Good day, everyone and welcome to Entegris Second Quarter 2011 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 Steve Cantor, Vice President of Corporate Relations. Please go ahead, sir.

Good morning, and thank you all for joining our call today. Earlier we announced the financial results for our second quarter ended July 2, 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 the 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. And Gideon will now begin the call.

Thank you, Steve, and good morning. Thanks for joining the call. We delivered another quarter of excellent results. Our performance was highlighted by record sales, earnings and operating cash flow. We achieved an operating margin approaching 21%, and generated $52 million in cash from operations. And we continue to grow share on our core business and make inroads into key emerging adjacent markets. Specifically, sales in the second quarter were $209 million, up 3% from the first quarter. The semiconductor portion grew 1% and accounted for 72% of the second quarter total. Within semi, our sales from fab customers grew at a faster rate due to good performance of our filtration and purification products for leading edge semiconductor processes. Production output at many of our customers through much of the quarter remained at relatively high levels. We also grew our sales to OEMs, although demand related to new fab infrastructure projects paused after being very strong in recent quarters as some of these projects have been completed. Outside of the semiconductor market, we also had good performance. Sales to these markets grew 9% sequentially and accounted for 28% of our total Q2 sales. This reflected growth in TFT/LCD and other high-tech industrial markets, as well as continued traction in emerging markets such as solar. Looking at our sales by type of product, our mix shifted slightly to the unit-driven side as sales of unit-driven products such as our filters and wafer shippers represented 62% of our sales and grew 6% in the quarter. Our CapEx driven sales were 38% of total sales and declined 2% sequentially after growing 17% in Q1. We believe this performance over the past few quarters compares quite favorably against the industry's recent capital spending trends. Across our divisions, the Contamination Control Solutions division, or CCS,…

Thank you, Gideon. I am extremely pleased with our financial results for the second quarter. We continue to execute well, both near-term and long-term growth initiatives, and achieved another quarter of record sales, operating profit and cash flow. Q2 sales of $209 million were up 3% from Q1, which reflected growth in North America as well as Japan, which recovered from the earthquake and tsunami disaster that occurred in Q1. Sales to Asia dipped slightly, and Europe declined after a very strong Q1. As a percent of Q2 sales, Asia was 38%, North America was 29%, Japan was 19% and Europe was 14%. As we expected, the second quarter gross margin improved 2 points to 45.5%. In the second quarter, our manufacturing operations across the company performed very well. Q2 operating expenses of $51.6 million were slightly higher than our guidance due to higher variable compensation costs. R&D expense was $12.5 million or flat with Q1, even as we continue to invest to support initiatives in advanced wafer handling, CMP and lithography applications. For Q3, we expect operating expenses to be down $2 million to $3 million or approximately $49 million to $50 million. Our Q2 adjusted operating margin was 20.8%. This was a record high for the company and reflects the strong operating leverage in our business model. Our tax rate for the quarter was 23%. Based on our current expectations for geographic mix of income, we expect the full year to be approximately 22%. EPS on a GAAP to non-GAAP basis were $0.24 per share. The non-GAAP number excludes amortization expense and $1.5 million noncash gain from the sale of an equity investment. Cash flow from operations for the quarter reached an all-time high of $52 million. The strong cash flow was due in part to continued attention…

[Operator Instructions] Our first question comes from Wenge Yang with Citi.

Couple of things. First of all, yesterday, one of your competitor guided the wafer starting second half look more flattish, and I want to hear your view on the wafer start in the second half.

As you know, we're a terms business. We don't tend to forecast wafer starts, and we don't pretend to know what they will be. Obviously, if you look at A long-term trend over 15 years, wafer starts around at something like a 7.5% or 8% rate. Certainly over the intermediate to longer term, that will be the case. It is very possible that you would have a flat quarter next quarter. We can't forecast that, but those things do happen despite a long-term trend that we think is very positive.

Okay, so if I look at your guidance, the revenue is about a little bit more than 10 percentage points. Can you give a little bit more color on unit-driven business versus CapEx-driven business, which is seeing more revenue decline and at what magnitude at the midpoint?

Sure, Wenge. So our business in Q2 was 68% unit-driven -- excuse me, 62% unit-driven, 38% capital. And so with those kind of ratios, if you were to think that the capital side of the business could be down in the 25% range of flattish unit side, you come to about that down 10% type number. We think, I mean, the weakness on the capital side will be largely and what we sell into the OEM world, so that's going to be largely within our components and subsystems business. In the unit side, I think as Gideon pointed out, and we know it's a terms business, so we're not going to forecast that specifically, other than to say, I mean, the environment is a little bit unclear on the unit side.

That's very helpful. One last question, can you comment on your non-semi business trend in Q3?

In Q3, I mean, the non-semi business should be -- to be flattish, I would expect.

Our next question is going to come from Krish Sankar with Bank of America Merrill Lynch.

A couple of questions. In Q3 if I look into your Specialty Materials business, how does that trend in Q3 given that industrial is looking pretty strong, but the implant business might be weak.

In Q3, we would expect our Specialty Materials business to be stronger than it was in Q2. Krish, after all, it's a really lumpy business. I mean, it's not unusual to have orders in that business that are $1 million, and so when one of those shifts from one quarter to the other, it can have an impact on the quarter. So what I would say is we saw in that business in Q2, while it was down 6%, that doesn't relate to any fundamental weakness in the business. It really relates to the fact that we had a big order shipped at the very end of Q1. We do have good momentum in that business going into Q3 and have some good opportunities there in some of our newer markets.

Okay, that's helpful. And then, can you give us an update on the wafer shipper business and where your share is now versus 3 months, 3 or 6 month ago?

Krish, this is Bertrand. Our wafer shipper business has performed really well in Q2. The trend actually extended beyond our performance in 300-millimeter FOSB. 300-millimeter FOSB had a record quarter in Q2. And right now, we are probably, in terms of gross margins, we are probably at about in the low teens and tracking towards the mid teens. So we are tracking favorably against our overall target to be in the 20%, 25% market share in a couple of years. But as I've said, overall, this business unit has performed well, and that strength reflected across all parameters.

And Krish, just to clarify when Bertrand talked about the low teens, he was referring to market share and not gross margin. We don't break the margin by product line out individually.

And then final question, in terms of R&D spend for 450 millimeter, I guess you guys have been doing some 450-millimeter wafer handlers, how much was invested so far now? And what do we think you will invest in going forward? Just on 450 specifically.

So on 450, we are very, very committed to being a market leader on that particular diameter and substrate size. We have been a very active player with our ATMI and SEMATECH. And today, we want to be facilitated, if you want, in the ecosystem as more OEM companies start embarking into their own development programs to support 450. So as you know, the overall timing of the adoption of 450 is still a little unclear. But given where we are in the ecosystem and the minute you start having a number of companies working on 450 programs, you need to have wafers being transported from one side to another. And therefore, again, we need to be one of the first companies to make those investments. Today, our investment is being prudent. Again, we are cautious. We want to be the leader, but we are investing prudently. We have made a commitment to a new building in Colorado to home these development efforts. And we are currently looking at when to make the next investment in terms of building the tool set for those products.

And then a final question for Greg. Any update on the share buyback, the use of cash and can you just tell us what is the right level of cash you need to run the business?

Okay. Krish, I mean, to actually run the business day-to-day, I mean, I think we'd be comfortable with cash something probably less than we have today, $150 million or so. I mean, we look every quarter at the options for our cash, and so we're not going to comment specifically on a buyback or anything like that. What I would say is we also believe that we'll start to see opportunities for smaller tuck-in acquisitions as we move forward, and we want to make sure that we have the liquidity to be able to participate in good opportunities without using leverage. So today, I think you'll see us accumulate cash for a period of time as we begin to spend a little more time on the M&A front.

And with that, we'll move to our next caller, Dick Ryan with Dougherty.

Say, Greg, you mentioned being careful to add fixed costs. What is your employee count done in Q2 versus Q1?

It's a little bit over 2,800. Actually, our permanent headcount over the last 12 months has been relatively stable, right around 2,800. As we've ramped over the last 6 months, I mean, we've made very heavy use of temporaries.

With your guidance and commentary on the outlook, it doesn't look like you're doing any -- would be doing any major shifts to shut down or close down any facilities at home.

No. I mean, however, I'll try and comment on this as well. We don't necessarily look at what we're seeing this quarter as a long-term trend, and we're not going to rebuild the company around the third quarter of 2011 revenue outlook. What I will tell you is that within the organization, I mean we've made it very clear that we want people to be especially cautious around discretionary spending in Q3, things like T&E [ph]. We're also focused on -- we're not in a hurry to fill open headcounts. We're not, at this point, making fundamental changes.

Right. I mean, I'm totally with your comment, Greg. The internal view is really that this is really a midcycle correction. This is really a first in the cycle. So we want to find the right balance between being prudent and ready in the event the industry contracts more than we expected to be the case. As Greg said, we remain very, very committed to hitting our target margins at different revenue levels. And I think that your position is to react favorably against that objective.

Okay. Say, Greg, in the non-semi business, I don't think you breakout the revenue from the various other markets, but is there any major shift within those segments?

No, I would say today, I mean, we've been talking about the new frontiers or the new markets being about 5% of revenue, and that would be consistent in Q2 as well.

We'll move next to Patrick Ho with Stifel, Nicolaus.

Well, the current environment is pretty fluid right now, and there's a lot of moving parts. But from your perspective, where do you see fab utilization across the industry in 3Q? And do you believe that this could be potentially the bottom at least on the utilization rates level?

So we don't know specifically utilization rates by fab. And actually, I can report that the direct sales to fabs actually grew faster than our overall sales in the last quarter. There are some indications that some fabs are lower in wafer production and utilization. We have seen historically that sometimes when that occurs, they can overcorrect on the downside. And so you may see production rates pickup late in the second half of the year. It is unclear. There is some -- I'd reference the first answer we gave today, which is into the extent we have any visibility at all, we would see a flattening of wafer production of second half, which is below the long-term trend. The long-term trend has been sort of 7% to 8% growth. And that would not be surprising if we saw that in the second half of the year.

Okay, great. You guys have a good exposure to lithography market and with a lot of the changing dynamics there especially as we go to EUV, can you just describe your progress and your work on that front with customers for these next-generation tools?

So we have a lot of very exciting and active partnerships going on across the industry from OEM to leading edge fabs and industry consortium. And that cuts across our very broad technology platforms from UV parts to the most advanced filtration requirements at the point of dispense around the tool, but also around the ambient environment in the clear room. As you know, contamination control will become a very critical problem to solve those advanced nodes and contamination control is what we do. So we are actually welcoming all of the challenges that EUV is providing the industry. So we feel pretty good about the opportunities ahead of us.

I guess, maybe as a follow-up to that, I know you probably can't get too specific, but do you see your investments in R&D, efforts in EUV increasing at least over the next 6 to 12 months?

Well, it has already been increasing over the last several quarters. I don't actually expect to see an additional incremental spend for those projects, but I would expect those investments to continue for the next several quarters.

And we'll take our next question from Avinash Kant with D.A. Davidson & Co.

A few questions. First off the near-term weakness that you have kind of guided to, could you give us some color in terms of first, when did you start seeing it? And the second one, any particular customer base like memory, foundry, logic where is that weakness more pronounced at?

Well, as it relates to when did we start to see the weakness, I mean, our revenue, through the second quarter, was relatively linear. In fact, June was better than March. And so we have just now, in the last few weeks, started to see some of the weakness around the edges. With regard to customer specifics, I'll turn that over to Bertrand.

Yes, I don't think I actually want to go into, I don't know, customer specifics, but you're right, I think that the slowdown has been relatively recent and it was in the process of, again, trying to decipher what it all means. And therefore, the guidance we provided.

Okay. To ask it the other way then, particularly, what has been the mix -- within your semi-conductor, what has been the mix of logic, foundries and then memory compared to what you have kind of guided to in your third quarter? Has there been a meaningful change?

We don't provide a guidance on that mix. We don't talk about that mix. We are, in general, Avinash, memory is a smaller, quite a small percentage relative to both logic and foundry. That's as much as I'll say. And I'll also remind you that we're somewhat agnostic between the percentages of those different categories because of the nature of the products and the mission of our company and the industry. So it really is not going to impact us that dramatically in terms of the mix between the different technologies.

Okay. And a little bit of update. Early during the year, you talked about some of the initiatives that you were taking in terms of share wins and also trying to grow some of the segments, specific segments of the market that you had talked. Could you give us some update? Does that number also change or it's still kind of intact when you talk about incremental revenue opportunity?

I just want to say, we have a goal in 2013, as you well know, of running at $1 billion level. We don't see any reason that we can't get to that goal, regardless of whether Q3 is flat or down on the capital side or not. The reason for that is we have a continuing series of initiatives that are really aimed at the advanced notes. If you listen to the calls of the large device manufacturers, what you hear repeatedly is that they're moving rapidly through 32, 28, and in some cases, you'll hear that they're preparing the groundwork for even much, much more stringent advanced notes. Even today, they're preparing the ground work. And we're aiming to be there with them every step of the way. Those kinds of products, those technology nodes are tailwinds for our business. Our products are super important to those nodes. And that's the fundamental reason that we think we'll be at those kind of levels at 2013, regardless of a short-term variability this year, for example, in Q3. That's a longer-term answer to your question.

All right. And on the same vein, Gideon, the one thing I was trying to get a focus on a little bit, lithography and CMP seems to be the 2 key areas that you've been trying to grow especially through new product offerings and additional growth could come from there. How do you see your growth in those markets over the next 2 years because of the new product that you may be introducing?

Well, as Gideon mentioned, we are really looking at partnering better than ever before with the leading edge fabs, and their most critical and most complex challenges are in the area of photolithography. So we are indeed spending a lot of time and efforts and resources to come up with very relevant and indispensable solutions for this particular process. So we feel really good about where we are. We feel really good about development pipelines and opportunity pipelines around litho. In the case of CMP, that's a relatively new area for us. And as you know, we've been expanding our product offering for that particular process fab. And we have a number of very exciting qualifications going on right now for CMP products from [indiscernible] to brushes used in the post-clean process, but also most recently, we'll be introducing a new product line of bath conditioners. So again, very exciting times for us at CMP. But I will also flag to you a third very critical process step which is wet etch and clean, which is for us a fast-growing opportunity. Not only for our contrition product, but also for our sensing and control products. So we have there, again, a number of very exciting opportunities in the fabs, but also directly working with the OEMs and getting design into their newest platforms.

Perfect. And the final question, any color in terms of how this feels more of a shorter term or when would you know when things are starting to come back? Typically, what's the time line? How quickly do you find out from your customers?

Well, we don't have a hotline that rings. There's no red phone on our desk that rings. So we have to obviously be very, very close to our customers. Our sense is that this is more a pause than a sort of prolonged downturn. Our sense is that there is a tremendous amount of innovation going into the industry that the end markets continue to be robust in many parts of the world. And that the requirements -- and most importantly for us, the requirements for contamination control at 32 and below are basically an order of magnitude more challenging than they have been previously. And that is the most important thing that helps us to feel very good. We don't know today whether the third quarter will be flat when wafer starts. We don't pretend to know, but we don't -- it doesn't feel, at this point, like a prolonged kind of a downturn.

And with that, we'll move to our next question from Steve Schwartz with First Analysis.

Greg, incremental margin, first quarter to second quarter was quite nice. I mean, you picked up $7 million in gross profit and $6 million additional revenue, is that just because the mix of product in unit-driven held up versus CapEx?

It really has more to do, Steve, with what we commented on when we reported Q1, and that is Q1 was really hampered by some accounting related things in terms of how our inventory produced in December flowed through the Q1 P&L. I would say from an operating perspective, we clearly operate it better in Q2 than we did in Q1. But a lot of it, like I said, the improvement had to do with that Q1 anomaly.

Okay. And then, just talk a little bit about your CapEx, is it the former credit agreement where you had a limit on capital spending? Is that limit now abolished with the new agreement?

Yes, it is.

Okay. And can you give us an update on what's going on with those various facilities. I know you've got some activities for 450 in Colorado, and there are 1 or 2 other facilities where you're spending this money, isn't that right?

Right now we're spending capital primarily on 2 facilities, and that is we're establishing a manufacturing, small manufacturing presence in Taiwan. We've been investing in that through the year, and you'll continue to see investment in that through the third and fourth quarter. And we're investing in a facility in Colorado Springs to do primarily our 450 applications and our EUV-related applications. We're also -- we also continue to invest in Malaysia as we transition some additional products there.

How does Taiwan work in with Malaysia? Is it complementary? Is it a completely separate group of products?

It's largely a different group of products. The new Taiwan is kind of more of a niche manufacturing facility. I mean, it's not a high-volume facility like Malaysia. We're going to start out with 2 or 3 product lines there. And we are -- and those are primarily CCS products, as well as some Specialty Materials applications.

Okay. And then my last question just relates to PV. There's a correction of photovoltaics this year that's pretty well-known. Is that end market big enough for you yet that, that has factored into your third quarter guidance?

So the end market -- this is Bertrand, Steve. The end market, I mean, we don't really split revenues for all of those new market opportunities. But solars has been increasing very nicely for us and it's starting to represent a fairly meaningful portion of our total revenues. Yes, we have factored into our guidance what is currently expected for solar-related CapEx. The other component, obviously, is that overall production of cells and panels is not expected to slow down. And that, obviously should, for us, offset some of the weakness that we expect on the capital side. Just the order of magnitude, our solar sales would break down probably 2/3 unit driven and about 1/3 CapEx driven. So that could probably explain a little bit more why we are not already concerned about the expected contraction on the solar CapEx front.

There is some talk, and I've heard a number of as many as 500 panel manufacturers, so that industry appears to be oversupplied at this point. How does that play into your strategy if there is consolidation in the manufacturing base and so forth? Does that at all affect you guys?

No. We don't think it would impact us meaningfully.

[Operator Instructions] Our next question comes from Christian Schwab with Craig-Hallum Capital Group.

Just a few other quick questions. Talking about the capital equipment side mix to wafer starts at the beginning of the call kind of going from 38% to potentially 25% in Q3, and, Greg, your comments regarding change.

I don't think I said anything. I said I assumed.

Did I not -- did I write that down wrong?

We go from 38% to 25%. I said that if the industry is down 25% and we're roughly 40% capital related, you'd expect us to be down about 10%.

Perfect. All right, that helps. I couldn't make that math work. So then given the weakness that you saw in the last couple of weeks that you commented on, is that when you talk to the capital equipment side of the scenario regarding this pause, have they given you any indication about how long they expect it to last?

No. We don't know more than what you've been hearing. We all were at semiconductor, SEMICON West last week. There was a lot of chatter, and I think that, again, everybody is really trying to slow down what we've been hearing and what everybody has been commenting on over the last couple of weeks and what we see in our most recent business trends. But we don't have any specific knowledge.

Okay, that's fair. On the contamination control systems portion of your business, is there any profitability difference between your CapEx products and your consumable products?

What I would say is we have high-margin consumable products and we have high-margin CapEx products. I mean, I would also say it depends where you are on the cycle. At this point in the cycle, our CapEx related products are operating at relatively high volumes so that the margins on those products are pretty strong right now.

It make sense. And then do you have a new -- can you remind us what your long-term objective on the contamination control system is for an operating margin target besides improvement?

We don't have a target. Divisionally, we have a corporate. What we have, which we are very transparent about, obviously, is we have a target model for the corporation. Obviously, that is anchored by specific target models for the division, which we do not publicize. We are delighted with the performance of the CCS business. 33% operating margin is an all-time record for that business. And it has a very attractive combination of being a growth business, as well as a high profit and high cash flow business. And we think that's a pretty good combination.

Yes, we would agree. And then lastly, my last question, is your sales per wafer start that you guys talked about at your Analyst Day, is that continuing to move up into the right?

The data hasn't been published yet for Q2. The industry data. But in Q1, the Q1 data was just recently published and that showed that in Q1, we continued to increase our content per wafer start.

Perfect. And then given the 300-millimeter share gains that you've talked about, do you expect that to modestly improve going forward? Is that fair?

We have no reason to believe that the trend would be any different in Q2.

And with no further questions, I would now like to turn the call back over to Mr. Gideon Argov for any final and closing remarks.

Just to remind folks that we believe that the combination of products and the technology that we have is well-suited to the needs of the industry in advanced nodes. We believe we have executed for a number of quarters at a very, very excellent rate in terms of profitability and on operative basis as well on comparable basis. And we're very optimistic and excited about our business longer term, as well as our performance during the second quarter, which was excellent. Thank you for joining us on the call. We look forward to speaking with you again.

And with that, once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation, and have a great day.