Good day, everyone, and welcome to the Entegris Second Quarter 2012 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.

Good morning, and thank you for joining our call. Earlier today, we announced the financial results for our second quarter ended June 30, 2012. You can access a copy of our press release on our website, www.entegris.com. Before we begin today, I would like to remind listeners that our comments will include some forward-looking statements. These statements involve a number of risks and uncertainties, which are outlined in detail in our reports and filings with the SEC. On this call, we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. You can find a reconciliation table in today's press release, as well as on our website. On the call today are Gideon Argov, President and CEO; Bertrand Loy, Chief Operating Officer; and Greg Graves, Chief Financial Officer. And with that, Gideon will now begin the call.

Thank you, Steve. Good morning, and thank you for joining the call. We're pleased with our second quarter results, which reflected good performance across the company. Sales increased 7% sequentially to $188 million in the second quarter. We grew our adjusted operating margin to 18.1% and recorded cash earnings per share of $0.16, while generating $43 million in cash from operations. And we continue to get traction with a number of new products that are proving to be critical for the industry to implement next-generation technologies, including 28-nanometer processes. Broadly speaking, the trends through the second quarter were favorable as demand remains strong, particularly from the leading device makers for their advanced production lines. Fab utilization at the leading edge remained high in the second quarter and capital spending, stable. Looking at our revenue trends during the quarter, our unit to CapEx mix of sales was 66% unit driven and 34% capital driven, a slight shift to the unit-driven side. Our unit-driven sales were up 8%, boosted by record quarter for our liquid filtration products and higher sales of wafer shippers. Sales of other unit-driven products such as our electrostatic chucks for both semiconductor and solar ion implant tools also reached a record. CapEx-related sales grew 7% due to higher demand for fluid-handling components and photochemical pumps for new tools and fab construction projects. Looking at our business by market, our semiconductor-related sales represented 75% of the total and increased 9% from the first quarter. Outside the SEMI market, the trends were not uniform. Our non-SEMI sales increased 2%. In the markets that account for most of these non-SEMI sales, stronger demand for flat panel display and data storage contrasted with weakness in some of our industrial markets. Nevertheless, we were encouraged by performance in several new applications that have…

Thank you, Gideon. We are pleased with our second quarter results. We continue to execute very well as we achieved an adjusted operating margin of 18.1% and cash EPS of $0.16. The Contamination Control Solutions division, or CCS, had another strong quarter driven by record sales for liquid filtration products. CCS sales grew 7% sequentially to $123 million, and the operating margin was 28%, which was up slightly from Q1. Sales for the Microenvironments division grew 10% sequentially to $45 million on higher sales of wafer shipping products. ME's operating margin improved to 19% from 14% in Q1. This improvement was driven largely by higher volumes and a more typical product mix. For the Specialty Materials division, sales were $21 million, up 7% from Q1. The increase was driven largely by strong sales of specialty coatings for semiconductor application. Specialty Materials achieved an operating margin of 22%. The geographic mix of sales was: Asia, 39%; Japan, 19%; North America, 30%; and Europe, 12%. Second quarter gross margin improved sequentially to 44%, reflecting higher volumes and solid performance across our manufacturing operations. Operating expenses excluding amortization for Q2 were $48.7 million, an increase of 4% from Q1. This increase relates in part to the strategic investments we highlighted at our analyst day, which will result in 150 to 200 basis points of additional spending when they are fully implemented by the end of this year. Approximately half of the spending relates to R&D expense for core technology and product development, and the balance, which relates to key customer-facing initiatives, will be reflected in SG&A. For Q3, you should expect OpEx to be approximately $50 million. Our tax rate for the quarter was 32.8%. This is consistent with what we expect for the full year. We generated $43 million in cash from…

[Operator Instructions] We will take our first question from Avinash Kant with D.A. Davidson & Co. This time we'll go to Jason Ursaner with CJS Securities.

It's actually Arnie Ursaner backing up Jason. Greg, I'd like to try to focus on the next quarter guidance. It looked like the cycle had bottomed in Q4. The industry was burning off inventory. So investors seem to be quite focused on the revenue outlook of flat to down 5%. I guess the real question is you mentioned signs of caution. Could you be more specific about some of the signs you're seeing? And is it also, in your view, a -- this continued divergence between the advanced nodes and the legacy nodes?

Okay. So in general, when we talk about our guidance of flat to down 5%, I mean, what we expect is to see a stable environment, really, in our unit-driven business. The caution on our part really comes on the CapEx side of the business, roughly 1/3 of the business is CapEx. And that's driven by -- in part by some of the comments that we're hearing from the major OEMs. As it relates to the divergence, we definitely have continued to see the divergence particularly in our CCS business, where advanced filtration, advanced flow control continue to be very strong parts of that business. On the Microenvironments side, again we see -- continue to see strength on the FOUP part of that business, which is also primarily driven by some of the migration to advanced nodes.

Okay. my final question, if I could, obviously, you spent a great deal of time discussing the recent industry announcements about the 450-millimeter and EUV. A couple of questions related to that. What do you think the timeline of commercial fabs would be in that? And with these announcements that we've seen, do you expect it to change the focus of some of your Japanese competitors on developing 450? And the final question related to the whole area. How much of the IP inside the box do you think is set at this point?

So -- this is Gideon. So first of all, related to 450, we're delighted that this investment is taking place, because we've been early supporters and early participants in the move to help the OEMs and the device makers transition over time to 450. I mean, basically, we've created a set of products in the Microenvironments area and now as well in some other areas that support 450. So we think it's good for us. As far as the Japanese competitors, I would say it's not clear. But we've had a very good position in 300 millimeter, particularly in process carriers. We continue to have an excellent position in that area. And I'd say we're winning a preponderant share of the advanced FOUP applications that are out there. I would think we will continue to do that at 450. In terms of the IP around the box, we worked very, very closely with the participants that are determining the ITRS roadmap and the exact configuration of that box. And we've worked closely with leading device makers. So our role is to be part of the solution, which means very strong cooperation with consortia, very strong cooperation with device makers and not carving out a sort of independent path that ignores needs and requirements of those organizations. We feel very comfortable about that. Was there a third aspect to your question?

Well, the only question is how much of that IP do you think is basically set at this point?

A lot of it's set. I mean, this is an industry that, as you know, operates with a long-time horizon, and many of the parameters are set, many of the tolerances are set and many of the configuration aspects are set. And we feel very comfortable about our position in all of those.

And we'll go next to Terence Whalen with Citi.

This question relates to CapEx. It sounds like we're coming in near $70 million, $75 million for the year. Is your expectation in 2013 that we revert back to a more normalized $30 million to $35 million? Or could you foresee potentially projects requiring CapEx to remain elevated into 2013?

Terence, I didn't really -- can you repeat the -- I didn't get the context really of the $75 million comment.

So for the full year in calendar '12, CapEx is going to be about $70 million to $75 million? Is that correct?

Industry CapEx? I'm sorry, yes. Okay.

And so my question, Greg, is that going into the first half of 2013, do you foresee any reason that CapEx will remain elevated? Or can we expect a CapEx number closer to $30 million in 2013?

So the $70 million to $80 million in CapEx this year is highly unusual, because we've got 2 major projects, and that's the 450 initiative and the i2M facility here. Depending on how this year comes out -- I mean, if this year comes out at the high end of the range I mentioned which -- in the high 70s, I would expect next year would probably be in the $40 million range. And then we'll revert to the lower levels as we move into 2014. Now if these projects, if anything, were to slow, and if we were to finish this year at a lower number, you'd expect -- I'd expect next year to be higher. In other words, we're got kind of the bubble of these 2 major products that are going through the system and how they split in terms of 2012, 2013 will really [Audio Gap] that where 2013 ends up.

Okay. Terrific, very helpful. And then the follow-up question I had was -- and forgive me if I missed this. On gross margin, how do expect gross margin to trend in the third quarter into the fourth quarter, given the shift in mix toward consumable away from equipment?

We'd expect it to be in the same general range kind of in that 43% to 44% range. If you look back over the last, really, 8 quarters, Terrence, I mean 6 of the 8 quarters has been right in that 43%, 44% range. We had a quarter where our revenue was up near $210 million, and it was higher. We had a really low quarter, and it got down around 41%. But it's tended to trend in that 43%, 44% range for the last, like I said, 6 to 8 quarters. And I'd expect that to continue.

Great. And then my last one, if I could, is just simply on 450. If you were to estimate what amount of your R&D today is being allocated toward 450, what would that be? And then also on 450, have you seen any change in customer behavior in the past week in terms of the inquiry levels or natures of the inquiry?

Terence, this is Bertrand. I'm my losing voice today, so hopefully, you can hear my answer well. So first of all, in terms of the amount we are investing in R&D, I would say that about half of the -- any divisional R&D expense is probably geared toward 450 and leading-edge process carrier development. Now again, a lot of what we do in terms of development in the Microenvironment division really is CapEx, because as you know, in the molded products, what we do is, really, we develop new molds, and we invest a lot in those molds. So it's really a CapEx investment as opposed to an expense -- an R&D expense. In terms of the recent development in 450, I mean, obviously, as Gideon mentioned earlier, we were very pleased with the announcement of the collaboration between Intel and ASML. I think what it really means is that the pace of adoption of 450 is going to pick up in intensity, and that's really good news for us. It's good news, because we have been hoping, and we have been actually planning for a fast-paced adoption of this technology, and this is happening, and we are ready. As you'll remember, we've been an early participant in this effort. So we have very extensive collaborations ongoing with all of the leading players in the industry. We've been learning a lot over the last few years, and our design is really incorporating all of the learning that we've been able to gather through the ecosystem, number one, but also all of the learning that we've been gathering working on the leading-edge, 300-millimeter FOUPs, where as you know, we benefit from a commanding market share. So I think that, again, we are really welcoming the increased pace of adoption in 450.

And Bertrand, have you seen any specific change in customer behavior even in the past week? Or is it just too early to see any sort of change?

No, the reality is that no. It's interesting to see what companies are really saying publicly and what they are in fact doing. Given where we are positioned in the ecosystem, we've been working with a number of companies over the last 6 to 9 months on their 450 project even though I would tell you that publicly, they were not really making a lot of noise about that. So, again, I think that, if anything, I think that this latest announcement is just formalizing things that were already happening.

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

Guys, just looking at your Liquid Filtration business, that's been actually pretty robust over the last, I would say, 12 to 18 months. Maybe can you characterize how much of it is just the industry adoption versus share gains on your end that's driven that part of the business' growth?

In the liquid filtration business, Patrick, you're right. I mean that business has been very strong for us and then we've set quarterly records the past couple of quarters. And it's driven really by both of what you said. I mean, we've clearly seen continued strength with some of the advanced filtration applications, primarily our Torrento product line, but we also -- as we look at the competitive data, we feel quite confident that we're gaining share against some of our major competitors.

Right. Looking at that investment by ASML -- or the investment into ASML by Intel and the 450 versus EUV discussions that are out there, maybe taking a look on the EUV side of things, obviously, that's been delayed, but you do have a presence there on the litho side. Can you comment with these delays how it can potentially impact your presence in the etch market, which clearly benefits from the migration to double or multiple patterning over the next few years?

Well, our investments in EUV are really both in the Microenvironments area, because we, obviously, make reticle pods that store these things. And we also have a number of products that are actually materials-based products that are used in the EUV applications. I would say, in the main, Patrick, the products that we are used -- that we are involved in EUV are consumable products. They will depend on the rate of adoption of EUV. They are still a very small portion of our business. But along with 450, we think this is all part of a solution set. I mean, the broader issue is what are the requirements at the advanced nodes. And I think you just asked the question before about our filtration business. We're being challenged as never before to come up with answers to particle issues that relate to a variety of particles: ions, amines, metallics, organics, AMCs. It is a rogue's list of particles that is impeding yield at 2x and below. That to us is sort of -- public enemy list #1 is those particles. And to be honest with you, it's impacting all of our business including what we're doing in EUV, and it's -- actually, this is the kind of stuff that makes us excited, because it presents opportunities.

Okay, great. And final question, maybe for Greg, specifically. Your comment on gross margin being in that steady 43% or 40% range in the near term. What are some of the levers on the OpEx side of things, given that you are making a lot of investments near term? What are some of the levers you can pull there to keep the EPS at these same levels?

So, I mean, I think as we've rebuilt our targeted model over the last few months that we presented in May, I mean, we have been very aggressive in the target -- in developing that to make sure that the spending is against ER&D, project-related, new product initiatives, customer-facing activities. And we have been very tight on increasing spending in functional areas like finance, IT, HR. I mean, the focus has clearly been on the newer initiatives and the engineering around those initiatives.

We'll go next to Krish Sankar with Bank of America.

Thanks for taking my questions. I have 2 of them. Gideon, when you look at what your front-end equipment guys are seeing in terms of customer concentration and seasonality and when you look at your own business, do you feel like there's a seasonality trend developing in your overall business?

No, we don't think there's seasonality in our business. Whatever seasonality exists typically relates to very small portions of our business as data storage. There are some aspects that come into play around Chinese New Year. I'd say, it's very muted. For the most part, it's not a seasonal business.

Got it. And then just in terms of -- not to harp on 450 too much, but can you guys quantify how much you spent so far on 450? And when you look it over the next several years, what would be the R&D needed to get 450 to the market? I don't need the exact number, I'm just trying to get a sense of the magnitude. Is it tens of millions, or is it hundreds of millions?

No, it's tens of millions, and it's low 10s. And with regard to the engineering, I mean, we've spent a very large portion of the engineering. I mean, we'll obviously have ongoing sustaining engineering in that -- in 450-millimeter, both on the process and the shipping side. But the product is largely engineered today. With regard to the capital, we've spent -- I mean, order of magnitude, it's sort of a $20 million to $25 million number. And we've spent most of the money that we need to spend on tooling, most of the money that we need to spend on larger presses, and so what we've got left this to spend really is around facilitization. So we began on the capital side, spent a meaningful portion of what we need to spend. So while the...

And Krish, just to add to that, so to be clear neither 450 nor EUV will be an earnings drag on this company in the future, just to be very clear, or on capital. This is not some kind of an open-ended kind of project, number one. Number two, as Greg indicated just a minute ago, the target model that we revised and laid out very clearly at the May analyst meeting is the envelope within all of these will be contained. This is not something that's going to take us outside of the envelope. That includes 450, that includes EUV, that includes all the advanced nodes, everything is in there.

Well, the next is Dick Ryan with Dougherty.

Say, Greg, I think you mentioned weakness in the industrial sector for the specialty side. Can you go into that a little bit? Is that kind of a protracted weakness, or what's pushing that?

I wouldn't call it a protracted weakness. We just saw a little bit down in a couple of areas. It's not -- I mean, at the end of the day, that industrial business, in the scheme of the entire company, is not terribly significant. But then when you look at that specific division, that was part of what drove the weakness in Specialty Materials.

Okay. When you look at margins both for the ME and the Specialty, quite a bounce in the ME side. I think you said mix related for the specialty side. How should we look at those margins going forward? Is there kind of a normalized trend we should be looking at?

Well, I -- with regard to the ME business, I think we should continue to focus on mid to high teens operating margins. I mean, the operating margin we saw this quarter is probably closer to indicative of what we expect long term than what we saw last quarter. With regard to Specialty Materials, I mean, our view has consistently been that, that's kind of 20% to 22% operating margin and $20 million in revenue. And last quarter, for instance, when we put 24% up in that division, I think we were pretty clear that, that was like perfect mix, an outstanding outcome. So I feel very good about the Specialty Materials division margins in kind of the 20%, 22% range.

One last one. Depreciation for next year with new facilities, where should we peg depreciation at?

It probably goes up by somewhere in, order of magnitude, next year $400,000 to $500,000. It depends, large part, on when we get the facility online here in New England. Start taking depreciation.

And we'll go next to Jairam Nathan with Sidoti.

I have a couple of questions on the mix. So do you -- it looks like you would continue to see a shift towards unit-driven business revenues for the next couple of quarters. Is that fair to say, and is that going to be a significant shift?

Jairam, if you look back over the last 4, 5 quarters, I mean, we tend to trend around 34% to 37% capital. I mean, at the very height of the capital spending last year in Q2, we were up at 37%. I mean, we consistently think of that business as kind of 34%, 35%. And I think that's the way you should think about it going forward. I mean, if there's some weakness in the capital side of the business, I mean, maybe you'll see the capital piece come down to 33%, but it's not going to change markedly this coming quarter.

Okay. And just following that -- does that impact gross margins, the CapEx?

It really doesn't. There are -- certainly, there are mixed things that can have a minor impact on gross margin, but as a whole, the capital products and the unit-driven products are relatively consistent.

Okay. And then my last question was you mentioned some gain on investments, can you expand on that? And where is that -- what part of your income statement does that hit?

We had a -- there was a $1.4 million write-up related to acquiring a majority interest in a company where we owned a minority interest. It was really an accounting convention. It was noncash. And if you look at the GAAP to noncash reconciliation, we actually took that out of our earnings for purposes of the cash EPS.

[Operator Instructions] We will go next to Christian Schwab with Craig-Hallum Capital Group.

I have 3 questions. One, do you still believe you're in a great position to outgrow the market? Number two, given the recent pause in spending, do you still expect to be at $1 billion run rate and $1 or so in earnings, give or take in 2014? And then lastly, you've mentioned in the past that you have about -- need about $150 million to operate your business as you see it today. Can you give us what -- if you have any thoughts for your excess cash?

Okay. Christian, this is Greg. And Gideon can take 2. With regard to outgrowth of the industry, when we look back in Q1 and how we did relative to our comparable group, our revenue was up kind of 8% to 9%. Comparable group was up closer to 2%. So we significantly outperformed in Q1. With regard to Q2, the data's not out, but, I mean, we believe that we probably outperformed in Q2 just based on what we see in terms of some of the competitive trends. That's that. Your third question, remind me?

Cash.

Oh, cash, yes. I still believe we need about $150 million in cash to run the business. I also believe that we need a cash reserve to be able to be opportunistic on the M&A front. Well, financing and acquisition with debt is not something that's an option, so we need to keep additional liquidity above and beyond what it takes to run the business for that. And we are just now really in the last several months becoming increasingly active in terms of rebuilding the M&A pipeline. We haven't spent much time on that at all in the last 2 or 3 years, but it is now -- it becoming a focus again.

Great. I'm sure you'll get increased calls from that comment too, so -- and then the last one about the $1 billion run rate?

So -- on that one, Christian, yes, we think we have a good shot at that. It will depend on where the industry is. We've been very clear, about 1/3 of the delta between last year's revenue and $1 billion run rate would come from industry growth, 1/3 from market share gains in our core SEMI business and 1/3 from the adjacent markets that we have been investing in all along. The conditions in the market side that would help the $1 billion run rate on that 1/3, we've said all along would be about a $35 billion WFE market. That's the same basic size market that exists in 2011. Now 2012, latest Gartner estimates for that to actually be down approximately 7% from last year, but it remains to be seen. And then in terms of MSI, square inches of silicon growth, the expectation or the condition would be sort of high single-digit growth rate compounded from 2011 to 2014. I'd say today, jury's out. But I don't see any reason why we can't get close on that depending on the industry. We feel very, very good about the other 2 areas. We feel very good about taking share. We've talked about that on this call, we've talked about that at analyst day, and we are doing it. We know we're taking share, and we know kind of what products we're doing that in. And then in terms of adjacencies, I would remind you, we basically grew in our non-SEMI business by 2% this last quarter, even though the new parts of that business, particularly LED and solar, are experiencing what I would describe as Sahara-like conditions. It is a desert in terms of those 2 industries right now. But we are holding our own. We think those will ultimately be growth industries, and we think we're -- we've got some great product offerings there.

We'll go next to Steve Schwartz with First Analysis.

Greg, in responding to an earlier question, just on Microenvironments, you talked a little bit about operating margin. But can you tell us a little more detail on why you saw such a significant sequential increase from the first to the second quarter. Is it just a matter of timing of expenses?

It is not a matter of timing of expenses. Spending into that business is relatively consistent with Q1. We clearly saw a more favorable mix, but what I would say is a more traditional mix. We had seen some weakness in the 200-millimeter and below wafer shippers earlier in the year. We saw good strength in that business this quarter. We saw a decent strength in some of our 200-millimeter and below process products in the quarter. Those things all benefited the margin, but are things that we would expect to continue.

Okay. All right. Fantastic. And just as my follow-up, one of your major filtration competitors has formed a partnership with ISMI. And I think that's an organization you guys are affiliated with as well. Can you give us a feel for how that might change the competitive landscape for 450?

Yes. I would say that we are very actively involved at ISMI G450C and a number of other consortia in the industry. So I don't expect -- I mean, first of all, I would expect many of our competitors to start engaging a little bit more on some of those -- or with some of those consortia. But I would say that I don't expect these recent announcements to change the competitive landscape for us.

[Operator Instructions] We'll go next to Avinash Kant with D.A. Davidson & Co.

A few questions here. First, maybe you talked about the guidance for the September quarter, flat to down 5%. And I think at one point you did say that you expect relative stability in the unit-driven side of the business. So could you put a little bit more color, like do you expect the unit business to be up sequentially in the September quarter? Or by how much, and what's the expectation for the CapEx side of the business?

Avinash, I think on that, I'll just stick with my initial comment that we expect relative stability on the unit side. I mean, so we would expect that to be close to flat.

Okay. And also, could you give us a little bit color about the fab activity like, TFT [ph], of course, that's the key driver for the business. And could you talk a little bit about what kind of -- how many fabs do you see coming up this year? And compared to that, how do you think things will pan out next year? What kind of projects do you see, and where they are in terms of taking equipment at this time?

So in terms of fab, again, fab activity, I should think that, clearly, we know that 28-nanometer capacity is very constrained right now. We know that a number of our customers are very committed to the most advanced nodes, and they are aggressively investing on that. But I won't speculate. I think, much like you, we are hearing some of our customers that remain very committed to an aggressive investment timeframe. Others are giving sights that they may actually postpone or delay some of those investments. But again, I won't speculate. I think that -- I don't think I -- we know a lot more than that than you do.

Okay. And also specific, was there any currency impact in the quarter?

Currency negatively -- versus Q1, negatively impacted us by about $1 million. Year-over-year, it negatively impacted us by just a little over $3 million.

And with no further questions in the queue at this time. I'd like to turn the conference over to Gideon Argov for any closing or additional remarks.

Thank you very much for joining our call. We look forward to keeping you updated in the future. Good day.

Again, that does conclude today's presentation. We thank you for your participation.