Entegris Inc (ENTG) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Entegris fourth-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 Vice President of Corporate Relations, Mr. Steve Cantor.

Good morning and thank you for joining our call. Earlier today, we released Entegris's financial results for the fourth quarter and fiscal year ended December 31, 2006. You can access a copy of our press release on our Web site, www.Entegris.com.

Before we began, 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 and in our most recent 10-K report as well as in our 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 and 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 Web site.

I should also note that 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; Jean-Marc Pandraud, Chief Operating Officer; John Villas, Chief Financial Officer; Greg Graves, Senior Vice President of Business Development and incoming CFO; and Peter Walcott, General Counsel. Gideon Argov will now begin the call with some prepared remarks.

Thank you, Steve. I will make some comments about the fourth quarter and the fiscal year, John will provide some color on the financial results, and Greg will discuss our outlook for the first quarter.

We ended the year on a solid note. Our revenues in the fourth quarter were $169 million, which is above the high end of our guidance through the strong sales of our liquid systems. Our earnings per share from continuing ops were $0.12 on a GAAP basis and $0.16 on a non-GAAP basis. Our unit driven product sales were approximately 60% of total Q4 sales and declined modestly from Q3, as we anticipated. Sales of consumable liquid filtration products and wafer shippers reflected slowing utilization in semiconductor production across the industry during the quarter, but sales of these products remained firm and were at historically strong levels. Sales of data storage shippers were lower as expected following our very strong June and September quarters, reflecting the normal seasonality of this business. In January, subsequent to the fourth quarter, we received the first order for our 300 mm [FASB] wafer shipper product from a major Asian semiconductor device maker. We expect a modest ramp in orders for these products in 2007 as our product begins to gain traction in the field, and we are committed to building significant share in this market over time. In the meantime, the 200 mm and below market is stable as demand for these wafer sizes remains firm.

In the capital driven side of our business, which represented about 40% of our Q4 total sales, sales increased about 2%. Driving this growth were liquid systems products, such as our photochemical pumps, which continue to do very well. Sales of liquid systems products were strong in Q4 and rose about 34% for the entire year.

Our Q4 operating results reflected a lower gross margin offset by good control of our operating expenses. Now, as we discussed with you last quarter, we addressed manufacturing inefficiencies at a specific facility in the third quarter, which had a residual impact in the fourth quarter. During the quarter, we also conducted a comprehensive review at each of our manufacturing facilities worldwide to identify and root out any similar inefficiencies. And this had an additional Q4 impact on gross margin. John will have more details on this, but let me just say that we have identified the issues, the root causes, and we have taken very specific actions across our manufacturing infrastructure including putting in place enhanced financial and factory processes to ensure that these inefficiencies do not recur. Our focus is now on implementing, as we have said in the past, our long-term plan to transition more manufacturing to low-cost locations, particularly in Asia, by leveraging our investment in our operation in Kulim, Malaysia, by using more contract manufacturing partners and by maintaining rigorous discipline in our manufacturing processes.

For the full year 2006, sales from continuing ops were $679 million, up 15% on a pro forma basis and earnings per diluted share from continuing ops were $0.45 on a GAAP basis and $0.62 on a non-GAAP basis.

So all in all, fiscal 2006 was a good year for us. We successfully completed the comprehensive merger integration process. We achieved all and more than all of the cost synergies planned. We consolidated three manufacturing operations and in so doing, we reduced our infrastructure footprint by about 25% around the world. And we embarked on a long-term program to move more manufacturing, as indicated, to low-cost locations and to Asia. We invested in a portfolio of new generation products that extend our 65 and 45 nanometer position in a number of processes and we generated almost $100 million in cash from operations, while at the same time, returning $100 million to our shareholders in the form of an accelerated stock buyback. So, 2006 was a good beginning and we're more excited about what lies ahead.

Our products, as you know, purify, protect, and transport critical materials. They're becoming more important as the industry advances along the ITRS road map. We're using our expertise in contamination control as well as in microenvironments that surrounds three key processes, those being lithography, wet etch and clean and CMP and develop new products and systems that help customers both improve yields and reduce costs. A good example is lithography, which represents just under 20% of our revenues worldwide. There are several new applications emerging that we are uniquely positioned to address. We expect lithography related sales to grow as a percent of our total business, with the additional litho passes and increasing contamination control challenges that occur at 65 and 45 nanometer nodes. We are already solving those challenges at 193 nanometer wavelength, where the potential sources of contamination are more subtle, more difficult to isolate and control, and can be more disruptive to the manufacturing process.

In the fourth quarter, we received our first order for a system, a new series of systems we call our [Clairlight] solution. Clairlight addresses a specific issue of haze formation on reticles. Reticle haze forms on the reticle from chemical reactions in the air, which occur with high-intensity UV light at 193 nanometer wavelength. It can significantly degrade the properties of a reticle, causing defects and requiring our customers to replace or clean those reticles prematurely, and that replacement can represent a major cost lithography process in a fab, particularly in a reticle-rich environment such as a foundry. The issue of reticle haze becomes more significant, more prevalent in 193 nanometer, as 193 nanometer techniques become deployed regardless of whether they are liquid immersion or DUV.

So what does our Clairlight system do? It extends the life of a reticle and in so doing, reduces reticle management costs significantly for customers. Our solution involves maintaining the reticle in a chemically purified dry environment from the moment it arrives in a fab. We do this by providing a mechanism for purging the atmosphere in which the reticle sits with chemically purified air. What is most significant is that it represents the merging of technology leadership positions from both predecessor companies.

We are already the leading provider of gas purification systems for litho applications and as well, the leading provider of reticle pods or microenvironments that protect the reticle. So this is an excellent example of how we are realizing the strategic synergies from the merger from a top-line standpoint to solve a difficult contamination issue in a comprehensive way that provides real and immediate value to customers.

As we look to 2007, our key long-term priorities remain unchanged. First, to enable our customers advanced technology processes by solving their most challenging contamination control issues. Second, to develop and introduce a steady stream of new products using our core filtration and materials handling technologies. And third, to leverage our operating model by improving the operating efficiencies throughout the Company. So we're looking forward to another year of substantial achievement in these areas.

Before turning the call to John for his comments on the quarter and the year, I want to note this will be John's last conference call for us. When John joined Entegris 23 years ago, the Company was fairly small, under a $30 million, I think, and today, we have $679 million of revenue last year. So John leaves a Company that is not just much larger and more global, but in great financial shape with significant prospects for continued revenue and earnings growth. And although John will be here until the end of March, I want to take this opportunity to thank him for his many years of service to Entegris publicly and wish him the best of success. 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.

As Gideon mentioned, sales from continuing operations for the December quarter were $169.1 million. This compares to $171.3 million in the September quarter and $147.1 million a year ago. For fiscal 2006, sales were $678.7 million, an increase of 15% from $592 million for fiscal 2005 on a pro forma basis. On a geographic basis, our Q4 sales were as follows -- Asia was 33%; Japan was 25%; North America was 27%; and Europe was 15% of total sales. Of note, sales to Japan increased 8% from the third quarter, reflecting somewhat favorable currency as well as strong demand at both Japanese OEMs and device manufacturers.

Our GAAP net income from continuing operations was $16.3 million or $0.12 per diluted share and was boosted by a favorable tax rate. On a non-GAAP basis, which is adjusted for merger-related and other charges and expenses, net operating earnings from continuing operations were $21.1 million or $0.16 per diluted share. Reconciliation information between our GAAP and non-GAAP results may be found in today's press release which can be accessed on our Web site. The quarter's results included merger-related and other restructuring charges of $600,000, amortization expense of $3.5 million, integration expense of $600,000, and integration related stock-based compensation expense of $900,000. I will reference each of these items as I discuss the rest of the income statement for the quarter.

Gross margin for the fourth quarter was 41.5% of sales, which reflected approximately $5 million or nearly 3% of sales of unusual manufacturing charges and inefficiencies. We have determined that the majority of these inefficiencies resulted from our efforts to meet ramping demand in 2006 while we transitioned and consolidated several manufacturing sites. About $1 million of the $5 million related to the residual impact of issues we identified and recorded in the third quarter at a North American production site. The balance of these costs were identified after we completed a comprehensive review of procedures and processes on a plant by plant basis of our worldwide operations. Specifically, the impact in the fourth quarter of $5 million included approximately $2 million of inventory adjustments or scrapped inventory, approximately 1.5 million related to unabsorbed overhead as we reduced our production levels and began lowering inventories to meet lower demand. And approximately $1.5 million related to manufacturing inefficiencies and [rework] costs.

Excluding $5.3 million of merger-related expenses and other restructuring charges, total operating expenses were $46.4 million or 27.4% of sales. This represented an improvement as a percent of sales and in absolute dollars from the September quarter, reflecting continued cost control and a reversal of certain performance related accruals.

The R&D was $9.6 million for the quarter and SG&A was $36.8 million. As I indicated, total integration expense in Q4 was approximately $600,000. Total stock-based compensation in Q4 amounted to $3 million or $0.02 per diluted share, which included about $900,000 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 declined through 2006 as these grants are amortized.

Adjusted for merger-related and other charges and expenses, non-GAAP operating income was $23.8 million or 14.1% of sales. We reported income tax expense on a GAAP basis of $3.9 million in the quarter, bringing our tax rate for 2006 to 30%. The lower tax rate was due primarily to two onetime factors. The resolution of a tax audit and a reduction in our tax reserves based on a reassessment of our tax exposure. For 2007, we are estimating our tax rate to be approximately 32%.

The shares outstanding at the end of the fourth quarter were 132.8 million.

Turning to the balance sheet, we ended the year with a very strong financial position. Cash, cash equivalents, and short-term investments were $275 million at the end of Q4, up by $46.5 million from the third quarter. Ending inventories of $94.7 million were down $10.1 million from the September quarter as expected. Inventory turns improved to 4 times compared to 3.7 times in Q3. Accounts receivable in dollars declined about $1.5 million and DSOs were 70 days, which was level with the third quarter. We generated $50 million in cash from operations in the quarter. Depreciation and amortization totaled approximately $10.7 million. And capital expenditures for the quarter were about $10 million.

Total capital spending for the year was about $31 million inclusive of investments associated with the expansion of the Kulim facilities.

As Gideon says, this will be my last quarterly call as Entegris's CFO. I want to thank Gideon and the rest of the senior management team as well as all of the wonderful people at Entegris, especially my finance team, who have made my time here so meaningful and enjoyable.

With that, I will turn it over to Greg Graves.

Thank you, John. Turning to our outlook for the first quarter, based on a flat to modestly down industry environment, we expect first-quarter sales to be flat to down 5% sequentially or between $161 and $169 million. We expect gross margin of around 44% of sales and total operating expenses to be in the range of 28% to 30% of sales. Operating expenses as a percentage of revenue are expected to be slightly higher than in Q4, which as John indicated, were favorably impacted by the reversal of certain performance incentive accruals. With an anticipated tax rate in Q1 of approximately 32%, we expect GAAP net income per diluted share to range from $0.08 to $0.11. Adjusted for approximately $6.2 million in merger-related charges and expenses, we expect non-GAAP net operating earnings per diluted share to range from $0.11 to $0.14.

As the incoming CFO, I want to wish John well and thank him for his contributions to Entegris over the past 23 years. He is both a mentor and a good friend and has made my transition to CFO a very smooth one.

With that, we will take your questions. Operator?

(OPERATOR INSTRUCTIONS). Chris Blansett, J.P. Morgan.

Thanks a lot. Quick question. Could you guys give a breakout of stock comp during the quarter?

Yes, our stock-based compensation, Chris, was about $3 million. About $900,000 of that was related specifically to merger-related grants.

I was kind of looking for the COGs versus OpEx related stock comp.

Of the amount that is in COGs, would be just several hundred thousand dollars and the OpEx (inaudible - microphone inaccessible)

And then kind of looking at the timelines for the manufacturing transition to Malaysia, I wonder if we can get an update on that.

Chris, this is Gideon. The Malaysian facility was formally dedicated actually in the last quarter. And so, it's double the size. It's an additional 100,000 square feet. We have already begun the process of moving the first of several product lines out there and we'll be taking the next 12 to 18 months to do that. So, the plans are pretty specific, they're very specific, and it's not just product lines, but it's also infrastructure and I would say a number of positions that relate to certain G&A rules as well.

We just hired in the last three months in Asia several fairly senior people in the supply chain area, for example, in a number of areas that you associate with G&A, and those are also important roles that it makes sense to have in an environment like that. So, it started. It's going to take a year to 18 months. We have a very specific track to do that and obviously it's going to have a positive impact on us.

A couple of quick kind of accounting ones here. What was your headcount during the quarter and share buyback during the quarter as well?

Our head, back in the quarter, I want to say, is about 2900 people. I mean, I could be off by a dozen or so, but I think it's about right. And that hasn't changed dramatically. The charged share buybacks, we've repurchased about 7.7 million shares. Our share count stands at about 133 million. We're not going to see much movement in that. We have some additional buyback offset by dilution from stock options. So I would say that the $100 million stock buyback is going to be completed within the next two, three months likely. By the middle of the year, I'd say, Chris, we should be done with not only that, I'm hoping to be done within the first half of the year by much of the $50 million additional buyback that will come after the $100 million accelerated buyback is complete. So we have a $50 million buyback, as you know, behind the $100 million accelerated one, and we expect to complete that within the next few months.

Thank you very much, guys.

Brett Hodess, Merrill Lynch.

Good morning. I was wondering if we could delve a little bit more into the margin progression that you expect once you've moved through some of these efficiency issues and production. Because if we look at the revenue guidance for March, it's pretty strong still, yet the gross margins versus say one year ago at a slightly lower revenue rate were higher than they were today. So how much longer does it -- do you expect these efficiency items to be worked out or is there something else going on with mix or something like that right now that would keep the margins not from moving up in the near term?

Brett, mix is not really the issue. The first thing I would say, we have dealt with the manufacturing and production issues that were the source of the issue, and let me talk about that. When you look at the Q1 margin from last year, Brett, you would note that two events were happening. The first is we were in the middle of a ramp and were building as much product as we could to keep up with customer demand. Secondly, we were in the middle of integration, as you well know, and we were building a number of inventory buffers to support manufacturing moves related to, for example, closing our German operation, as well as consolidating our operations in Chaska, Minnesota. And probably, Brett, 30% of the products in the Company at some point last year moved from geographic point A to B as part of the integration and the facilities consolidation. When you build inventory in that scenario, you get some wind at your back, which helps gross margin. And that reverses itself when you decelerate production and reduce inventories, which is what we did in Q3 and Q4. So I would indicate that is a contributing factor in terms of absorption to what occurred.

Number two, we did look very carefully because we wanted to make sure that we were done at the end of Q2 with integration from a physical standpoint, but as we move into the optimization phase, we wanted to make sure that we actually addressed all of the operational issues that we identified in Q3 with respect to a specific manufacturing facility in North America, and we did that. Facility by facility throughout the Company in Q4, that is what resulted in what you saw in Q4. And we will see that then return in terms of margin to normalized levels in the mid-40s in the first quarter.

So as we move forward from this level, normalized margins in the mid-40s as we start to see, hopefully we get into a position later in the year with revenue growth again, should we start to see then relatively quick leverage to that, Gideon, given that the efficiencies were already in place?

Yes. We think there is a lot of leverage in the gross margin and we are -- the fact that we are executing on the plan to optimize the operations, for example, what we talked about a minute ago by moving more manufacturing to lower-cost areas and outsourcing, will actually increase that leverage. So in a peak environment -- and we've talked about this very specifically, a peak environment in the neighborhood of 200 million per quarter, we would expect to see margins in the very high 40s, close to 50%. We're not at that level today from a revenue standpoint. I don't think we will be there -- I can't see that level of revenue this year. I would be very happy if it happened. It would be a high-class problem to deal with. But yes, we would continue to do that.

And I would say one more point, Brett, but you didn't ask about specifically, but it is important. The OpEx is not -- I would not call the OpEx sort of artificially low. There were some onetime positive impacts on OpEx this last quarter, but as you know, one of the open questions when we executed the merger was how much leverage there was in the combined platform. And I think we've been positively not surprised, but positively moving through a better leverage from an OpEx standpoint than we originally thought. And although we're not going to disinvest in R&D, we continue to invest heavily in R&D, I think we will see continued excellent leverage in the operating expenses, which is important because it implies a lower break even and better leverage going forward.

Absolutely, and it definitely shows up in the operating margin year-over-year, the operating expense, I should say, year-over-year already. So, thank you.

Colin McArdle, Needham & Co.

Good morning. Thanks for taking my question. I was wondering -- you said lithography was 20% of revenues. Could you give the break out for wet etch and CMP?

Yes, this is a good question. This is Jean-Marc Pandraud. The wet etch [MP] is about 30% -- 3-0, 30% of our revenues. It has been a traditional business for both a [situation] side and the wafer carrier side as well at Entegris. And lithography is a bit ,just around 18%, 19%.

Okay. And then also, just on this gross margin topic again, the previous quarter you mentioned the gross margin chart flow was all in Chaska and that you are working to resolve those issues. What was the thought process that's got you to evaluate it on a more global basis? Would you mind just walking me through how that evolves?

This is Greg Graves. Part of it was we saw we had an issue in Chaska. We're going through this migration in the CFO role, and one of the things I said is I want to make sure we come into '07 on an absolutely things in perfect shape. So what we did is we went on a facility by facility basis around the world. We had sort of a 10-point checklist and we looked at our inventory levels, our inventory that had been blocked for quality reasons. We looked at rework. We looked at a whole series of issues, literally on an every week basis throughout the fourth quarter, to make sure that everything was, like I said, that the process controls were in good shape as we come into this year.

Okay. And then just again, if we were to assume a stable business environment throughout this year, would this process get gross margins back into the high 40% range similar to let's say the first half of last year? Over the next quarter?

I think as Gideon said earlier, the first half of last year, we clearly had some benefit from the rising inventory levels, and so in a flat revenue environment, I would not expect to see the kinds of margins that we saw the first half of last year. That said, we do believe there is leverage in the gross margin that will show over time.

One other thing I would like to add with regard to the margin, today we have 90,000 square feet of manufacturing space in Kulim. We've got dollars budgeted to transition products to Kulim. And so at one level, we are seeing a slight penalty in our margins as we do this migration. And so when we actually get product over there, we should see both the benefit of the lower labor costs as well as the fact of the transition costs behind us.

Thank you very much.

Mark Fitzgerald, Banc of America Securities.

Thank you. I'm curious how you guys are thinking about the year at this point, particularly with your OEM business and all of the controversy around the memory business in the second half of the year.

Hello, Mark. This is Jean-Marc. I would say we have a pretty conservative idea about this year. We are guiding relatively flat. I mean I don't give guidance for [further] same quarter so on, but today we are pretty conservative. We said flat for this quarter and a bit down eventually. We have significant business with the [IDM's]. We have about 60% of our business there. So certainly we are [related] to the investment with the OEM as well. But I have to say that we have such a diverse array of products, especially with the OEM involved in lithography today and this is a very highly demanded place. So we do expect to increase in that area. So I'm not too concerned about the situation with the OEMs in general especially from North America because we have a lot of CMP related, wet etch MP applications, as well as the lithography ones. So it should be a good story for us in a kind of limited capital growth environment in 2007 according to the numbers I've seen.

Mark, let me just add a point here. Gideon here. The biggest driver for our Company really is a transition from generation to generation. And if you look, as we have, because we've really tried to build this model pretty carefully, if you look at a 300 mm foundry making logic devices, making say 30,000 wafers a month, which is not untypical, our opportunity for unit driven products and capital equipment for that fab, when you move from 90 to 65 nanometer, is about 20% to 25% higher. And even more exciting at 45 nm, it's 40% higher than at 90. And this is a sort of bottoms-up analysis that we have done. It is driven not unexpectedly by more metal layers, more mask sets, more complex contamination control issues, and it's not based on some of fictional new product lines that have yet to appear. It's actually based on our current product line. So that's the driver, so that when we see the announcements, as we all know, about Intel and others moving to 45 nm, that is very good news for us.

I guess though if you look at the lithography business, which is such a big part of your business at this point, it's the NAND part of the business that's really driving lithography and that's where the market is concerned about the sustainability into the second half as an issue. And I'm number one, curious if you feel if you can tell us what your memory exposure is there and if you feel any risk with those sales to the leading edge NAND flash markets.

Mark, this is Jean-marc. Sure, we are exposed, like everybody in this industry, to sometimes the craziness of the investment in the memory area. Our business is no more exposed than about -- I would say less than 15% of our total revenue is linked to the [Murray] activities -- not necessarily NAND, but the entire memory field. So we have some exposure, but not to any extent that would cause a risk for the entire Company.

Okay. Then just quickly, on the tax rate, can you explain the low tax rate for the current quarter and then what we might expect for the fiscal year [comp]?

Hi, Mark. John Villas. We had a favorable ruling on a tax audit that resulted in a significant savings that we also went through. I think as many companies are at the end of the year, looked at all of our tax [exposures] and so that resulted in a tax reduction in our tax reserve, so for the quarter brought our rate down to about 20%, 30%, for the full year. And we would expect going forward in 2007 to have a 32% tax rate.

Okay thank you.

Tim Arcuri, Citigroup.

This is actually Brian Lee calling in for Tim. I just had a few things. And not to harp on this margin issue, but if I look at gross margins, they're down about 700 basis points over the past couple quarters; this is the second straight quarter where we've seen a margin shortfall. So I guess my question is, what gives you the confidence that this is not a system panic issue such as pricing and that this remains an isolated issue?

Well, you have to look at the data, which we look at very carefully. So pricing is always competitive in this industry. There's no difference that we see in terms of ASPs and what they are doing than what they normally do in this business. Trade margins are healthy and as expected. We do not see -- I repeat -- we do not see any significant increase in raw material prices that would impact our margins. And we work those raw materials very, very aggressively and very carefully. And that normally is what you look at to understand your margins. So all of the margin issue that you are speaking of is a result of the specific operations-related issues that we identified in Q3 in one facility in North America, that we looked for very carefully.

We have an incoming CFO. He told you just very clearly that he wanted to start off 2007 with a clean slate, and he wanted to make sure, and I was completely supportive, that we looked at everything top to bottom, soup to nuts because we did go through a very extensive set of integration with the merger early in the year. We -- and that is what we did. So that is the source of the issue.

It is behind us in the sense that we have identified it. We have dealt with it, and we said we would have residual impact in the fourth quarter during our last call. That's what we saw. End of story.

Okay. Maybe if I look at it another way, if I adjust for the $5 million this quarter, it looks like margins would have been mid-40s. That's basically where you're guiding to in Q1. So I know a couple of people have asked about this, but there seems to be a -- I don't want to call it structural, per se, but a 200-300 basis point decline in margins versus what you were doing before these manufacturing issues hit. So I know you are explaining some of this away from the inventory build impact that you saw in the first half of the year. But are you expecting any additional spillover from these manufacturing issues into Q1? Is that embedded into the 44% guidance?

No, we really, Brian, are expecting that we've got these issues behind us. We are, as we mentioned, went through a lot of transition during the last year as we ramped up our production levels to meet the increasing demand, the inventory absorption we talked about. But we will continue to be working the transition for manufacturing lower-cost jurisdictions, and we will be working hard to make sure that we get leverage there. We are going to always be in a mode of doing the best we can to be close to our customers, giving them quality products, and meeting the market demand (technical difficulty).

Okay thanks a lot, guys.

Jim Covello, Goldman Sachs.

This is [Kate Codlarski] on behalf of Jim Covello. Just a quick question. In terms of the breakout of your CapEx driven and unit driven sales for Q1, do you expect it to be fairly similar to this quarter?

Yes. This is Jean-Marc. I do expect that to be very similar to our current quarter. In fact, when you look at the 2006 (indiscernible) perspective, we had about 59% which was unit driven and 41% which was CapEx driven. And 2006 was exactly in between with what 2004 and 2005. 2004 was an upturn year, where we had the 57/43. 2005 was a downturn year, when we had 61/39. So now we are in a kind of plateau if you want, but I expect we will continue over 2007 as well with a 59/41 kind of split.

So just in terms of how you expect each of those businesses to track throughout the year, could you comment on that as well?

Sure I can. If you look at -- depending on who you listen to right now, you have an expectation for capital growth that are from negative couple of points to positive couple of points. And on the -- we first start something like flattish. So this is where the numbers we are using currently to forecast 2007 very cautiously.

Okay thank you. And just an administrative question, in terms of the share count for next quarter, could you tell us what we should be modeling?

Shares at the end of the quarter, Kate, were about 133 million. We would expect something in that sort of range for the March quarter.

Okay, thank you.

Hari Chandra, Deutsche Bank.

Thank you. Why is the liquid systems [vote] so volatile given it's grown 36% in second quarter and down 18% in the third and I think up 34% in the fourth quarter?

I'm sorry, Hari, could you repeat the question? It didn't come across too well.

The liquid systems growth, I just wanted to know why is it so volatile? It's been up huge in second quarter, down --?

Why is the liquid system growth volatile?

I think this is a fairly simple question. Most of our liquid system is linked to the OEM, mature manufacturers. Our partners are -- you know those names and they are generally following the investment cycle in the industry, so whether we provide them with CMP or wet etch and clean or lithography equipment, we do follow some of their cycles.

The good news was I think in the fourth quarter we were able to grow this business in the fourth quarter. We had been cautiously when we started the fourth quarter. We even guided down or flat for these liquid systems and we ended up in the positive territory in the fourth quarter with significant growth. And we expect that to be at least flattish to up for the coming quarter.

On the margin issue, you explain most of it relating to the manufacturing site. My question is are there issues behind manufacturing in terms of like when you're getting into competitive pricing, getting the revenue but sacrificing margin at the same time?

No, as Gideon mentioned, there have been [no less pressure] with the semiconductor business in pricing. So we have always to accommodate for lower-cost ownership for customers. We try to do that by lowering our costs and moving our products to Asia as well to maintain those gross margins. Our trade margin has been pretty stable over time. So I don't expect any major change there in the foreseeable future.

One final question on the acquisitions. What happened to your strategy of growing by your acquisitions? Nothing has [come by] for a while?

Nothing happened to our strategy of growing by acquisition. But you have to find the right ones. We believe we can do both buyback of stock, which we are doing and growth through acquisition. There's no reason we can't do both. But we are going to be pretty careful about the kind of acquisitions that we pursue. Any acquisition would have to support -- by the way, I think we will make some acquisitions. If I had to predict, I think we will. I think it will be in the foreseeable future. But it will have to be companies that support and relate very closely to our core and that means the processes that we deal with, with our customers -- the geographies, particularly the emerging geographies, in Asia that we deal with. But I would expect that we will make some acquisitions. So it's not for lack of a desire that we have not done so.

Thank you.

(OPERATOR INSTRUCTIONS). Chris Blansett, J.P. Morgan.

A couple of quick ones here. Now that you guys have your first 300 mm FASB win, could we have some kind of guidance on how to estimate revenue potential for each win going forward?

Yes, Chris, this is Jean-Marc. Yes, we're very happy with this first stake in the ground, which gives us a good opportunity to take market share in a traditional area, where we didn't have a lot of market share -- in fact none so far.

My goal is within the next three years, the market size is about $90 million to $120 million. I do expect to be a significant player by 2009. And now, how do you draw the line between the first starting point today in 2009 with a 30% market share is depending on our ability to take market share and to win those [mines] at the wafer growers, but also at the IDMS. And our teams are currently [do good] to do that. We have programs in every geography to do that. So it's difficult to predict quarter after quarter, but I know where I want to be by the end of 2009, a significant player in that area.

So just to quantify, the $90 million to $120 million, that's for 300 mm FASBs in general?

This is correct. This is 300 mm FASB business.

Okay. And then on the consumable side, I'm not trying to get out core guidance, but do you think that Q1 is kind of the bottom for the units driven business?

I think the Q1 should be at least a positive compared to the current fourth quarter in terms of unit driven. This is where I expect to be flattish to -- you never know a couple of percent up or down, but probably the bottom, I expect the upturn would come in 2008 as the industry is forecasting. So if we can be entering the same kind of revenue in the first quarter for the unit driven, we would be happy.

And then one last question. I guess based on the number of shares you repurchased, it was 7.7 million during the quarter. Does this imply that you've already started accessing the additional 50 million share buyback program?

The mechanics of the program is the 7.7 is what we got -- what we've received so far under the terms of the accelerated buyback that broker has delivered to us. Those were not repurchased per se during this quarter. There are purchases going on that the broker is managing, but those are transparent to us.

The remaining what we talked about one to -- around one million shares that will come under the ASB is when we essentially square that transaction up with the broker on the back end. And then we will have an additional $50 million worth of shares that we can repurchase, which we would expect to happen beginning sometime in the -- probably in the middle of the second quarter.

All right. That clears it up. Thanks a lot, guys. I appreciate it.

It appears we have no further questions at this time. Mr. Argov, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you for joining our conference call. We look forward to updating you after our next quarter.

Thank you, ladies and gentlemen. That does conclude today's conference. We do appreciate your participation.