Entegris Inc (ENTG) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Entegris first-quarter 2007 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 Vice President of Corporate Relations, Mr. Steven Cantor. Please go ahead, sir.

Good morning, everyone, and thank you for joining our call.

Earlier today, we released Entegris' financial results for the first quarter ended March 31, 2007. You can access a copy of our press release on our Web site, 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 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 (technical difficulty) 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 also in today's press release as well as on our Web site.

I should 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 Pendraud, Chief Operating Officer, Greg Graves, Chief Financial Officer, and Peter Walcott, General Counsel. Greg Graves will now begin the call with the financial highlights of the quarter.

Thank you, Steve. Good morning, everyone.

I'd like to begin today with a summary of the quarter's results. Sales from continuing operations for the March quarter were 161.1 million, within the range we provided in February. This compared to 169.1 million in the December quarter and 157.7 million a year ago.

Unit-driven sales represented 58% of the total and capital-driven sales were 42%. This mix represented a slight shift from the CapEx side from the fourth quarter in which we reported a 59/41 split.

On a geographic basis, our Q1 sales were as follows -- Asia, 35%; Japan, 23%; North America, 26%; and Europe, 16% of total sales. Of note, sales to Asia increased modestly from Q4, reflecting favorable currency exchange rates as well as strong demand, while sales in Japan declined 11% from a record in Q4.

Our GAAP net income from continuing operations was 10.4 million or $0.08 per diluted share. On a non-GAAP basis, which is adjusted for merger-related and other restructuring charges and expenses, net operating earnings from containing operations were 14.8 million or $0.11 per diluted share. Earnings port diluted share on a GAAP and a non-GAAP basis were within the range of the guidance we provided in February. 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 400,000, amortization expense of 3.5 million, integration-related stock-based compensation expense of 700,000, and integration costs of 1.9 million. 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 on a modified basis was 43% of sales, an improvement from 41.5% in the fourth quarter. Even so, the Q1 gross margin was about 100 basis points below our anticipated level, primarily as a result of the lower sales volumes and to a lesser extent from continued reduction in our inventory levels. We're confident that we have addressed the inefficiencies that impacted our gross margin in the second half of last year, and we're working to achieve steady improvement through the rest of the year.

Including 6 million of merger-related expenses and other restructuring charges, total operating expenses were 50.9 million or 31.6% of sales. We had expected an increase versus the 27.4% level in the December quarter, which were favorably impacted by year-end adjustments to certain performance compensation accruals. In addition, the modified SG&A of 40.1 million in Q1 included 1.7 million or approximately $0.01 per share of severance costs related to reductions in our manufacturing workforce to be in line with the lower production levels.

We also eliminated a layer of management in our manufacturing organization as part of our long-term efforts to streamline our global supply chain and to reduce costs. At the same time, we stepped up spending on key new product development projects. This resulted in modified R&D for the quarter of 10.8 million, an increase of 1.2 million from the fourth quarter and 1.6 million from the same period a year ago. As we indicated in February, total integration expense in Q1 was approximately 1.9 million, of which 1.8 million related to departures of employees who had employment contracts connected with the merger.

Total stock-based compensation in Q1 amounted to 3.1 million or $0.02 per diluted share, which included about 700,000 related specifically to restricted stock grants made in connection with the merger integration process. These integration-related amounts declined from 900,000 in Q4 and will continue to decline through 2007 as these grants are amortized. As such, you should expect these charges to be negligible by the first quarter of 2008.

Adjusted for merger-related and other charges and expenses, non-GAAP operating income was 18.3 million, or 11.4% of sales. We reported income tax expense on a GAAP basis of 4.3 million in the quarter or a 29% tax rate. The rate was favorably impacted by the geographical mix of profit and an adjustment related to 2006 that was booked in the first quarter. For the balance of 2007, we are estimating our tax rate to be approximately 32%. Shares outstanding on a fully diluted basis at the end of the first quarter were 135.2 million.

Turning to the balance sheet, cash, cash equivalents and short-term investments were 305 million at the end of Q1, up by 30 million from the end of December. This gives us tremendous flexibility as we look at ways to grow our business and to increase returns to our shareholders.

Ending inventories of 88.9 million were down 5.8 million from the fourth quarter. Inventory turns were 4 times, about the same as in Q4.

Accounts Receivable in dollars declined 12.5 million. DSOs were 66 days versus 70 days in the fourth quarter. We generated 25.3 million in cash from operations in the quarter. Depreciation and amortization totaled approximately 10.9 million, and capital expenditures for the quarter were 8 million. Total CapEx for 2007 is estimated to be approximately 30 million.

With that, I will turn it over to Gideon Argov.

Thanks, Greg.

Our performance for the quarter was pretty much as expected. Sales and earnings came in at the low end of our guidance, reflecting continued signs of softening in the industry. Even with some of our OEM and IDM customers growing increasingly cautious throughout the quarter, business levels were fairly stable across businesses and geographies.

Our unit-driven product sales were 58% of total Q1 sales and declined modestly from Q4, as anticipated. Sales of consumable liquid filtration products reflected some slowing utilization and production levels at semiconductor customers as well as fewer wet tool shipments, which also drives demand for filtration products.

Among other unit-driven products, sales of wafer shippers for 200 mm wafers grew from the fourth quarter due to high capacity utilization at the 200 mm fabs. We achieved some additional share gains in our already-high share of that market. The 200 mm shipper market has been very resilient and we are on track for a record year for these products in Japan.

During the quarter, we began shipping our new 300 mm FOSB or wafer shipper product to a major Asian customer. This was a significant milestone for us in this product area, and we still have more work ahead of us to build meaningful share in this market.

Sales of data storage shippers were lower, which reflects seasonality of this business. Typically, sales of these products peak in the second and third quarters of the year, driven by increased production of electronic products in anticipation of the fourth quarter holiday season.

Sales of capital-driven products represented 42% of total Q1 sales and declined 3% from Q4. Sales of our liquid systems products remained relatively firm as the strong demand for our photochemical pumps continued from the fourth quarter. Our high-performance offering continues to be the pump of choice for critical photochemical applications by IDM as well as foundry customers. It's also getting traction for retrofit applications. Sales of other capital-driven products, such as wafer process carriers and FOUPs, were essentially flat compared to the fourth quarter, reflecting increased cautiousness on the part of key IDM customers in their CapEx spending plans, particularly as they ramp up new 300 mm capacity additions.

This is a business that has historically been lumpy, but our sales of these products have remained fairly flat for the past several quarters. We remain convinced that long-term growth in this market will come, first, from an increased need to make the environment within the FOUP even more contamination-free and pristine, and second, our ability to add functionality and capability to our product to achieve precisely those ends.

The sales of gas microcontamination products declined modestly. Demand for these products tends to follow shipments of stepper tools, particularly advanced nodes, since controlling airborne molecular contamination in and around (inaudible) process is a growing application for these products.

Our Clarilite Certified solution is a great example of this and we were pleased with the initial sales of these products in Q1. As we've discussed on previous calls, Clarilite combines a number of our products and technologies, including reticle pods, gas purification systems, and membrane technology to provide a solution to a very complex contamination issue facing semiconductor manufacturers, particularly at the 45 and 32-nanometer technology generations.

Looking out to the rest of 2007, our attention is on four primary areas. First, we are continuing to develop and launch a steady stream of new products using our core filtration and materials handling technologies. Some of these initiatives, such as Clarilite and a new TVA roller brush product for post-CMP cleaning, have already shown initial results this quarter. But others are still in the early stages and are expected to yield results as we move through the year.

Second, we're committed to taking share in some key markets. The initial sales of our 300 mm FOSB marks an important step in that process.

Third, we are continuing to execute on manufacturing moves to Asia in general and Kulim specifically to increase our operating efficiencies.

Fourth, we intend to use our strong cash flow and financial position to maximize shareholder returns.

Turning to our outlook for the second quarter, there are signs that the industry may be at somewhat of a rolling bottom. This generally flat environment means second-quarter sales are expected to be in the range of $155 million to $162 million, and GAAP net income per diluted share will range from $0.08 to $0.10. Adjusting for approximately $4 million in merger-related charges and expenses, our expectation for non-GAAP net operating earnings per diluted share would be to range from $0.10 to $0.12 per share.

With that, we will now be happy to take your questions. Operator?

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Brett Hodess, Merrill Lynch.

I had two questions. First, on the capital-driven side of the business, Gideon, can you talk about how that splits out between direct sales to fabs, I guess mainly new fabs, and to OEMs? I guess you said overall it was down 3%. Could you talk about those two sides? Were they both down or was one up and one down, and sort of how that played out?

This is Jean-Marc here. On the equipment maker from Quarter 4 to Quarter 1, we have been basically flat. The ratio of revenue coming from the makers compared to the total revenue is about similar to the previous quarter. On the grower side, it's about flat as well, so we are not seeing a lot of challenge in terms of revenue from the fourth quarter to the first quarter from both the tool manufacturer and the growers.

How about direct to fab?

Our direct fab business has been about flat as well because mostly the impact for us was in the data storage where we had some softening, so if you exclude this softening in the data storage, the fab from Quarter 4 to Quarter 1 was pretty steady.

Okay, that's great. The second question was on the gross margins. I guess you mentioned that the likely outlook is for some improvement throughout the year. Will that stand up, even as you get a little lower volume potentially in the coming quarter?

Brett, we would expect that the margins, even on slightly lower volume, would be relatively flat in the current quarter with a bias toward improvement through the year. But if we see a decline in revenue and we expect also to continue to reduce our inventory levels, we would expect to maintain those margins relatively flat, even on a lower revenue level in the quarter.

Great. Thank you.

Chris Blansett, JPMorgan.

Just a couple of things here. What's the update on the transition of the manufacturing to Malaysia? What kind of revenue level are you expecting out of Malaysia by the end of the year? Has this weak time of the cycle -- I guess is this kind of helping you to accelerate your transition to Malaysia?

Good morning, Chris. It is Gideon. Malaysia, before we expanded the facility, accounted for about I think 15% or so of our manufacturing. As you know, we've doubled the size of that facility and we bid that -- so we added well over 100,000 square feet with the specific plan to migrate several product lines over there. That is already in-process. Between the beginning of the year, you know, three months ago, and I would say the middle of next year, there would be three product lines that are significant to us that are going to be transferred over there. I think we are sort of in the first few innings of that ball game, so we don't have really a lot of additional new shipping coming out that. In effect, we're being penalized because we're paying for the cost of transferring that. It costs money to do that; that's being reflected in our results. We're paying for the additional cost of that larger facility and getting that structure and all the fixtures and so forth that have been put in place. That's temporary -- because I would say, by the beginning of next year and even by the fourth quarter of this year, we will start to have meaningful shipments out of that new side of the facility.

As I said, these are very specific products. I would say they're both on the filtration side and also on the wafer handling side, which we're in the process of transferring over there. When we do that, Chris, we do that very carefully because, as you know, this is an industry where not only do you want to have the authorization of certain customers to transfer products, but also you want to make sure that you are really training people in a highly effective way so that you don't have any glitches. That's in fact what we're doing. So it will have a very positive impact, but you're not seeing it reflected at all in the numbers yet.

Okay. Then what kind of share buybacks did you have, Greg, in the quarter? I guess in the near future, are you guys looking at being a little more aggressive on that, or --?

I mean, we didn't implement any additional share buybacks during the quarter. My sense is that the counterparty to our ASB was probably in the market buying shares but we don't know exactly what that buying was. So from an accounting perspective, there were no changes in our share count related to share buybacks.

I think our position has been and I guess I have a little bit of a benefit, being the new CFO, being able to read that relook at the balance sheet and think about things. All I can say is we really don't need $305 million in cash to run this business. We showed last year that we would be aggressive on the buyback front and I think you can expect to see similar things in the future.

Okay, and then the last thing -- what was your headcount at the end of the quarter?

Headcount was about 2700 people, down from almost 2850 at the end of the fourth quarter last year, Chris.

Mark Fitzgerald, Banc of America Securities.

On the strategy for 2007 for new products here, is there any way to help us understand the revenue opportunity for the Clarilite and the brush products and some of these other things you've got going?

Yes, this is Jean-Marc. Yes, you know, we committed to a $40 million net project extension and new products for platinum, and we are well on our way. I mean, we did about $10 million in the first quarter, so it looks good for the goal.

You're right on the brushes. We are progressing very nicely right now. We are qualifying additional customers and we are ramping up production here in (inaudible) in order to sustain the new demand.

(inaudible) Capital revenue, it's a fraction of a percent of the total company has revenue from this year, so (inaudible) but a fraction of it.

For the Clarilite product as well, it would be a fraction of a percent. We have started to book some significant bookings already in Quarter 4 and Quarter 1. We are currently ahead of our plan for the Clarilite Certified solution.

So just to roll that all up, you are saying $40 million a quarter towards the end of the year is what new products will contribute?

No, I'm saying $40 million for the year as well under control, and we currently booked in the first quarter 10 million.

Okay. Just switching gears to the strategy on your cash flows here and using this to I guess improve the capital structure, are you comfortable enough that you've got a business structure that through a downturn can be cash-flow positive? Therefore, could you be looking at a potential dividend as one of the other alternative for returning cash to shareholders?

Mark, Gideon here. Before I tackle the cash issue, I just want to make one point on the new products. If you look at our R&D spending, it is up. It is the one area -- I mean, we are very careful and really careful about our G&A spending around here. We continue to make good progress in that area.

The one area where we do not -- where we are very, I would say, not liberal but where we actually have increased our investment is in the area of new product development/R&D, which on a run-rate basis I think for the quarter was about $1.5 million higher than it was a year ago, so it's actually an area of investment for us and we do that very consciously. The lifeblood of a company is new products. Given the tremendous amount of IP that we have developed here and I would say the convergence of the technologies in this company -- I am particularly talking about the microenvironments technology and the filtration technology, because what you have with, for example, the Clarilite solutions that we were talking about is we really have for the first time the convergence of microenvironment technology and filtration technology. We are seeing that in the reticle pod area, because that's an area where there's a huge amount of, frankly, money at stake, particularly in the foundries, which use a lot of these Smith pods with their reticles, and where the cost of contamination are prohibitive, particularly as you go to 45 nanometers. So that's the first time this is happening. We expect that convergence to take place in other parts of our business as we move forward through the year and into the future. That's why we are investing and we were investing in very specific technologies to, I would say, take advantage of that wave, which is going to be coming our way.

As far as cash, our breakeven, as far as we can understand, in terms of non-GAAP or cash flow, if you will, is about $120 million a quarter. That is considerably less, obviously, than we are doing today. I would say that would constitute a very significant downturn, approximately a 25% reduction in revenue versus our revenue right now. So we're very comfortable that we have well -- we have that well in hand. We don't expect to see that obviously, but we intend to flex as needed.

To answer the question more directly, as Greg Graves said a couple of minutes ago, we will look to use cash for a number of purposes. Historically, if you look at what we've done is we've made some very focused acquisitions. We find those; we will make those, and we hope to do that. Then we've also used our cash to return it to -- to basically to improve our return on invested capital, which is something we take very seriously around here. This is a leadership team that actually is measured based on ROIC. Very clearly, that's a link to our long-term incentives around here, and you should expect us to continue to pay very close attention to that.

Does that answer your question?

Well, more directly, I mean would paying a dividend be one of the options for returning (multiple speakers)?

There are a lot of different options. I wouldn't basically fixate on one or the other. I would say take what I said at face value, essentially.

Okay. Then one last question here. It the foundries guidance coming off the first (technical difficulty) quarters were pretty a sharp snapback in wafer starts, kind of high single digits, low double-digit growth rates, so I'm a bit curious in terms of your bouncing along the bottom type guidance at least based on what's going on in the foundry at this point. Can you resolve the difference there?

Remember, in our rear-view mirror, it says objects are closer than they actually appear to be, and that's because we have limited visibility, as many of our brethren do, into the future. You know, so we don't see that sharp snap at this point in terms of the bookings level, certainly, but we do try to operate a very flexible model as far as our ability to respond. I don't see any reason, in terms of either raw materials or our ability to manufacture product, that would preclude us from responding to a sharp turnaround in bookings. We don't see that yet, and we see the same information that you see. We do talk to our customers extensively. And we certainly -- that will be a high-class problem to have, Brett.

Jean-Marc, do you want to comment?

Yes. I would say that it is known that capacity utilization was really bottoming in the January-February time frame, and it is expected to ramp up during the second and the third quarter, so we are ready for that. But we are really yet to see that -- we didn't see that too much in the April timeframe, so hopefully, we are in a holding pattern situation and it should come before the end of June. But we're probably, I would say, (inaudible) conservative on the bookings level coming from the fab right now.

Remember, those numbers have not significantly decreased from Quarter 4 to Quarter 1. We have been flattish on the fab, so not to bad. If there is a pickup, that's great, but at this point in time, we have to be conservative.

There's no inventory issues in terms of these guys holding excess inventory, or inventory above normal levels, for your parts?

No. I mean, we have about 11 confinement places worldwide and they are just available for customers to be ready to ramp up when we need to and these aren't the main fab but this is representing nothing for us in terms of quantity of finished goods at (inaudible) locations.

(OPERATOR INSTRUCTIONS). Timothy Arcuri, Citigroup.

A couple of things. I guess, first of all, a couple of your comments are a little baffling, frankly. So if I look at your Q1 revenue, and I look at it relative to the peak, you're down about 12% from the peak. I'm looking at just the consumables piece, so the consumables are down 12% from the peak back last summer, which is about double what wafer starts are down. Then I hear you say that you had $10 million worth of new product in Q1, so if you strip that out, you're actually down more like 17% versus a wafer start down like 6% or something. So I guess I'm still trying to figure out why the consumables revenue is under-growing wafer starts by so much.

Tim, this is Jean-Marc. First, not all our business is related to semiconductor. You know, we've a piece which is coming from data storage and [TFT] business and in that area, I would say that we have seen some softness, as we said before, from Quarter 4 to Quarter 1, so not all of consumables is related to the wafer starts in fact.

On the other hand, this is true that second quarter last year, our peak quarter, there was a rush in terms of ordering at that time. I mean, probably the 181 million we had at that time was a little bit boosted by cautionary bookings and sales from the fab. So this is distorting a little bit the comparison on a quarter-to-quarter basis when you look at wafer starts comparing second quarter last year to current quarter. So this is what I have to say about that. I mean, you should be very careful looking at [quarterization] and quarter-to-quarter.

On the other hand, we have also yet to take market share into some unit-driven business such as the FOSB business. You know, we have a limited market share right now, committed to take 20% market share by 2009. We will get there, but today, it is not contributing yet to a significant impact to our unit-driven business. (multiple speakers) that a little bit.

Okay, Jean-Marc, so even if I stripped out all the data-stored weakness and all the non-semiconductor weakness and I just compared like-for-like semiconductor consumables to semiconductor consumables -- and it's difficult to do that given the information that you've provided -- but even if I looked at those two pieces and I compared that to wafer starts, you would argue that number is not underperforming wafer starts?

No, I believe -- I mean, you know, we don't have a straight comparison with wafer fabs. I know that some really do that; we don't. I mean, there is -- I would say directionally this is parallel if you want but it's not mechanically linked as it is for some other companies.

If you exclude disk shippers, Tim, our unit-driven sales actually were down 4% from Q4, so that is a direct comparison, if you take the disk shippers out of that picture.

Okay, Gideon, that helps. Great, thanks. Then can you give us some idea of what the P&L would have looked like in March if you strip out the additional costs from Malaysia?

We would estimate that the impact of carrying Malaysia and the costs we are incurring for the transition of products to Malaysia is probably somewhere around 0.75 of a point, gross margin point. I mean, because as Gideon said early on, we are carrying the depreciation, we are starting to staff the facility, we're spending money to move things over there -- products over there.

The other aspect of that, Tim, is that it's not just 0.75 of a point of gross margin; it's also 0.75 of a point of net margin because we don't pay taxes on that income. As you may know, we have a long tax holiday in Malaysia.

Sure, okay. But that would kind of encompass the entire impact?

Correct, yes, at this point.

Okay. Then the last thing, so not to say that this will happen, but if, in a year from now, once the conversion to Malaysia, or even 18 months, once the conversion is fully completed and you are getting all the revenue that you want out of that facility, what would the margins have been in March? So, if you take that same sort of revenue level, what would the margins be when you fully convert over to Malaysia?

I don't want to be terribly specific, but I would expect that it would be a point to 1.5 points higher. I mean, if you look at our March quarter, the declines in the inventory, the slower sales, we were probably penalized 0.75 of a point, so I would say like 1 point to 1.5 points higher is what we experienced this quarter.

Okay, so just kind of follow-up on that, so the number was 75 basis points, constrained by the conversion, but you would only get a 150 basis point improvement. So, the net is only 75 basis points?

Yes. What I'm saying it is, if you looked at the current quarter, we probably have 75 basis points of downside related to the reductions in the inventory and some modest inefficiencies in manufacturing. So, quarter-over-quarter, Tim, if we had flat revenue quarter-over-quarter and no changes in inventory, I would expect the margins next quarter to be about 75 basis points higher.

Okay, so the full benefit from the move --

(inaudible) operating (inaudible) --.

Okay, so the full operating benefit from the move is about 75 basis points on the gross margin line?

Right.

At this time, not when the facility is fully occupied. Let's be clear. You asked two separate questions. One is what is the gross impact, the gross margin impact today, and what's the gross margin impact a year or 18 months from now when it's fully occupied? That's a different answer. In the case of today, it's 75 basis points. In the case of when it's fully occupied, what Greg is saying is it's about 150 basis points. Are we clear on that?

Yes, that helps. Thanks, Gideon.

Jim Covello, Goldman Sachs.

Good morning, guys. Just a quick clarification -- you made the comment that there was a rolling bottom -- it appears that we're at the rolling bottom. I just want to understand if you think that applies to both your unit and CapEx-driven businesses or justly the unit-driven business.

This was mostly in terms of capacity-utilization, so mostly driven by the unit-driven business. (multiple speakers)

Okay, if I were going to get a characterization of the overall outlook for the business --

(multiple speakers) -- seen a flattish situation from Quarter 4 to Quarter 1.

But, you know, with the orders declining pretty significant at the OEMs this quarter and potentially the next couple of quarters, you know, as you plan for the business and you think about the margin comments qualitatively you made and the quantitative guidance you've given for the out-quarter, does that contemplate a deterioration in the semiconductor equipment side of the business, or not?

We do not anticipate that. I mean, I expect some softness for the next two or three months, but we do expect some pickup in the second part of the year.

Based on what segments, do you think? I mean, obviously, foundries could order a little more, memory customers -- so you are arguing that there's going to the offsets to decline in memory spending, or you don't think there's going to be a decline in memory spending?

I think memory spending is -- I mean, there has been a lot of investment. I mentioned (inaudible) investments over the last quarter (inaudible) three months ago, so this is happening right now. There is a glut. But for the logic, I don't see an issue picking up in the second part of the year.

Hari Chandra, Deutsche Bank.

Can you give us the gross margin performance from the new products in 2007? Does it track corporate average or below that?

We have a different kind of new products. I mean, some of (inaudible) new products will be the brushes, as you know, and I mentioned before that we are getting a few qualifications. Margin is pretty good here; it's a consumable product.

We have also additional revenue coming from the FOSB business. This is a very competitive business. This is probably one area are in the (inaudible) where we need to be considering pricing or conceding to some price pressure from the entrenched competition. So I would say that, in that area, the margin would be a bit below the corporate average. But overall, if you take the mix of all the various new products that we are introducing this year -- Clarilite is very good example -- we are addressing (inaudible) and complicated application there and frankly, we are competing against a kind of head-to-head kind of products. I mean, we are sold a problem and the customers are ready to pay for solving a problem. So overall, I would say the margin in aggregate would be comparable to the current corporate one.

I would add another point on that, and that is we are seeing, this year, and as you know this, the first bit of beginnings of migration to 45-nanometer technology. That requires a level of purification and filtration, particularly which, number one, requires materials that are new and hence a number of new products that we are actually introducing and have not really talked about but are in the process of introducing as we speak, and frankly those new products are going to provide levels of contamination control that are fairly unprecedented. We would expect those to have good margins, as they typically would.

The second thing is we mentioned, in our script, and I would reiterate that our liquid systems business has remained fairly strong and we definitely see a -- we don't see any weakening, any further weakening of that business at this point. Where possible, we are channeling our efforts on the capital side to products that are system-oriented products because of the specific question that you asked. That is a higher-margin opportunity for us. Part of the Clarilite solution in fact involves exactly that philosophy, as do other things we are doing in the systems arena. So I would reiterate what Jean-Marc just said.

Okay. What was the currency impact on the first-quarter sales? Also, can you elaborate on Japan?

The currency impact overall was $2 million.

Okay, and on the Japan -- what's going on there, and the outlook?

The outlook for Japan is up for the next quarter. I mean, the situation in Japan for the first quarter has been some kind of flattish, and we expect the trend to be up. I mean, the indication we have for our key customers in Japan is up for the next quarters to come.

One final question on the OpEx -- how should we look at OpEx? I agree there is an increase in R&D that you talked about, but about the SG&A -- what numbers should we look at on an ongoing basis?

I would expect OpEx to be relatively flat on an ongoing basis, excluding the severance-related costs of $1.7 million.

Sure. Okay, thank you.

Jesse Pichel, Piper Jaffray.

Good morning. What are the remaining merger and integration charges, and how much of that will be cash charges?

We should not have any additional merger -- any additional cash merger and integration-related costs going forward.

Going forward, we will have two buckets. We will have $3.5 million a quarter of merger-related amortization, which will be with us for six to seven years or more, and the acquisition-related stock grants, which will be about 500,000 next quarter. Those will diminish to essentially 0 by the first quarter of next year. So by the end of this year, all we will have left is the merger-related amortization. But we have no cash costs at this point.

Great. Gideon, you mentioned that management performances or benefits are tried to ROIC. I would just like to know. How do you calculate ROIC or specifically what is the ROIC for the Company and what is the [WAC] as well?

Well, go ahead, Greg.

We calculate ROIC based on total invested capital, which is essentially total assets less noninterest-bearing liabilities, and then the net operating profit overtax being the numerator. Today, the ROIC is in the 7% range. Clearly, our targets and our compensation is tied to numbers that are higher than that.

With regard to cost of capital, we use the standard capital asset pricing model. I mean, the data bounced around at different times but that high teens cost of capital.

Okay, and what does using your cash for a share buyback there do to your ROIC?

Well, if we were to -- if you took $100 million in cash off the balance sheet, you would reduce the capital invested in the business by about 10%, so the denominator would be reduced by about 10%. The numerator would be constant. You would have a modest improvement in the ROIC.

Can you just talk specifically about your R&D spend? How much of that spend is for products not launched versus continuous improvements on existing products?

Most of that spend is on, I would say, at this point, products either not launched or in the process of being launched. No, there are sustaining engineering efforts that go on. I would probably say 60% on brand new products and 40% on any engineering. (multiple speakers).

That 40 million that you spoke of before, that doesn't refer to the 60%, right? That's already-launched products?

(multiple speakers) the $40 million new coming from expansion of (inaudible) family and brand new product is directly related to products already launched; this is correct. (multiple speakers) launched within the next couple of quarters. Most of the R&D, you are right, has been already spent for those products. This is correct.

But you know that we have 60% of our business which is unit-driven, I mean consumable. Different (inaudible), different membrane, different surface modification, and there is a significant part of our expenditures in R&D which are devoted to continuing on the certification of a [gain] to go to 45 nanometers and below. (inaudible) sides, increasing the flow rate, diminishing the contamination issues and so on.

At the same time, there is also about 55% to 60% which is dedicated to new flavors, new membrane, new devices based on existing platforms. So it's very difficult to make the distinction between brand new products versus derivatives because the efforts in the control of contamination are (inaudible) in fact. They are not necessarily break-through every quarter. They are incremental and they have been that way for many years.

Great. I'd like to talk to you about that off-line if I could at some point, but -- so the total revenue target for all of your R&D -- for new products not yet launched is what?

We said this year that three-quarters of the $40 million would be incremental to our revenues, so this is $30 million this year and $10 million will be cannibalizing existing products.

Great. Thank you for clearing that up.

Colin McArdle, Needham & Company.

You mentioned that gross margins fell short of your expectation by about 100 basis points. I wondered if you could just break out what percent was volume-related, inventory and manufacturing issues lingering?

I really just don't want to go into that kind of level of granularity. I mean, I can talk to you about that off-line if you would like.

Okay. Secondly, though, on that point, you mentioned, in the last conference call, that you wanted to conduct a worldwide review of manufacturing. I wondered if, in that exercise, you found anything that you could share with us.

We continue to look at kind of the entire manufacturing platform. Today, I don't have anything specific for you but I would say our whole manufacturing initiative and the cost around that is that it's an ongoing process as we look to continue to outsource, as we look to continue to implement lean initiatives as this whole migration to Kulim takes place. But today, I don't have anything specific other than kind of our ongoing activities.

Just to add to that, we made certain changes in retrospect when we made that review of manufacturing. Those have actually -- those were completed, basically, and we did not experience the same issues that we did in the second half of last year, which I think we made clear in the script.

So, what Greg is talking about, which is reality, is like every company that strives to increase its operational capability, we do that on an ongoing basis. That's both in our factories. That's obviously the more strategic elements like the move to Asia and Kulim. It's a combination of all those factors.

Okay, thanks. Then separately on the Clarilite product line, it seems fairly revolutionary. Is there a longer selling cycle or getting customers up the learning curve on the ROI? Is there any competing product out there?

That's a very interesting question. You know, (inaudible) and airborne (inaudible) contamination in the close proximity to reticle or to a wafer, by the way, because applications are very similar, has always been there but interesting enough, when we combine combined Entegris and Mykrolis a couple of years ago now, it became apparent to many of us in the Company that the synergy, by bringing a solution (inaudible) containers, both for reticle and wafer and also the ability to purify on the spot with various purging systems, I mean mechanical systems or just what I call (inaudible) was available to the Company. Since then, we have introduced a family of products (inaudible) the [SPIE] show in California; it was a couple months ago. And even reluctant customers who knew they had a problem and wouldn't necessarily talk too much about it, are now jumping on the bandwagon and adopting those solutions.

So the competition was probably the mental resistance of some customers to admit that they could fix the issue by a different way of purging or a way of maintaining the contamination around reticle and wafer in a pristine way. We see now a rush to those solutions. That would be competition because for sure we have seen already some moves in that area, which is good news in fact because it means the market is recognizing that there is a need. We do have the privilege of having started first and having a lead here, and we are also the only company that doesn't need to go outside to assemble the proper product offering that does make the containers and the purifier a single and continuous product offering.

Tim Summers, Stanford Group.

Just number one, regarding the management layoffs, was this a function of a change in your business outlook or was this already in your strategic plan?

We talked about the severance-related costs. It really falls into three buckets. A portion -- and they are almost equal buckets -- a portion of it relates to reduction in the variable labor at our factories. Another portion of it relates to us literally taking a layer out in our manufacturing operations, if you will. Then the last piece relates to just some selective reductions in our SG&A costs.

I guess bucket number one and number three, did you expect to do those going into the first quarter?

We didn't expect our volumes to be as low in the first quarter. I mean, the midpoint of our range was $4 million or $5 million higher than where we actually ended up. So did we expect to do the right thing? If we saw low volumes, I mean, we would expect to do the prudent thing and reduce our workforce, but we didn't expect the volumes to be at the level.

Number three, we are continuously looking at our SG&A costs and being prudent in that area, and (inaudible) just made some selective eliminations; it wasn't specific to reductions in volume.

Okay, great. Just as a follow-up, when does the reconciliation on the ASB end?

Contractually, it's October.

Does that mean that you are boxed out of further buybacks until then?

Not necessarily.

Okay. Is it realistic to assume that you would enhance your buyback until then?

I would say, Tim, you should just read and listen to what we said at face value and not -- we're not going to go beyond that. Clearly, we have a philosophical orientation towards making sure shareholder returns are appropriate. Clearly, we've talked about our breakeven level of revenues as being 120 million. Clearly, we have an organization that knows how to flex. The fact that you asked about why we took people out -- if our business level goes down, we're going to flex our cost structure. If our level of business goes up, we will flex our cost structure. We will do that every time. I won't go beyond that.

Okay, great. Thank you.

Ali Irani, AI Capital Management.

I'm hoping you can clarify at what point we would expect the double costs incurred with the ramp-up of Malaysia to start coming off. Meaning, when you talked about volume coming out of -- for the new coming out of Malaysia end of year Q1, should we expect, at that point, some further cost reduction in the United States? Thank you.

Well, we said it's about a 12 to 18-month transition to fill the Kulim facility, so if we are 6 months into that, I would expect it to be at this point in time next year.

So basically what you're saying is, through 2008, we will have the redundant cost structure scaling down?

The transition costs will be behind us by, you know (technical difficulty) or early to mid-2008. The double costs -- I mean, we will need to make adjustments obviously other places with regard to our manufacturing footprint. At this point, we haven't made any formal commitments around that. But you can expect that -- we had 90,000 reviewed somewhere, we need to make adjustments elsewhere.

Here's another bigger-picture question for you. One, with these three products, what percentage of your revenues would you expect to come out of Malaysia? In the grand scheme of things, do we see a (technical difficulty) strategically that would make sense to have 80% kind of production coming out of low-cost regions from Malaysia, China or elsewhere, in order to bolster the operating margin structure of the business in the long-term?

Well, the answer to your first question is my guess would be that Malaysia will constitute -- it will be closer to 30% to 50% by the time we're done with this transition. So if you look out to the middle of next year, it's probably close to double in terms of output. That would be realistic given the fact that we've doubled the size of the facility.

I would say the second question you asked is a complicated question. Here's the simple answer. We've already outsourced a number of key products. Probably the area that is most -- has been most aggressively pursued here has been parts of the data storage product lines, which are outsourced. So whether it's that, whether it's moving production to lower-cost areas, directionally that's where we are going.

At the same time, you know, we have reasons for wanting to manufacture in certain geographies. It has to do with customers and being close to customers, as well as, frankly, operating efficiency. We've got some highly efficient operations in North America. So it's very much of a puzzle and one where we feel very comfortable that we are not -- we're not way off at the current time frame. We don't have huge excess capacities anywhere, Tim. We are not in a situation where we are rectifying some -- Ali, sorry -- some manufacturing issues that are significant. But it's a move that's occurring current over time and carefully. So, that would be my answer to your question, Ali.

Glenn Primack, Broadview.

Most of my question has been answered, but I'm wondering if you have much overlap with BOC Edwards given the Linde/BOC merger. I'm not sure what happens with that asset.

BOC is a (inaudible) customer. It depends but we do compete in some small areas of subsystems from time to time, but I would say we are more partnering than competing against BOC.

Mark Fitzgerald, Banc of America.

A quick question -- can you give us any idea on R&D expense, quarterly, through the balance of the year here? Up, down from where we are?

I would say flat with a bias towards up slightly.

Okay. Then what is left in the share buyback?

From an accounting standpoint, or our income statement essentially reflects the $[100] million buyback related to the ASB. The counterparty to that buyback is obviously likely to still be in the market. There is a buyback activity occurring but it doesn't impact us from a financial perspective. When we announced that buyback, we announced 150 million. So there's 50 million unused under that buyback.

Okay. What is the share count you're using for the EPS guidance?

135.5.

Okay, thank you.

Timothy Arcuri, Citigroup.

Can you give us some idea of semiconductor and non-semiconductor revenue this quarter? (technical difficulty) if you could go back a couple of quarters.

Yes. From a fab standpoint, from the fab standpoint, it was -- you want a comparison versus the first quarter or --?

Yes, I just want the number from March, and then I want the number going back for December and if you have it for September as well.

I don't have September handy right now but we could probably joke off-line -- but flattish to up for the fab from the fourth quarter to the first quarter. This is representing about 28% of our total revenue (inaudible) fab.

Well, Jean-Marc, I guess what I'm actually looking for is I want the percentage of revenue that is semiconductor versus non-semiconductor.

This would be 78% of our revenue would be 78% in fourth quarter was semiconductor, versus non-semiconductor; and 79% of our revenue in the first quarter was semiconductor versus non-semiconductor.

Okay, great. Thanks, guys.

That does conclude our question-and-answer session. I will turn the conference back over to Mr. Gideon Argov for any additional or closing remarks.

Thank you very much for attending the conference call. We look forward to communicating with you in the future.

That does conclude today's conference. You may disconnect at this time.