Entegris Inc (ENTG) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to Entegris's third quarter 2006 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 Mr. Steve Cantor, Vice President of Corporate Relations. Please go ahead sir.

Good morning. Thank you for joining the call. Earlier today, we released Entegris's financial results for the third quarter ended September 30, 2006. 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, in the Entegris 2005 10-K report, as well as in other reports and filings with the SEC. We encourage you to carefully read those reports and filings. On this call, we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. You can find a reconciliation of non-GAAP financial measures to the comparable reported results of operations under GAAP in today's press release, as well as on our website. In addition, all numbers discussed on this call, unless otherwise noted, are based on results from continuing operations.

On the call today are Gideon Argov, President and CEO, John Villas, CFO, Jean-Marc Pandraud, Chief Operating Officer, and Peter Walcott, General Counsel. Gideon Argov will now begin the call with some prepared remarks.

Thanks, Steve. I'll make some comments about the September quarter and then turn the call over to John for the third quarter financial highlights and our outlook for the fourth quarter. Sales from continuing ops in this quarter were $171 million, and our earnings per share from continuing operations were $0.13 on a GAAP basis, $0.16 on a non-GAAP basis. These results were within our expectations and reflected the flattening of semiconductor production at some IBM as well as foundry customers, and slowing of OEM tool demand that occurred through the quarter. Unit-driven product sales were 61% of total Q3 sales, about the same as the second quarter, reflecting flat levels of wafer starts, or IBM and foundry customers.

Specifically, sales of our liquid filtration products were marked by a continued growth of our flagship line of quick change filters, wet edge, and clean applications. This growth was offset by slightly lower sales of filtration products used in non-semi markets for flat panel and electronic chemicals. Other unit driven products, such as our wafer shippers, increased modestly and were driven by higher sales of 200 millimeter wafer shipper products. Sales of these 200 millimeter products continued to be quite robust, and we continue to execute our plans to penetrate the 300 millimeter wafer shipper market.

Sales of disc shippers for data storage products were also higher, as the market for 95 millimeter devices remained strong. Within the capital-driven products areas, 39% of third quarter sales were capital-driven products. And they declined about $9 million, or 13%, from the record quarter in Q2. Specifically, sales of liquid systems declined 18% from the second quarter, after having grown 36% in Q1 to Q2, based largely on a major retrofit sale of our photochemical dispense pumps.

Our pump business in the third quarter did not quite match the record high in Q2, but remained at historically healthy levels. Our order of trims for these products, which were largely driven by tracked tool sales, are currently positive, and our leadership position in this market remains strong. Other capital-driven products, such as our wafer transport products, or FOUPs, reflected somewhat slower capital spending, particularly at some North American customers. Sales of our gas micro contamination controller products reached an all-time high for the 6th consecutive quarter, reflecting continued market acceptance of our gas purification systems and the ramp of liquid lens systems used on advanced lithography steppers.

Turning to our financial performance in Q3. We achieved an operating margin on an adjusted basis of almost 17%, 16.7%, actually. Excellent control of our operating costs, and the benefits for the full realization of the merger-related cost synergies were partially offset by a lower than expected gross margin of 44.6%. The reasons for the gross margin shortfall, as John will explain in more detail, relate primarily to issues. One is the effect of lower production levels, which is expected. The other relates to certain manufacturing inefficiencies at a North American manufacturing facility.

We are addressing these specific inefficiencies and are pressing ahead with our efforts to further optimize our operations around the world. Back in August, when we announced our second quarter results, and when the integration process was substantially completed, I outlined three key long-term priorities for Entegris. The first priority was to focus our organization on solving our customers' most challenging contamination control issues at the advanced technology nodes. The second priority was to achieve the top line synergies from the merger with a steady stream of new products.

And the third priority was to leverage our operating model by increasing the operating efficiencies around the Company, and around the world. All of these priorities involve long-term, sustained efforts. To be more specific about what we're doing in terms of optimizing our business, one of the critical elements of our manufacturing strategy, as we have said, is to move more production, more infrastructure, in effect, closer to the customer, and to lower cost operations. We've already closed manufacturing facilities in Germany, Japan, and in the U.S. at our Chaska campus, as part of our integration process. And we've transferred manufacturing of certain product lines to other Entegris facilities. We're by no means finished. Next week, we will officially inaugurate our expanded facility in Kulim, Malaysia. Over the next several quarters, we will begin transferring manufacturing of certain additional products to Kulim, as well as expanding our engineering and application support capabilities there. And when the Kulim facility is at full capacity, it will contribute to the achievement of our target earnings model.

I want to report, as well, on the $150 million share repurchase program that, as you know, we announced at the end of August. Two-thirds of this program has already been put into place in the form of a $100 million accelerated stock buyback program. The size and form of this buyback reflects the board's and management's belief in the strength of our operating model and market position and the long-term position of the Company.

This quarter, despite a bump in the road in terms of the operating challenges at one of our facilities, was our second best since the merger. What we do to refine protecting and transporting critical materials is becoming more critical to our customers than before. It allows them to produce more complex devices faster and with fewer defects. We're very excited about the future, particularly as the industry transitions from 90, to 65, to 45 nanometer technology generations. And with that, I will 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. Sales from continuing operations for the September quarter were $171.3 million. This compares to $180.7 million in the June quarter. For the first nine months of 2006, sales were $509.6 million. On a geographic basis, our Q3 sales were as follows, Asia, 33%, Japan, 23%, North America, 28%, and Europe, 16% of total sales. Our GAAP net income from continuing operations was $17.9 million, or $0.13 per diluted share. On a non-GAAP basis, which is adjusted for merger-related and other charges and expenses, net income from continuing operations was $21.9 million, or $0.16 per diluted share. I want to point out that reconciliation information between our GAAP and non-GAAP results is disclosed in today's press release and can be accessed on our website. The quarter's results included merger-related and 5other restructuring charges of $300,000, amortization expense from the merger of $3.5 million, integration expense of $900,000 and integration-related stock based compensation expense of $1.1 million. I'll reference each of these items as I discuss the rest of the income statement for the quarter.

Gross margin for the second quarter was 44.6% of sales. In spite of a favorable product mix and stable raw material prices. The lower than anticipated gross margin primarily reflected manufacturing costs and inefficiencies of approximately $4 million, related to inventory adjustments including scrap and sub-optimal production yields, as well as unabsorbed expenses related to the lower production levels. These inefficiencies were isolated to one of our manufacturing facilities in North America. We are addressing those issues by strengthening our manufacturing processes at this facility. Excluding $5.7 million of merger-related expenses and other restructuring charges, total operating expenses were $47.8 million, or 27.9% of sales.

This represented an improvement as a percentage of sales from the June quarter on a comparable basis, reflecting the impact of integration cost savings and other cost controls. ER&D expenses were $9.8 million for the quarter, and SG&A was $38 million. As I indicated, total integration expense in Q3 was $900,000. Total stock based compensation in Q3 amounted to $3.4 million, which included $1.1 million related specifically to restricted stock grants made to retain and incentivize key executives in connection with the integration process. As expected, these integration-related amounts have continued to decline through 2006, as these grants are amortized.

Adjusted for merger-related and other charges and expenses, non-GAAP net income from continuing operations was $21.9 million, or 12.8% of sales. EBITDA from continuing operations for the second quarter was $35.5 million. We reported income tax on a GAAP basis of $8.5 million in the quarter. Our YTD tax rate was 33%, which we expect will be the effect of income tax rate for fiscal 2006.

Our shares outstanding at the end of the quarter were about 133 million, down from about 140 million shares at the end of the June quarter. This reduction of about 7 million shares reflects the impact of the share repurchase program. We expect to retire an additional 2 to 3 million shares over the next two to three quarters, as the actual stock purchases are completed and adjusted according to the terms of the accelerated share buyback contracts.

Turning to the balance sheet, cash, cash equivalents, and short-term investments of $228.5 million remained at strong levels, even after funding the $100 million for the accelerated stock buyback. Ending inventories of $105 million was up $4 million from the June quarter, reflecting inventory bills to support our manufacturing facility consolidations and to meet customer delivery commitments. Accounts receivable declined $3 million, although day sales outstanding were 70 days, versus 67 days at the beginning of the quarter. We generated $21 million in cash from operations in the quarter. Total depreciation and amortization was approximately $10.4 million, and capital expenditures for the quarter were about $7 million. Total capital spending for the year is expected to be approximately $30 million, inclusive of investments associated with the expansion of the Kulim facility.

Turning to our outlook for the fourth quarter, based on continuing softening in the industry, we expect fourth quarter sales in the range of $155 to $163 million. We expect GAAP net income per diluted share to range from $0.09 to $0.12. Adjusted for approximately $5.4 million in merger-related charges and expenses, we expect non-GAAP net income per diluted share to range from $0.11 to $0.14. And with that, we will now take your questions.

Thank you. [OPERATOR INSTRUCTIONS] We're going to go first to Stuart Muter at RBC Capital Markets. Please go ahead.

Yes, thanks. Good morning. A couple of questions. First, in terms of the gross margins impacting the North American facility, how long is it going to take to solve that problem?

Stuart, this is John. We expect to get those problems and issues rectified during our fourth quarter. As you may recall, as part of our integration process, we reduced our manufacturing footprint by about one-third in totality. At our Chaska campus, this involved closing a large facility and moving the production of those products to another Entegris facility in Chaska. While this was going on, we were meeting ramping demand from our customers, as we saw in our sales levels at the end of last year, and as a result of all this, certain manufacturing lines at this facility were not fully optimized. And we are taking steps, as I mentioned, to strengthen the operating line management team. We've added manufacturing engineers to this process, and we are constantly, and will be reviewing ways to further optimize those process steps. So we are working hard on this during this current quarter ending in December.

So, John, why do you think the gross margins are going to be in Q4?

Obviously, with our guidance, lower sales levels. So, even with those lowered sales levels, we expect to see gross margins in about a similar range to what we just saw in this most current quarter.

Okay, and then just some housekeeping questions. Could you break down the charges in terms of amortization, and your total [inaudible] comp, please?

Yes. The total charges that we talked about, adding back during the quarter, were about $5.8 million. $3.5 million was amortization expense from the merger. We had integration-related stock based compensation expense of $1.1 million, and then about $1.2 million in total of restructuring charges and integration expenses. On top of that, Stuart, we do not add back other stock based compensation expense, but tat total amount was $3.4 million for the quarter, of which we are splitting out $1.1 million as a part of these $5.8 million in charges. Is that helpful?

Yes, that's helpful. And then maybe just one more question for Gideon, in terms of the outlook going forward. Definitely, wafer starts seem soft here, but a lot of tool shipments are kind of bouncing back. So I'm wondering if you could talk about what you're hearing from your customers and what's guiding-- what's driving your cautious guidance here?

Well, we're being obviously realistic about the order rate. I think, as you said, on the wafer start related products, if you will, the consumable products, it is flattish. I'd say generally both in the consumable as well as capital related sides of our business, we're pretty much with in line with what we see as the industry's performance over the past few quarters. And I think also in line with what the industry might do in the next couple quarters. So, yes, more softness on the tool related side, flattish on the consumer related side. And that is really the source of our guidance for next quarter.

Okay, thank you.

We'll go next to Tim Arcuri at Citigroup. Please go ahead.

On that point, Gideon, about the CapEx driven business. If I look at your CapEx driven business, it's about flat in September versus what it was in March. But if I look at your customer shipments, they're up about 20 to 25% during that six-month period. And also, you're kind of guiding to a little bit more cautious on that side, I think, than what most of the OEMs are saying for Q4 as well. So what's going on in that side of the business? Is it that you're losing share, is that there's some ASP compression?

No, actually Tim, that's a good question. We look at our product lines in a great deal of detail. Because, as you know, we have a number, a fairly significant number of products that are quite specific, and we review that in enormous detail. So I can tell you that we don't believe we're losing market share. In fact, our position is quite strong. We saw, in Q2, where we had about $181 million of revenue. It was a very high quarter. We said, during that quarter, on the last call, that we were somewhat surprised by how healthy the business was. Particularly on the CapEx related side of our business. I think it particularly manifested itself in the liquid systems area, where we had a lot of business that, on some cases, was some retrofitted products, some one-time projects. And so, I think a more reasonable facsimile, or a more normalized, if you will, quarter, was what we saw this last quarter, the third quarter, as opposed to the second quarter, which was extremely robust for those reasons. But I don't believe we're losing share, I think our business is strong pretty much across categories, Tim.

Okay. But if I take it over the six month period, so I take it from the March quarter all the way to the September quarter, and I look at OEM shipments up about 20 to 25%, and your business about flat. Is that not a relevant way to examine your business?

I think it's difficult to line up-- I mean, our fluid components business tends to lead the market, Tim. And so it's difficult to line it up with customer shipments. That's how I would answer that question.

Okay. And then, I guess, a question for John. John, can you give us some idea of what percentage of revenue comes out of this manufacturing facility where you've had issues?

I would estimate that probably somewhere in the range of 30% of our production, somewhere in that kind of range, comes out of this Chaska facility.

Okay. And then I guess it's probably difficult to tell what's going to happen into the new year, but do you anticipate that the margins issue will be resolved as you add into the March quarter?

Yes. We are, as I mentioned, Tim, we are taking strong and proactive steps to get this dealt with during this December quarter. So we want to move into 2007 with these issues behind us.

Okay. Thanks.

And we'll go next to Brett Hodess at Merrill Lynch.

Good morning. As we dig into some of the softness issues, Gideon, you talked about the strength in the advanced lithography portion of your line with lens and whatnot. And if we look at the lithography companies and some of the other component players in lithography, it looks like the shipments there are a bit down in the December quarter, or are lower than what was originally thought, and that some of that's been pushed out to the March quarter just due to the long delivery times on the advanced systems. Is that something that you're seeing, is that affecting your outlook for the December quarter?

[Inaudible] From what we have seen in the third quarter, third quarter was about a third of the liquid lens system but we're just about-- we're booked this year. So, the third quarter didn't reflect any kind of softening for the liquid lens business. Going forward, I believe we expect the fourth quarter to be a bit flattish, right now, from a liquid lens standpoint because it's [inaudible] everywhere. So we might have a little softening on the overall capital investment in the fourth quarter, but in the liquid lens scenario, I don't think we'll see anything. It's still a growing piece for us.

So it's just flattening out after the strong third quarter?

Yes.

And then the other question I had was, when you look at the margin problem that's going on in Chaska right now, with the flat, sort of, margins sequentially here, on the drop in volume. John, if you didn't have-- if revenues were flat sequentially, or-- could you size for us a little bit how much of the flat margins sequentially is volume related at this point?

I can tell you that if we wouldn't have had these issues in the third quarter, our gross margins would have been in the range of 46.5 to 47%. So, does that answer your question, Brett?

So 200 to 250 basis points of increase. So you would been off only 100 to 150 basis points on volume related?

On the [inaudible] quarter number?

Yes. Sequentially. Your margins would have been down from 48 to 47 to 46.5, something like that?

Yes, but that's because of the lowered sales, we did see nearly $10 million in lowered sales. So with our usual drop-through of 55 to 60% of gross margin-- to the gross margin line, that-- we would have expected a lower gross margin.

Yes, exactly. That's what I was just trying to figure out, if the drop-through was still the same as normal. X the problem.

That's right.

And we'll go next to Daniel Berenbaum at Susquehanna Financial Group.

Hi, good morning. This is Robert [Stein] on behalf of Dan. A couple questions. First off, I was wondering if you could let us know in the guidance for the fourth quarter, what the split is between capital and unit-driven. And a follow-up to a prior question, if we're not losing share in the coming quarters, how do we-- how can you explain the sort of flattish nature going from Q1 to Q4? Thank you.

Yes, this is Jean-Marc. Your question is related to losing share. First, in the third quarter, as Gideon said, it was the second best quarter for the Company. And even from an equipment standpoint, we had a large year of sales revenue in the equipment when we [had] in the first quarter. I mean, our liquid systems business was growing compared to the first quarter. It was less than the second quarter, but significantly higher than the first quarter.

And we do expect the same kind of revenue for the fourth quarter, flattish to a little bit down. On the market share, last-- [inaudible] to say in the third quarter was, some U.S. based OEMs were a little bit less aggressive in buying equipment, when they used to be in the second quarter. But for the [traditional] business, where we have most of our revenue coming from the dispense pumps on [tracks] and so on, we are keeping our market share where it is. It has been well established for several years, and it doesn't look like we are losing any market share in that area. And this is the brunt of our business there.

Anything else for you, Mr. Berenbaum?

Thank you for that. And also wondering if you could give a split for the fourth quarter between units and [capital].

And we do expect-- what you have today are 61% and 39% ratio between unit-driven capital, is very typical of softening of a business. We don't expect that presentation to be slightly different in the fourth quarter. I mean the 61%, 39% is probably going to stay for probably a couple of quarters, given the softness of industry right now.

Great. Thank you.

And we'll go next to Colin McArdle at Needham & Company. Please go ahead.

Good morning and thanks for taking my question. As you look at the Company now, combined for a substantial period of time, could you tell us the progress that you've made on cross-selling initiatives? Maybe, specifically on Japan? And what the challenges are in that?

Yes, this is Jean-Marc again. If you look at my travel agenda for over the last couple of months, I can tell you that we have been part of every key supplier there is at every key customer. Which means what. It means that we are a significant player now, having combined with two companies we are in the first 20, first 50 key customers for the leaders of this industry, whether they are fabs, g-ram, s-ram, or tool manufacturers in North America or Japan. This means a lot. So we have a lot of agility, we have a lot of cross-selling opportunities because we have reduced the crossover [shift] of those customers by proposing a larger portfolio [product]. So this is happening right now and we are booking revenue right now because of the higher visibility from a sales presence standpoint. Now from a product synergy, we said we had a certain number of initiatives, more than ten in different areas. Are we [inaudible] a lot of revenue right now from this synergistic product? No. Surely we can [ignite synergistic revenue] in 2007 from those synergistic technologies being brought to the same platform here, it says yes. And we do expect probably a 3 to 4% impact in our base in 2007 in terms of revenue increments, if you want, coming from these new product synergies.

Okay. Would you mind sharing with us a target model for the Company, as it looks today, and something that we could use as a benchmark?

Yes. I think-- this is Gideon. I think we've been fairly clear that we, at somewhere in the neighborhood of $200 million per quarter in revenue, we'll be at a 50% gross margin. That was clear three months ago, it's clear today, and it'll be clear next year. And we're not in a position of being able to forecast the cycle in the industry. We do know, as Jean-Marc has said, that we are going to be growing organically.

We're excited about the new products that are coming in. We're excited about the exposure to Asia, which I think will give those products a real boost as they get into the system. And in addition, embedded in this model is the fact that we're taking steps, as I said earlier, to optimize our operations, including moving more manufacturing and infrastructure to lower cost areas, and a certain amount of outsourcing. all that together is going to allow us to get to those kind of margins. So you will see that happen.

Okay, thanks.

We'll go next to Dan Leonard at First Analysis. Please go ahead.

Good morning. Not a whole lot left, I guess one question I would have is to what degree, can you tell me, is your forecast for a sales decline in the fourth quarter-- was that reflected in the month of October versus maybe that's just reflective of uncertainty in the back half of the quarter?

I believe it's [inaudible] than that, because, in fact, the [multiple rate's] pretty good. But, you know, the end of a year, last week of a year, start with Christmas on a Monday, your fabs can decide to stay open, [inaudible] manufacturing and so on. So we have a lot of uncertainty in the last week. And you know, a week is about 7% of a quarter when you think about it. So we want to be cautious, but currently the guidance we give you is [inaudible] with a cautious approach.

Thank you, Jean-Marc.

And we'll go next to Jim Covello at Goldman Sachs.

Hi, this is [Kay Kavarsky] on behalf of Jim Covello. Most of my questions have been answered, but one question I was hoping to ask is how much of your business this quarter was non-semiconductor related, and what your thoughts are about that business going forward in the next couple of quarters?

[Semi] business is traditionally 20 - 25% of our total business. And, in fact, we had some kind of softening in this segment this quarter, in some area of the semiconductor material and display, so this didn't help out, in fact. It didn't deliver the buffering effect that it used to play in the [inaudible]. But 75% of our business is clearly semiconductor and we're still impacted by the softening of the [inaudible] industry. You see capacity [inaudible] just reducing right now, and the way to be even reduced more in the coming quarters, so this is reflecting in our [inaudible] right now.

And then going forward since the non-semi business didn't serve as a buffer this quarter, would you expect it to serve as more of a buffer in the next quarter or two? How do you expect that business to track?

I believe what we are seeing in this quarter was some mixed results, if you want. But that whole storage business was pretty good for us growing positively with this quarter. The display business was down, the chemical business was about flat, only a couple of percent. So we were contrarian trend in this business. I do expect ultimately the flatness to continue in the fourth quarter for the non-semiconductor business.

Okay, and then one final question just on the gross margins. What do you expect for 2007, what kind of synergies do you think you can recognize in the gross margin line in 2007, if you could comment on that.

I think we've been pretty clear. The integration phase of the Company is over, the gross margin, if you can tell me today that we'll have a $200 million quarter, I can tell you that we'll have 50% gross margin. I don't think I can give you a better answer than that.

Okay, thank you. That's very helpful.

And we'll go next to Chris Blansett at JP Morgan.

Yes, hello. This is [R.J. Supra] calling in for Chris Blansett. I have a couple of questions. One, could you comment on the linearity of the wafer stock and utilizations, transitioning from September quarter to December quarter?

I'm not sure we understand your question. Are you asking us about wafer starts, because--

Yes, wafer starts.

Well, we don't have any-- we don't forecast wafer starts, is the short answer. So, if you're asking us about our business, we can tell you. So, please be more specific.

So, let's say your unit-driven business. How did it trend in the last two months of the September quarter and into the first month of Q4?

Wafer starts have been flat in the outside world outside of the company, for the third quarter. And our unit-driven business has been flat as well, coming from the second quarter into the third quarter. And we do expect probably a similar trend, with some question mark away. At the end of the year, you get these preventative maintenance happening or not happening in the fourth quarter. But so far, flat for the unit-driven or wafer stocks, our [capitalization] related revenue, if you want.

And then a follow-up question for the liquid lens system for immersion lithography. You gave a flat outlook. What I was most interested in is, did you see a change in your shipment dates in the past 90 days?

No, we didn't. In fact-- again, you have to remember that those liquid systems are certainly important, but we are selling hundreds of systems here. We are selling teams of systems. And what we saw in the third quarter was a certain number of systems [preferred] of the total systems sold [with] here. So we do expect to have a similar kind of numbers in the coming quarters, because the adoption rate is clearly obvious for those fabs willing to move to this next lithography stage, if you want. And our [qualities] were accepted, and we'll see the business at least flat or maybe growing in the future.

Anything else for you?

Okay, thank you. Most of my other questions have been answered.

Very good. Thank you. We'll now go to Hari Chandra's line at Deutsche Bank.

Thank you. In terms of your fourth quarter guidance, [technical difficulty]

Hari, can you repeat that? We're having a hard time hearing you.

For the fourth quarter guidance, does it reflect a lack of recovery form anticipated gains in the [new] 300 millimeter shipper product?

Your question's about the 300 millimeter shipper product?

Yes.

Hari, the 300 millimeter products are two kinds in this company. Huge penetration in the carriers, 70% market share, doing well, no problem. On the shipment side, this business doesn't exist today. We have shipped units to a [inaudible] facility for testing in the last couple of months, we continue to do that. We do expect to take 30% market share by 2009. There will be a starting point, we have yet to recognize significant revenue in the [inaudible] business right now, but we should see that happening in the coming quarters. But we don't go from 0% to 30% market share just right now. So from a revenue standpoint, little impact. From the fourth quarter, modest impact, for next year, some impact. But not to a point of changing the courses yet.

Okay. How should we look at the operating costs? [Gains] [technical difficulty] are they locked in, or [technical difficulty]?

Hari, this is John V. We did really put in some diligent cost controls during the quarter which certainly had an impact. We did have lower accruals for some of our incentive plans as well, which aided the lower operating costs and then we really fully realized the cost synergies from the mergers. So we would expect operating expenses to be in somewhat of a similar range as we go into quarter four here.

And finally, [technical difficulty] tax rates, and also what's the number of shares that we should [model] for fourth quarter?

Hari, what was the first part of the question? Tax rates is 33% on a YTD basis now, it was a little bit lower than that for the quarter and we expect 33% to be the full year effective tax rate. As we mentioned, we did see a part of our share repurchase program did impact the weighted average shares outstanding, so going into the December quarter I think a share count on a fully diluted basis of around $133 million or so would be about the right amount.

And we'll go next to Mark Fitzgerald of Bank of America. Please go ahead.

Can you give a sense on the timeline for this Kulim manufacturing movement?

Yes, Mark, it's Gideon. We already have a large facility there. We're adding 90,000-- we added 90,000 square feet. Within the next 12 to 18 months, that's going to fill up. So that's the short answer. And when I say fill up, it's not to the gills, we'll still have some extra capacity, we're actually building two floors there. But we'll substantially realize the benefit of that over the next 12 to 18 months, and that'll impact our cost position in a positive way. I mean, that's why we're doing all this.

So is that necessary to get to your 50% gross margins, or does that get you above your 50% gross margins?

I would say that's part of the strategy that gets us to 50% gross margin. I would not be sitting here predicting gross margins above, substantially above 50%. I think it's part of the strategy, it's not a-- our strategy does not involve silver bullets. It involves moving closer to our customers, moving to lower cost locations around the world, it involves operating our supply chain in a good way, and it involves growing our business. And I think all those things get us to 50% margins. But none of it is heroic. I mean, these are all things we understand how to do, we have them in the plan. Kulim is an important part of that, because it does have a substantially positive cost impact when we move products over there. So we're excited about it, we also have a tax holiday there for a number of years. So for many reasons, it's going to have a very positive cash flow impact.

Okay. And just a general question, here. Is the unit forecast being planned into the fourth quarter kind of flies in the face of what's going on, at least in the foundry business with wafer start cuts. Are you seeing problems in the foundry business being offset by other strengths in other areas of your business?

Yes, Mark, this is a good point. We have seen in TSMC fabs and some of the fabs reusing their capitalization right now. But we have also some other part of our business, especially in the gas micro contamination, still growing, in fact they had their record quarter in the last quarter. So we have some offset of some softening in some areas by some other areas expanding with [inaudible]. Yes.

Mark Fitzgerald. Okay. Thank you.

Now we'll go next to Ali Irani at AI Capital Management. Please go ahead.

Yes, thank you. Most of my questions have been answered. I'm hoping you can give us a sense of how much that inventory correction that your customers is affecting your outlook in the fourth quarter, and I'm hoping you could give us of how the business at the fabs is split between your logic customers and your memory customers? Thank you.

Okay, you're asking good questions. I'm going to try, but I don't think I can give you the answers you want. Because basically, we don't always know where our product's going to end up, whether it's memory, or whether it's logic. I mean, we don't have-- when we ship out a filter, it doesn't have a memory address on it or a logic address on it. So that is difficult to say. That is difficult to say. From an inventory correction standpoint at our customers, remember, Ali, we are a book and turn business. We don't sit here with a backlog that goes out months and months. That's part of the pluses and minuses of having a business with 60% consumable products, or unit-driven products, if you will. And so, I don't think we have this ability beyond what we see in terms of orders, and clearly as Jean-Marc has just said, there are some capacity reductions going on and certainly we see that in the foundries that would indicate some inventory, I would say, corrections at some of our customers. But I'd say beyond the fourth quarter, where we actually give you an estimate and we give you an earnings estimate, we have a hard time seeing whether that trend continues into 2007 or not.

Is there any potential, or have you identified any inventory that's being worked down at your OEM customers, given their build and shipment reduction over the next couple of months, or do you think that they also are operating on a just-in-time basis out of [your] shipping?

You know, I cannot answer that question. I would like to, but I just don't know the answer to it. I think a lot of them probably are working on sort of-- if we're working on eight weeks, my guess is our OEM customers are working on 16 weeks. That's typically what you see in the equipment business. It's not a hell of a lot more visibility than we have, but it is a bit more. That-- I don't have an answer for you. I'd like to answer your question, but I don't have the information.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] And we'll go next to Mona Eraiba, I believe it is, at TCW. Please go ahead.

Questions have been asked and answered. Thank you.

Very good. Thank you. And we have a follow-up from Tim Arcuri at Citigroup. Please go ahead.

Hi guys. John, I'm still trying to understand exactly what the issues are at Chaska. Because if I try to back out what some of the normalized cogs coming out of that facility are, it's kind of in the high $20 million a quarter [calling], $27 million or so. So if the entire $45 million shortfall was from Chaska, that's kind of a 20% cost overrun just in that facility alone. So given the size of that, I'm just wondering if you can be a little bit more specific about what issues were there. Was it particular to one product or was it more systematic? And just kind of trying to get some more confidence that you have the issues under control here. Thanks

Actually, Tim, they were, very much. [Third product] was in that facility, and we do-- actually do about 30% of our production or sales have come out of that facility. So it would be more on the magnitude of $50 million for the quarter. So that's $4 million we've talked about really related to sub-optimal yields on some certain production runs, so it's an inventory adjustment, some scrap, and also expenses that were not adjusted down at the pace that they should have been and as a result of the lower volumes that were being produced because of the softening that we saw. So, does that answer your question, Tim?

Let me-- this is Gideon, Tim. Let me just add a little bit of color. Tim, none of the issues we experienced requires rocket science to solve. Let me just be very clear. We're not-- we don't have to go to NASA to find a solution for this. We understand what it is, it's getting fixed, it is limited to certain products, it is not systemic in the way that I think that you're asking the question, and that's it. That's the story. There is no other story.

Tim, this is Steve Cantor. Just to follow up on your earlier question. If you look at our CapEx revenues for the last six months end of September over the previous six months, so basically the fourth quarter of last year, first quarter. They were up 21%. So I think our main point here is that over an extended period of time, you'll see that our CapEx-driven revenues more or less in line with the industry.

Yes, okay. Well, we can follow-up more, post the call. Thanks guys.

And we have no other questions in the queue, so at this time I'd like to turn the call over to Mr. Argov for any closing comments.

Well, thanks for joining us, we look forward to speaking to you in the future. Thank you.

Thank you, that does conclude the call. We do appreciate your participation. At this time you may disconnect. Thank you.