Good day, everyone, and welcome to the Entegris First Quarter 2012 (sic) [ 2013 ] Earnings Release Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. 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 first quarter ended March 30, 2013. You can access a copy of our press release on our website, 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 Bertrand Loy, President and CEO; and Greg Graves, Chief Financial Officer. Before turning the call to Bertrand, I do want to let everyone know that Entegris will be holding an Analyst Day on June 4 in New York City. You can contact me for more information about that event. Bertrand?

Thank you, Steve. I will make some comments on the quarter's achievements, and then Greg will provide detail the first quarter financials and our guidance for the second quarter. I am pleased with our operating performance for the quarter. We executed well and delivered results in line with our expectations. Our gross margin improved, we controlled our operating expenses well, we generated solid cash flow, and we continued to make good progress in our new product development. Our first quarter sales of $165 million reflected the expected seasonally weak Q1 and a gradual start to the year. Sales in the semiconductor market represented 74% of total revenue and were down 1% from Q4. Trends in the semiconductor industry were still mixed as we started the year. There were pockets of strength related to strategic technology investments by foundry customers, but this was offset by anemic demand and production levels and legacy fabs and for PC-related devices. Sales in our non-semiconductor markets were 26% of total revenue and declined 2%. Many of our industrial markets experienced some rebound, but this was offset by continued weakness in some, not most, of our emerging markets such as solar and LED. Over the past 6 months, as I stepped into my new role as the CEO of Entegris, I've had the opportunity to review with many of you Entegris' new strategic priority. These are: invest in new products and technologies for advanced knowledge; to invest in our R&D and manufacturing infrastructure and capabilities; to make focused acquisitions; and finally, return cash to shareholders. Let me take a moment to update you on our progress on these 4 priorities. First, regarding our investment in new products and technologies, the semiconductor industry is in the midst of an unprecedented period of R&D intensity, driven by the…

Thank you, Bertrand. Good morning, and thank you all for joining the call. For the first quarter, sales of $165 million were at the midpoint of our guidance and down slightly from Q4. Our non-GAAP EPS was $0.13, which included about $0.015 of nonrecurring favorable impacts from currency mark-to-market adjustments and a one-time discrete tax benefit. Geographically, Asia sales were $71 million and grew 8% sequentially primarily due to strength at the major foundry. Sales to Japan were $25 million and declined 14% in large part due to the weaker yen. Sales to North America were $48 million and declined 9%. Sales to Europe were $21 million, up 3%. In terms of quarterly performance by division, sales for the Contamination Control Solutions division, or CCS, declined 6% sequentially to $104 million. The revenue decline reflects weakness in the yen and slower sales of liquids and gas filters, which declined after record Q4. The operating margin for the CCS division was 21% versus 20.3% in Q4. The increase was largely attributable to lower discretionary spending. Sales for the Microenvironment division, or ME, were up 3% sequentially to $44 million, driven largely by strength in the 300 mm FOUP business. ME's operating margin improved to 21%, reflecting outstanding performance by ME's manufacturing operation. Sales for Specialty Materials, or SMD, rebounded 14% to $17 million. The increase was the result of higher demand for semiconductor-related products, as well as higher revenue in certain industrial markets. SMD's operating margin improved to 13% from 7% in Q4. The improvement is indicative of the operating leverage of the SMD business as revenue ramps. Overall, gross margin of 40.7% improved approximately 1 point from Q4 and was in line with our expectation. While revenue levels were slightly lower, the product mix was comparable. The improved margin reflected…

[Operator Instructions] And we'll take our first question from Terence Whalen from Citi.

As we look into the June quarter revenue guidance, it's slightly below our expectation. What I wanted to understand was 2 things. First, the linearity of the quarter and how you saw this developing; and then second, how much of the slightly lower growth outlook for 2Q is attributable to, say, the large 3 spenders and customers versus the longer tail of customers.

Terence, I'll comment in Q1, and then Bertrand can comment on the outlook for Q2. But Q1, we did see -- it was considerably weaker in the January time frame. We saw improvement throughout the quarter. So the quarter was -- Q1 was certainly not linear. It was stronger in the back half of the quarter.

Right. Terence, this is Bertrand. And let me just start by saying that, as you know, we have fairly consistently outperformed the industry and the pace of the industry for the last 40 years, and we certainly intend to fully participate in this current industry. After having said that, I would just comment that we are right around the inflection point right now, as Greg mentioned. And remember that our business is really a turns business, so that makes it particularly hard for us to really gauge and forecast the pace of the upcoming recovery. Having said that, again, what we're guiding towards to is a flat to up 5% on the top line. And I think that takes into account a fairly significant disparity between different customers. As you know, different device makers have different expectations in terms of their revenue growth going into Q2, and that's what we try to take into account as we were providing the guidance for Q2.

Okay, terrific. The second question that I have is as you look at the Filtration business, can you just give us an indication by segment whether it be clean, or etch or lithography, where you've seen relative strength, and whether any trends specifically standout in each one of those areas?

Well, Terence, I mean we typically don't provide that level of detail, so I won't go into this for you. But again, I think that, as you well know, wet etch and clean is one of the growth area for the industry. That is one area that we are very focused on, not only for our liquid filtration products, but also for a number of sensing and control and component and system products. And this will be coming next in terms of our strategic focus. So I think that those process areas will be -- those 2 process areas would be the 2 areas of focus for the Entegris team going into 2013.

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

This is Thomas Yeh calling in for Krish Sankar. Can you provide us the details between unit-driven versus CapEx-driven sales this quarter and your expectations for the direction of both that's baked into your guidance?

For the quarter, it was about -- unit-driven business was 66.5%, CapEx-driven was 33.5%. And as it relates to the outlook, Bertrand, do you want to comment on that?

So the thing I would expect actually the CapEx to benefit from increased wafer fab equipment spending in Q2. So I could see actually a scenario where unit-driven could be slightly less in Q2 versus Q1. Having said that, again, it's going to be very marginal change.

That's very helpful. And based on your guidance for revenue to be flat to up slightly in Q2, I just wanted to get a better sense of the reason EPS is coming down. You had mentioned the $0.015 nonrecurring benefits in 1Q. I just wanted to sort of get a better sense of your expectations around product mix and the quarterly expense levels moving forward.

Sure. The decline in EPS really is related specifically to those discrete items. If you look at them and you say we're at $0.13 in the current quarter and we had $0.015 a little bit more of discrete items, we'd have been at $0.11, which is right in the middle of our guidance, so on flat revenue comparable EPS. What I would say is, regardless of the scenario, we would expect to be in line with our target model. Our target model at $170 million in revenue is for operating margins of 13% to 15%. You talked about -- in terms of more granularity around the P&L, we talked about OpEx of 47% to 49% in the quarter. I didn't comment specifically on the gross margin, but I would expect to see some incremental improvement in the gross margin as we move into Q2, driven really by continued improvement in absorption and what we expect to be slightly better mix.

And then just a final one for me. Can you talk a little bit about what you're seeing in the competitive landscape? Taiwanese wafer shipper named Gudeng Precision has experienced pretty significant growth over the last few years. I just wanted to get a sense of if you're seeing any impact on the share or pricing.

Right. So we are actually seeing -- if you think about any, specifically -- which I think is what your question is about -- we continue to see our, I would say, traditional wafer handling competitors, but we are also noticing the entry of a couple of new Asian competitors. Having said that, I would really encourage you to check your facts and your sources. I think that it is true that the one Taiwanese competitor that you're mentioning is getting a lot of publicity. But if you look at the market share that they've been able to gain, I would say, that their gains have been relatively modest. And I'm basing this comment both on the 300 mm platform as well as more importantly on the 450 mm platforms.

And we'll take our next question from Patrick Ho with Stifel.

Bertrand, maybe you can give a little color in terms of the units-based business based on the commentary you just highlighted. Do you believe some of the chipmakers that you obviously work with are still working through some of their inventory and that'll take another, I guess, spike up in utilization rates on their end before, I guess, they pick up their pace with you guys? I guess what's the disconnect between some of the growth that we're seeing, say, at a TSM and some of the other foundry versus what you're seeing right now?

Patrick, I would just say that, again, if you -- and I think your question is around Q2. So as we get into Q2, we do expect some improvement in terms of fab capacity utilization, but I would say that we will remain probably relatively low for legacy nodes. And again, as you well know, the fab capacity utilization would be very different from one customer to the next. Having said that, we also -- as you pointed out, we believe that there's still some level of inventory for liquid filter products, in particular, in the channels that some of our customers needed to work through in Q1. We don't have perfect visibility to that so -- but I think that they should be working off those inventory as we get into early Q2.

Okay, great. Maybe a question for Greg. You mentioned that you expect to see some improvements in gross margin heading into 2Q. You've also mentioned previously in the past that you expect some headwinds as you build out and ramp the i2M facility. Can you just give us an update on some of the moving pieces and how we can look at the gross margin line, not only in the June quarter but over the next couple of quarters as you ramp up that facility?

Yes, so, I mean, the gross margin line is obviously heavily dependent on volume, so it's a little difficult to talk about Q3 and Q4 at this point. As it relates to the current quarter, we would expect to see slightly better mix in the quarter, slightly better absorption, and continued strong manufacturing performance. So that's what gives me confidence that we'll see some incremental improvement in Q2. As it relates to Q3 and Q4, we talked in Q1 really about having about $2.5 million to $3 million of cost in the back half of the year related to the migration into that new facility here in Burlington. And that's still our perspective on that. If you split that evenly between the 2 quarters, it could be between 3/4 and 1 point of margin in Q3 and Q4.

And we'll take our next question from Jason Ursaner with CJS Securities.

Just first I'd like to concentrate on the semiconductor market at a high level. There's a lot going on in the industry. And, Bertrand, you mentioned that it really is an unprecedented period of R&D right now. So as an outsider, one of the best parts of your business is that you are semiconductor indifferent. They all use your products, and you are largely tied to unit production. So the question I'd like to ask is as you look forward, is there really a best scenario for Entegris? Are certain ones better or worse? If techniques are achieved or not achieved, whether it's double patterning, thin set, EUV, is there really a best for you, or is this uncertainty of finding the next solution the best for Entegris?

Again, before, I thought, going to some of the granular answers, I need just to high-level again frame some of the major drivers for our products, and that would be the number of process steps required to make a chip and the amount of chemicals being used to produce a chip. So as we see the industry going down the industry road map and shrinking from whatnot to the next, we are seeing more process steps being introduced, and those process steps are contending with more complex contamination challenges. All of that actually bodes well for the demand of our products. Again, contamination control becoming particularly critical to yield improvement and time-to-yield to our customers. So I would say that ThinFab is definitely introducing a number of interesting contamination challenges, so we like the complexity of this particular process technology. Multiple patterning means more process steps being introduced, so obviously, that drives chemical usage and that drives usage of our filters, so we like that. So EUV could potentially be viewed as a risk, but I would just point to the fact that EUV really is allowing us to develop a number of radically new solutions around the light source and the light path. So things that -- or products and solutions that were not required in standard immersion lithography. So I think on balance, I think that all of those new process technologies are presenting some positive opportunities for us.

Okay. And in the Microenvironment segment, you continue to generate stronger operating margin there. Is this a natural transition because of your share and IP at the 300-FOUP level? Are you gaining back any of the share you missed in the shippers of 300, or is this really more of the legacy products, where maybe you aren't seeing degradation in price at this point.

I would say it's a function of our strong market position of 300 mm, where we continue to do very well with the FOUP product line. I mean, we continue to win, consistently win, and it's also a function of manufacturing performance, as I said in the script, particularly in Malaysia, where we have really seen a marked change in those operations over the last 12 to 18 months.

Okay. And then just last question, staying in the Microenvironment segment. On 450, you got a question before on a competitor, how much of the IP in 450 do you think is fully set at this point for what's going to end up being in the FOUP? And generally, where do you think you stand in that standards setting?

Well, it is a great question, Jason, and thank you for asking. I would say that a lot of the IP has been set and developed. Entegris actually has a very rich portfolio of IP around 450. And I would tell you that most of our competitors actually will need to secure licensing agreements with Entegris in order to practice the 450 technology. And actually most of those licensing agreements are actually in place.

I couldn't hear that last part, I'm sorry.

I said that most of those licensing agreements are in place.

And we'll take our next question from Jairam Nathan.

Just on the contamination control segment sequential decline of 6%. You mentioned filtration, came up [ph] as one of the reasons -- as the yields of the 28 nm kind of improved, does that imply that the intensity of use kind of comes down with your customers? And is that one of the reasons why you could kind of -- behind the decline?

Yes, that's one of the many factors. I think you're right that typically when a fab customers ramps up production of a new node, the yield challenges are daunting. And as a result, consumption of our products usually tend to increase or to spike up. Then once the solutions and the process recipes are more stable, then you reach a more normal level. So you're absolutely right that we did see that actually when some of our customers scaled up their 28 and 22 nm nodes. I would expect to see similar benefit as some of those customers actually start getting ready for the 20 and 14 nodes later on this year.

Okay. And just, Greg, on the gross margin, I just wanted to kind of follow up on -- you indicated the 75 to 100 basis point pressure from the i2M in the second half. But at the same time, your volumes probably, hopefully should go up. So how should we think about gross margins on a year-on-year basis, '12 versus '13, in the sense you had a pretty -- the fourth quarter of 2012 kind of brought down your average for last year.

Well, I guess, Jairam, I think it really depends on what kind of volumes we're operating at as we get out into Q3 and Q4. I mean, if we're operating at volumes in Q3 of '13 like we were operating in Q3 of '12, I think you could expect to see a similar margin profile less the impact of that manufacturing transition. So if you look at Q3 of '12, we're at about 44%. If we're running at that kind of revenue level, I don't think that'd be an unreasonable expectation minus the point for the transition.

[Operator Instructions] And we'll take our next question from Steve Schwartz with First Analysis.

In your prepared remarks, you talked about 450 adoption picking up in 2015. So I'm just wondering what you expect the contribution to revenue might be in 2014 versus '13. Can you give us some idea of what that ramp might look like for you?

Well, I think that -- we had a similar question during the last call, and my answer then will be the same answer we give you today, which is that revenue for the ME division will remain -- revenue coming from the 450 mm product lines for the ME division will probably represent around 1% of their revenue this year and probably for most of next year. And as we start getting into pilot production mode, I think we could see some increase to probably closer to 5% of the ME division revenues. And I would expect that those levels probably would be relatively stable for a year or 2, until we see some further adoption of 450 mm by other industry participants.

Sure, sure, okay. That's very helpful then. Greg, you talked a little about the manufacturing improvement in Malaysia. And I'm just wondering, to what extent are their transition efficiencies left to work through if there are any? Or how much improvement you could continue to see out of that facility?

Today, I don't expect to see any marked change in kind of our margin profile or our manufacturing operations over the next 6 to 12 months other than this transition into the new facility here in new England. We do have a number of product transitions that are -- have taken place or are taking place today that are putting some drag on the gross margin, but it's not, at this point, it's not material. So I really wouldn't see a lot of material change over the next 12 months.

Okay. And then just as a last question. You'd mentioned that the share of revenue from the semiconductor market dropped by 1 percentage point sequentially. Is that simply because of the improvement in Specialty Materials and industrial? Or is it non-semiconductor electronics applications where you saw an improvement?

So I mean the portion that really improved the most in Q1 was really the industrial markets in the SMD division. And that actually was offset by pretty consistent across-the-board decline in most of the other non-semi market such as solar, LED, display for data storage.

And we'll take our next question from Dick Ryan with Dougherty & Company.

I think, Greg, I may have missed the number, but did you give -- I know you gave CapEx for Q1, but did you provide CapEx for the remainder of the year?

We're still holding with our view the CapEx will be approximately $70 million for the year.

Okay. How should that be split, front-end, back-end?

Well, so we've spent $16 million in Q1. I'd expect it will be relatively evenly split over the next 3 quarters, and we'll finish out the i2M Center. We'll have some additional spending related to 450 mm after taking a little pause on that over the past couple of quarters.

Okay. In the non-semi space, you talked about weakness, solar, LED. Can you address what your expectations are there, Bertrand?

For going into Q2, I would expect some level of improvement across most of those markets. But again, in our projections, we are anticipating a growth rate in the low-single digits for those markets. That's looking again Q2 over Q1.

And Greg, customer concentration, I know you did started moving more towards the top 3 representing, I think, 20% of sales. How is that -- how did that shape up in Q1?

That really hasn't trended any differently. I mean it would probably be a little bit less than it was in Q4, but the overall trend has not changed significantly.

And we'll take a follow-up question from Terence Whalen with Citi.

The follow-up question I had was regarding Jetalon. I may have missed this, but what was the financial consideration, and what's the financial impact of that acquisition on Q2 results?

We paid a little over $13 million upfront for the transaction, and there is an earnout structure involved, so we could have additional consideration over the next 2 to 3 years. From an impact on our revenue and P&L through the balance of the year, it's really not material. In either case, I mean, the revenue will be modest and -- but there's also no drag on the P&L either.

Okay, great. And then my second follow-up was regarding looking at the 450 shipper market. Just wanted to hear any insights you had with regard to prospects to gain share back there, and also understand what you think is driving your ability to perhaps regain share in the shipper market specifically?

Well, Terence, as you know, as you well know, 450 mm for us is actually a very significant opportunity indeed to reset our market share expectations for our shipper product lines. We've been working very aggressively towards that goal. We are very pleased with the results, the feedback we're getting from our customers. And I would say that, as you know, there are only limited number of industry participants that are very active on 450 right now. But more feedback we are getting would suggest that we have a very solid overall solution that is well endorsed by the industry right now. So I like the competitive -- in other words, I like the competitive position we're in at this point. Having said that, if you indulge this person, I would say the fact that the Tour de France is -- I think we've won a number of stages. We probably even won a few mountain stages. We have a good team, but we really want to win the race, and I think that's really what we're focused on.

And we'll take our next tour next question from Christian Schwab with Craig-Hallum Capital Group.

Bertrand, you said earlier in the conference call you were optimistic for the remainder of the year. Can you walk through or help us understand that optimism for the second half of the year, and maybe give us some bands on what you expect wafer fab utilization to improve or wafer starts to improve and maybe a disproportionate share of CapEx spend in the second half of the year versus the first half?

Well, Christian, I would just say that right now, most macroeconomic projections are pointing to more optimistic scenarios for 2013 than they were 6 months ago. So as you know, there is a strong correlation between global GDP and electronic devices. So that's, I would say, the basis for our confidence. The other reason on the CapEx front is that all of the major industry participants have come up with fairly strong CapEx numbers for the year. And as of today, they all seem to be sticking with those numbers, which again, at this very moment, would suggest that there could be some positive momentum for the year as we see some more CapEx coming from logic and memory customers. Having said that, we are in a volatile environment, volatile industry and a volatile macroeconomic environment, and I would refrain from quantifying my expectation on a full year basis. We just simply don't have enough visibility at this point in time.

That's fair. As it relates to the unit-driven business, and in particular, the movement to the 2x node and below, what should we be assuming your growth rate at constant market share? Should it be above wafer starts?

Christian, could you repeat that question or reformulate that question, please?

Yes, I would reformulate it. If wafer starts grow 7% this year, then your unit business should grow how much better than 7%?

So again, our objective is to be around 300 basis points above the overall industry growth. That's what we've been delivering for the last 3, 4 years, and that's our goal going forward, so that would be the answer I would give you.

And that does conclude today's question-and-answer session. At this time, I would like to turn over to Mr. Bertrand Loy. Please go ahead, sir.

Thank you for joining the Entegris call today. We look forward to seeing hopefully many of you in New York, June 4. With that, Mary, please go ahead and conclude the call.

And that does conclude today's conference. Thank you for your participation.