Good day, everyone, and welcome to the Entegris Second Quarter 2013 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 Mr. Steve Cantor, Vice President of Corporate Relations. Please go ahead, sir.

Thank you, Kyle. Good morning and thank you all for joining our call today. Earlier, we announced the financial results for our second quarter ended June 29, 2013. 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 Bertrand Loy, President and CEO; and Greg Graves, Chief Financial Officer. Bertrand?

Thank you, Steve. I will make some comments on the quarter's achievements and then Greg will provide detail on the second quarter financials and on our guidance for the third quarter. I am very pleased with the second quarter performance. We grew our sales 8% sequentially, and exceeded our forecast. We executed well, achieving an adjusted operating margin of 16% and cash earnings per share of $0.15, both ahead of our target model. We generated strong cash flow, $35 million in cash from operations and achieved some key milestones on our product and technology roadmaps. In terms of our sales mix for the quarter, our revenue shifted slightly towards the semiconductor market. Semi-related sales represented 75% of total revenue and grew 10% sequentially, driven by a record quarter for Liquid Filtration Products and steady growth of fluid handling components, legacy wafer handling products. Overall, the demand in our overall industrial markets picked up but the level and extent of the strength was not uniformed. There was strong demand from leading edge fabs. Although in aggregate, fab utilization rates, one of the key drivers for our business remained well below peak levels for the industry. Sales in our non-semiconductor markets were 24% of total revenue, and declined 1% from Q1. While there was strength in some of our mature electronics markets deserves [ph] display, our data storage business was down modestly. Our PV, LED and Energy storage related revenue grew modestly. We had another quarter of strong cash flow from operations. Consistent with a clearly defined capital allocation strategy, we are deploying our cash to achieve our goal of both rising above market growth through the cycles and creating long-term shareholder value. There are 4 components to our capital allocation strategy: Invest in new products and technologies for the advanced knobs;…

Thank you, Bertrand. Good morning and thank you all for joining the call. It was an all-around excellent quarter. We executed well and achieved results, which exceeded our target model. Sales of $178 million were above our guidance and up 8% from Q1. Our non-GAAP EPS was $0.15. Geographically, Asia sales were $76 million and grew 8% sequentially, primarily due to strength at the major foundries. Sales to Japan were $25 million, up 1%, even in light of the weaker yen. Sales to North America were $52 million, up 8%. Sales to Europe were $24 million, up 14%. Foreign currency exchange rates had a negative impact of approximately $3 million on our revenues compared to Q1. In terms of quarterly performance by division, sales for the Contamination Control Solutions division or CCS, grew 10% sequentially to $114 million. Record quarterly sales of liquid filters and higher sales of fluid handling components contributed to CCS's strong financial sales performance. The operating margin for the CCS division improved to 25% versus 21% in Q1. Sales for the Microenvironments division or ME, were up 4% sequentially to $46 million, driven largely by higher sales of legacy products. ME's operating margin was 20%, down from 21% in Q1. Sales for the Specialty Materials division or SMD, were $17 million, or even with Q1. As planned, SMD's operating margin of 11% declined from 13% in the first quarter, reflecting higher investments in new products for the LED and semiconductor market. Overall, gross margin of 43.7% improved approximately 3 points from Q1, reflecting improved mix, better absorption and solid execution at our manufacturing plant. In Q3, we expect gross margin to be approximately 43%, which reflects slightly less favorable mix and lower absorption. Operating expenses for Q1 were $49 million or 27.5% of sales and were…

[Operator Instructions] We'll take our first question from Krish Sankar from Bank of America Merrill Lynch.

A few of them. Bertrand, what was the percentage of mixture of consumables versus CapEx in June quarter and how do you expect that to trend in September?

Right. So Krish, the split was 66% unit driven, 34% CapEx driven, which was actually a slight shift towards unit driven from Q1 of this year. We expect actually the shift to continue to evolve more towards unit driven as we get into the second half of this year.

So if I look at the midpoint of the guidance, it's roughly down like 3 percentage points. Should we assume both unit and CapEx would be down in Q3 or is one better than the other?

So we certainly, I mean, this guidance actually is a reflection of the fact that we expect CapEx to be softer in the second half of the year and certainly, that will be the case in Q3. In terms of MSI, the reason why guidance is actually so broad is we are actually reflecting on the potential scenario on a high-end of the guidance, which suggest some -- the continuation of strong wafer start trends through the end of Q3. But there's another scenario that could play out, which would be a deceleration of wafer starts sometime in September. And that actually is the assumption behind the lower end of the guidance.

Got it. That's really helpful. I don't know if you guys have a view on this, but it seems like most industry forecasts of wafer starts is in like the low to mid-single digits for this year. So even if you get into the upper end for Q3, it seems like Q4 has to be strong to get to those levels, which is against normal seasonality. So I'm just kind of curious if low to mid-single-digit wafer starts for the year is actually a little too optimistic for the industry.

Well, I think, Krish, that's really what we're all trying to make sense of, right? I think the trends are really very mixed right now. We spend a lot of time with our customers trying to understand what the near-term trends are for their business. And again, I think that general consensus is that, [indiscernible] again, are very, very mixed. I think that the reality is that logic and memory maker output will be influenced by the near-term trends in PC and in mobile devices, which are both trends showing signs of weakness. And I guess, that's why we are very cautious in our outlook in terms of MSI for Q3 and it's too early to comment obviously, on what to expect in Q4.

Got it. Got it. And then final question for Greg. How much -- is it $37 million you have left in the buyback? Is that the approximate number? Or...

We have a $50 million authorization, Krish. And year-to-date, we've spent right around $10 million. So we've got about $40 million left.

We'll take our next question from Patrick Ho from Stifel.

Can you just give a little more color in terms of the CapEx outlook? You did mention that 3Q sounds a little bit soft. At this point in time, do you see that coming back in Q4? Is there something that pushes out into 2014?

Patrick, this is Bertrand. Again, it's hard for us to really comment on Q4 at this point. Again, I would limit my comment to Q3, and we are seeing some softening in our CapEx -- the CapEx business as we enter the quarter. We are hearing from a lot of our customers that they are working really hard at optimizing their capital spending allocation decisions and trying to push out some of their spending into 2014. I don't know exactly what the impact of all of that would be on to Q4. I think that generally speaking, we agree with the view that the industry, we need to continue to invest aggressively over the next 2 years to add capacity and to continue to aggressively march on the industry technology roadmap. But having said that, I think that the timing of these investments are really difficult to predict. And while we remain very optimistic around the prospects for 2014, I would say that again, there's a fair amount of uncertainty and likely soft environment ahead of us in the next couple of quarters.

Okay. Fair enough. Just going to the unit side of the business. Typically, as we enter both June and September, that's traditionally the seasonally stronger period time of the year. Did you experience any problems [ph] to the June quarter that may be taking some away from the September quarter in terms of seasonality aspects? As I would assume that, that would've been up a little bit as well going into the September quarter. Can you give a little bit of color in terms of the outlook there?

That's a good question. I don't think we've seen much of that, frankly speaking. I think that the current velocity of our unit driven business going into Q3 is about same as exiting Q2. So which is again, a reflection on a lot of the fabs operating at roughly similar levels of production right now. Again, I think our guidance is just a reflection of the fact that if indeed their Q3 -- their Q4, I'm sorry, proves to be soft -- and again, a lot of the device makers would suggest that Q4 -- their Q4 revenues will be weaker than their Q3 revenues. The likely impact on us is that factory loading will start slowing down some time before the end of Q3, and we are really not sure about when that will happen. And that's really what we're trying to reflect into our guidance.

Okay. Fair enough. And final question maybe for Greg. In terms of the operating model, you guys did really well this quarter and looks like those positive trends are continuing into the September quarter in terms of the margin profile. I guess, what's the biggest maybe shift or what's the biggest occurrence that has led to what I would assume pretty sharp improvements, particularly on the gross margin profile, given where you were a quarter ago and even a few quarters ago?

Yes. I mean, really, we talked about our results, Patrick, for Q4 and Q1. We suggested that we had adverse mix and we have relatively low manufacturing volumes. We really just had a much better mix in Q2. We'd expect the mix to stay good as we move into Q3. But if you think about the Q2 mix, it was heavy on legacy ME products, it was heavy on Liquid Filtration Products, all of which are good products for us as it relates to margin. On the operating line, we just continue to -- I mean, we're focused on investing in the R&D but we continue to keep a sharp eye on the SG&A side. And so our spending continues to be kind of in a reasonable range, like it's a revenue levels, if you get to revenue levels at 170 and above, or it's much more comfortable for us to make the model.

We'll take our next question from Jason Ursaner from CJS Securities.

I just have a question on Liquid Filtration. Greg, you just mentioned margin on those products is favorable. I know in the past, you guys have talked about how the true leading edge filtration products, there is higher cost and you haven't fully set your manufacturing scale and that it is important to set the standard but it may not show up in margins immediately. So I'm just wondering if you could maybe give an update on that trend and if the margin, I guess, is now beginning to more show up on some of those products.

I don't think we've really seen any specific change in terms of the margin on some of those leading-edge products as much as the fact that we've just seen much higher volumes of those products in Q2 than we saw in Q1.

So in terms of absorption, I mean, are those products...

Our absorption was much better. We still work on a number of those products. We're still working on getting them to what I call for RTM, or ready to manufacture, which is where we'll begin -- we should begin to see better margins on those products.

Okay. And then for Bertrand, excluding the timing of Q3 versus Q4, versus next year, can you just -- I guess, go over broadly what's driving the expectations for this aggressive growth in capacity that you're going to need over the next couple of years, particularly if there is capacity in the legacy nodes and if PC sales and smartphone demand may be softening relative to some expectations, why you would still need the capacity growth and investments?

Right. So Jason, I would like to characterize that in simple terms. But if you look at the various segments of the industry in terms of semiconductor makers and start with memory. I think, there is a clear case there for capacity to be constrained. And I think that we've all been looking at all of those players and we are -- at one level pleased with the fact that they've been a lot more disciplined in the ways of being timing. There are new capacity additions, but we all know that they will have, at some point in time, to act, and they will have to spend additional CapEx to add capacity. If you look on the logic side of the equation, I think that the CapEx decisions will be driven by different considerations, depending on the players. I think some device makers will need to add capacity because they are currently running actually at near-full capacity on their leading-edge nodes and fabs. And for some other players, I think their CapEx will be driven by the desire to remain in a leadership position in terms of process technology. They may not need the additional capacity but their decision to invest will be driven by more strategic consideration. So again, different reasons, I think, depending on industry participants. But again, I can spend a lot of time with all of those companies. I'm comfortable with the statement that CapEx should be up or could up most likely in 2014. And again, we're still left with the timing of that recovery and when actually we would start to see some pre-cursing signs.

We'll take our next question from Avinash Kant from D.A. Davidson & Co.

So a few questions. You talked about the weakness in the bookings near-term. Now could you give us some idea about where have you seen some weakness coming from? Is it from the memory side or logic side or foundry side or is it all over it?

Actually, we didn't say that. I think what we said is the opposite. We said that the bookings right now are at about the same level as what we've been experiencing in Q2. What we are seeing is -- what we are saying is that we are concerned that there may be a softening in our bookings and in our shipments as we get closer to the end of the quarter.

Okay. So it's just an indication, you have not seen it in your bookings yet?

No.

Okay. And in the guidance, did you talk about -- going forward in the guidance, Q3, what do you see from the non-semiconductor businesses and what do you see from the semiconductor side?

Can you repeat the question, Avinash?

Like if I were to look at the semi- and the non-semi businesses separately, Q2 to Q3, what's the expectation?

Well, I think, we kind of covered that question on the semi side of things. But on the non-semi side of things, I would say that we expect environment to be relatively flat. Remember that our non-semi business is really made of a number of markets that are all subject to their own microtrends, be it display, data storage, LED, PV, et cetera. And we do not expect any of those markets to meaningfully depart from what we saw in Q2.

Right. And at one point, did I hear you right that you said capital spending for the second half could be weaker than the first half?

Yes, we said that we expect actually a slowing down, of course, in CapEx for the second half of the year.

So that's what -- so slowing down at current levels or the second half, you think will end up being weaker than the first half?

What we said is that we expect Q3 to be weaker than Q2, and we said that we will not quantify or qualify Q4, it's too early. But all in all, we expect, again, the second half CapEx to be soft.

Okay. And this is the revenues you're talking about, not the bookings?

We were talking about our revenues.

And just to be clear, I mean, our revenues and bookings are not that much different. I mean, remember we're a turns business. So I mean, we typically book and ship within 30 days.

We'll take our next question from Dick Ryan from Dougherty.

Greg, on your capital spending plans, you said $18 million in Q2 and if I recall, it was $16 million Q1. I thought you were looking at around $70 million for the year, but then you mentioned something about 2/3 of the way through the spending in -- for maybe the 2 new facilities. Can you just kind of clarify that for me?

Yes, for those 2 big projects, I mean we've essentially got about $30 million -- I mean, on a combined basis, we've got about $30 million in additional spending to go on those 2 large projects. Actually, a little bit less than $30 million. And that breaks down about 1/3 of that relates to the facility in New England and about -- excuse me, 2/3 relates to the facility in New England and about 1/3 relates to the facility in Colorado Springs. So I would expect that we'll spend -- of that remaining amount, we'll probably spend 80% of it this year and then we'll have -- with regard to the facility in Colorado Springs, we know that we're going to have some spill over into next year. But sitting here today, I would still hold with our thesis that we will be in that $65 million to $70 million range in spending for this year.

Okay. Shifting over to the Specialty division, you talked about how your investments kind of impacting the margin there, setting up for some new product introductions. Can you give us a flavor for what you're looking at? Anything there to kind of move the needle potential?

So the 2 areas that we're investing in there is, one, is really in our silicon carbide technology, which is where kind of the next-generation of applications and the Poco business are within the semiconductor market. So we're spending money there. We're also spending money on some advanced applications in ion implant. And both of those are opportunities that we think over the next several years can have a meaningful impact on the top line of that business.

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

Greg, just to carry that question from Dick over on the Specialty Materials. So where do you expect the margin in this business could go? Because you mean at this point, you're running $70 million in revenue and obviously, you're down 300 or 400 basis points from where you were last year at the same revenue level.

I mean, I would expect the operating margin in that business -- I mean, we've consistently said the $20 million in revenue is 20% operating margin business. I wouldn't change our tenor there. But what I would say is that we will be continuing to invest in that business over the next several quarters. So unlike revenue levels, I wouldn't expect to see a meaningful improvement. Now there are some things in mix that could change, it could improve -- that could change that. But I would say in general, if we continue to operate at the same mix that we're operating at now in the same revenue levels, we'd see similar margins. I mean, as I said in my prepared remarks, I mean, the margin decline there was actually planned for. I mean, we're making conscientious investments in that business.

Yes. I mean, they are already at the leading edge in terms of the type of carbon they produce. Can you, without bogging down our call here with the details, but can you, in 1 or 2 sentences, kind of talk about what else they're doing here for the silicon carbide or ion implant?

So just that high level, I would say that on the chuck technology, we've been invited to participate in some development work to again, upgrade and update our chuck technology to meet some of the requirements of the next generation ion implanters. And we will actually permit the resources required for us to successfully deliver the right solution and the right technology for this application. And that's probably the primary investment that we're making into this division. And we're doing that again in the complex of a very soft business environment for ion implanter sales. So I think that's what puts a lot of drag on the overall margin level of this division. In terms of the silicon carbide initiative, as the industry transitions to the next nodes, they require actually more dense, more solid cleaner materials and we are also in the process of developing that. So those 3 investments actually, relatively significant, especially given the small scale of the overall division. I said that as Greg mentioned, we are making a conscious choice in deciding to invest into those opportunities. And I would tell you that the results that this division has delivered over the last couple of quarters are exactly in line with our expectations. So they are delivering, and they are executing actually very well. And the lower margin levels should have not be viewed as sharp executions in any shape or form.

Okay. Just as a follow-up on the Microenvironments business. Greg, you talk a little bit about the operating margin there sequentially. If you could step in to the way back machine and just talk a little bit on the year-over-year basis, I thought the second quarter of '12 was pretty strong for the legacy products and yet you had a higher margin on a year-over-year basis. You noted that the legacy products were strong in the second quarter of '13. Can you just talk a little bit about how you got that 130 basis point improvement year-over-year?

Right. What I would say with regard to the Microenvironment business is we've just -- we've been on a pretty consistent trend of improving execution over the last 6 or 8 quarters, and it's really not any -- I mean, it's not any one thing. I mean, particularly on the manufacturing side, though, that business continues to do quite well.

Okay. So it's manufacturing?

Well, yes. I mean, so they're doing well on the manufacturing side, improving their gross margins and unlike the CCS -- the CCS business, I mean we've made very significant investments in ER&D. The spending levels in that Microenvironment business have been pretty consistent for the last 2 to 3 years.

And a lot of ingredients in terms of improving manufacturing technology of this division. And we have brought a lot more process stability to processes. I mean, remember that manufacturing processes in CCS and ME are very different. In ME, you're talking about a fairly capital intensive, automated type of process. And we are actually seeing some very nice improvements in terms again, of process stability, the adoption of statistical process, our controlled tools, which makes actually the environment a lot more sustainable and we are enjoying nice, greater yields than before.

We'll take our next question from Jairam Nathan with Sidoti.

Just most of my questions have been answered but a couple of ones on -- you indicated your ForEx impact on revenue. Is there an earnings impact, which you can -- is it material?

The earnings impact would not -- from an operating margin percentage perspective, would not be material.

Okay. And just on your tax rate, it looks like you had closer to -- over 30% in 2012, it seems to be coming down quite a bit. What's the reason behind that and is that kind of sustainable into 2014?

So I'm really pleased with where we are on the tax rate relative to 2012, and it's -- it really involves around 2 things: One, is the number of planning strategies that we've implemented over the last year or so that I don't really want to go into specific details on. The other thing would just be -- we've had very strong performance in 2 lower tax rate jurisdictions, and that's Malaysia, where we've had very good manufacturing performance. And Taiwan, where we've had good sales performance. And making higher profits in those lower rate jurisdictions has certainly been helpful.

Okay. And then lastly, on your -- on Jetalon, I'm kind of -- can you give us some more details on like -- is there like an addressable market that kind of opens up for Entegris. And how should -- and where would the revenue kind of be bracketed once the cash starts flowing in?

Right. So again, what this technology is all about is it will allow us to measure critical fluids in the fabs realtime. So just think about the possibilities that this will open up in the -- so we would be selling to both fab operators as well as OEM and -- or semiconductor applications and we have a lot of evaluations happening right now. But this technology is likely the number of applications outside of semi and one of the particularly appealing area would be in life sciences. And we're working across the life sciences ecosystem with manufacturers of bioreactors and with Biotech companies directly to unlock that potential.

[Operator Instructions] We'll take our next question from Christian Schwab from Craig-Hallum Capital Group.

As we look at your semiconductor related sales, can you remind me what your mix is with the device makers between boundary, logic and memory?

Well, Christian, we don't break that down. I think again, overall, the semiconductor business grew 10% to 11% sequentially. Feel pretty good about that. We don't break that down across the various types of fabs operating.

I would now like to turn the conference back over to Mr. Bertrand Loy for any closing remarks.

Well, thank you again, everyone, for being on the call today. And we look forward to updating you on our Q3 performance soon. Thank you.

And this does conclude today's conference call. Thank you, all for your participation.