Entegris Inc (ENTG) 2011 Q4 法說會逐字稿

(Operator Instructions). Good day everyone and welcome to the Entegris fourth quarter 2011 earnings release conference call. Today's call is being recorded. At this time for openings remarks and introductions, I would like to turn the call over to Steve Cantor, Vice President of Corporation Relations. Please go ahead, sir.

Good morning and thank you all for joining the call. Earlier today we announced the financial results for our fourth quarter, ended December 31, 2011. You can access a copy of our 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 which are outlined in detail in our reports and filings with the SEC. 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 table in today's Press Release as well as on our website. On the call today are Gideon Argov, President and CEO, Bertrand Loy, Chief Operating Officer, and Greg Graves, Chief Financial Officer. Gideon will now begin the call.

Thank you, Steve. Good morning and thank you for joining the call. I'm pleased to report that Entegris has achieved another record year in terms of sales, earnings and cash flow. We grew our sales 9%, $749 million from the prior year, achieved cash EPS of $0.80 and generated $157 million in cash from operations.

Above all, we continued to execute well operationally and to move forward on our growth strategies. We're proud of this performance particularly during a year in which the industry slowed dramatically in the second half, and the world contended with considerable global economic challenges. In the fourth quarter sales, as we anticipated, were $164 million, down 5% from the third quarter. Cash EPS was $0.16 and our adjusted operating margin was 14.8%, both in line with our target operating model. We also generated nearly $45 million in cash from operations during the quarter.

In terms of fourth quarter trends, and for much of the second half of 2011, the semiconductor industry was a tale of two cities. Technology driven spending by the leading semiconductor device makers continued unabated, while on the legacy side of Technology Spectrum, production rates in the industry remained sluggish through the fourth quarter.

This was reflected in our business results. We continued to gain traction and growth with our products designed to support advanced processes. Our mix of sales, 64% unit driven and 36% capital spending driven, was virtually unchanged from the third quarter.

However, we had growth in several advanced filtration product lines for wet etch and clean and photo chemical applications. This was offset by lower sales of some legacy unit driven products such as shippers used for 200-millimeter and below wafers. Similarly we had strong sales of advanced CapEx driven products, such as our family of new 300 mm FOUPs, which is designed to provide the industry's most comprehensive protection against contamination within the wafer handling environment at 32 nanometers and below.

In fact, 70% of the FOUPs we sold in the fourth quarter were models that are less than a year old. In contrast sales of fluid handling components used to outfit fab infrastructure were soft during the quarter. Looking at our business by market, fourth quarter trends were also not uniform. Our semiconductor related sales representing 73% of total, declined 3% from the third quarter.

In our markets outside semi, sales declined 10% reflecting the slow down in the TFT-LCD and LED markets, as well as lower data storage shipments due to the flooding in Thailand. Nonetheless, we were encouraged by progress in some emerging markets such as solar, where our sales doubled in 2011 and hit record levels during a year in which the solar industry was confronted by huge over capacity and substantial price declines.

As we move into 2012 we have several reasons to be encouraged. We exited 2011 with a pickup in demand that has sustained itself thus far in the first quarter. Our strategic initiatives are enabling us to become increasingly aligned with a technology road map of the largest and most influential players in the industry. This is allowing us to penetrate opportunities at the 28-nanometer and below semiconductor process nodes, as well as for EUV and 450 millimeter.

The opportunities are both near- and long-term. We are not content with simply maintaining our edge in these markets. We intend to extend our technological and market leadership. We are making a major investment to be the leader in 450 millimeter wafer handling as that technology is adopted over the next several years.

We also intend to invest in our core membrane technology, and our coatings technologies, to continue to create differentiated high value unit driven products for the most advanced and demanding semiconductor applications. Before I turn it over to Greg for some additional commentary on the financials and our outlook for the first quarter, I want to leave you with these three points. One, Entegris is one of the small number of companies in the world that has the breadth of contamination control technology and the experience needed to fully address the semiconductor industry's next-generation processes.

Two, we have a strong balance sheet and a high operating cash flow business that will support that growth and three, we have strategies that are proven and continue to provide growth opportunities both within the semi industry as well as in adjacent markets. Greg.

Thank you, Gideon. We are very pleased with our results in 2011 and the performance of our three divisions, as our growth continued to outpace our peers. Sales for Contamination Control Solutions, or CCS, grew 11% to $484 million as our liquid filtration business reached record levels.

Sales for MicroEnvironments Division were $182 million, which was even with the prior year, and sales for Specialty Materials were up 19% to $83 million. We demonstrated strong performance on both the unit and capital sides of our business, with unit driven sales up 9% and CapEx driven sales up 8% for the full year. We continued to show leverage in our business model as our operating income for the year increased 14% on a 9% increase in revenue.

This performance was the result of excellent execution, particularly during an industry slow down in the back half of the year when we responded quickly and flexed our cost structure down. Shifting to our Q4 performance, sales for the CCS division declined 5% sequentially to $105 million. CCS operating margins were 25%.

Sales for the MicroEnvironments Division declined 6% sequentially to $40 million. ME's operating margin was 15%. For the Specialty Materials Division, sales declined 8% to $18.7 million. Despite the decline Specialty Materials achieved a record operating margin of 23%.

Consistent with the lower sales levels, fourth quarter gross margin was 41.2% reflecting lower absorption of fixed costs and reduced production levels. Inventory declined by $9 million in the quarter, as we adjusted our manufacturing output consistent with the lower demand levels. The impact of lower manufacturing volumes was offset in part by lower variable compensation costs.

Operating expenses for Q4 were $43.4 million, a decline of about $2 million from Q3. The lower level of spending is the result of tight control over discretionary costs and lower variable compensation expenses in both SG&A and R&D. Moving into 2012 we are committed to the R&D spending needed to sustain our initiatives in advanced wafer handling, CMP and lithography applications.

Our GAAP tax rate for the quarter reflected a one-time tax benefit of approximately $21 million resulting from the reversal of valuation allowances on our deferred tax assets. This is a GAAP convention and we are essentially recognizing all future tax benefits related to certain carry-forwards in the current quarter versus recognizing the benefits as they are utilized, which is what we have been doing over the past two years.

Going forward, we are planning for a GAAP effective tax rate of approximately 30% to 32% in 2012, although our cash taxes will continue relatively unchanged at approximately 20% to 22% in 2012. Including this one time benefit, our tax rate in Q4 would have been 9%, with a full year rate of 19%. The lower Q4 tax rate, as compared to the previous quarters in 2011, resulted from ending the fiscal year with a more favorable geographic mix of income than previously estimated.

Q4 EPS on a non-GAAP basis was $0.16 per share which excludes amortization expense and the one-time tax benefit. The Q4 non-GAAP EPS also included a favorable impact of approximately $0.02 per share due to lower variable compensation and approximately $0.02 per share due to the lower effective tax rate in Q4. In terms of our balance sheet, cash and short-term investments reached $274 million, an increase of $45 million over Q3.

Cash flow from operations for the quarter was $45 million, as we continued to aggressively manage our working capital. Cash flow for both the quarter and the year was favorably impacted by the reduction in accounts receivable and inventory. While we have a share repurchase trading plan in place, we did not repurchase any stock in the quarter.

Depreciation expense was $6.5 million in Q4, and CapEx was $6.1 million, $3.4 million below Q3 spending. For the full year, CapEx was approximately $30 million. During 2012 we intend to make a number of significant investments in our leading-edge technologies that will strengthen our business moving forward.

These initiatives include equipment and tooling to manufacture 450 millimeter wafer handling products, and the establishment of an advanced membrane manufacturing and development center for critical filtration applications. These investments, that are largely one time in nature, are critical to our ability to extend or technology leadership. As a result of these specific investments in 2012, we anticipate CapEx of approximately $70 million, or a little more than double the amount we spent in 2011.

As Gideon mentioned, we did experience a pickup in demand in December for some of our more advanced semiconductor products. This strength in bookings has continued into Q1. As such, we currently expect Q1 sales to be flat to up 5%, and non-GAAP EPS to be $0.11 to $0.13.

The EPS guidance is consistent with our Q4 results, excluding the favorable impacts of lower variable compensation and a lower tax rate in the fourth quarter. In summary, we are extremely pleased with our results for 2011, a year in which we had record revenue, earnings and cash flow. Sales in Q4 reflected strength in products for advanced semiconductor technologies.

We delivered strong financial results in cash flow, consistent with our current target model, as we flexed our cost structure and we are stepping up our strategic investments to extend our leadership in advanced technology. With that, we'll now take your questions. Operator.

Thank you. (Operator Instructions). And we will take our first question from Terence Whalen of Citigroup.

Hi. Good morning. Thanks for taking the question. This question is on expectations around inventory heading into the first half. I'm trying to understand with your guidance close to the $170 million level, what type of a gross margin might we expect? Are you going to be building into that to help the gross margin? Thank you.

Our assumption moving into Q1 is that our inventories will be relatively stable so we won't see that same impact that we saw in Q4, where we did have some negative impact on gross margin from the reduction in inventory. In Q4, as I mentioned, we reduced our inventories by about $9 million. That alone had an impact of about .5% to .75% on our gross margin.

Okay. Terrific and then as a follow-up I think looking at your presentation and your rough guidelines for revenue and gross margin near the $170 million level, I think you think a gross margin between 44 and 46 is reasonable. When I think about the gross margin I expect to come in a little bit shy of that. Can you help us understand sort of what factors to look for going forward to understand how we can get back to the 44, 45 level near $170 million revenue level? Thanks.

Yes. Terence, the target model is about three years old and we've stuck with it it over the past three years. I would say it is not likely that we will get back to that type of margin at $170 million. The operating margins that you see there, will, at $170 million, be at the lower end of the operating margin that we show in that published target model.

Okay. Fair enough, and if I could just ask my follow-up question was actually regarding the CapEx. The $70 million CapEx investment, can you describe sort of specifically what areas that is going into and what signs do you see today that give you the confidence as you increase that investment? Thank you.

Okay. First of all, I would say the $70 million is, that's a pretty abnormal number for us. I mean if you look back over history, this is a business in the really points in the cycle, we were spending in the 'teens per year.

A typical year in our history has been somewhere around the $30 million that we're spending this year. So we are making a couple of unique investments, primarily in the advanced membrane facility that I mentioned and 450 millimeter technology. Those two items alone make up a little more than two-thirds of that total investment.

Terence, this is Gideon, let me give you some additional comment on that investment. As you know, we're in the midst of significant technology evolution and I'm referring to both 450 millimeter as well as the UV which are requiring very significant investment by fabs. These are disruptive technologies and they also require innovative contamination control solutions. To take advantage of these opportunities, we do have to make some investments in order to be able to penetrate these new markets.

The largest of those that Greg alluded to relates to the creation of a nano tech manufacturing and development center for membranes and coatings in North America, in New England, which really is the heart and soul of our filtration business and is our core technology that enables us to develop and differentiate solutions and in this case will enable us to do that for the 2x and beyond process nodes.

Very helpful. Thank you, Gideon. Thanks, Greg.

Thank you.

We will take our next question from Patrick Ho of Stifel Nicolaus.

Thanks a lot and congratulations on a nice finish to the year. Greg, just a quick housekeeping question in terms of the tax rate for 2012. Does that not account for any renewal of the US tax, the R&D tax credit at this point in the game?

The US R&D tax credit, I mean we generated more credits in 2011 than we have in past years. We think we will generate a fair amount of credit in 2012, but in terms of the overall tax rate the real driver of the delta if you will between cash taxes and book taxes is the foreign tax credit, and we continue to have a fair amount of foreign tax credit carry-forwards left over that were generated in kind of the darker days of 2008 and 2009.

Great. Maybe just a question for Gideon in terms of the overall business trends and what you are seeing out in the marketplace. How would you characterize the unit driven business for you guys relative to what your customers are telling you right now? Because obviously with earnings season already started the equipment companies have seen the pickup in equipment spending. How does it look like on the chip side of things in terms of both I guess demand and utilization rates?

Well, number one as you know we have limited visibility because we are a terms business so with that caveat, you now I had indicated that it's a tale of two cities, and it really is. The fault line for us is trailing edge, versus leading-edge and we're seeing a marked difference between I would say the strength and demand for sort of 45-, 65 manometers types of applications, versus the leading-edge which is really in generating quite a bit of investment by major device companies.

So we have seen our products that support the leading-edge in particularly the unit driven products, filtration and purification but particularly filtration. Liquid filtration has really been on a tear and we know that is because they're being used in leading edge applications which they are designed for, we're delighted with that. That's the short answer to your question.

Okay. Great maybe a final question from me in terms of the share gains and the opportunities you have there. You know, liquids filtration has been a bright spot for you guys over the past couple of years. As you look forward in both 2012 and beyond, are there any other product groups or any other segments where you see the opportunities in those areas like you have seen in liquid filtration?

I would just say I think that as we see some of those major industry technology revolutions coming our way, especially in the area of UV lithography. We do believe that these conditions will mean very significant opportunities for us both in terms of filtration, but also in terms of purification. The contamination tolerances for those process steps are becoming a lot more stringent, and we are actually working very closely with a number of participants in the ecosystem and on the EUV tools specifically. I would say that we have about four to five active joint development agreements with all of the technology agenda setters.

Unfortunately, we are bound to a fair amount of confidentiality when it relates to development agreements so I won't be able to probably satisfy your curiosity. But one of the reasons why we are investing into this center of excellence is because we want to be in a position to manage those customer requirements very effectively and we believe that creating this cluster of technology in New England for specialty coating and membrane surface modification and in Colorado for 450 is the best way for us to address those requirements and those opportunities.

Great. Thank you.

And we'll take our next question from Krish Sankar from Bank of America Merrill Lynch.

Thanks for taking my question. In terms of your March quarter guidance, how do we think about the different segments trending, are they all going to be awfully flatish, or is one better than the other in terms of ME, CCS and Specialty?

Yes. When we look at the units and CapEx, we would expect the split to be relatively similar in the March quarter. We would expect a little more strength probably in CCS than in the other two businesses in terms of the potential growth rate.

Alright. And in the December quarter within your Specialty, how did the different segments within that trend in terms of like the semi, the industrials and the graphite section.

Within the ESM segment the greatest weakness in that segment was actually in the industrial part of the business. We had a number of significant--that business is relatively lumpy and so we had a number of larger orders at the end of Q3 that didn't repeat in Q4. The semiconductor business in that segment was also weak really, but consistent with what we saw in the overall semi business.

And in terms of units business do you have (inaudible) end market driver is it mostly coming from the foundries at this point, or are you also seeing some pickup on the memory side.

I think we would see that across the board Krish. I think as Gideon indicated it's really more of a function of whether you are dealing with leading-edge fabs as opposed to a trailing-edge fab. And as you know contamination control is increasingly viewed as one of the best ways to optimize your years. And as those fabs are actually adopting those new technology process nodes, time to yield and tool up time is really what matters and we are providing some very unique solutions to help them do that. So that explains really the strength that you are seeing in a lot of filtration and purification products.

Alright. And then just a final housekeeping. In Q4 what is the split between CapEx and (inaudible) I think I missed it. Sorry.

The split?

Yes.

Was 64-36, which was the same as what we saw in the prior quarter.

Alright. Thanks, guys.

And we will take our next question from Jason Ursaner from CJS Securities.

Good morning.

Morning.

Greg, can you repeat the tax rate that's embedded in Q1 guidance?

30% to 32%.

Okay. And then the inventory reduction in Q4 that hit gross margin, was it across-the-board or was this also driven by the divergence in the leading-edge versus legacy nodes?

It was really broad. I mean it was product based.

Okay. And then the microenvironments division revenue and margin were both a little better than I expected. Gideon, you mentioned stronger CapEx in the 300 millimeter FOUPs. Is this strength being exhibited globally or is it really the advanced fabs in the US right now that are being built?

It is globally. It's really a function. Again, it's the same story of trailing and leading. We have, as you know, I think a whole suite of very new advanced FOUPs that have all kinds of barrier materials and essentially are designed to operate in a 3x, 2x environment and it's the orders and increasing the shipments for those products which were as I said 70% of all FOUPs that we actually shipped in the quarter. That really represents some of the strength you're seeing in the ME business.

We also continued to do well on the shipper side in 300 millimeter whereas you know we're picking up shares as we go along. The weaker side of that business was Legacy, 200-millimeter and below, not unexpected and that is part of the trailing edge story we've been talking about.

I guess I'm also asking how do you think your market share looks globally right now.

It varies by product. You know, our market share is not something that, one number doesn't really give you the answer. We are very comfortable that we are the leaders in the FOUP area. I can't tell you what the exact market share is, but it's very significant. And we're gaining market share in the shipper area in 300 millimeter. And below 300 millimeter, we have good market share and have had it for many years.

Okay. Would the trend of retaining engineering talent over labor costs bring some of the most advance FOUPs back to the domestic market be a benefit to you over some international competitors or would that really not have much of an impact?

Well, really it's a global market. You have to remember, Jason, it's a global market. So we serve a global market.

The way we operate the Company, we have centers of excellence by technology around the world, and it's our judgment that in the area of advanced filtration, for example, we have access to both customers and key consortia but also access to the key technology personnel and academic institutions that allow us to actually create as Bertrand said, a clustering effect that is very, very positive here in New England. The area of advanced microenvironments, we feel very comfortable that on the engineering side Colorado is an excellent place to be, but don't confuse that with manufacturing because we make products all over the world and over half of our manufacturing is outside the United States.

Okay. And then lastly what do you think the inventory picture is now at the semi device companies? You know, the advanced nodes have been running at pretty high rates. Are you at all concerned that some of the positive sentiment from a December inflection could be just inventory that's coming ahead of the Chinese winter new year?

Those are good questions, none of which I can answer because I have no clue. I mean honestly we don't have any ability to monitor the inventory at the device companies. I was in Asia recently and there's a lot of excitement about the new technology nodes and the trailing edge is operating at lower capacity. What happens as 2012 unfolds is a good question.

Okay. I appreciate the commentary. Thanks.

Our next question comes from Avinash Kant from DA Davidson.

Good morning Gideon and Greg. Just one or two questions actually. The first one was you talked about the new nodes and I was wondering in terms of new nodes could you talk a little bit about the mix overall what is it of the total revenues? Some idea.

It's still relatively a small portion. I mean you have to look at what the wafer production at 32 and below is around the world globally. I would say it's under 10% and so that is an interesting point you bring up and it bodes well as that percentage goes up for sure, Avinash.

Okay. And Gideon, could you talk a little bit about 450 millimeter investments, like what percentage of your CapEx in 2012 is going to be on 450, and how do you see that trending going forward?

Of the number that I laid out, Avinash, it would be approximately $70 million of 450 would be somewhere 15% to 20% of that.

15% to 20%. Okay. And one final question. You have been talking lately of course about non semiconductor opportunities and you have talked about LEDs and most recently life sciences. Could you give us some idea in terms of where do you see those opportunities and what's the magnitude right now and how could that grow over the next few years?

Avinash, this is Bertrand, as we mentioned in our prepared remarks, we have seen actually some real momentum in the non semi markets, in particular we were able to double our solar related revenues in a very difficult market as you know, the solar industry experienced a very severe contraction in the equipment side in the second half the year. So I think that this is very positive for us and it is a reflection of some of the industry dynamics that we have been reporting to you over the last past years.

As you know cost of watts remains the primary industry driver and you can only achieve that if you increase your staff efficiency or you lower your manufacturing costs. Well, over the last year a lot of the leading-edge cell manufacturers are starting to realize that in order to achieve that, they need to increase the level of automation of their manufacturing processes and they also need to introduce some more complex manufacturing steps.

All of that bodes really, really well for what we do, because what it means is that most likely this industry is going to move to a type of process solution that will include greater wafer handling solutions as well as become actually more sensitive to contamination which means that it will require some more complex contamination control solutions, exactly what we do. So, again, we were able to double our revenues in solar this year in a difficult industry and I would expect to see those revenues hopefully double in the next couple of years.

So Bertrand, maybe you may or may not want to break it, but trying to get some understanding of what's the level of business at this point if you include the solar and the LED and the life sciences?

So I Avinash, 30% of our revenue is non semi. Start with that. That divides into roughly two worlds. By far the majority of that business I would say related to TFT-LCD flat panel and I would say different consumer types electronic products.

Data storage.

Data storage as well. So of that 30%, probably three quarters is as I have just described it. The other quarter is what we call our new initiatives, our emerging industrial markets and that includes solar, that includes LED, sorry that includes solar, that includes some energy storage, that includes healthcare and those are growing much more quickly but they're still smaller.

The reason we reported and we did that our revenues in semi were down 3% and our revenues in non semi were down 10% is related to more than anything else two specific factors. One, second half the year was a disaster for the world of flat panel as you know.

Yes.

And it was a disaster for the world of rotating memory. Those are the worlds that dominate that 30% for us. That will change over time as these emerging markets take hold.

Okay. This is very helpful, Gideon. Thank you so much.

Our next question comes from Jairam Nathan from Sidoti.

Hi, guys. Thanks for taking my question. Can you hear me?

Yes. Hi how are you this morning.

Good. You know, generally noticed that building of newer facilities is generally followed by higher OpEx. So my question is on the membrane and on the 450, is there an increase in capacity or is it an increase in capability?

It's a largely an increase in capability.

Okay.

450 I mean we're moving to the next process node. If that happens to be a new facility although it's a relatively small facility in terms of square footage. In terms of the advanced membrane, it's purely investing in a capability and it will result in consolidating a number of existing facilities.

Okay and so you know, beyond 2012 do you think, looking at it I can see increasing OpEx, but not necessarily higher revenues. Is that fair.

The OpEx, I mean we're obviously going to spend a small, not material in the scheme of our overall numbers, dollars on these projects implementing the projects, so I would not expect these projects to have a meaningful impact on OpEx over time, and with regard to the gross margin same thing. They're relatively neutral to our overall margin over time.

So you wouldn't be adding a lot of people on the DNA war, that's been an issue?

Neither one of the initiatives involve a significant number of people.

Okay. Okay. Sounds good. And next on the 450, you know, if you talk to other suppliers the feeling I got was 450 might be a 15, 16, 17 kind of time frame technology, if that, and what are you seeing different, and my question is are you being too much ahead of the curve here?

It's an excellent question and I think obviously the jury is still out as to when will the exact timing of the adoption of 450 in the industry. This being said, you know, the timing for investment is different depending on where you are in the ecosystem, and being the leader in wafer handling solutions, we need to be ahead of most equipment makers and most device makers simply because without transport solutions for the 450 millimeter wafers, nobody in the ecosystem would be able to start working on their 450-millimeter solution.

So that's why we need to be one of the first to invest in 450. Needless to say, that we are not making this investment a vacuum, we are working very closely with the people driving 450 conversion and migration and we want to be extremely responsive to their requests and their timelines. That's why we are making the investment we're making at this time.

Okay. Great. Thank you.

Our next question comes from Dick Ryan of Dougherty & Co.

Alright. Good morning guys. Greg in your comment about the target model being several years, two or three years old, and that gross margins might not be at the level that would previously be indicated at the revenue level indicated OpEx, or the op margin at the lower end. Is this a quarter, two quarter scenario, or does this require reassessing the model and rolling out a new target model assumption going forward.

I would say first of all with regard to the target model, I did comment that we put that in place in 2009 and we did the equity offering in 2009. So it's been a relatively static model for a period of time, and the model for us is an excellent tool. For us it's become the way we manage the business.

Every division has a target model and so we view it as a tool to drive the business forward. Today I'm not suggesting that we are or we're not going to ever change the target model, but I'm saying in the current quarter the current will be at the lower end of the existing target model.

Okay. And when you look at R&D for the, with the CapEx spend and as we get through 2012 with some of these new initiatives, how should we look at R&D spend going forward?

R&D spend in the first two quarters of the year probably will be in the neighborhood of $12 million.

Dick, just a point in general as you raised questions good questions about the margin and the R&D spend which is obviously mostly OpEx, I want to make sure that it's very clear. We've gotten where we have gotten because we have been very disciplined about executing, including on the cost side.

That discipline is not about the change. So I don't want you to conclude by any means that there is a change in our proclivity to spend money. There is no change in the discipline we're going to exert.

The real question is, as in all businesses, how do you balance the need to show profitability in cash flow, with the requirements of our customers and the need to invest for the long-term. This is the world where we live and you obviously recognize that. We're going to make those tradeoffs. We may make them differently next year. This year, we may change that but we under no circumstances will be spending money like it's going out of style. It's just not the way we do things around here.

All right. Appreciate it, Gideon. Thanks, Greg.

And we will take Christian Schwab from Craig-Hallum Capital Group.

Thanks for taking my question, I apologize, I jumped on call late. Are you guys sees any increase the filtration business, given the migration of the 2X node?

Yes, we did actually, but I'm happy to rephrase the answer. So what we have been saying is that our leading-edge filtration business benefited from two factors. First we saw some increase in fab capacity and utilization at the leading-edge, and as you know more wafers being processed through the fab would benefit our filtration business so that was number one.

But more importantly is the factor number two, and factor number two is that at the most complex nodes contamination control becomes increasingly important in order to optimize your yields, and so that's really the answer we provided a few minutes ago.

Okay. So TSM talked about in 2010 having less than 2% of their capacity at those nodes and expects to exit the year at greater than 10%. So we are finally seeing that migration, you know, in line with typical cycles, right we expand at a very rapid pace, we pause and then we spend more money on advanced technology nodes.

So if those type of unit assumptions on their part, which I believe they are probably smarter than I am, that is obviously not only a positive for filtration and contamination control but also a positive, you know, on the FOUP business as those could be more expense as well, am I thinking about that right?

I think your thinking about it right. In talking about the filtration business, we did say our liquid filtration business was actually up the most recent quarter. Even as our business has contracted over the last couple of quarters our most advanced filters have continued to show sequential quarterly growth the last several quarters.

So the thesis around the filtration that you lay out, you see that in our business, and then with regard to FOUPs, there's no question. And we've talked about the advance of FOUPs for the last couple of years and those products continue to have very good traction. Most of the major device manufacturers of the world are looking at our more advance FOUPs. Many of them have ordered our more advanced FOUPs.

Right. Right. Not to put words in your mouth, but you know, as we begin advanced technology node spending cycle you guys are very well positioned for increase dollar content and then to comment on yields every time we migrate to these type of nodes, yields are a tremendous problem and so we change our filtration products much more rapidly as a means to increase yields in the short-term until we figure out how to do it efficiently, right.

Right. So I think that is something that we have seen happening at every node transition. But I think there is another factor which is a new factor this time around, which is that if you look at the cost per gate - it was actually declining every time we were shrinking the dimension all the way up to 28 nanometers. That actually is not the case anymore as you move to, you know, 22 and below.

If anything, the cost per gate is increasing. So if you want to reduce your cost per gate, which is obviously a very important goal and objective for every fab and primarily the foundry makers, you are left with trying to reduce the cost of the wafer and that's actually not going in the right direction either and that's to increase the wafer dimensions. And that's why the industry is going to transition to 450 pretty soon.

So you're really left with one tool in your tool box and that is yield optimization and you are back to the argument we've been making, which is if you want to increase your yields, you need to be absolutely paranoid about contamination control and you need to be absolutely paranoid about the way you handle your wafers through the various process steps in your fab. So I really do believe that we are in a very sweet spot right now; not just because the industry is transitioning to new nodes, but because I think that contamination control is going to become one of the big drivers for the industry to optimize the yields. And I think it's here to stay. You know, at 22 and below.

Right. TSM also mentioned the tremendous cost as we migrate and we are migrating to 28 which is one thing which costs let's say for every dollar we spent at 28 we're going to have to spend $1.45 at 22 or 20. Is that type of percent they were talking more on the wafer front end equipment obviously why LAM and Novellus are excited about that combination but is that something that you would experience at least directionally?

Yes. You are framing what I was describing a different way but yes.

All right. Perfect. My last question is you guys have highlighted at your last Analyst Day a path to a billion dollars, you know, with macro industry growth, some market share gains some adjacent market expansion. Is that billion dollars potential revenue? Is that something that you think is feasible in a stable macroeconomic environment at 2013 or is that for of a 2014 fiscal year event?

I would say that is probably a 2013-slash-2014 event. I don't mean to hedge that but I think we clearly saw a much softer back end of 2011. There is clear divergence of opinion in the industry about the strength and nature and trajectory of any recovery in 2012.

There are a lot of macro factors that I don't need to go there for you as I think you know them as well as I do and I would say given all that and half of the delta between, you know, 2010, which was when this original discussion occurred and 2013, half of that delta, maybe 40% of that delta was going be through market growth. I would say it's more likely to be a 2014 event. That being said what we're all about I think, Christian, as you know is we will out-grow the industry and that is exactly what we have been doing for three years, that is exactly what we will continue to do because of all of the things that we have been talking about today.

Great no other questions. Thank you. Good quarter.

(Operator Instructions). We'll take our next from Steve Schwartz from First Analysis.

Hey. Good morning, guys.

Morning.

Gideon, you mentioned rotating memory was weak in the first quarter in Thailand. Just wondering if you expect weakness in the first quarter and when do you expect that to come back?

Well, we hear that there is resurgence or an increase in manufacturing of disk drives based on the recovery that's taking place in that region. I would point out that is a very small business for us and really has not much material impact on the overall revenues of our Company. We have no manufacturing, repeat, zero operations in Thailand.

Okay. That's good to know. Okay. Greg, as far as CapEx is concerned, what's your maintenance CapEx? What has it been over the past couple years? Like $15 million or $20 million.

I would say it's a little more than that. Christian, kind of the 2009 time frame and early 2010, we were spending very little because we were working to improve our balance sheet, but I would put it in kind of that $25 million range.

Okay. So you've got the $25 million plus the two-thirds of 70 that you said was for Colorado and New England and that pretty much that tallies it up.

That's exactly right. And that 25, you know, how do you describe maintenance? I mean this year there were capacity additions for a key product line in Kulim and next year there's a capacity addition for our drum line in that 25. So it's not all just strictly maintenance, on a year to year basis I think I need to think about CapEx as $25 million to $30 million.

Did you guys give startup dates for New England and Colorado?

No, we did not.

Are you willing to?

Not at this point.

Okay. Alright. Thank you very much.

Thank you, Steve.

It appears there are no further questions at this time. I would like to turn the call back over.

Thank you for joining our call and we look forward to updating you as we move through the year. Thanks again.

That concludes today's conference.