Entegris Inc (ENTG) 2006 Q1 法說會逐字稿

Thank you for standing by. We are about to begin.

Good day, everyone, and welcome to Entegris' 1st Quarter 2006 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 the director of investor relations, Mr. Steve Cantor. Please go ahead, sir.

Thank you, Stephanie – and good morning, everyone.

Earlier today we released Entegris' financial results for the quarter ended April 1st 2006, which is the 1st quarter of fiscal 2006 following the Company’s recent change in fiscal year-end from August to December.

Please keep in mind that unless otherwise noted, all references to sequential results refer to the 3 months ended November 26th 2005 – which is the last quarter we publicly announced. You can access a copy of the press release on our website, www.Entegris.com.

Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and our actual results may differ materially. These risks and uncertainties are outlined in detail in this morning’s press release, the Entegris 2005 10K report, as well as in other reports and filings with the SEC. We encourage you to carefully read these reports and filings.

On this call, we will also refer to non-GAAP financial measures, such as defined by the SEC and Regulation G. You can find a reconciliation of non-GAAP financial measures to the comparable reported results of operations under GAAP in this morning’s press release, as well as on our website. In addition, all numbers discussed on this call – unless specifically noted – reflect results from continuing operations.

On the call today are Gideon Argov, President and CEO -- John Villas, Chief Financial Officer – Jean-Marc Pandraud, Chief Operating Officer – and Peter Walcott, General Counsel.

With that, Gideon Argov will now begin the call with some prepared remarks.

Thank you, Steve. I’ll make some comments about the March quarter, and then I’ll turn the call over to John for 1st-quarter financial highlights and our outlook for the 2nd quarter.

Our March quarter was very successful, across the board. Sales from continuing operations of $158 million grew 7% from the 3 months ended November 26th 2005 – and exceeded the high end of our guidance that we gave you in early January. The sales levels reflected strong order growth throughout the quarter.

Our earnings also exceeded our guidance. On a GAAP basis, we reported earnings-per-share of $0.08. On a non-GAAP basis, EPS was $0.13, excluding merger-related expenses and other restructuring charges and income from discontinued operations.

Our operating margin was 16% of sales – which ranks amongst the best of our peers in the industry. Industry trends were favorable through the quarter. Fab capacity additions and new tool production contributed to strong demand for our capital-driven products – including our wafer-carriers and transport products, gas microcontamination control products, and fluid-handling components in the systems.

Our sales of unit-driven products, such as our liquid filters, also tracked positively during the quarter, as fab utilization rates at our IBM and foundry customers remained high -- especially the advanced nodes where we have historically done particularly well.

Specifically, we experienced strong growth in sales of gas contamination-control products, including gas filters and purifier components and systems. Many of these products are used throughout the fab infrastructure, as well as in gas-based tools – such as deposition and edge tools.

Our purification systems for controlling airborne molecular contamination also did well, as these systems find increasing applications in advanced photolithography tools.

Sales of our liquid systems – including our fluid-handling products – were also strong, particularly for our valves and fittings and dispense pumps, as a result of fab build-outs and higher OEM demand.

Sales of wafer-handling products reflected strength in Asia – particularly for FOUP and reticle pods. We received our first major order for the Spectra FOUP, which continues to gain traction in the market. Wafer shippers remain strong for 200 mm wafer sizes, and qualifications of our 300 mm FOSB shipper product are proceeding at key customers.

Sales of liquid filters grew modestly – reflecting the continued high-fab utilization rates and product levels that drive demand for these products – as well as additions of new fab capacity – particularly for flash memory.

We see considerable opportunities ahead for these products – given the investment underway in 45-nanometer technology. The 65-nanometer and 45-nanometer nodes – which require even greater levels of purity, combined with more cleaning steps required for higher-end devices, play into our strengths.

Finally, finished electronic products rebounded – reflecting strong orders for film, frame-shippers, ship trays and process carriers – as well as higher demand for our 95-mm disk drive shippers.

Looking back to the beginning of January, we had 3 main operational priorities at the outset of the quarter, and we achieved all 3 of them. First, we kept the merger integration process on track, while meeting ramping demand. Second, we accelerated the development and market acceptance of new products – including projects that capitalize on Entegris-Mykrolis technology synergies. And third, [inaudible] strategies for increasing our supply-chain efficiency, and lowering our manufacturing costs -- achieving these 3 objective positions us well, for the balance of the year.

With the conversion in February of our ERP computer systems, including our financial systems –to a single platform, the integration process is on track and has moved into the final stages of completion. This conversion was a significant task, and it was made more challenging by ramping customer demand. We're pleased with how the conversion went, and grateful to the hundreds of dedicated employees around the world who made it successful.

With regard to our second goal – we're making significant progress with what we call our "Platinum" projects. Projects intended to realize the technology and customer synergies made possible by the merger. These projects are expected to result in a number of key new products, as we move through the end of this year and into 2007.

One of these projects where we're seeing earlier results is our liquid-lens, liquid-immersion application. We shipped several of these systems this quarter, but the significance is 2-fold. First, it broadens our product line in the critical area of lithography – which represents about 20% or 120 million of our annual sales, today – and is one of our fastest-growing market opportunities. Secondly, the liquid lens demonstrates our growing capability to design and build subsystems for critical applications, and to integrate those technologies resulting from the merger.

I'd like to highlight one other product – and that’s our new, intelligent mini dispense pump, which we launched at SEMICON Japan. This pump is used for dispensing photo-resists and other coatings, in leading track tools. We were able to significantly cost-reduce and reduce the footprint of this product, while retaining its high-performance characteristics. Customers have made it clear to us that they continue to need the high-performance and precision of our proprietary 2-stage technology – particularly as they move to more-advanced technology nodes.

Our third priority was to continue to increase our supply-chain efficiency, and lower our manufacturing costs. The closure of our German manufacturing facility, which we announced in December – and our recent announcement of the expansion of our facility in Kulim Malaysia are both important steps to bring our supply-chain closer to our customers, and reduce our manufacturing costs. We expect to have the new line of the Kulim facility up and running in the early fall, and we have ceased manufacturing operations in Germany.

In summary, we are pleased with this quarter’s results. Our merger-integration process is now largely behind us. We're seeing significant benefits form the merger, in terms of both cost synergies, as well as critical technology and customer synergies.

Looking ahead, we're more-positive than ever about our long-term growth prospects. The business which we're in, which is controlling micro- and molecular-contamination in our customers' processes, is becoming more critical to achieving target yields. Particularly, as the industry moves from 65- through 45-nanometers, and beyond. We have the products, the technology, the global scale and scope, as well as the talent to address a market that is actually moving towards us and that is increasingly dependent on our technology, products and service solutions.

With that, I’ll turn the call over to John.

Thank you, Gideon.

As I go through the financial highlights in my prepared comments, I will refer to supplemental information that we have provided this quarter. Also, because of the change in our fiscal year-end – August to December – the names for our quarters may be confusing. Any reference to the 1st quarter of 2006 refers to the quarter-just-ended.

Sales from continuing operations for the March quarter were $157.7 million. This was 7% higher than the November quarter sales of $146.8 million, and 7% higher than the comparable 3-month period ended December, on a pro forma basis.

On a geographic basis, our Q1 sales were as follows. Asia – 33%. Japan – 21%. North America – 30%. And Europe, 16% of total sales. By product type, sales of unit-driven products represented 59% of our sales, and capital-driven products represented 41% of our total sales. This ratio compares to a 63/37 unit-driven versus capital-driven split, for the 3 months ended in December – reflecting the strong demand associated with capital infrastructure additions the industry experienced over the March quarter. These ratios are a bit different than what we had discussed in previous quarters.

We have reviewed the definitions of what is, "Unit-driven" versus what is "Capital-driven," and made some minor adjustments for consistency. Unit-driven products, as we now define them, include products that have average lives of less-than 18 months, or that need to be replaced based on usage levels. These include our liquid filters, wafer-shippers and ship trays, as well as disk-shippers.

Our GAAP net income was $11.4 million, or $0.08 per diluted share. These results included $1.6 million in income net of taxes, or $0.01 per diluted share from discontinued operations. We completed the sale of these discontinued operations in February.

Turning to our continuing operations on a non-GAAP basis, which is adjusted for merger-related and other charges and expenses, net-operating earnings from continuing operations or $18.6 million or $0.13 per diluted share. I want to point out that reconciliation information between our GAAP and non-GAAP results is disclosed in this morning’s press release, and can be accessed on our website.

The quarter’s results included restructuring charges of $3.2 million, amortization expense of $3.5 million, integration expense of $4.5 million, and integration-related stock-based compensation expense of $2 million. I’ll reference each of these items as I discuss the rest of the income statement for the quarter.

Gross margin for the 1st quarter of $73 million or 46.3% of sales, reflected $2.4 million of merger-integration expenses, as well as restructuring costs for manufacturing closures. Excluding these items, gross margin in the 1st quarter was 47.8%, as raw material prices were relatively stable.

SG&A of $52.1 million, and ER&D of $9.2 million, included $10.7 million of merger-related expenses and other restructuring charges. Excluding these expenses, total operating expenses were $50.5 million, or 32.1% of sales. This represents a decline as a percentage of sales from the November quarter on a comparable basis. Our results reflected approximately half of the $20 million of annualized integration cost-savings that we anticipate. We expect to see more of these savings as we proceed through the June quarter.

As I indicated, total integration expense in Q1 was $4.5 million, relating primarily to severance-and-retention costs, as well as consulting fees. To date, we have incurred approximately $29 million in integration-related expenses.

Total stock-based compensation in Q1 amounted to $4.3 million, which included $2 million related specifically to restricted stock grants, made to retain and incentivize key executives in connection with the integration process. We expect these integration-related amounts to decline through 2006, as these grants are amortized.

Adjusted for merger-related and other charges and expenses, operating income from continuing operations was $24.9 million, or 15.8% of sales. EBITDA from continuing operations for the 1st quarter was $32 million. We reported income tax of $4.8 million in the quarter, or a 33% tax rate, which we expect will be the normalized income tax rate for fiscal 2006.

Turning to the balance sheet. We have a very solid financial position. Cash, cash-equivalents and short-term investments were $283 million. Ending inventories of $86 million increased $16 million from December 31st 2005, primarily as a result of higher customer demand, increases at various locations worldwide related to a change in our selling model, and inventory builds to support manufacturing consolidations.

Accounts receivable increased $11.7 million, as Days Sales Outstanding were 71 days versus 69 days at the beginning of the quarter. The increase is primarily due to higher orders and sales levels.

Working capital increased by $30 million in the quarter, which resulted in net cash used from operations of approximately $2 million. Total depreciation and amortization was approximately $11 million, and capital expenditures for the quarter were about $7 million. Total capital spending for the year is anticipated to be approximately $40 million, which includes investments associated with the expansion of the Kulim facility.

Turning to our outlook for the June quarter, we expect strong order rates through the end of April to contribute to 2nd quarter sales, in the range of $164-172 million – a sequential increase of 4-9%. We expect GAAP net income per diluted share to range from $0.09 to 0.12. Adjusted for approximately $11 million of merger-related charges and expenses, we expect non-GAAP net operating earnings per diluted share to range from $0.14 to 0.17.

Thank you. And with that, we will now take your questions.

Thank you. If you'd like to ask a question at this time, it is *1 on your touchtone telephone. We ask if you are using a speakerphone, please make sure your mute function is turned off, to allow your signal to reach our equipment. Once again, that is *1 on your touchtone telephone.

We’ll pause just a moment to assemble the queue. And our first question will come from Jim Covello, of Goldman Sachs.

Good morning. This is Amanda Hindlian, and on behalf of Jim Covello, I have a few questions.

My first question is, what should we be thinking about in terms of gross margins in the 2nd quarter?

Amanda, we said that our EPS would be -- from continuing operations – in the range of $0.14 to 0.17. And with the increase in our sales levels, we would expect our gross margins to improve in the 2nd quarter. By what? It will be somewhere over 48%.

Somewhere over 48%?

Yes.

Thank you. Next question. I just want to be sure that the non-GAAP earnings-per-share guidance – the $0.14 to 0.17 in Q2 – that includes non-merger-related ESO expenses?

Yes. That is part of our expense that is in there. So we're backing out only the merger-related stock grants, to come up with that $0.14 to 0.17.

And what’s the non-merger-related stock expense?

For the quarter we just ended, it was 4.3 million in total. $2 million was merger-related. So there was about 2.3 million of non-merger-related stock expense. So that will be up just slightly in the 2nd quarter, due to some grants that were made in the January timeframe. So it’ll be pretty comparable, but up just a bit.

Okay. That’s helpful. And then last question. Which products were taken out of the unit-driven sales classification?

Amanda, this is Jean-Marc Pandraud. The unit-driven products are generally products that are actually considered to be consumable – short lifetime – below 18 months. Included into those products are the small orders renewing the 200 mm. For example, shippers would be included into that. Because they are not associated with a new capital investment. And they are generally ordered in small quantities.

As well, when you have small orders of refinishment… for example, for 300 mm FOUPs, some of them could be included into the unit-driven. Because they are not directly related to new capital investments.

Okay. That’s very helpful. Thank you so much.

Our next question will come from Brett Hodess of Merrill Lynch.

I guess 2 questions. First, John, you commented that the strong order pattern through April gives the confidence for the strong order outlook in the June quarter. And I'm wondering if you could characterize if it’s still strong across-the-board, both in capital spending and consumables, or if one area is stronger than the other.

And in addition, the second part of that is – can you give us some color on how mix affects margin, going forward? Are you seeing mix-dependent changes that might occur?

Yes. This is Jean-Marc. Yes. The growth [pair] of the various – let’s say – business units or product family, if you want – will be between a couple of percent to 10% -- depending on wherever we are referring to. Unit-driven product versus various equipment.

So if you blend those numbers with not a major shift in mix from one quarter to the other, you end up with a blended growth that would be between 4 and 9% for the low end of the guidance to the high end of the guidance. In fact, every business unit is swinging between these 2 numbers. Couple of percent to double-digit percent.

Brett, if you look at the mix issue in terms of our gross margin, we did see very good fall-through to the gross margin line from our increased sales over the November quarter. And our gross margins are in a pretty tight range. So we had just very good performance there, to our kudos to our global-supply chain and meeting the customer demand. So, yes – mix did not have a significant impact, and we expect a pretty similar mix for the June quarter.

So, and given the mix is similar for the June quarter, I guess the comment was… If you did see a shift in mix towards the capital spending side on the short-term because of the strength in capital spending, that doesn't really change the margin profile?

It would not. This is Gideon. It would not change the profile dramatically, because our mix is typically 60/40, with 40 being sort of capital-related, and 60 being recurring revenue or consumable products. And it can vary by 1 or 2%. But typically, not more than that.

Got it. Very good. Thank you!

Our next question comes from Avainash Kant of Canaccord Adams.

Good morning. Quick question about cost-savings after this merger, of course. You have periodically talked about roughly $20 million in annual cost-savings. At this point generally you are running, it looks like things are going a bit ahead of schedule. Do you think we’ll be able to save a little bit more than the 20 million that you had talked about earlier?

Avainash, we had said that we will commit to $20 million of cost-savings. We feel as though we are really right on target. About half of the cost-savings have been realized. We’ll continue to see more in the June quarter, and then we should be really fully integrated and seeing the full effects of the cost-savings in our September results.

So we have announced other cost-saving programs that were above-and-beyond our 20 million from integration – including the closure of our facility in Bad Rappenau. So we're very pleased with how we're proceeding on the integration, and the synergies that we're realizing.

And coming back I think, on the unit-driven and the capex-driven side of the business. So, given the new classification that you have, you would say that unit – from the historical level – would be roughly 60%, and capex would be 40%? That’s what the historical mix would have been?

Yes. There's not been a significant swing in that mix. That is correct. It’s been about that ratio.

Okay. In terms of thinking about the growth rate for the year, then… We kind of understand the capital-unit cycle seems to be too strong, at this point. On the unit side, what kind of growth do you expect year-over-year? Historically, what has it been, and what would you be expecting it to be?

Just to give you some information about the quarter… We had a growth which was about 2% this quarter for the unit-driven versus the past quarter. And we had a 19% growth quarter-to-quarter for the equipment. For the total year, I guess that our unit-driven will be closer to 8%, and our capital-driven will be in excess of 10%.

And just to add to that, if you look at the growth in millions of square inches of silicon, for the quarter, it was – in fact – 2% over the prior quarter. So the unit-driven revenues are pretty much tracking with that growth rate.

Yes. I think basis in growth in unit-demand seems to be pretty much consistent with historical. I guess you'd say the average would be roughly 7% and the better years would be 9% or so. Is that a reasonable number?

That’s a reasonable number, Avainash. Yes.

Perfect. Thank you so much.

Our next question will come from P: Timothy Arcuri of Citigroup.

Hi. Just a follow-up on that. Jean-Marc, did you just say that the capex-driven business is going to grow 10% year-over-year in '06?

Yes. This is what I believe. You know, it’s a mix of different products. We have liquid systems, which are very much in favor, right now. Because we offer a total solution to many OEMs. American OEMs and Japanese OEMs. It’s also related to the gas-micro-contamination products, which are generally equipment-related. Filters that you put in the subfab or on the gas-line and so on.

It’s a blend of different capital-driven equipment, if you want. And both of them today are growing very nicely in the 1st quarter. I don’t think we’ll have a 20% growth for the year. The reason why I mention the 10%-plus growth for the entire year over last year.

But if you look at your customers and you look at the percentage of shipments year-over-year, we're going to ship upwards of 50% year-over-year this year – maybe even 60% for the OEM tool shipments.

So 10% seems very low as a year-over-year number, relative to the 60% compare that you're seeing from your customers. Am I missing something there?

Tim – you have a point. But the capex-by-company… If you look at the measure of 20 companies, the capex is supposed to grow 3.6% 2006 over 2005. 35-36 billion, if you want, in 2006. So our growth will be in excess of the capex growth for 2006.

Okay. Let me ask a question on the consumables piece. So are you saying that wafer starts… Your outlook for wafer starts is up roughly 8%, this year? Year-over-year?

Yes. It’s about right. Yes. And if you look at the growth for silicon wafer, it’s about 8% for the year. So we are tracking, in fact, the silicon growth.

If I run those 2 numbers, certainly the year-over-year number in capex is definitely low, relative to what your customers are shipping. And the consumables piece – 8% annual wafers start growth implies declines in wafer starts during the back half of the year. So is that implicitly saying that revenue is going to kind of flat-line at this level and maybe decline during the back half? Or am I not reading that right?

No, we are… Tim, this is Gideon. We are not saying that. We're not saying that. In fact, the unit-driven product growth is based on millions of square inches of silicon, and not wafer starts. Let me be very clear about that. That’s different, obviously. Because we ship more filters for larger wafers than we do for smaller wafers. So that’s why that’s critical to realize.

We're not saying that’s going to happen. In fact, we don’t see that happening, at this point. I'm just reminding you we are a high-turns business. We have great visibility for the quarter that we're in, but we turn our orders very rapidly to meet our customers' demands. So to make specific commentary on the back half of the year, it’s very difficult for us to be real precise.

Understood, John. And then I guess just one last one for me. John, can you give us some idea of what incremental gross margins should look like? So as we kind of model this thing out, maybe in '07 and even '08, and as we grow maybe near the $200 million level in terms of revenue… What sort of incremental drop-through should we be using in terms of gross margin?

Tim, it’ll be somewhat dependent on what the demand mix is like, and if we have to… We are expanding in Malaysia, as we've talked about. So that’s certainly good news, because we want to be expanding. But I would say on the gross margin line, we just saw the November quarter around 60%. $0.60 of every sales dollar falls through to the gross margin line, in our continuing operations. And I think a range a little below that, if everything’s really humming a little above that, it’s relatively safe.

Great. So at the $200 million range, you could potentially have gross margin with a 5 in front of it?

If we really saw that kind of a growth rate, it’s possible. Yes.

Thanks.

Our next question comes from Chris Blansett of JP Morgan.

Good morning, gentlemen. Thanks for taking my questions. Two quick ones. Basically, do you guys have an estimate of your kind of recurring revenue stream based off your new lithography product?

We do. We're not going to break that out. But you just touched on an important point. Because every one of those systems consists of a multiple of filters, purifiers and other recurring products – which have to be replaced periodically, over time.

The recurring portion of the revenue associated with our lithography business should triple over the next 4-5 years – based on what is occurring in the photolithography area.

As you move to 193-nanometer technology and you need to have immersion-lithography systems – and frankly, as you move beyond that into extreme ultraviolet – potentially, the need for these kinds of products is going to grow dramatically. We're in a unique position to satisfy that.

The TAM in that part of our business could triple in the next 4-5 years. And from a systems standpoint, we are uniquely positioned to supply systems that basically address that. And yes, a large portion of each system is recurring.

Would it be fair to say that gross margins are better than corporate average?

We'd say they probably are a smidgen better. Yes.

And then in general, during this recent quarter and maybe kind of entering into 2nd quarter, do you think any of your semiconductor-based customers might be delaying some maintenance activities just due to very-high utilization rates and demand from their own end-customers?

No. I don’t think so. We have seen – depending on the region – those activities are happening on a quarterly basis. You want to run your equipment safely. And we see these change out every quarter, in every geography. So people are not taking risks, because theoretically, you are buying an insurance when you buy your filter. So they don’t want to take risks of just delaying maintenance.

Yes. We just got back from a week in Asia, sitting across the table from fab managers and department managers at fabs, and hearing directly from them about their challenges. I would say there are dual challenges. I would say they're dual challenges. Most of the outfits we visited with are setting up new fabs this year. As you know, there are probably about a dozen 3-mm fabs going up, as we speak. Probably about half a dozen 200 mms. You know where they are.

But they're also running – particularly in the case of some of the foundries, at very high utilization rates. And they need to have periodic maintenance. Just to keep those yields where they need to be. So a lot of emphasis on that.

Kind of just touching on that, when you talk about the future and the demands of moving into 65-nanometer versus 90-nanometer, what kind of feedback do your customers give you on their requirements? And I guess if you kind of normalize the revenue opportunity for a 65-fab versus a 90, do you guys have an estimate?

Well, we have some pretty good internal estimates. What I’ll tell you is this. The need for contamination control, down to the molecular level, rises significantly as you go into 65 and down to 45-nanometers. Some of the places that we visited in Asia are making devices that have – for example – gate arrays – that are using 45-nanometer technology, today. The requirement at those line widths, for purity of fluids – of the air, for example, in and around the photolithography bay and the track – and the requirements for purity of CMP – slurries, for example, which are used in much-heavier quantities with those kinds of devices are very significant. And they actually open up new opportunities for us that did not exist in, I would say, older technologies. Now, we saw that across the board.

And then one quick accounting. What was your headcount at the end of the quarter?

Approximately 2,700 employees.

All right. Thank you very much.

And next, we’ll go to the site of Hari Chandra of Deutschebank.

Good morning. Can you elaborate on the platinum project, in terms of the overall opportunity? And also, can you size up individually the possible CMP, and how much lithography for the next couple of years?

Well, what we can tell you is, there are 3 processes within the fab. We are concentrating a great deal of what we call our, "Surround the Process," strategy. One of those is Wet, Etch and Clean. That represents, all told, about 30% of our revenue, today.

Second is photolithography, which is about 20% of our revenue, today – more or less. And the third is much smaller – and that’s CMP. It’s about 5% of our revenue, today. But frankly, its going to grow dramatically because of some of the trends that I've talked about.

We are aiming most of our platinum projects at products that are going to helpful to us in surrounding those key processes that consume a great deal of chemicals, that are critical from a customer’s standpoint, and that become more critical as the number of layers and the number and complexity of the devices grows dramatically. That’s an area of great strength for us.

As far as the actual platinum projects… I don’t think we want to describe them in a lot of detail on this call. But they include component-level as well as system-level projects. Combining our filter applications, combining our micro-environment technology – which comes from the old Entegris. And frankly, combining our fluid-handling technology, which is where many of these systems are engineered. It’s in what we call our fluid-systems or liquid-systems group, where they're deployed.

So significant opportunities, I'd say, in the next year. Jean-Marc?

Yes. You are right, Gideon. I realize that the combination of controlling what’s going on in the mini-environment with our purification technology is a great position to be in. Because today, those wafers traveling in the fab outside with that are subject to process conditions, which are difficult to control. We have many, many applications today in [inaudible], but also in the transportation of those wafers within the fab – which do require to monitor the contamination. Whatever it is. Particles, chemicals, or even electrical contamination on a kind of routine basis.

Having purification to the transportation of those wafers is a great advantage for our customers to deal with us.

[inaudible] in terms of control, but [inaudible] for the sales. Where should we see that, going into the next year, approximately?

I'm not sure I understood your question. Sorry.

Gideon, [inaudible] lithography and CMP are the areas of focus for the platinum projects? Currently, [inaudible] of about approximately 55%? Where should we see that going, into the next couple of years?

I believe lithography, for sure, is an area of growth. It’s only 20% of our total business today. But as you know, in the reticle area, where you have between 32 and the reticle – you have a kind of mini-environment to care about with high-energy involved, and also a mini-volatized compound. And age issues, and so on.

Those issues are praise, even, to the industry. Gideon and myself – we are traveling in China and Taiwan. Over the last couple of weels, we heard that in many, many places. We have to be able to solve those applications, because at 45-nanometer, you cannot afford to have too much time between cleaning those masks, purging them and so on. So you are affecting yield. You are affecting output. So lithography would be certainly a real huge growth.

Wet, etch, and clean for the same reason. We have a lot of opportunity in cleaning, etching and resist-stripping tools. Again, dealing with particles, with metals, with organics. And again, everything is driven at improving yield. So these are just 2 examples.

CMP is small for us, today. But great opportunity, as well. I want to address these areas. But these 3 pillars will really drive our growth over the next couple of years.

Moving on to the competitive situation, can you elaborate a little bit on how you position, and is that [inaudible] to ATMI fab product? And also, can you just touch upon that litigation issue, as it relates to Pall Corporation?

Okay. I will let the litigation issue to peter Walcott. But for what it is – a relationship we have with a key OEM… And you mentioned TKL, which has been a long-time customer for more than 10 years. Several generations of products have been successfully tested and adopted by [TKL and also by the end-users of different fabs.

Today, we have the 4th generation of product embedded onto their tracks, and we are still keeping our market share there. We are also working with every kind of tool manufacturer in the same kind of application. So the position is very good, and ATMI certainly has some kind of product offering, today. But it doesn’t impact us, at this time.

On the litigation side, maybe Peter – you want to add a couple of points.

Well, we've consistently taken the position we will aggressively defend our intellectual property. We've had a new patent issue that covers our dispense-filter modules and the manifolds, and we have initiated litigation to defend those against Pall. I expect this litigation will proceed for some time, because we are determined to protect our intellectual property.

Thank you.

Our next question will come from Stuart Mutter of RBC Capital Markets.

Yes. Thanks for taking my question. Question for John. I think in the prepared remarks, you mentioned raw material prices have been relatively stable. Could you talk a little bit about the strategies you're employing there? And in talking to your raw materials suppliers, if oil stays at around $70 a barrel, longer-term, will that impact your gross margins?

Yes, Stuart. Our supply team has worked very well to try to mitigate any increases that we've seen as a result of oil price increases. They're working very hard to find us sources of supply that can help us get to our gross margin performance. So really, we're seeing relatively stable pricing, right now, across the board. That doesn’t mean everything is up – everything isn’t down… it’s pretty much a mix of different prices from our different suppliers.

At the present time, we're feeling comfortable with where our raw material prices are. But there are also things that can come up in the future as they did in past years – like hurricane season and so forth that can throw things into quite a state of disarray.

So for the near-term, we're feeling good. And things feel quite stable.

Okay. That’s helpful. And a quick accounting question. Interest and other income ticked up a little bit here. Do you expect it to be about the same level going forward?

Yes. Our interest income obviously is up as a result of the increased interest rates and our very strong cash position. Other income – we had some items that flowed through there. I would not necessarily expect that to be quite at that same level, in the next quarter. But interest income, we should see certainly at that level – and perhaps a little bit more.

Great. Thank you.

Our next question comes from Ming Yang of Piper Jaffray.

I'm here for Jesse Pichel. Could you give us some color on your chip product markets? You talked about nan-flash earlier? And maybe some other products, as well?

What was the question again, Ming?

I guess the color on the product market for the chips. Flash versus memory or…?

Yes. This is true that nan-flash are doing very well, right now. And we are benefiting from this trend. However, from a process-down point, we are still using similar processors like we use in the traditional DRAM world. So for us, it’s not a shift in terms of product offerings. We are just benefiting from these high-demand in nan-flash, right now.

I would add, though, that we're fairly agnostic between nan-flash and rotating storage devices. Because as you know, there's new life in that business, as well. Because of vertical storage trends that are quite interesting. And we play in that market, as well. We're having a good go of it, and we're seeing good performance in that part of our business, as well. So don’t prefer one over the other.

Then the focus about your growth rate you mentioned. You guys are playing a lot into these leading-edge processing, like immersion lithography. Do you expect growth rates to improve beyond wafer starts in maybe a year or two years?

Oh, definitely yes. I mean we are working with the key players in the industry. And you know there are three of them. We have a good relationship with them. And surely it’s a kind of exponential growth. But it’s still a small piece of our total equipment business there.

So it is important, but it’s important for us to demonstrate our understanding of a technology. It doesn’t necessarily reflect into huge sales, because the number of systems is not in thousands. It’s in tens.

And last question for John. For tax rates – it’s 33% this year. And what do you expect it to be next year, as you move to, say, [KL]?

Yes. Our guidance for this year, we expect to be in the 33% range. It really will be dependent next year in terms of where we are generating profits on a global basis. We certainly have strategies that we're going to be working on to try to bring that down, over time. But to say anything below that, right now, we're just comfortable with 33%.

Okay. Great. Thanks, John.

Thank you.

And our next question comes from Mark Fitzgerald of Banc of America.

Thanks. What’s the capex for this year, and what was the capital spending in the 1st quarter?

Our capital spending, Mark, for the 1st quarter, was about $7 million. And our guidance for the full year is $40 million. That does include an expansion that we announced for our manufacturing operations in Kulim Malaysia.

And can we assume into 2007 that would drop because that Malaysia facility will be up and running?

Yes. I think that’s a good, safe assumption. Obviously, we’ll have to be responsive to the market and the conditions. But yes, I think it’s a good assumption.

Thank you.

Thank you. Once again, if you'd like to ask a question or have a follow-up, it is *1 on your touchtone telephone.

We’ll take a follow-up question from Timothy. Please go ahead.

Hi. Jean-Marc, can you get back on this capex and consumables piece? Can you give us the pro forma, as you're now breaking out the revenue? Can you give us the pro forma for what the consumables were in 2005 and what the capex piece was in 2005?

Yes. In terms of the…

Tim, just as we look for that, I can comment that for the last quarter, we had comment. We said that units were 63% and capex was 37% for the December quarter.

Yes. I can give you a couple of years, because I do understand – as John noted – that we have changed a little bit the rules, and going into the new company. So for 2002, it was 65/35. 65 on the unit-driven – 35 on the capex. For 2003, 65/36 or similar numbers. For 2004, 57/43. And for 2005, 51/39. And currently, 1st quarter of 2006, 59/41.

Okay. Thanks. And that 61/39 in '05 is on a pro forma revenue base of what, again?

It’s on about 592 million.

Great. Okay. Thanks, guys.

Thank you. And at this time, I'd like to turn the call back over to Mr. Gideon Argov for any closing remarks or additional comments. Please go ahead, sir.

Yes. Thank you very much for joining the call. We look forward to updating you in the future.

Ladies and gentlemen, that does conclude our presentation. We do appreciate your participation. At this time, you may disconnect.