semiconductor and data storage have higher gross margins compared to the life sciences, fuel cell and services markets. Based on our forecast we anticipate next quarter's product mix to be more favorable compared to the first quarter.

The second factor in the margin decline was inventory aging. With declining sales inventory levels remained flat. For each productline we establish an inventory reserve if the product has not been consumed after a certain period. We have a conservative but prudent inventory obsolescence policy that allows us to avoid large onetime charges. This quarter aging for certain product lines increased more than anticipated.

The last and most significant impact to gross margin was under absorption. Some of our manufacturing facilities were running at lower manufacturing levels because of declining sales. Even though we are continuously adjusting variable cost at current business levels, we cannot reduce fixed cost quickly which leads to under absorption and impacts gross margins.

We have a track record of successfully managing through the cyclicality of the semiconductor industry and we have taken prudent steps to adjust to current market conditions. For example, in the last 4 weeks we reduced our temporary workforce by over 100 people. However, we are keeping our infrastructure to service our customers effectively. I anticipate the under absorption issues will continue to impact us, particularly as we see shifts in demand for different productlines impacting our facilities.

SG&A expenses were $24.5 million in the 2005 first quarter, down sequentially from 26.3 million reported in the fourth quarter. SG&A expenses are typically higher in our fourth quarter because the larger semiconductor trade show falls into that quarter. In addition we have lower incentive based accruals in our first quarter 2005 compared to fourth quarter 2004. I anticipate next quarter's SG&A expenses to again decline slightly on a dollar basis over the first quarter.

During the first quarter 2005 we invested $4.7 million in engineering, research and development compared to 5.4 million in the fourth quarter of 2004. Generally we anticipate ER&D spending to be about $5 million on a quarterly basis.

Operating income was 8.6 percent of sales during the first quarter of fiscal 2005 compared to 12.6 percent during the fourth quarter of 2004. We anticipate next quarter's operating margin to be between 4 and 6 percent. Other expenses during the quarter were $394,000 compared to an income of $84,000 during the fourth quarter primarily due to a foreign exchange loss related to the appreciation of the euro. We have taken steps to mitigate future losses.

We recorded a tax expense of $2 million for the first quarter of fiscal 2005 which equates to an effective tax rate of 25.5 percent. This included a $500,000 tax benefit that was recorded due to a favorable resolution of an Internal Revenue Service examination of a refund claim we made. Based on our current analysis of the Company's fiscal 2005 projected tax position, we continue to anticipate an effective tax rate of about 32 percent for the remainder of the fiscal year.

Entegris reported net income of $5.7 million or 8 cents per diluted share for the 2005 first quarter and $8.9 million or 12 cents per diluted share for the 2004 fourth quarter.

Our balance sheet continues to be very strong. Cash and investments on hand are now $139 million, up over $6 million in the 2004 fourth quarter. We generated $7 million in cash from operations during the 2005 first quarter. Short and long-term debt at quarter end was $29.5 million, up $2.7 million. Our debt is primarily in international locations with very favorable lending conditions. The increase in short and long-term debt is primarily related to the weakening dollar against the yen and the euro.

Overall inventories were $45.9 million, up 700,000 from the fourth quarter to the first quarter. Here again currency exchange rate fluctuations were primarily responsible for the increase in inventory value.

Depreciation and amortization expense was approximately $5.8 million for the quarter and capital expenditures were 2.2 million. We used some of our cash during the quarter to repurchase 224,000 shares of our stock. The $25 million buyback of stock authorized by the Board of Directors in September of 2004 remains in effect.

Let me conclude by saying I believe we're in a very solid financial position. We have successfully managed through many ups and downs within the semiconductor market and have any opportunities to expand our position in all markets we serve. We have an ample cash position and the infrastructure in place to financially support our technology roadmap, our growth goals and service our customers. Now I will turn the call over to Jim.

Thank you, John, and good morning to all. As John just stated, from a financial perspective we had decent performance in light of last quarter's fluctuations in market conditions. Entegris is in a unique position. We are the leader in materials integrity management and we're managing the Company to maintain and grow our leadership position in all markets we serve. We're focusing on what we can control and continue to invest in the future of all of our markets. We balance all this with our goal of annual profitability which we've achieved in all of our 37 years of history.

Being a leader brings a responsibility to serve our customers under all industry conditions and that's why we focus on service and technological innovation. We're also leveraging our technical knowledge and materials integrity management expertise into new and adjacent markets. The result, our sales today are less volatile than just 5 years ago. We've achieved a broader reach into the markets we serve which I believe will build value for all of our stakeholders including our shareholders.

Before I go into more depth about the quarter's events, let me share our perspective on current market conditions. To cut to the chase, the semiconductor market conditions are softening, but are not dropping precipitously for Entegris. And I'd like to remind you that while we cater to the semiconductor market, we generally don't experience the same sales volatility as semiconductor capital equipment companies since demand for our units and consumable driven products and services offering remains relatively stable. In addition sales from life sciences, services, data storage and fuel cell markets generally stabilize our revenue flow.

The semiconductor industry is currently in a slowdown. However, leading semiconductor manufacturers are generally maintaining their planned rate of 300 mm investment. During the last few weeks I visited a number of our customers in Southeast Asia and Japan including wafer growers, fabs and our subsidiaries and manufacturing facilities in the region. Despite the softness in the market I left the region with a very positive impression. We've done a lot of work there to strengthen our manufacturing and service presence and our relationship with our customers.

In Southeast Asia I visited with one of the largest wafer growers and that customer summarized the importance of our service offering best when he said, and I quote, "we're focused on producing the best wafers possible. Who knows wafer shippers and how to maintain shippers better than Entegris?"

Outsourcing is becoming more and more important for the semiconductor industry and we're participating in this trend. In the services market we are in the process of building another off-site cleaning center in Taiwan where we currently have offsite cleaning facilities in California, France and Singapore. These are small, very flexible facilities requiring relatively small capital investments. With a concentration of fabs in Taiwan and a new 300 mm wafer growing facility under way, we believe that the investment in the Taiwan cleaning center will strengthen our services offering and extend our reach. Our goal is to have the facility up, running and qualified by the summer of 2005.

During my trip to Asia I also visited Entegris Precision Technology. You might remember that this is the joint venture with Mitac-Synnex Group, the leading electronics manufacturer and distributor in Taiwan. We announced this joint venture last quarter. We now have the equipment in place and are starting production to qualify the first Entegris FluoroPure 200 liter high purity drum. This facility is scheduled to go into volume production in the latter part of this fiscal year.

These are just two examples of how we've deepened our presence in the region. We've also expanded our manufacturing capabilities in Malaysia and Japan and upgraded our offsite services facility in Singapore.

Growth opportunities for Entegris are plentiful in Southeast Asia and elsewhere in the world. In the fuel cell market we have an enviable position particularly with Japanese car manufacturers. Worldwide about half of the fuel cell cars are now utilizing Entegris components. We've leveraged our expertise very effectively into this market and our customers see us as a partner to help them achieve next generation technology breakthroughs.

For example, in a joint presentation last quarter with Plug Power, a leading fuel cell system developer in the United States, we released the results of our successful collaboration solving critical problems in manifold design by simplifying the manufacturing process. From generation two to generation three we increased the value proposition of Plug Power's fuel cell system by enabling a 50 percent part reduction, a 75 percent wafer reduction and a 40 percent reduction in manufacturing cost. While fuel cells market sales are still small compared to total Entegris sales, this market clearly is moving in the right direction.

Entegris' engineering capabilities and with it, our intellectual property, are at the core of our success and leadership position. We're consistently investing in technology innovations and protecting our intellectual property. Recently we signed a letter of intent to license some of our intellectual around 300 mm FOUP's and FOSB's with one of our Japanese competitors. Our patented technology is critical to the success of the industry and, while we're protecting these patents, we are willing to work with our competitors and license a technology if it contributes to the overall success of the industry.

Another example of our technology leadership in a very recent development is the agreement we just signed with one of the top semiconductor manufacturers in the world. We will jointly develop the next generation Reticle Pod. Through this new collaboration we'll receive funding for our engineering and development efforts while gaining direct insight into the technology road map of this key customer. We're very excited about the opportunities that this collaboration opens up.

We have strong relationships with our customers, a deep technology portfolio and have expanded our position at all the markets we serve. And we also have an extensive track record of managing successfully through all cycles. As John already said, we have the tools in place to adjust our cost level to current market conditions.

Before I share with you our perspective on our expectations for next quarter, let me quickly update you on the just completed acquisition of Metron Technology by Applied Materials and the impact on Entegris. First, we hold about 1.1 million shares in Metron stock which will be liquidated in connection with the acquisition. We'll record a pre-tax gain of about $2.8 million in fiscal '05. We cannot determine the exact timing of this gain at this point.

Second, Metron has been an important distributor for our fluid handling products. With the change in control we've signed a new distribution agreement with the Applied owned Metron. This agreement allows us to leverage Metron's new strength to service our fab customers while furthering our direct relationship with our OEM customers. We believe that the new agreement will enhance the service we can offer to our customers.

This all brings me to our outlook. Across all of our markets Entegris' growth opportunities are exciting. Will we be affected by fluctuations in the markets we serve? Yes, absolutely. But we have a strong consumable and unit driven component to our business and therefore less sales volatility compared to semiconductor capital equipment companies. In addition, sales into the data storage, services, life sciences and fuel cell markets are impacted by different market dynamics, making Entegris less affected by semiconductor industry cycles. That's why we anticipate a more measured sales decline next quarter of 8 to 14 percent compared to 20 to 35 percent order decline expectations by most semiconductor equipment companies.

We're anticipating operating margins for the second quarter of 2005 to be in the 4 to 6 percent range and earnings per share between 2 and 4 cents depending on sales level and product mix. This does not include any benefit related to the Metron stock sale.

Let me close by emphasizing that we have the strong financial position with $135 million in cash and investments, an experienced management team and a history of successfully managing through all market conditions. I firmly believe that our strategy of leveraging our materials integrity management expertise across markets and strengthening our market leadership position while controlling our costs benefits all our stakeholders. And with that we'll it up to questions.

(OPERATOR INSTRUCTIONS) Theodore O'Neill, Wells Fargo Securities.

John, as regards to the guidance for the next quarter, if I pick the midpoint of the range for revenue, which would be down 11 percent, and assuming only very modest improvement in gross profit margin and very little change with the operating expenses I still -- I come out to 4 cents. And so it seems like I might be missing something here. Are gross margins going to be literally down numerically in the second quarter or are OpEx's going to be above the first-quarter number?

I would say operating expenses will be down slightly we said in SG&A, gross margins -- the impact there. Product mix should be a little bit more favorable. I don't anticipate the same levels with inventory aging issues. However, this under absorption factor does come into play; as sales decline less of our fixed costs are absorbed into our manufacturing or cost of goods sold. So I would say that gross margins will be in the same range as they were this most current quarter.

Okay. Thanks very much.

Jim Covello, Goldman Sachs.

Jim, maybe you could talk about the pricing environment a little bit in each of the different segments?

It continues to remain pretty consistent throughout all areas of the markets we're serving. In the past we've talked about we're not as price sensitive as some products, particularly some of our customers' products. And also remember that we're still able to carry a premium over our competitors of somewhere in that 20 percent range. So not a lot of new issues out there with regards to price.

Not even if you look at any of the individual segments that -- that commentary is consistent across the segments?

There's always hot spots and we're always having to defend the position, but overall I don't think pricing issues is going to be an issue for us in this next quarter.

Okay, that's helpful. Maybe if I could just ask one quick follow-up. On the capital equipment driven businesses, are there any inventory issues that are driving the sales declines or do think it's just directly related to the shipment declines at your OEM customers?

I think it's the latter, Jim. As far as us and our capital equipment related products, that's pretty hard for us to measure what's going on with our customers. And I don't believe that we have any inventory issues with the components that go into their capital equipment. I think that's been managed pretty carefully by all in the industry the last couple of years.

Thank you so much.

Vijay Rakesh, Next Generation Equity.

Just a couple of questions. On the margins going to 40 percent, what do you see it going out one or two quarters out? I know next quarter you mentioned it to be in the same range. How do you see --?

Vijay, that will be dependent on our sales expectations, the mix, the impact of the different markets and how they will contribute to our overall business levels. As Jim mentioned, we are not seeing a precipitous fall in sales, so we don't anticipate gross margins declining rapidly because sales we don't anticipate declining. So we continue to be focused on operating margins, making money, having positive cash flow, all things we've been successful at. So it's really hard at this juncture to give you guidance on gross margins out beyond the next quarter.

I don't know if you mentioned what the 300 mm and 200 mm split was on your productlines?

We really don't talk specifically about splits, but we can tell you that 300 mm orders and shipments continue to be very strong. As the industry ramped up starting about a year ago at this time on the capital equipment side we saw 200 mm and below capital spending driven products pick up very rapidly. That capacity hasn't filled and that's where we are seeing declines in our capital spending business. On the wafer processing side, fluid handling in general is tied to OEM business. So 300 mm continues to be very, very good for us, but 200 mm and below has been off a bit the last couple quarters.

And just to recap, looking out into the first quarter you're seeing capacity utilization (indiscernible) drop 10 percent and wafer starts mid single digits 1 to 5 (indiscernible), is that what you said?

Yes, we basically see our material drive productlines, which are made up of wafer shippers, test assembly packaging products and our ultra pure chemical containers, drop a couple of percentage points first quarter over last quarter and we anticipate a mid single digit percentage decline again in the February quarter.

Do you have (indiscernible) quarter out for that? Right now it's just one quarter outlook?

Our visibility on that is just so short given the fact that we continue to churn most of our business over within 1 to 2 weeks and so we don't have the backlog that would give us the kind of visibility that would suggest we can make projections out beyond next quarter.

And do you have any initiatives on trying to improve margins on your newer segments like life sciences and fuel cells considering that they seem to pick up as a percentage of your revenues as the semi side declines?

Of course we have that going on all the time. There's not a day that doesn't go by that we don't think about things. But we also have to recognize that those new markets are all about investing in the future and that means that we're not doing it so much for today and the results that it can drive today but rather what tomorrow brings. But we prudently look at those investments and those markets to ensure that the end game will be successful for us.

Maybe I'll just amply that. We are going continuously focused on this and have initiatives that are working on improving margins in these new markets constantly while we're growing them and I'm personally encouraged by the success and the trend lines that we're experiencing. So I think that's going to be a continued road for improvement and we can do it.

Okay, great. Thank you.

Stuart Muter, RBC Capital Markets.

Good morning. A question for, Jim. You mentioned you were recently in Asia and you were talking to some of the wafer growers -- wondering if you could share with us what their outlook is going into next year.

The sense that I got is they're somewhat cautious. I think that the latter part of -- that would be the latter part of our year -- beginning the first/second quarter of '05 I think they expect to see things improve slowly. Clearly their third and fourth quarter of fiscal '04 seem to be somewhat off for them and slowing as a result of some of the activities in the fabs and perhaps some inventory adjustment. But I don't think that they see this right now at least as being long-term.

Okay, thanks. That's helpful.

Brett Hodess, Merrill Lynch.

A couple of questions. Jim, on the wafer shipper side, if you look at the holiday period that you're coming into now, you could miss 5 or 6 or 7 days at some of the different customers between all the different holidays and what not and fab shutdowns. And so if you look at your unit driven business -- a mid single digit drop sequentially is only in line with about how many days you might have a shorter quarter. So is that correct that ex holiday shutdowns it sounds like the unit driven businesses probably wouldn't be down, might be flat or even slightly up?

Actually, Brett, you said that better than I could have. That's I think right on. We've got two major holidays, Christmas in North America and Europe and the lunar new year in Asia. And depending on where we're at in the cycle sometimes companies take advantage of that and I don't have a clear picture as to what is exactly happening during that time frame, but I think what you've just described is exactly some of the things that we're thinking about.

So given that, that would mean that if you looked at it like a daily or weekly run rate you're a little better than last quarter. Would you think that that's more a product of your either share gains or some of your non semi businesses picking up more? As you mentioned, data storage has picked up a lot in the last few weeks and, of course, we've seen a lot of good comments from the data storage companies recently on demand?

Yes, data storage is remaining quite strong through this period of time. It's uninteresting; I think the same thing happened a couple years ago when we went through a similar dip. And so that's encouraging for us and it's part of what we talked about with the breadth of our product offering and the different markets that we serve, we don't get banged around quite as hard as some of the pure play particular CapEx guys.

The other thing that helps us is that while 200 mm isn't at the same robust levels, every once in a while you get a nice pop from someone that's doing a conversion and recently this past quarter we got a 200 mm conversion and we actually got it at much higher prices than our competitors. So I think the value is still there for Entegris and that's kind of the message I think we've been sharing for some time now.

The other question I had -- relative to the letter of intent for a license with the Japanese competitor for the 300 mm products, will we see a license fee and a royalty stream from that over time?

Yes, we will. We don't expect it to be a real needle mover, but I think the significant part of that announcement, Brett, is the Japanese are recognizing that we do have dependable and significant IP and are wanting to make right with us on it and we think that this is a real recognition of our technology and the position that we have. And we're going to continue to defend our IP technology.

That's great. And I had one last question. Relative to the agreement you had for the development of the Reticle Pod, I think you mentioned that you'll be getting some funding. Will that be an offset to R&D or will that just be in addition to?

It will be an offset because we think that this relationship is -- it's not only about advancing the technology and what we and the customer are looking to do at this next generation product, but the real pay day I think for us is the revenue that will come off of that product in the future and the real pay day for our customer is the technology breakthrough that it affords them in taking them to their next level of product.

So we think that it's a great position to be in with this customer and I think it's truly recognizing us as that materials integrity management company. I don't think our competitors or anyone else that's really doing something similar to this has a relationship or is respected by our customers to the point that they would have offered the same thing with them. So we're just real pleased with this development.

So when you're done developing that, Jim, are you going to be able to offer it to other customers as well besides the one you're working with?

Yes, we will.

Great, thank you.

Jesse Pichel, Piper Jaffray.

Do you consider your assembly and test products unit driven or CapEx driven?

It's absolutely unit driven.

And was the 10 percent gain from existing customers or share gains? The 10 percent growth you saw in the quarter.

It's actually a combination of the two and, of course, we've recently introduced tape and reel and we're starting to get some traction in that area as well.

And what would your outlook be for the segment in Q2?

We anticipate that, depending on the adoption of the technology, we would expect that particular product offering to be fairly flattish in Q2.

Okay. And you mentioned some cost-cutting actions regarding temporary workers. Were they mostly in cogs or SG&A and what else contributed to the SG&A decline of about 2 million sequentially?

All the temporary workforce, Jesse, that we have been taking a hard look at. Certainly in the last several weeks and months have been in the cogs line. In terms of SG&A, the decline was related really to looking at the SemiCon West expenses that we do not have in our first quarter which impact our fourth quarter and lower bonus and donation accruals. And in general we have a philosophy of asking our management team and our people there to flex their budgets depending on the sales levels and how the market conditions are impacting us. And so I think we're seeing success there not only on the SG&A line but also on the ER&D line.

And how many more temporary workers do you have and could you give us a sense of fixed versus variable costs in your model?

In terms of temporaries our peak was about 20 percent or more of our work force and that has been adjusted now by over 100 people. So there are still quite a number of temporaries left and we'll be adjusting based on the market conditions and what we need to do. We do have certain regions of the world that are very busy, so -- and certain manufacturing centers of excellence. So we have to take a look at it really on a facility by facility basis.

In terms of our fixed/variable within our model, I would estimate that our fixed costs at the present time are in the $40 million a quarter kind of run rate.

Okay. Thank you very much.

Tim Summers, Stanford Financial.

Good morning. With the weakness in the U.S. dollar and domestic inflation picking up a bit are you seeing any cost issues on your raw materials?

Yes, Jim, we do have a contract in place with many of our raw material suppliers, but that has had an impact on certain more commodity type resins. We're not prepared to disclose what kind of impact that's had, but we have had an impact on our raw material cost and our cost of goods sold.

And just as a follow-up, could you compare the new Metron distribution agreement with the old one and particularly with regard to any infrastructure expenses that may be required by Entegris in 2005? Thanks.

We are continuing to work through some of those very issues that you've asked. The basis for the contract is to utilize Metron and Applied's strengths and further increase our position in the fabs and that it also affords us the opportunity to take the OEM business on a direct basis. And that's really what I was saying in the script that we went through a few minutes ago.

With that it means that we'll have some of our own people now calling on some of those direct OEMs. And I expect a slight increase in headcount as a result of that, but it should offset the margin difference that we would have gotten on a distributor discount versus selling direct.

Okay, thank you.

Avinash Kant, Adams, Harkness.

A question about gross margins. I'm trying to understand, I believe the gross margins you have on the material side of the business are slightly better than the CapEx side of the business. As going forward do you see more stabilization in that unit driven business? Don't you think that that should support the decline in revenues overall? (multiple speakers) in gross margins?

Avinash, it's really probably not that simplistic an answer. We really do have a mix of gross margins depending on the markets and even within those markets as we discussed. So generally, yes, we have really good gross margins on our unit driven consumable type products, but we also have strong gross margins on certain of our capital spending driven products.

So to give you an answer that really indicates that we're dependent on the market and dependent on the products, that's a little bit hard to do. The under absorption issue is something that does impact us and that really is across any markets in the capital spending driven product impacts us probably more directly -- more impactfully because we do have significant fixed cost and infrastructure to make those highly complicated and high assembly type products.

By any chance did you give the mix of the unit driven and the CapEx driven side in the semiconductor business this quarter?

No, that really varies quite a bit depending on the market conditions. Generally it depends on where we're at in the capital spending cycle. It can be in a range of 50-50, but it really depends on where we're at in the cycle.

But in the current quarter would you say that materials were a higher percentage?

No, I wouldn't say that.

Now quickly on Japan, you did talk about a relative strength there. Do you see that going forward in the next quarter also?

Yes, I think we feel good about not only the current position we have with our customers there. We've made several changes in Japan over the last couple or 3 years including our own direct sales force there and the relationships that we've forged with another significant Japanese company to help us further our sales efforts there. And so from a position perspective we feel better about Japan than we ever have and it's also the home of 300 mm wafers and where most of the wafers are produced. And we're looking to participate more in that with our new FOSB offering.

Just a final question. On the absolute basis do you still see Japan as being a decline in the next quarter?

I think Japan will probably be somewhere around flat. There might be a little bit of a decline, but that's so dependent on just one or two POPs and it changes. Right now if we had to project where it's going to be we'd say flat but it could tip either way a little bit.

Thank you.

Theodore O’Neill.

I don't know how current you are with what's happening in Taiwan, but we are hearing of an uptick in wafer starts in the last 7 to 10 days. Would you like to comment on anything you're seeing out of Taiwan?

I think I must have made a difference when I was there. It's been 2.5 weeks since I was there so that's great news. It's a little bit what I suggested earlier that their third and fourth quarters seem to the more in question than what they might come into the new year, and so that's wonderful news. No, I hadn't heard it, but we'll check more on that.

Great. Thank you.

We have no further questions at this time. Ms. Erickson, please go ahead.

Thank you.

This is Jim and let me just close by thanking you all for taking time to join us today. I would like to close by reiterating that we see great opportunities to further strengthen our position and to expand our reach into our core markets and leverage our materials integrity management capabilities across the multiple markets. And as always, please call Heide Erickson if you'd like additional information related to this quarter's financial performance. And I again thank you for your interest in Entegris and I'd like to wish you all a blessed holiday season and a successful '05. Take care.

That concludes today's conference. Thank you so much for your participation and you may now disconnect your lines.