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ATMI, Inc. (NASDAQ:ATMI)

Q4 2009 Earnings Call

February 3, 2010 11:00 am ET

Executives

Dean Hamilton - Director, IR

Tim Carlson - EVP & CFO

Doug Neugold - President & CEO

Analysts

Steven Chin

Mehdi Hosseini

Krish Sankar

Avinash Kant

Timothy Arcuri

Brendan Furlong

Raj Seth

Operator

Good morning. My name is Morris and I will be your conference operator today. At this time, I would like to welcome everyone to the quarterly and annual 2009 financial results conference call. All lines have been placed on mute to prevent any back ground noise. After the speaker's remarks, there will be a question-and-answer session. If you would like ask a question during this time (Operator Instructions). Thank you, Mr. Dean Hamilton, you may now begin your conference.

Dean Hamilton

Thanks very much Morris, good morning welcome to ATMI's fourth quarter and fiscal year 2009 conference call. The call is being webcast on ATMI's web page at www.atmi.com and Morris will provide replay information at the end of today's call.

With me this morning, are ATMI Chief Executive Officer, Doug Neugold and Tim Carlson, Chief Financial Officer. The information discussed during today's call and the question-and-answer period that follows it, include the forward-looking statements within the meaning of U.S. Federal securities law. These forward-looking statements involve a number of risks, uncertainties and other factors, including those described in ATMI's filings with the Securities and Exchange Commission that could cause the actual results to differ materially from those described. ATMI assumes no obligation to update any forward-looking information.

Copies of all recent SEC filings and additional information about ATMI are available through our website at www.atmi.com.

Now, here's Tim Carlson, CFO with a look at the quarter and the year. Tim?

Tim Carlson

Thank you Dean. Good morning, everyone. As reported in our earnings release this morning results for the fourth quarter showed significant improvement versus recent quarters while 2009 was a very difficult year for us and our industry, at ATMI we are proud to say that we made it through a tough year and we did so by achieving our cost saving and deferral targets by generating positive cash flow from operations and by maintaining a strong balance sheet all while making significant strategic investments for good growth.

Now let me give you a quick overview of the quarter and the year. Revenues for the fourth quarter were $84.6 million, up 21% compared to $70.1 million a year ago and up 17% from $72.6 million last quarter. As we've discussed in prior calls, during the fourth quarter of this and the past two years we've benefited from a multi-year take-or-pay agreement with a large customer.

We recognized $4.5 million of revenues from the agreement in Q4 this year and $3.4 million last year. Excluding the impact the take-or-pay agreement, revenues were up 10% sequentially as we experienced greater than market revenue growth during the quarter primarily associated with strong demand for our products used in copper processes as well as our NOWPak products, which are primarily used in flat-panel display applications.

Also as discussed last quarter our in plant revenues were closely tracked to customer production levels as SDS inventories return to normal levels in the channel. Despite a difficult start to 2009 we finished strong as full year revenues $254.7 million breaking revenue down by end use market for the quarter and the year, approximately 64% came from logic, 16 came from memory, 12% from display and 8% from like sciences.

Gross margin for the fourth quarter was 45.4%. Down from 46.3% in the prior year quarter and relatively flat the last quarter due to unfavorable product mix in Q4 primarily associated with the lower margin take-or-pay plating revenues in certain implant products.

As a reminder our Q4, 2008 gross margin included $6.5 million of one time benefits. Excluding these items are Q4 2008 gross margin, would have been 40.8% which would equate to a 460 basis point year-on-year improvement.

Gross margins for the full year 2009 were 40.1%, compared to 49.1% in 2008. In 2009, margins were depressed by charges we took in Q1, associated with our cost saving initiatives and asset impairments from lower revenue levels, channel inventory adjustments and product mix.

Margins for our products that addressed advanced devices remain strong. As discussed in prior calls, assuming a normalized product mix, we expect margins to increase as revenue levels improve given our average contribution margin of our products of approximately 60%.

R&D spending in the fourth quarter was down approximately $1 million from the prior year quarter as announced in our press release, given the many market opportunities available to us, we anticipate increasing the amount spent on R&D by $8 to $10 million in 2010 to capture incremental revenue opportunities over the next two years.

SG&A spending in the fourth quarter was down approximately $2 million from the prior year quarter; we achieved our cost reduction and deferral targets and are beginning to selectively incur certain people related expenses that had previously been deferred. Based upon the pace of the economic recovery we may over the next 18 months selectively reinstate approx half of removed costs. Nonetheless we expect to leverage our current infrastructure to support incremental revenue growth. We plan to keep SG&A as a percent of revenues below our historic levels, particularly below the percentages they were at when we entered the downturn.

Capital expenditures in the fourth quarter were $4.3 million and $17.3 million for the year, down from approximately $50 million in the prior year. Depreciation and amortization expense was $6.7 million for the quarter and $27 million for the year. Our capital expenditures in 2010 are focused on high productivity development and life sciences and we anticipate spending approximately $20 million in incurring approximately $28 million of depreciation and amortization expense.

Earnings per diluted share in the fourth quarter of 2009 were $0.22, compared to $0.10 per diluted share in the fourth quarter of 2008. ATMI had an effective income tax rate of 34.6% for the quarter, and an effective income tax benefit rate of 51.2% for the year. As a reminder we realized one time tax benefits of $0.04 per diluted share during the third quarter. For 2010, we anticipate a full year tax rate of approximately 30%.

We've been very successful in protecting our strong balance sheet. We generated over $28 million of cash from operations during 2009, and our overall cash balance including marketable securities was $108 million at the end of 2009 compared with $96 million at the end of 2008. Our strong balance sheet provides us with financial flexibility to pursue business development opportunities.

Compared to last quarter, head count at the end of the year remained relatively flat 693 and was down from 761 at the end of last year. Looking back at the last 12 months we've been through a very difficult time. We've taken what we think are the appropriate actions to come out of the year stronger and more focused on achieving our long-term growth objectives. Now let me turn it over to Doug.

Doug Neugold

Thanks for that update Tim. Hello and good morning, everybody. Thanks for being with us and I'm sure we're all happy to be in the New Year. There are plenty of encouraging signs as we enter this New Year and I'll gladly share my impressions. Before doing that, I'll revisit some of what we think are the important items from 2009. For a long time now ATMI has been managing its investments to enable us to innovate for the benefits of the industry and technology leading customers and to do things that draw us closer and closer to those key accounts.

2009 was a year where those beliefs could have been tested. With our history of managing ATMI conservatively from a financial perspective, we went into the downturn in reasonably good shape. While we made some short-term expense control decisions that reflected the overall uncertain environment we were in, our strong balance sheet and cash generating business model gave us the confidence to continue investing in what we have identified as key growth areas for ATMI, revolutionary development capabilities which have been critical to our efforts to increase our interactions with key IC customers and technology and infrastructure for our life sciences business building on our developments of the prior few years.

From our perspective, there's so much going on in the IC market that creates opportunity. First and foremost, it is clear that a group of customers are leading the industry out of the downturn. Because of their investment history and technology capability, those who have led investment in technology development and capacity seem to be recovering first and fastest. We think that the trend towards fab-wide manufacturing will continue to benefit the leading foundries and its possible there will be more consolidation at the IC producer level.

The objective for us to have a strong position with the leaders and we have directed our technology development and selling and support resources squarely at them. The fact that they are stronger and in the lead raises expectations of them and gives them greater challenges. For the last couple of years, the number of new materials being integrated into state of the art ICs, first in logic and more recently in both DRAM and flash memory is one of, if not the biggest process challenges they face.

Bringing new process capability up quickly and ramping to high volume manufacturing is how they get returns and our ability to help them improve in this area by rapidly inventing and qualifying materials that solve their challenge is our best path to better than market growth. This is a rationale for our investment in high productivity development capability. Building on our excellent history of using traditional approaches to develop new deposition and cleans chemistries we apply common (inaudible) science principles and processes combined with massively parallel data processing and an ability to do much higher amounts of experimentation on a single wafer. The result is an ability to do multiples of the work that we used to do.

While we have increased our R&D cost and will do so again in 2010, the majority of this increase is for facilities, hardware, software and support in our four HPD locations around the world. With an effectively fixed number of people we've been able to increase the speed of our development activities and the number of projects we are able to work on. This is a critical point.

Materials markets have changed as new generations of chips have been introduced. Rather than one material that can work for multiple customers at a node, today each customer has something like an application specific material requirement. For ATMI what in previous generations might have been a $50 million world wide market for a more standard material has morphed into multiple application specific materials markets that may be on the order of $10 million per year each.

If you can address multiple customer requirements in an effective and efficient way, as we are by applying our HPD innovations you'll have a hard time winning the business. With these investments, we're exiting the downturn with more new collaborative development activities than we had when we entered it. More than 55 new collaborations have been started. 15 of the projects are in node diagnostic and the balance are targeted at specific nodes for specific customers with about 15 engagements at 40X, 10 engagements at the 30X node and more than 15 at the 20X node.

The majority of user based on our wet platform with the focus on many new cleans applications being created to support the new thin films being processed. More recently and moving into 2010, we've been ramping our dry capability which allows us to more comprehensively exploit thin film depositions which are vitally important for high-k and metal gate processes as well as the myriad of new technologies enabling next generation Flash and DRAM.

We have a history of developing pre-cursers for these applications as do several other suppliers. This history combined with our HPD film deposition and characterization suite, re-defines our ability to understand final film for hope performance and the process conditions that influence this. With HPD, we've proven an ability to identify successful new pre-cursers and process condition in a much shorter period of time.

This is a very differentiating capability for ATMI that is vitally important to customers. We estimate these new applications will result in excess of $500 million worth of new market opportunities over the next three years and we think we are as well or better positioned than anyone in our industry to succeed and create greater than market growth for the company.

These opportunities will play out as the new nodes are ramped. After all, this is said, the summary is that, through the downturn we reduced variable cost, we continued making significant investments for future growth, but of course, I know there's a lot of interest in the near term as well, wafer starts for the first quarter already look better than the historical pattern of a decline and at this time, we expect wafer starts to be flat to slightly up versus the prior quarter.

Based on having maintained our relatively high market share positions and our base business, meeting our SDS product line, products used in copper wafer processes now packs or IC and flat panel applications, as wafer starts improved through 2010, these businesses will move pretty much in lock step. We expect to grow at greater than market rates from new products as new technology nodes are ramped and new products are consumed.

The other top opportunity that we invested in during 2009 and which will get continued an additional investment in 2010 is live sciences. For the past few years we've been methodically developing technology and IP portfolio and market presence in the biopharma segment. We've been applying our liner fabrication capability as used in our NOWPak business to opportunities that exist in the development and manufacturing of drugs.

Historically, the drug industry has developed and manufactured using stainless steel for their mixing and production processes. Grossly over simplifying this, it costs a lot to build. You're restricted as what you can make in it. You can't use it all the time. You spend a lot of money to maintain it when doing stainless steel. The solution for these customers is one time use disposable technologies. The benefits for them are similar to those chased for years in the IC space.

Faster, better and cheaper, it takes them less time and costs fractions to build the facility. The facility can be used for multiple applications and the processing and maintenance costs are reduced. The desire has been there for several years. The concept has reached the point where the early adopters have proven the idea. Mainstream producers are now qualifying and ramping applications as well. Again there's not a single time line. It is a customer by customer discussion, but the ramping will begin in 2010.

We have well over a hundred units in the field for process qualification, mostly for emerging drugs. There are several mainstream high volume qualifications going on as well. We think we're going to be able to secure a nice fraction of this rapidly emerging market. Today, market size is on the order of $30 million for bioreactors and $25 million for the mixing side.

Initially we're populating customer operations with tools and their consumable use is relatively low. As the process ramps, the consumable rate gets substantial. As the market adoption rate accelerates, so should our growth rate. Leading over the next few years, to what we think is on the order of $100 million opportunity for ATMI, in 2010, we expect to begin shipping bioprocess vessels from our Minnesota facility, where we spent the last year outfitting it to produce multidimensional bags for biopharma applications.

So, in summary 2009 was a year of challenges, some negative, some positive. As we end the year, we believe we've largely maintained our strong market share positions. We see R&D investments as having put us in a very strong position to take advantage of market opportunities in semiconductor and live sciences. As customers adopt and ramp their new technologies we anticipate our sales will follow in line delivering the growth we all expect.

As always we thank our employees for the contributions they made in a tough market, which enabled ATMI to continue to invest for the future. Characters revealed in the tough times and we saw many examples of great character in our employees last year and we thank them for it. With that, Morris, let's open the call up to questions.

Question-and-Answer Session

(Operator Instructions). And your first question will come from the line of Steven Chin.

Steven Chin

First question is about the increasing R&D spend by about $8 million to $10 million for these high (inaudible) products. Is there any estimate Doug that you can share for incremental revenue contribution. Do you think ATMI could generate from these products next year after this R&D investment?

Doug Neugold

Well, it of course is the most important question and the way we've been trying to, I guess, respond to that question, as I said in the prepared comments, some of our product development activities are what we call non-node specific. So we're actually working on a couple of things that could be qualified and could go into the market in 2010. They're not really need specific. So it's a question of finishing the qualification work. I think we'll see a incremental revenues from a couple of those products in 2010. You're starting from zero right. So you grow up to several of millions on your way to tens of millions. So it's not going to move the needle if you will from a non-node specific standpoint.

The balance of the projects we're working on, things that are going to be ramped at 40 nanometer, the sort of 40 X node. 30 X node and 20 X node. If you go out into the industry, and if you kind of go in to the archives, I presented a couple weeks ago in an investor conference and put a chart up. You can find the PSMC pronouncements for when they're going to ramp they're different notes. Intel, you can kind the road map, you can find the memory guys and rather than suggest when we think things are going to ramp, know that we have multiple cleans applications and some people are going to be ramping 40 this year and we'll probably intersect a couple of those, and you'll see the impact of that. But I would argue that the meaningful impact starts in the second half of the year. And so we will see benefit from it this year, but I'm not really trying to quantify it because I think it's really so dependent on how customers ramp these nodes. A lot of words to perhaps not answer your question but hopefully give you a little insight.

Steven Chin

That's helpful. The second question I have on the wafer start guidance. I know you talked about the first quarter wafer starts being flat. Could you share your initial views on 2010 wafer starts and how you think Taiwan could trend in 2010?

Doug Neugold

Yeah. It's all highly caveat. So at this point in time, when we normally answer it, we say we can see forward the next three months pretty well and we're encouraged. Taiwan in particular I think will have, will have a slightly positive wafer start growth environment and that's good news and then when I think of the discussions we've had with other customers and the things they've said, that leads to my comment. I think that it will be better than it normally is in the first quarter. Flat to slightly up is kind of the way we're modeling it.

I the momentum, the way it feels right now we see it strong carrying thought the second and into the third quarter. So my normal caveat is of course, talk to me, we'll talk again in three months and I'll tell you what I've got on a sheet of paper in front of me. But it looks pretty good. And Taiwan in particular, I think the way we're looking at it and the way it's been presented to us, from a year-on-year perspective, I think you're going to have very strong wafer start increases, well in excess of 25%, the way we're looking at it now.

So it should be a good year from Taiwan's perspective for wafer starts. They're absorbing an awful lot of that fab light off load that I spoke about. I think the global foundries entry is a significant one. I think they're a company we look at that is poised to do well. UMC seems to have strength in its business based on everything they've said and the discussions we've had for planning. So we're more encouraged than we were. Certainly the last time I talked I couched things in sort of environment of uncertainty and as we exit the year and enter the new one, we're going in with momentum and the general discussion in the marketplace, its good.

So the way I've tried to, I guess address that, is simply that we feel strongly that we've maintained our good market positions with our leading customers and we have pretty high market shares for the leading products that we sell. As the wafer starts increase, I think you should expect to see the tracking in our business that we've spoken about before. We think we're pretty secure there. So I'm not going to try to predict wafer starts. I feel pretty good about what I know for the next couple of quarters. There's a lot of people who get paid to predict wafer starts and who like to make statements about, that they get tied to. So as the wafer starts improve I think you'll see that reflected in our business.

Operator

Your next question will come from the line of Mehdi Hosseini.

Mehdi Hosseini

Going back to the wafer start commentary, I want to get more detailed color as how you feel about the starts between different types of customers like Logic foundry and memory, especially in the Q1 Doug, I think you said wafer starts would be flat to up and I have a follow-up.

Doug Neugold

Well, the foundry guys are working very hard and based on what they've shared with us, it appears that at least some of them have the ability to expand wafer starts. I think in memory it's still a selective discussion, I think you have some groups frankly who are running flat out and don't have a lot of room to expand and you have some groups who have expansion room. And then in more the traditional ID and logic sector I think there is a little bit of room to expand and that is happening for at least a couple of them. So you do all that together and the answer is flat to slightly up.

Mehdi Hosseini

As a follow-up that, it appears that the two big foundries, are waiting to see what happened to the Chinese new year holidays and associated sell through, my question to you is, do you see them building up material inventory in case the sell through is good or above the expectation and in case customers come back late February with expedited orders or upside to the wafer start plans?

Doug Neugold

Well, I think, you know, the most important fact was that for a lot of those foundry customers for the high volume products we're on a consignment agreement with them it flows right through. I'll allow Tim to elaborate a little bit on that.

Tim Carlson

The two major foundries that you mentioned too are, in fact, on consignment so we don't see any inventory build. We've got inventory leveled requirements based upon the pull through that we continue to maintain.

Mehdi Hosseini

And then you have enough, I guess, based on con assignment, so you're already planning for any possible upside to orders late in the month or early March?

Tim Carlson

Yeah the consignment levels themselves are predicated based upon the recent pull through and we maintain the required levels at customer sites and we maintain the appropriate safety stocks with their own infrastructure should the up-take be it greater than thought.

Mehdi Hosseini

Okay. And then going back to a previous question about the new product, I understand it started from a small base. But Doug help us understand, do you think that, by the end of this year as we exit 2010, the new product could account for double digit percentage of your revenue, or is it going to remain less than 5%?

Doug Neugold

I don't think at the end of this year it will represent that much based on what I know about the ramps, I think, you know they gain momentum in a meaning full way for us really in the second half of the year and you know that just goes month to month. It depends on what they do. I think that, I can't quantify it too much but my belief is that we will have several products moving to high volume consumption as we exit the year and that in 2011, you know, they will be, will, you know, will give, will give more insight in how they're performing, but it's not going to be, it can't go that quickly for us, with the base business recovering the way it is, right, you know as you see wafer starts move up, it's kind of difficult for the new product sales to over take that quickly, but as the base business, you know, grows and then stabilizes, I think in 2011, you know it's something that's going to be worth talking about and analyzing in greater detail.

Mehdi Hosseini

I apologize, I think you touched on this in the previous calls, but, is the margin profile for new product any different than the rest of the business?

Doug Neugold

It is. It's better. The way we run our development activities here, people come with a business case and they ask for investment and some new opportunity. They bring along all the things you'd expect them to do. We don't approve of any development activities starting that don't, that are not above our, you know, sort if you will, average growth margin expectations. So all new products that are going in the after market have a very good margin profile?

Operator

And your next question is going to come from the line of Krish Sankar.

Krish Sankar

Thanks for taking my question. Doug if I look at your wafer start guidance of flat to slightly better. That consolidated to how you're revenue line would look, how do we model Q1, given that you know the one time $4.5 million take-or-pay won't be there in the top line.

Doug Neugold

I'll give that to Tim to answer.

Tim Carlson

First of all subtract the take-or-pay so the Q4 revenue levels, obviously, included the $4.5 million of take-or-pay. As we talked about in previous calls as well, you know given order patterns for the 60% of our revenue that's not on consignment, you know and there could be a $2 million swing one way or the other on a quarterly basis. You know backing out the take-or-pay and modulated a little bit for potentially order patterns should allow you to end up in a right place from the modeling stand point.

Krish Sankar

Got it. Another thing is you did give us a good target of over the next three years for HPD in the new businesses I should know how much do you think it will be in 2010?

Doug Neugold

You know, sort of similar to the prior question. I think that the way it's going to work, Krish is that we're going to start to see volume sales of at least a couple products this year, but the way these things always work, you know, the momentum builds over time. I expect that we will have several products in high volume manufacturing next year. So as we exit the year, we won't be at double digit sales levels yet. You know I was trying to indicate that our base business is recovering and these new product sales you're always starting pretty much from 0, you know more or less, so they're going to move up. We're going to be excited about them as we end the year, but they're not going to be double digit contributors. I think that feasibility can happen in the 2011 time frame and you know the momentum will be building very nicely after that. But that's really a second half of the year story when volumes, when volumes start and you know we go from there.

Krish Sankar

One final question. Did you guys give the revenue split of copper, SDS and other segments?

Doug Neugold

We did not. Copper during the quarter was 47% implant was 21%, our display business was 12, life sciences eight, and then the others is made up of our NOWPak and IC and our deposition business.

Operator

And your next question is going to come from the line of Avinash Kant.

Avinash Kant

Actually in the past you've also broke even out your revenues by region. Do you have an idea in terms of Asia Pacific, North America or Europe. How do you do that?

Doug Neugold

64% Asia, 22% U.S., 14% Europe approximately for the quarter and the year.

Avinash Kant

And talking a little about the Life Sciences business, of course it looks like a pretty good opportunity at this point and you have been going through a lot of qualifications. But in terms of penetration, what would you think of the penetration. How much of the market have you actually penetrated or at least gone through the qualification? And could you give us some idea?

Doug Neugold

Yeah. Sure. So on the mixing side, they're never precise right but what we try to do is part of that activity and what some independent groups do is they look for the number of qualifications ongoing in the industry. So for these one time use mixing application we think we've got an excess of 60% of the qualification tools in the marketplace for processes that are ramping at a whole host of different customer sites. For bioreactors we're rather early in our development there. So the market share is very, very low.

The point is, that we've developed a fascinating technology which, like so many things we do, in Life Sciences, the only reason we're getting into it is because we think that we can drive efficiencies to the customer's benefit. It's our process efficiency discussion. So our mixing technology has a dramatically positive impact on the effectiveness of the reactions taking place inside of it versus a lot of other competitive technologies. This has been demonstrated by some people and presented in conferences and it's a known capability. So much of our development activity and business development work is around mixing. So we expect to go from virtually no market share to meaningful market share over the next year or two and that's a side of the business that's going to grow rapidly. So we have some targets internally but I won't share those with you.

Avinash Kant

Who is the key competitor there Doug? Anyone has a similar product, the new one that you have?

Doug Neugold

The people who compete with us generally have names like Wave, which is now part of [GE Bio]. Somewhere deep inside of Fisher thermal electron is a group focused on these sorts of activities. Paul, (inaudible), they're probably the large name players, Sartorius (inaudible) is very involved in the industry but what they do in this space is, we do a little bit of work with them as well. So those are the biggest names. Tim, anyone to add?

Tim Carlson

No.

Doug Neugold

Those are the kind of people that we compete with.

Avinash Kant

Okay. And one more question about in general the directionality of the business. You did say that from what you see at this point it looks like you have pretty good visibility into the next two quarters or so it looks like. Now, given the forecast that you are getting from your Taiwanese customers for the full year, what's the qualitative directionality? Do they have sequential improvements going all through the year or they have sudden weaknesses in a certain quarter and things improving from there on, how is it?

Doug Neugold

I think that first quarter as I discussed earlier, it will be slightly up. I think you'll see very strong growth through the second quarter and then the third quarter is still, nice growth but, you know it backs off a bit but from my perspective it's less comfortable for me to talk about that. I think looking through Q1 and Q2 you can see pretty good strength.

Operator

And your next question is from Timothy Arcuri.

Timothy Arcuri

A couple things. First of all, Tim, does the incremental R&D that you have for spending in March, is that sort of a structural change that you're having to spend more money to generate incremental revenue or is that specifically product related and it sort of rolls off once those products get out in the market and you start to get revenue from those?

Tim Carlson

It's probably a combination Tim. The spending is actually going to roll in on a quarterly basis. It's not going to come all in into Q1. We announced in our previous call that we made an investment in the dry work flow and a lot of cost structures will be actually associated with that dry work flow which is focused on advanced memory materials. We do anticipate that when we get out in 2011 and 2012 however that some of the efficiencies that we'll be generating as a result of these applications should allow us to reduce R&D as a percent of revenues back down to more normal levels.

Timothy Arcuri

It sort of seems like in the last couple of years that you've been spending at a sort of elevated R&D level, and for some obvious reasons the sort of payoff of that R&D has been pushed out probably because of the cycle and all. But is there some sort of a change in sort of the customer's willingness to adopt some of these things that you're working on because it seems like it's taking you longer to get a payback on your development dollar?

Doug Neugold

That's a very fair and appropriate question and a good one. So clearly I must say the last couple of years, starting in the middle of 2008 were anything but normal in terms of us trying to figure out how to get customers to ramp the products that we've been trying to introduce them. But if I wind it back even further than that, I think you ask the question last quarter Tim about Regency and AutoClean where we had spent some money to develop those products. We had them kind of geared towards productivity requirements that we though they had for their processed tools and then you know things changed quite dramatically in terms of tool utilization and in terms silicon pricing and the demand drivers for those products changed.

We still have the expectation that will sell some of that but not at the levels we thought we would when we started the programs. So the way we're looking at it, you know, we've made this investment, which is meaningful and significant and more than incremental because of the need to be able to the way we talk about it internally is to do a higher level of value added work for our customers and it's got to be around process integration and so we are looking at how our materials interact with other materials, which is work we haven't done before.

We're doing this, you know, as I was saying in my opening comments, we're doing this because it is very clear, you can look at the, you can look at the things driving our key customers. It's very clear that certainly in the logic space and in the foundry space they're dealing with material integration challenges that are accelerating versus what they were before.

Not yet remember last year. TSMC made an announcement that they were going to dramatically increase their R&D spend while they're going that we would like to dramatically increase the amount of interactions we had with them at an R&D level. They have to be able to do the work that they need which is very much around process integration.

What is the impact of our product on their film characteristics, which is really what matters to them at the end of the day and then for the memory in particular, they don't really the way I look at them they don't really have the history of having to integrate substantial numbers of new materials. That's changed over the last year or two and they're faced with integration challenges that are very different so the requirements that our customers have put on us, you have a few choices you can try to do things the old way. You can give them the material set you know they want to learn a lot faster and they want to know a lot more because they have more challenges we just decided that we thought we could do something better for them so our investments in this (inaudible) capability are aimed right at that so in the short term we spend a fair amount of money on capital to make sure that we have the tools where we need them to support our customers.

There's been a spike in that spend because of the learning curve associated with doing something new. As we exit this year, the efficiencies on those tools are way higher than they were a year ago. The number of programs we're able to run is increased dramatically as Tim said we expect the spending to get more normalized as we go through this learning period.

We did it because the customer requirements from our perspective, we saw a chance to provide them a lot more information, give them a lot more value add on how these materials perform, so other people may not, you know perceive their expectations as different. I can't speak to that. From our perspective, by having this capability, that was my point, we've entered into, you know an excess of 55 new opportunities with them that we didn't have before.

So you know, that, that's where the payoff starts. You get the opportunity, you succeed, and you get the business. And that's why we made those investments because we're doing, enabled us to do a whole sort of different kind of work with them.

Timothy Arcuri

Got it Doug, okay. Just one last thing for me. Doug you were just talking about CQ2 you thought was again off of CQ1 and sort of not to throw water on that, but I'm sort of wondering, when historically, you know you get these rolling forecasts that come in every week or so when do you feel good, kind of at what part of the quarter do you feel like you're following quarter is pretty well locked in? Do you have to get into, you know, the quarter for the customers to not monkey with wafer starts such that they'll mess up your quarter or do you feel like you're Q2 would get locked into before you even get into Q2?

Doug Neugold

I think that's a fair question, but normally we don't express momentum for two quarters outright? We say, you know we feel good about the quarter we can see in front us, so this is slightly different, because we're getting some, we think there's some strong signals that say the second quarter will be good. And you know, I think, I in particular have a recent history at least holding back an enthusiasm about wafer starts, so you know, for me to say that I'm comfortable that Q2 has got some momentum behind is uncomfortable.

I've seen the information. We get our information, we usually feel very good. You know we get it, the best information is, you know, right at the end of the prior, early in the new quarter. We feel very good about the first quarter from what we've seen right now and you know, the information that's come in on the second is better than it was the last time we had the information and you know, we, we kind of believe it.

Operator

And your next question will come from the line of Brendan Furlong.

Brendan Furlong

Question for you on the SDS, I'm kind of surprised in the quarter that it was such a low percent of revenue certainly after the inventory draw down that we had at the beginning part of the year. Can you show some light on that for me?

Doug Neugold

Okay. One of the up drivers obviously was the large amount of take-or-pay. Plating revenues in the as well as our copper products themselves came in a little bit stronger than we thought they would, going into the quarter. So it's primarily just a normalized mix of revenue during the quarter.

Brendan Furlong

Would you expect, SDS to be more stronger in Q1 and Q2 on a catch up kind of basis?

Doug Neugold

It's really going to vary depending on how our other product lines obviously perform as our new products come into the fold and our Life Sciences business takeoff a little bit. Implant will become a smaller percent of our revenues in the future but I anticipate implant to be in the 20% to 25% of total revenues in the next quarter or two.

Brendan Furlong

Next quarter or two. So with that I'm assuming we should think that gross margins should be a little bit higher in Q1.

Doug Neugold

Yeah. We had some negative product mix in Q4 from our plating business. In addition that I mentioned during the script that we have certain of our implant products themselves that ended up being quite strong in December. That hurt margins a little bit as well. But we believe the mix will be a bit more favorable in Q1 based upon what we're seeing right now.

Brendan Furlong

Excellent. And then my last question is, I know you gave a revenue breakdown, what was your total packaging as a percent of revenue in the quarter?

Doug Neugold

Total packaging was 28%.

Brendan Furlong

Perfect.

Operator

Your next question will come from the line of Raj Seth.

Raj Seth

A couple of questions if I might. Tim, first of all, the margins on the take-or-pay, what order of magnitude of gross margin is there, which is obviously diluted I would imagine them.

Tim Carlson

Yeah, our plating margins as we talked in the past, are in the mid 30s.

Raj Seth

Okay. And you talked about last quarter keeping SG&A spending under $20 million. Exiting the year is that at a peak during the year of less than $20 million? Is that fair?

Tim Carlson

I think that's fair in the first couple of quarters depending, if things get stronger than what we anticipate, there are some incremental sales and marketing expenses that we're contemplating that we may put back into the business. But if you look at SG&A as a percent of revenues, we're in the mid to high 20s. So when we came into the downturn, I expect us to be in the low 20s as we go through the course of year.

Raj Seth

And could you remind me, you talked about selectively adding back a portion of the costs that you had taken out. How much did you take out and how much conceivably if the business is strong could come back that you'd previously taken out?

Tim Carlson

We haven't talked publically about any of the specific numbers but what I did mention in the last couple of quarters is it could be anywhere from a couple million dollars a quarter going forward.

Raj Seth

Okay. And one last one for Doug. Doug, obviously you're optimistic slash bullish that higher productivity platforms will drive growth in excess of wafer starts. It sounds like that will really turn on in 2011. This year, is there the opportunity you think to materially outgrowth starts or is that really something that is a 2011 event?

Doug Neugold

When you look at the whole year I don't think we're going to material out grow wafer starts. The impact of HPD, you know as I've tried to explain here will be felt in the second half of the year. But you're coming off a base of zero. So that will be what it is and you know as well as I do Raj how processes ramp and how sales ramp. So it takes a while. The impact will be felt in 2011. That's the way we're looking at it. So that's how we expect it to play out.

Raj Seth

Okay, last quick one. What's normal seasonality to Q1 from a start perspective? I know you said flat to slightly up. What normally is it?

Doug Neugold

Flat to slightly down.

Operator

And I show no further questions at this time.

Doug Neugold

Okay. Well thank you everybody for joining us. We appreciate your interest. Have a good quarter and we'll talk to you in a couple of months.

Operator

And this does conclude today's conference call. Thank you for participating in the quarterly and annual 2009 financial results conference call. This call will be available for replay beginning at 11:52 today, through 11:-59 p.m. eastern time on February 6, 2010. The conference ID for this replay is 52743121. Again the conference ID number for the replay is 52743121. The number to dial for the replay is 1-800-642-1687 or 1-706-645-9291. You may now disconnect.

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Source: ATMI, Inc. Q4 2009 Earnings Call Transcript

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