Good day, everyone, and welcome to the Entegris Third Quarter 2013 Earnings Release Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Steve Cantor, Vice President of Corporate Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining our call. Earlier today, we announced the financial results for our third quarter ended September 28, 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 refer to non-GAAP financial measures as defined by the SEC in Regulation G, and you can find the reconciliation table in today's press release, as well as in the quarterly slide presentation we have posted on our website. On the call today are Bertrand Loy, President and CEO; and Greg Graves, CFO. Bertrand?

Thank you, Steve. I will make some comments on the quarter's results, and then Greg will provide detail on the third quarter financials and on our guidance for the fourth quarter. While our sales for the quarter were at the low end of our guidance on an operating basis, we performed well. Our operating results exceeded our target model, and we achieved earnings per share at the high end of our guidance. In addition, we generated strong cash flow from operations. Our sales reflected the mix trends that we have been experiencing in our core semiconductor market over the past several quarters. After a strong second quarter, most of our key customers slowed production and lowered fab utilization to match soft end market demand. This slowdown in activity, which impacted both trading and leading edge fab, was one of the scenarios we anticipated based on the anemic growth in the macro economy, sluggish PC sales and slowing demand for high-end smartphones and tablets. Industry capital spending continued to strengthen. But the highest spending levels were not broad based and remain concentrated among the few semiconductor toolmakers and specific toolsets. With this benefit from this high spending in the quarter, our sales of fluid handling components and dispense solutions grew. Demand for these products are typically driven by sales of new wet etch and clean tools and litho track as well as new facility projects. However, this growth was offset by lower sales of other capital-driven products, such as our 300-millimeter wafer carriers. Sales of these products are typically lumpy, but we continued to win nearly all of the opportunities for advanced tools. We recently secured a major order for these products from a leading device maker, which will positively impact revenue for this product line in Q4 and into the…

Thank you, Bertrand. Good morning, and thank you, all, for joining the call. In addition to our press release, we posted a presentation on our website this morning that includes summary financial information for the quarter. Even though sales were at the low end of our expectations, we executed well and achieved results which exceeded our target model. In terms of quarterly performance by division, sales for the Contamination Control Solutions division, or CCS, declined 8% sequentially to $105 million. The decline related to lower sales of liquid filters and gas purification systems, which offset higher sales of fluid handling components. Despite the lower sales level, operating margin for the CCS division was a solid 24% versus 25% in Q2. Sales for the Microenvironments division, or ME, declined 7% sequentially to $43 million due to lower FOUP shipments. As Bertrand described, orders for these products can be lumpy, and we anticipate higher sales for these products in Q4. ME's operating margin of 20% was even with Q2. This strong operating performance reflected continued good manufacturing performance, as well as favorable sales mix. Sales for the Specialty Materials division, or SMB, of $17 million were even with Q2. SMB's operating margin of 11.8% was in line with the division's target model and improved from 11% in the second quarter. Even though overall gross margin of 42.6% declined from Q2 as a result of the lower sales level, we were pleased with these results, which reflect the good operating performance and favorable sales mix. In Q4, we expect gross margin to be essentially flat with Q3. Operating expenses for Q3 were $45.7 million or 27.7% of sales, which was below the estimate we provided last quarter. We flexed our spending effectively and continued to tightly manage SG&A while increasing R&D spending to…

[Operator Instructions] We will take our first question from Patrick Ho with Stifel, Nicolaus.

Greg, can you first give a breakdown of what the CapEx versus unit-driven business was in September and where you kind of see that heading in the December quarter?

It was 67% unit driven, 33% CapEx, which was consistent with where we were in Q2. As we move into December, we'd expect it to be relatively similar, although I'd expect that CapEx to creep up slightly as a percentage to creep up slightly because our -- implicit in our guidance, is a stronger CapEx environment in Q4.

Okay, great. Going back, maybe, Bertrand, for you, going back to the September quarter relative to the December quarter outlook, where did you see, I guess, the adjustments that occurred as the September quarter progressed to get to, I guess, the softer revenue results? Was it late in the quarter? Did the mature technology nodes not come when they were expected? I guess, what are the variables that caused that you come at the low end of your guidance?

Yes. So Q3 sales were weak, as we expected. And if you remember, during the second quarter earnings call, we characterized certain industry assumptions and certain industry conditions beyond the low end of our Q3 guidance. And as it turns out, this is exactly the industry conditions that we encountered in Q3. So if I want to frame that in more specific terms, I would say that the wafer starts started very strong in Q3, but we were concerned that device makers would start slowing down production late August into September as a consequence of continued softness in demand for PC and high end mobile devices, and this is exactly what we experienced in Q3. And in that context, our results are very much in line with our expectations. So these trends impacted, to the great extent, actually, our unit-driven product lines and, in particular, sales the of our liquid filtration products, which were just coming out of a record quarter in Q2.

Great. And a final question, maybe going back to Greg for a second on the capital deployment. With CapEx coming down or projected to come down at 2014, how do you see, you guys, I guess, redeploying that quote -- I don't want to say excess cash, but that extra cash that you're going to have into either the buckets of technology investments versus stock buybacks? Do you see a bias one way or the other as you head into 2014?

Well, first, let me just hit on the investment to the R&D. I mean, we are going to continue to invest in the R&D. What we spent in Q3, I just want to point out, was a record level of the R&D spending for us, both in absolute dollars and as a percentage of revenue. As it relates to the share buyback, we do go through an initiative every year in December with our board where we look at, kind of, our capital available, and we look at our price targets around our repurchase program and we'll go through that normal rhythm this year. And so expect our capital deployment strategy, moving into next year, to be consistent with this year, although we may have different targets in terms of where we buy shares.

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

Bertrand, there's still a lot of optimism for next year in terms of both the higher CapEx and the increasing production rates. Do you think the industry is leaving itself any room in that outlook materializing for 2014? And more importantly, how sustainable would you see it being in 2015 and beyond if the PC market continues to stagnate or maybe deteriorate even further?

This is a very broad question that you have for us. And I would actually refrain from really commenting extensively on anything past Q4. So as we look at what's ahead of us today, we are very optimistic about Q4, and that's reflected in our guidance, and we do believe that there will be some positive momentum getting into 2014 in terms of CapEx. How long can it last in 2014? It's way too early to comment on. Having said that, we would still expect the favorable wafer start environment in 2014. In other words, we would expect wafer starts in 2014 to be up versus 2013. And I would leave my comment at that for now.

Okay. And in terms of the 450-millimeter wafer transition, Intel, on their call, they're -- said they're not wavering on their timeline, which is somewhat in contrast to some of the industry commentary coming out. So can you maybe just update us on what your expectations are for 450? And since it would flow through the Microenvironment segment before any impact on production or in the Contamination Control business, when would you expect a meaningful portion of that business to be related to 450?

All right, so let me first start answering your broad question about 450, timing and production around 450. And I would just say that it is true that the timeline is very fluid at this point, which is, very frankly, very typical of any wafer starts transition. But internally, we're still targeting first pilot production in 2016 and high-volume production in 2018. So we are obviously paying a close attention to any information coming from the leading customers behind this transition. I would just tell you that anything you implied of some recent information provided by Samsung, the way we look at the Samsung comment is that it's really not new news. They've been very consistent, and they have very consistently stated their preference or the greater criticality for them of EUV over 450, and they never really suggested that 450 was on their roadmap for this decade. So internally, we are really looking at making sure that we take every steps to support our market share ambitions as the industry transitions to 450 millimeter, both for our FOUP and our shipper products. Now the last and second question which was around 450 and how it would impact other product lines, I think it's way too early to tell. But I think it probably would start impacting those product lines as the industry gets closer to volume production and volume manufacturing. So think 2017, 2018.

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

I have a couple of them. In terms of the Q4 guidance, you guys said the strength had mainly come from the CapEx side. I'm trying to get a sense, if I take the midpoint, you're probably doing 3% to 4%. Should we assume CapEx growth in the high single digit?

I'm sorry, Krish. What was -- you said CapEx goes at what level?

Is it in the high-single digits in Q4 sequentially?

It would be in the teens, Krish. So if you think about the assumptions beyond our guidance for Q4, let's start with some considerations impacting our unit-driven business. I would say that we continue to expect fab capacity utilization to remain soft in Q4. But the big difference between Q4 and Q3 is that we expect some Taiwanese and U.S. customers to start intensifying the assets to ramp their production for the next process nodes. And in that context, we expect some positive momentum for filtration and purification product lines. So we expect some level of growth in our unit-driven business, and then we would expect CapEx -- you would expect some positive momentum coming from the OEM customers, as well as, as I mentioned in my prepared remarks, we are expecting, actually, some very robust environment for our FOUP business going into Q4.

Got it, that's very helpful. And then one of the impressions, if I look at your consumable business for the full year, this year it looks like it's going to be down year-over-year, and last year was effectively flat. I mean, both last year and this year, you seem to be underperforming wafer starts. I'm just trying to get a sense of -- is there something else going on in terms of competition, or is it really not the right path for you?

Well, first of all, I'd say, as we look at the numbers last year, when we take the blend of our unit business and our CapEx business, the industry was down about 5%, and we were down between 3% and 4%. So last year, we clearly believe we outperformed the industry by about 100 basis points. As we look at where things are trending this year, we believe that the way wafer starts will finish and the way CapEx will finish, that we're in a position that will probably perform in line with the industry this year.

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

The first question, you talked about this new customer on 300 millimeter FOUP side. Was it a new win for you, or was it an existing customer ordering more from you?

It's a good question. And actually, it was a new customer in this particular case.

So did you replace someone?

Well, it was in the context of a new fab buildup. And again, we have -- traditionally are not the [ph] incumbent with that particular customer, that we won the new fab opportunity.

Very good. And also a little bit broader question. In the wake of all the consolidation that is happening in the industry, especially some of the larger players merging together, what kind of impact do you see as those happened to be your customers? Any kind of pricing impact, any shift in share as a result of that?

It certainly is an industry that continues to require the best of -- for both worlds. They want leading-edge technology and they want very affordable pricing. I don't think that the new landscape will naturally change a lot of that. And I think it makes it, actually, to some extent, easier for us to line up our technology roadmap because there are actually fewer strategic players to partner with. So at some -- actually, it makes it simpler an environment for us to operate into.

And so maybe a little bit more clarification on that. In terms of your opportunity or your share at the 2 largest players, Applied Materials and Tokyo Electron, do you think that it was very similar ahead of this acquisition, or was it a difference in terms of you were like stronger at one versus the other?

Well, I think that one of the reasons these 2 companies are combining, I believe, is that they view that there is a fair amount of complementarity in their product platforms. So as you know, a lot of our product lines really are targeting wet tools, wet applications. And in that context, it should be no surprise for you to learn that we have actually probably more established business with one of the 2 players. Having said that, again, I think this is a fast-evolving picture. And I think that, again, we are very attuned to any new opportunities that may come up as a result of this particular transaction.

Right. And so basically, what we -- I'm trying to get from you is that this would turn out to be an opportunity to win share where you did not have it, or you would have anticipate a bit more competition because some other players may have had some stronger foothold at some of the segments that you would not involve with? Maybe just...

It's really too early to comment. I think that, again, at this point in time, there is not a lot of clarity, first of all, on whether or not this particular combination will happen; second of all, on how exactly the integration of diverse product platforms will proceed. So I won't really go into a lot of details on that. It would be truly speculative.

Okay. One final question for Greg. Greg, you talked about the CapEx number for the next year. How should we think about the progression of that CapEx? Is it going to come down significantly in Q1, or it's going to come down gradually through the 4 quarters next year?

If the number is $30 million next year, we'll just take the high end of that range. It will be heavier in Q1 than it will as the balance [ph] and then probably spread out relatively evenly through the balance of the year.

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

Just -- I had a question on your operating expense. Now if I look at R&D, is -- on a dollar basis and your guidance for 4Q of an increase of $2 million, $3 million sequentially, is that mostly driven by R&D or would you expect your SG&A to increase as well?

Actually, the increase in -- between Q3 and Q4 will be largely driven by SG&A. I mean, we had some meaningful benefits in SG&A in Q3 from lower compensation costs. And so I'd expect that we'll go to a more normalized level in Q4.

Okay, okay. And as well as R&D...

I think, over time, I think, like I said, we've seen -- if you look over the last 3 years, I mean, we've seen R&D move from kind of that $11 million to $12 million level to kind of $13 million to $14 million a quarter. I think we'll continue to see a progression in terms of our R&D spending, and our goal is to clearly -- to keep SG&A flat over time.

Okay. And as far as your tax rate should be, is that a good tax rate that to continue, you think, in 2014 as well?

I said -- yes. So what I talked about for Q4 was 25% to 27%. At this point, I'd be reluctant to give you a '14 rate. But I would think it's likely to be at the higher end of that range, I think more like 27%, 28% as a starting point. And we continue to push the tax rate, but there've been a number of factors this year. We've had outstanding performance in Malaysia, and that really benefits us from a tax perspective because we don't pay taxes there. And at this point, I wouldn't want to speculate that, that would recur next year.

We'll take our next question from Rick Ryan with Dougherty.

Say, Greg, will there be any more true ups on the earnouts for, I mean, Q4? I know you had one in Q3. Is that over with or we have some [ph] drills?

Well, there -- yes, so essentially, just to hit on the true up, at the time we booked the accounting for the transaction, we assumed $3 million contingent liability for the earnout. We've essentially reduced that by $1.8 million in the current quarter. So there's still $1 million to $1.5 million of liability left. I would not anticipate a true up in the near term. I mean, it's possible that it could go -- over time, it's possible that it could go the other way, depending on the performance of the business. But I wouldn't expect anything in the near term.

Okay. Can you give a little perspective on your -- I know you had a pretty active collaboration program. Can you kind of give an update where you are with that, trying to get closer to the customers? And is that a driver for R&D going forward as well?

So Rick, this is Bertrand. Yes, it certainly is a big driver for the R&D spending that we've been incurring since the beginning of this year and for the past several years. We have actually a number of collaboration initiatives across a number of product lines. But I would say that the ones that we are most focused on are the ones related to advanced filtration to advanced wafer handling product lines of -- at 450, but still around the 300-millimeter wafer size as well. And then in our specialty coating business unit, where we are, in the process for developing the next generation of each product [ph] so all of those products and projects are proceeding well. And again, I think we made, once again, a lot of really promising progress in the quarter.

And we'll take our next question from Ben Pang with Northland Capital Markets.

First, one clarification on an earlier question. If I look at your consumables business, can you provide some details about the impact to your revenue stream of the utilization rates above 40 nanometer technology and below? Which has a greater impact in terms of the increase in utilization rate?

So your question is to understand the exposure that we have in terms of our filtration products to 40 nanometer and below for process [ph]...

Yes, I'm assuming -- yes.

Is that the question?

Yes. The advanced nodes recover, but the trailing edge doesn't. Is there a way to figure out how does that impact your revenues?

I would say that in any given quarter, for our filtration product, on average, about 25% to 30% of our revenues would be coming from those leading-edge fabs, which, in other words, means that it's still at about 70% of our filtration business that will be contingent upon relatively steady environment in trailing-edge fabs.

Okay. And in terms of your outlook for next year, I know you don't want to provide too many details, but how do you look at the recovery of the trailing-edge utilization rates in 2014?

So, Ben, again, I think it's way too early at this point to really comment on anything past the next 1 or 2 quarters. If you listen to the latest, probably, comments made by some of the 2 largest device makers in the world, even they have actually a hard time predicting the end market demand. So I would certainly not be in a much better position than they would to comment on that.

Fair enough. And final question for me. In terms of your R&D, I think you'd provided some good commentary as on -- for the previous questioner. But is there some specific area in terms of your divisions that spending more R&D, but in terms of where the leverage is in terms of the R&D increase between your different divisions?

Yes. I mean, typically, we don't go into a lot of details beyond that. But at high level, I would just say that we have given priority in our R&D spending through the CCS division on one end and to one particular product line within our Specialty Material division.

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

Just -- I thought -- I just want to make sure I heard a few things right earlier. You guys talked about your CapEx-driven business being up in the teens sequentially; did I hear that correct, in Q3, Q4?

We were commenting on Q4 over Q3, correct. Yes.

Okay. All right. And then as we look at the unit-driven portion of your business, I was confused on the very soft capacity utilization that you expect to see in Q4, but an advanced ramp to 20 nanometers that may drive growth. What is your expectation for your unit-driven business sequentially? I thought you said it would grow.

So -- right, we've said that there would be some puts and takes. And again, what we're saying is that definitely, we are counting on a very soft wafer start environment and fab utilization in Q4. But we expect that softness to be offset by a lot of efforts by a couple of large device makers to ramp up production for their advanced nodes. So we expect that this offset will have -- actually, our unit-driven product lines to enjoy some modest amount of growth sequentially.

Right. So then, that gets me to my question, so I did hear everything correct. The guidance you gave for revenue of $165 million to $175 million, right? You get $54 million in CapEx driven and teens -- let's just take the mid-teen at 16%, that's $62 million. And you have $110 million that you did in unit-driven business, and you expect that, as you just explained, to grow modestly. So that gets you to $172 million, and modest growth would get you at $175-plus million. However, you've guided at the low end at $165 million. So my question is, the guidance range that you've given officially, extremely conservative, given the poor execution versus your guidance on the top line last quarter.

Well, again, I think that what we're trying to reflect on, Christian, is the fact that if you look at some of -- listen to some of the comments made on the calls of some large device makers, the low end of their guidance going into next quarter is actually very, very soft. And if that's the scenario that plays out, then we're just concerned that the offset that we're expecting from the ramp activity may not be enough to totally mitigate that drag. So call it conservative, call it prudent, I don't know. But I think it's fair to say that -- again, there is not a lot of peer visibility in the market at this point in time, and we're trying to be cognizant of that.

Perfect, I appreciate that. And then my last question, Bertrand. Can you remind me who your largest exposure to is on the CapEx-driven side as far as equipment OEMs?

Well, again, as I've said, what we've said, it's tough to characterize it in a very generic terms. Typically, we have great exposure to wet tools, so wet etch and clean and track tools, think about it in those generic terms, and that will be for a component in system product lines. And then the other big component, as you know, is the FOUP business, and that has to do with new fab facilitization and first 2 lane [ph]. So those are the 2 big drivers for our CapEx business.

And at this time, there are no other questions in queue. I'll turn the call back over to Bertrand Loy.

Well, thank you, all, for your interest and for being on the call with us today. We look forward to continuing our dialogue as we report our Q4 results in January. Thank you. Bye-bye.

That concludes today's conference call. We appreciate your participation.