FEI's CEO Hosts Investor Meeting Conference (Transcript)

| About: FEI Company (FEIC)


Investor Meeting Conference Transcript

June 07, 2012 9:30 AM ET


Fletcher Chamberlin – Treasurer, Investor Relations and Communications Director

Don Kania – President and CEO

Ray Link – Executive Vice President and CFO

Benjamin Loh – Global Business Operations

Rudy Kellner – Vice President, General Manager, Electronics

Dominique Hubert – Vice President, General Manager, Life Sciences

Paul Scagnetti – Vice President, General Manager, Natural Resources

Trisha Rice – Vice President, General Manager, Materials Science

Gerrit van der Beek – Vice President, Technology

John Williams – Vice President, Corporate and Strategic Marketing


Fletcher Chamberlin

I think we’d like to get started. So if people could grab a sit that would be great. There are few more people coming in but we’ll manage. We’ll get going pretty soon. So for those of who, I’ve seen lot of names who has -- many people here, we have talked on the phone. I’m Fletcher Chamberlin. I’m the Treasurer and Investor Relations Director and Communications Director for FEI.

Welcome to everyone who is here. We appreciate you are coming and taking the time to listen to our story. We are pretty excited about what we have to say including this morning’s announcement and we hope you enjoy the presence.

And for people on the webcast thank you very much also for listening in. The slides are available in the PDF form on our website under the -- in the Investor Relations section of our website.

So I’m going to -- let me through the agenda briefly. Don Kania will come up in the moment, give you an overview, talk about what we’ve accomplished so far. He is going to turn it over to Ray, who is going to go through our financial performance and use of cash and some of -- talk a little bit more about the announcement we made this morning about the new building in Brno.

Benjamin Loh, who many of you have not met before, I don’t think. He runs our Global Business Operations. He’s going to talk about our global distribution, as well as our Material Science business. Rudy Kellner, Dominique and Paul, you can see they are going to follow up later.

We should talk until about 11:15 or so, maybe 11:30 and then we’ll take questions till little bit afternoon, so everything works as scheduled, there will be a lunch that will arrive around 11:30. After the Q&A about 12:15 you’re welcome to stay and have informal conversation with management till around 1:30.

So and I’d also wanted to point out a couple of things here, Don, Ray and Rudy on that list are based in Hillsboro, Oregon, where our headquarters is. Benjamin is based in Tokyo, although he really lives on airplane. Dominique is based in our operation in the Netherlands and Paul Scagnetti is here from Brisbane, Australia.

We also have three other members of management here, Trisha Rice, runs our Material Science business. She moved from Hillsboro to the Netherlands last year. Gerrit van der Beek is our Vice President, Technology. He is based in the Netherlands and John Williams. He has stacked in the back corner. He is based in Hillsboro. So this is a truly global company. We’ve got people all over the world and today’s -- one of today’s announcements was about the Czech Republic today.

So they -- and I do need to go through the basic Safe Harbor presentation. We are going to talk about the future. This is the same kind of information we put on the quarterly releases, but this is, we are going to do even more futures, the point of today’s meeting is to talk about our future.

So there are things that could change. There are risks. You all know that. But we encourage people to read the risk factors that we published in all our SEC filings.

And with that, I’m going to turn it over to Don Kania, who has been the CEO since 2006.

Don Kania

Yeah. Thank you, Fletcher. So, I’m just going to kick off throughout the day, you guys get to talk to me all the time. You got to talk to people who do the real work later. So I think that’s the exciting part of today. And as Fletcher said, this is not about the quarter. This is about the strategy and things that we’ve done.

So what I put here. This is exactly what we showed last year. This is to kick off slide that I showed last year in terms of what we want to do strategically as a company to grow and become more profitable and that’s been our focus.

So it’s, how we are grow the company. How we are going to expand margins and what we’re going to do with the cash, since we’ve been generating a lot. And I think today, you saw some of the press releases this morning. I think, we’re going to touch on all these. We get accomplishments that we’ve made in these areas which gives us a lot of excitement about the prospects for the company overall.

So what we do. I think we delivered a lot more market solutions, customer solutions, which differentiates us from our competitors and you’ll hear from each of the Vice President about their business, how their providing differentiated solutions, which ultimately, again come in higher margins and higher market share, that’s really what this is about.

We’ve got a record year in ’11. Ray will give a snapshot of that later in terms of the details, but it really was, I actually, I’m usually pretty conservative in words like, that was a transformational year for FEI. We really took a step up in terms of financial performance, global reach, the kind of products and solutions we’re providing to our customers and we just hope to carry that forward from now on.

We made substantial progress as you’ll see in our served available market that’s really been a model for how we are going to grow FEI. We’re going to go find some customers who have money. They are spending in other stuff. We want to spend it on FEI. And particularly in the Life Sciences business you’ll hear more about that from Dominique and how we plan to make that happen overall.

And then on the cash side, we expanded our investment in FEI. We raised R&D spending. We get back to 11%. We kind of out grow, getting closer to our target of 11%. We grew our ability to ramp that up, but we, as we’ve committed to everyone, we are going to continue to shoot for those levels of spending, because that’s what it takes to grow our business and continue to create new markets for ourselves.

Bought a couple of pieces of the business and you’ll hear more about that today from Paul and Dominique about telling aspects, bring those in. And then we just to make sure buybacks last year, at quite relative today’s pricing, quite favorable pricing overall.

So today, I think, I hope you all walk away with our growing confidence in that we can, and our ability to grow this company. I think, we can continue to execute on finding those new customers. And I think you’ll see a lot of evidence for how we are executing along those lines.

And given that confidence, we are clearly realizing we are going to do more manufacturing space overtime. We will go through those, what we are doing in the Czech Republic that we did announced today, investment in the future that will make in a brand new factory in Czech Republic, both consolidating our activities and giving us the ability to expand in our low cost manufacturing location.

And really at the end of this we have clear priorities for what we are going to do with the cash. Number one, invest in FEI, number two, we are going to continue to look at those tuck-in M&A opportunities that I think we do very effectively and as we grow as a company, we are seeing more and more of those, so that looks very attractive to us a way to bring in technology or market knowledge or improve profitability.

Announced the dividend today, so that’s a new thing, a new way for the cash and these are the priorities. And finally, opportunistic buybacks, since we do have a strong balance sheet, we were, when the Board has approve that for us to continue to look at buying back our own shares overall.

And we’ll update our long-term model and we’ve targeted 47.5% gross margin for Q4. We’re going to show our longer term model and how we expect to be able to improve profitability of the company.

On the lower right here you can see the chart in the lower is our view of going forward, what our served available market expansion looks like and we’ve done our best to quantify that as we understand better how as we learn more about new markets like oil and gas, how much we can access, we add that to the chart and this is our projection into the future.

The SAM in ’11 including service, so it’s a little different than we included service we can have that last year, just in case anybody is trying to compare about $2 billion. We think we can add in ’12 over $300 million of served market, so it’s just be glad to served market overall.

And if you looked over the next few years, we think we can grow the served market in 19% cliff and overall business growth should be at least 12%. That’s our targets for growing FEI. We got the, if we can execute against this plan, if we can execute against getting more customers, we should be able to achieve a 12% growth for the company.

So highlights kind of what you’re going to hear today and what we said, let us go quickly through this, you’ll hear the details from the people who actually do the work. In electronics, we really said, things getting smart, great for FEI, the customers are going to need more of what we do, that’s absolutely critical.

And the biggest opportunity there was getting our equipment closer to where the money is made, near line. And what we did, we got record results in the electronic sector last year and we demonstrated with customers the need for near line.

What’s going to happen in the future? This is a cyclical growth business. I know, we are starting to just get more and more investors who don’t come from the capital equipment background. They have more of an Instrumentation or Life Science background, cyclical growth, this is a great business. We love this business. We like it as a third of our business and that’s what we targeted to be. But it’s a very profitable business for us. We are technologically position. So we are not as volatile as the capital equipment business as a whole.

In Life Sciences, we identified a couple of segments, cellular and structural biology, in this last year, we developed some real key relationships with thought leaders like the National Institute of Health to help us accelerate our learning and our credibility in the community overall.

We bought till high performance optical microscopy bringing in some new market for ourselves and we are growing our pipeline from new customers, this NMR, XRD customers out there. So really, really accomplishments.

This year we are going to have some new correlative products, optical plus electrons together. It’s pretty -- we are very excited about that. We think that’s the new big thing in that space. And we’ll get more scientific output from our laboratory collaborations and that’s how these businesses grow, publications get done, people see those value, other people buy into the whole thing.

I tell many of you that this is a fashion driven business just like whether its handbag or shoes, it’s the same thing. If the fashion is set that people can do something new and novel, and that’s important others come, and that’s how this works, that’s how you grow that business.

In Natural Resources, we saw the promise of WellSite, taken our equipment there, last year business grew really well, Paul will talk about that. But more importantly, we did three data sites with real oil and gas companies, and service providers to test our solution at the site, and we learned a lot. And then this year, what are we doing, we can convert that to real business and Paul will go through that in a lot more detail.

And finally in Material Science, this is a global game, and I know there is a lot of concern. I was at Investor Meeting Monday, Tuesday of this week, everybody is concern about Europe and maybe I’ll cut to the chase on Europe right now. Our view of Europe. It’s real simple.

There are three parts to Europe, northern Europe, everything north of France going to be okay, there will be some give and takes, but the spending in that part of the Europe will be fine, southern Europe not so good, eastern Europe, the emerging part of Europe will remain strong, because they are going to invest in the future.

So in the aggregate Europe is going to be okay, probably better than the U.S., which I’ll remind everybody we’ve always said, U.S. has been slow for us over the past say six quarters.

We don’t see that really changing significantly. But I think we have a sense that maybe as some of the budgeting actually settle down, maybe that will actually be a minor upside in releasing some capital because people are being very conservative in the phase of uncertainty.

And then you will hear more about our views of the future. China has been a big thing in Material Science and then in the future really targeting the new customers in Chemistry, adding time resolution to what we do in this space.

So if we look at our SAM expansion, we showed this chart last year. The total market in 2010 we thought for all of these crazy instruments $7.3 billion, electron microscopy at the center $1.8 billion and so that’s kind of our view of the world.

And our goal is, let’s go find some of those customers, like Microscopes, Natural Resources, NMR, XRD, people that already spending money, another peoples products, so we will have new competitors now, that’s our goal is to expand into those spaces.

And so we did a bunch of recent announcement, so we supported that we could double the served available market by ‘14 and then we did a bunch of things, and you’ll hear about all of these.

We bought a couple of companies, we introduce some new products, we tested those in the field, you’ll hear about all the pieces of the pulse that put in terms of execution during the last year that gives us more confidence that will be able to grow in two, three years.

And if we turn in our goal from ’10 to ’11 and say what happened to the market, while the core market grew about 7%, that’s our best estimates, and the total market grew about 7% overall.

And if obviously we grew much more than that last year, so now we take a view, now we take our step back, you saw the stack bar chart, you’ll hear the pieces of puzzle that by 2015 we should be able to access about $4 billion marketplace, served market gives us ample room to grow. I think we’ve got a lot of the right tools to make that happen. We have the balance sheet to go buy some of the tools that we don’t have to make it happen. So that’s really, that’s the FEI growth story in short.

So long-term, we are going to grow this company at least 12%. We can do that via served market expansion and continued geographic expansion. The world is still a big place. We just open offices in Brazil. You’ll hear more about that there are places for us to reach to grow. We’ll continue marginal improvement. Ray will talk more about that.

But it comes from new products, new markets and we -- we are world class in operation, yeah, so there is places for us to do better internally. And finally, we’ll use our cash and we’ve added the dividend to that portfolio of ways that we can return cash to our shareholders.

And with that, I’m going to turn this over to Raymond. He is going to give you a lot more detail on all the good things going on.

Ray Link

Thanks Don. Taking a quick look at the agenda when I touch based on the 2011 results, talk little bit about the future obviously, margin expansion, what we are doing in operations, what we are doing with our capital structure and to remind people, how we view as our peers, we get that question quite often and who are direct competitors are.

So taking a quick peak at 2011, 2011 as Don said, it was a great year for the company. We really broke through to become a more profitable significant company, revenues up 30%, earnings per share $2.51, almost double from the previous year, very strong cash flow, exist year with a very strong backlog, so great, great year.

So that’s doesn’t take it too much in terms of where we go into future and where we go in the future, we are expecting 2012 to be another up year. We are guiding up for 2012. We are looking at revenues somewhere in the 6% to 9% range. And we get the question quite often in terms of what the break down between the organic versus M&A and currency.

While M&A, we did two acquisitions right at the beginning of the year. Those two companies will add somewhere around 2% to 2.5% to our overall revenue. They are strategically important have great long-term growth prospects for the year, still relatively small.

On the flip side, if currency stays exactly where it is today, which god knows, where that’s going to take us that will drop our revenue about 2% to 2.5%. So M&A and currency pretty much offset with the weaker euro, obviously everybody has slightly lower reported revenues. So our organic growth is net still somewhere in this 6% to 9%.

As a reminder, as we look into the second half of the year. We have a normal seasonal pattern where our Q3 is our most challenge quarter and that’s particularly due to the fact that one we have a lot of operation in Europe, two, we have a lot of customers in the research material science academic space and those customers largely don’t take a lot of shipments during the summer month.

So traditionally, Q3 is our most challenge quarter, but we are expecting Q4 to be a gangbusters and finish the year quite, quite strong. So that is our view of 2012 from a revenue standpoint.

Taking a peek at our business model and we’ve talked about our business model for some time with a goal of 47.5% gross margin for exiting this year, we still feel confident on that. I’ll take you through the steps that we think, our guess of 47.5% but we would like to introduce a new long-term target model of about 50% gross profit margin and we’re really looking somewhere in the 30-months out time frame 2015 and I will walk you through the steps to get us through 50% gross profit margin.

If we get to that level, we should have operating income in the 20% to 22% range. So focusing on gross margin, let’s take a peek of what we’ve done so far. When we look back, we really -- we really embark on driving gross profit margins up in 2008. That’s when we really made an important corporate initiative, our compensation, not only the executives but everybody in the organization has generally about half of their overall incentive compensation tied to gross profit margin improvement.

Looking back, in 2008, we were at 39% over a period between 2008 and -- Q1 of 2012, we increased margins by 600 basis points. So significant improvement there, a path of 47.5% and a long-term target of 50%.

So looking through the steps to get us to 47.5%, we finished Q1 with a revenue of $217 million and 45.1% gross profit margin. We’re pretty happy that we got to that point but there are obviously lot of pieces left to get to 47.5% and a lot of companies when they do this, they sort of budget by single. We’re going to have a whole lot more incremental revenue and in our case, we’re just assuming that incremental revenue of $225 million, which is the top end of our guidance for Q2 hopefully will be above that but that will only have an impact of about two-tenths of a percent.

So we’re not really dependent on incremental revenue to drive it to a higher gross profit margin in the short term. We are really dependent on operational improvements, new products, in particular, nicks in pricing will help. We do expect to have more Titan Krios which is our high-end TEM that Dominique will talk about it in her Life Science business.

We expect to shift more than in the second half of the year. They drive a higher gross profit margin. We expect to have some new products, little bit more software content. Paul Scagnetti will talk about his business in Natural Resources how that will help drive margins long term as well.

And importantly, important part of this is operational improvement. Now, that’s really, where the rubber hit the road, we really are driving our factories. We brought in a new ops’ guy. He has been onboard now almost a year. Fantastic person in terms of really understanding the business because he came from Philips Medical. He understands very expensive complex tools, how to build those -- how to build those more efficiently.

We’ve done some things in our various factories. In Hillsboro, we terminated agreement that we had with UCT that effectively just added under the stack margin component. They’ve moved out. We’ve retaken over the manufacturing. They were the same employees that we had before, very prowess movement on that manufacturing transfer and we expect to yield pretty significant improvements with that particularly in Q4 as we bleed of the inventory.

We expect more improvements from supply chain, more improvements in our Eindhoven factory and last there are service business. We don’t talk too much about service. Our service business has been a really good performing business. Q1 gross margin was a little lower than expectations.

We expect it to turn around very quickly as to yield higher margins. So next is our path of 50% gross profit margin. So kind of taking the same calculus starting with exiting Q4 of ‘12 with 47.5%, how do we drive the 50% gross profit margin.

Once again we’re not dependent on incremental revenue. And this is just an assumption of $250 million per quarter. Hopefully, by 2015, we’ll be well above that but that seem to be a very reasonable target.

That will only pull through about half a percent of margin. The big piece has really come in new products particularly and correlative microscopy where our Life Science business will start yielding a benefit of the integration of the TILL acquisition along with our high end electron microscopes, also our Natural Resources. This will be a much larger -- much more significant component of the FEI. It’s a very high margin business. It’s more or less a software content business.

So we expect those two pieces to drive margins. Our new factory in Czech Republic that we just announced today will be fully operational. We should yield some nice benefits from that and we expect continued improvements and just overall operational supply chain in our service business.

Our service business is basically a post-warranty break-fix fix model. We have opportunities to have our value added services and that will drive margins on a go forward basis. So when we look at this at as a target of 50%, we feel that that’s obtainable. I’m sure that our executive comps may be tied to that. So it’s something that we will push as a company.

Taking a look at what have we done and how -- what some of the success stories -- we have a lot of success stories but the two reasons we talk about are two product transfers that we did from our factory in the Netherlands to the Czech Republic.

One particular is our Helios Small DualBeam. We move that -- completed that move in Q1 of last year. That improve gross profit margin just on that product line and grown by 6 full percentage points that’s a significant movement in gross profit margins. The savings last year were about $8.4 million relative to the previous year and for Japan, we’re projecting full year 2012 savings of about $11 million based on higher volume.

The same thing was with our Tecnai transfer. This is our mid-end TEM product that was previously manufactured in the Netherlands, moved that to the Czech Republic. That was completed in Q3 of last year. So this is the first full year of benefit that we’re expecting about $3 million of savings on that particular tool.

We look at our factories, we have three primary factories. We have a couple of small ones that we have acquired with acquisitions with the three primary factories that we have, manufacturing most of all of our products. And we had -- even though our revenue was up 30% last year, our product revenue was up 36% because our service revenue grows at a smaller rate and it grows relative to the installed base.

And when we look at that by factory, our factory in the Czech Republic increased volume by 62%. So we have really tax that factory and it really maxed out while we can do there. Our Hillsboro factory increased 27% and in Netherlands even with the product moves that we had out of there, because of the strong demand for our high end TEM lines that increased its output by 14%.

So when we look at 2012, this is where we think we’ll exit the year. We think our factory in the Czech Republic will be close to 60% of our total output. I joined the company in 2005. At that point, that factory was doing about 15% of output. We’ve been growing at year-over-year. So it’s 60%.

We’ve added a bit to these space. We’ve leased a couple of other buildings but it’s an operation that has really pretty much maxed out. The Eindhoven factory will be -- just little under a third. Eindhoven factory was specialized in our high-end TEM product line and then our Hillsboro factory which primarily makes our wafer levels will be much our very large expensive products that we sell to our semiconductor and data storage customers plus the components.

So that all really led to the facility plan. We’ve started this over a year ago in terms of where we’re going to go as a company. What are we going to do with a lot of modeling, lot of analysis and we concluded that the best thing for the company was to expand and build a new factory in Czech Republic.

We’re taking three lease sites in Q1, brand new design to suit facility, nearly double the size of 140,000 square feet to 270,000 square feet. That’s a flexible design meaning that there are four footprints being built but we only have to take a certain portion of that. We have options to take additional pieces over time.

We also had built in clauses where were we can rate the lease at certain intervals without a significant penalty. So it has a lot of flexibility through the lease arrangement, very excited about it. What’s also interesting, the absolute lease cost for the new facility, which is almost twice the size of what we currently have is only 10% greater than what we’re paying on the three leases.

So it will really enable us to significantly expand our footprint, our output to be far more efficient, ever written one rule actually have a loading dock, have a place for employees to meet like going on acknowledging about all the benefits that are expected to get out of this factory.

But we’re really excited about that it’s a significant announcement for the company. We’re also doing things in our other factories as well. In Eindhoven, where we make our TEMs, we are expanding the capacity there. Effectively, we had to raise the roof in a certain portion of building so we can we make more high-end in Titan and Titan Krios product and in Hillsboro, I’d mentioned that we’ve already terminated UCT and expect to save about $3 million per year when that’s fully operational.

So moving to our next announcement of the today which is on capital structure. Let’s just take a look at where we are as a company, what we've done and to, so everybody understands where we are. At the end of Q1, we had just under $400 million on cash and of that a little over $300 million of it is in cash and short-term instruments which is earning virtually nothing.

That saved in treasury bills, money market funds, demand, positive accounts et cetera. I guess we get used to this room for free as part of that great lecture, but other than that, we don’t get a lot. So from a shareholder return, it’s nice thing to have but it has returned a lot to the shareholders.

Most of our cash is in the U.S. So we don't have the Apple problem which is, kind of, hard to even think that Apple even has a problem. But our cash is large in U.S., we have some international and while we have international, we expect the use for acquisition down the road.

So we don’t have the situation where we have to repatriate the money back to U.S. military attacks so that most of its city in U.S. portfolio. We only have one piece of debt to $89 million convertible note and less of the market completely falls apart. People are just tending to throw the tender away from FEI. That should convert the equity, converts a year from now. The conversion price is $29.35, 3 million shares. All their shares are already included in our fully diluted share count.

With that, we also have a uncapped credit facility. It’s $100 million expendable to $150 million. So we have lot of capital to grow. It’s the point I’m trying to make.

Well, we look at our cash flows, the company has had really very strong improve increasing free cash flow generation year-over-year. Because I said I joined the company in 2005 and 2005 was a very tough year for the company and even with that, we still generated positive cash flow.

Don joined in 2006 and we’ve obviously improved significantly since then exiting last year with free cash flow, which we define as operating cash flow, less capital expenditures of almost $90 million, a very strong cash flow generation for the company.

So to-date, we’ve used our money primarily around three areas. In M&A, we acquired two companies right at the beginning of this year, TILL and ASPEX. TILL is our high-end digital light microscopy operation. I’m very excited about that and ASPEX is our rugged eyes SEM that we’re using for our Natural Resources and also has a very nice low in SEM that we can quickly use in some of our channel.

Before that we acquired two software companies in Australia, which have laid a foundation for Natural Resources business. We acquired those for $8 million which is just screaming by. Our focus on M&A is areas that can improve and accelerate growth particularly in our targeted markets in Life Science, Natural Resources.

We’re also looking at opportunities to reduce our COGs and for just improve overall distribution. And most important, we need to add some position software content for software is really the key to a lot of the things that we’re doing. When we look at M&A, we’re not worried about whether it’s accretive next quarter or that quarter, whatever, we’re looking at the long term.

We want these transactions to yield a risk adjusted cost of capital and if they have to be strategic to our long-term growth. So that’s how we think about our M&A. Other things we know about our cash, we have reduced our debt that we bought back $11 million in 2010. That ship is pretty much sailed, that is sailing at a very high premium right now.

So it’s unlikely we’ll do anything there but we have been pretty active the share buyback. Last year, we bought back a little over $50 million of our stock at average price just a tad over $30. We expect to -- actually I hope we don’t do any share buybacks. We do have a share buyback in place for opportunistic situations. So that there is situation where our stock, we think would be severely undervalued relative to where we think it is.

If there is marked dislocation. We have an authorization which can be in the market. [John] will spot that days so we will continue to look at share buybacks.

As Don said today’s important announcement for FEI’s next step in the maturation of our company to become more of a well-managed looking at overall capital structure, more focused company. We announced our first ever quarterly dividend, $0.08 a share payable on record date of July 11th, payable on the 24 July.

We spent a lot of time analyzing this. We’re very comfortable with the decision. We think we’ll have no impact on our ability to do M&A from a cash flow standpoint, the amount on an annualized basis represents about 12% payout ratio relative to our earnings last year.

The amount of cash we generate on a quarterly basis well in excess of whatever the dividend would be. We preferred line of credit from one of our shareholders that you’re interested in, better utilization of our balance sheet. We think we have a nice balanced approach now between organic growth opportunities, M&A, share buyback and dividends.

The yield on this, even though, it’s relatively low with very low rates you can or otherwise it equates to about which on a five-year treasury bill. We also felt that started at a $0.08 per share, gives our Board the ability to reevaluate his annual base to see whether or not it’s appropriate to increase the dividend over time.

So, in summary, we’re very excited about this. Hopefully, you are -- we preferred line of credit from one of our shareholders to start paying the dividend and we think it is the right time for the company. So we look at how we’re using the cash. The main difference is organic growth has always been the number one priority.

We think we generate ample cash flow to do that M&A between our $400 million in our balance sheet, our credit facility, the fact that we generate fair amount of cash in of itself and the fact what we’re targeting the type of companies we look at generally on more tuck-ins strategic on the $300 million M&A type transactions.

We feel very comfortable. We could fund these. So dividends now become the third leg in terms of payouts of $3 million a quarter, little over $12 million a year and then lastly we will continue to look for share buyback on an opportunistic basis.

Looking at the second half of the year, we do have the number of commitments. We have been active looking at companies to acquire. There is potential to close two transactions in the second half of the year with an estimated value of around $80 million. Not all the cash would be paid up. Frankly, some of them may be set up with deferred payments, which I actually prefer.

The types of companies we’re looking at our software related and distribution related. So all I can say in this is to stay tune. There is no guarantee that these deals ultimately close but they are on a radar and we’re making progress. Dividends as we just talked about payable record July 24. We've also are, doing building expansion and in announcements today, we talked about $35 million capital requirement.

Most of that money will be spend next year. We will spend a little bit of money this year, somewhere between $5 million and $8 million, it’s primarily in our facility in the Netherlands and some cost upfront to get the engineering and architectural work done for our facility in Czech Republic.

And lastly, we are very closed to potentially settling negotiations on a patent cross license arrangement, we are very excited about this, there will be no P&L impact for the company. The amount that we would pay would be somewhere in the $15 million, $20 million range. So it’s not a significant amount but just one last thing, we can -- one more thing, we can check of will be done within and move forward. So we are excited about potential to close that in the second half of 2012.

So moving to our peer, just to get everybody on the same page, we have what we call our proxy peers. All public companies are required to have a peer group and it’s used primarily to track for executive compensation. We also use this to track performance. So, a list of 15 companies here are those that we track in our proxy. And it’s a combination of semiconductor cap equipment scientific and eligible test instrument companies, and a few local companies, because obviously, we compete against local companies as well in important market.

The companies that we really think our peers that you guys should work at FEI are more in scientific analytical test instruments space, people like Agilent, Bruker, Danaher, Mettler-Toledo, PerkinElmer, [Thermal Fisher], [Waters] those are companies that are really more closely aligned to who we are.

We have direct competitors of course in electronic microscopy space, JEOL, a public in Japan. I gave you the ticker symbol there. So you can look him as 6951. Carl Zeiss which is a German company. It is sort of private public company not a lot of financial information, very large company. Their electron microscopy pieces are small portion of Carl Zeiss, Hitachi High-Tech also public company based in Japan.

And there is several smaller companies that each of those have under 2% market shares. So they are not really work well to talk about, but when you think about FEI, this is sort of the group of companies you should be looking at. So in conclusion, we feel with the announcements that we made today, we are very confident in the future. We are doing additional investment in our organic growth, build a new factory in Czech Republic, increased R&D spending.

We’ve done two M&A transactions within the past six months. We have a couple in our pipeline for the second half for this year. We put forward in operating model that we feel pretty comfortable with of course 7.5% for Q4 with about to 50% our longer term. And lastly, the fact that we’ve announced the dividend and the continuation of our share buyback program makes us still pretty good about our overall cash position.

So with that, I would like to introduce Benjamin Loh, who is our EVP of Global Operations. Benjamin runs our market divisions and runs a lot of our organization. And I will turn it over to him. Thank you.

Benjamin Loh

So just a very quick introduction, I am here since August, 2007. First three year, I was running worldwide sales and service organization and then somehow Don and we decided that orders were coming in pretty quickly, easily and decided that he is not do enough. So they gave me the business units. And that’s what I have been doing as well for the last 18 months.

My piece would be talking about the distribution strategy and the expansion. And also a touching a little bit on the two core businesses that we have, which is Material Science and Service.

In terms of the distribution, I am very proud to say that when you look at our organization and how we approach the customers. There is no direct competitor above as there is as focus as us. I mean we are the only the company there has a business unit there is dedicated, for example, to Natural Resources and the Life Sciences, none of all competitors have that. They are usually segment into what you call, just industrial and cabin make and there is mumbo jumbo of a lot of other stuff.

We look at it as if you want to go after that business and that piece of the business is worth going after then you need to be very focused. And this is the reason why right from the beginning, we’ve already setup for example, business units in Natural Resources and also in Life Science.

In terms of the channel expansion, I would say that what we do of the solutions that we provide. We are the enabler of nano technology. And in that sense, we are very fortunate that a lot of countries we play an integral part of their science and technology program, whether it’s developed countries or whether it’s emerging countries.

I mean in the developed countries we find that they are still growing may be a little bit slower. But the -- a lot of growth today that we see and I will explain later on, it’s coming from the emerging countries, tremendous growth there.

Winning strategy, I would say that we -- our approach has always been, because we have a technology in the market share leader. We stay very closer to the customers. We understand what we want. We understand what the next step. And in the emerging countries, we try to get closer to the customer.

We have the saying for that which I will show later on, follow the money, which is an interesting one. And then finally, in our -- even in some countries, where there isn’t really a lot of business now, we do see them. So you will be surprise that we even have distributors in for example Iraq interesting.

The four businesses that we have, I would say a fairly different. In terms of what the customers expect from us. There is some similarity between Life Science and Material Science other than that, the four of them actually quite different.

Semiconductors, all of us know that it’s coming down to with that six or seven customers who can afford to invest and it’s all about the key account management.

It’s all about having a good relationship with your customer, and being able to draw upon that to have intimate road map discussions with them, so that you can support them going forward. I can not give names. But we are discussions, for example, with our customers on what is going to be done next step 14 nanometer niche (inaudible) and both sensor on. So we are in the game. Very much apart of actually, what they need to do to a progress to the next north, as far as the road map is concerned.

Material Science and Life Science is much more widespread customers all over the place. And here it’s much more I would say peripheral coverage and geographical expansion sort of strategy that we are embracing. We have for example, a lot of sales people on the ground in the more developed countries, in the western countries. But at the same time, we have and I will show that in the later slide, expanded fairly significantly in the emerging countries as well.

Life Science has one specific, I would say, characteristic that makes you little bit different and this is the strategic partnership. Because what we want to do to be able to sell the workflow solutions that we have to some extent time it and develop. We need to let’s say, have this verify in conjunction with partners that we have a very carefully chosen.

So some of you may know that we have launch two living labs, one with NIH and the other one we have OHSU. One for structural biology and one for the cell biology, this would go along way in helping us to validate and also proved that the solutions the workflow solutions that we have developed are going to be of immense help and benefit to the researchers.

The Natural Resources, we got into this business just couple of years ago. Amazingly, this is a business where it’s pretty conservative and the key here is to be able to strike up, I would say important strategic partnerships and relationships with the key players.

And I think that’s what Paul and his team has done very successfully over the last 24 months or so. When you talk about major mining customer, we have most of the major ones with us like Anglo Platinum and so on. In the area of oil and gas, we have Halliburton, we have Geolog. So in the sense we have made the necessary first move and we are capitalizing on debt.

The business that we have today is more moving towards a business model where is not going to be based in the lamp, but is going to be base at the site. And this is where a lot of remote support, a lot of let’s say changes in the way that we support our customers has to happen over the next, I would say, two or three quarters and Paul’s team is right in the middle of that.

So how this FEI, let’s say decide on where we invest in terms of expanding our channels. It’s actually pretty easy. We look at where is the highest GDP growth. When you look at this chart, it’s pretty obvious where it is coming and that’s not to say that we don’t invest in the countries like the North America or let’s say, Western Europe where we also have significant business. We need to do that, because the all business as far as electronics and to some extent Life Science and Material Science are also growing there. But a lot of the effort that we are putting into in terms of expanding our distribution channels, it’s actually going to the emerging markets.

I think either Don or Ray mentioned the new office in Brazil. So we have a new office in Rio de Janeiro and at the same time, we are waiting for the official papers to be done for our new office in Dubai.

So we will have a new office in the Dubai retail zone as well. The Middle East is another area, where Material Science and Life Sciences and of course Natural Resources we have a lot of potential there.

I will come to the China probably in couple of slides, but this is just to show that at the end of last year, we were already above 45% of our business coming from outside of the advance economies of the U.S., Western Europe, Japan. And just some clicks that statistics for the last nine year or so, the amount of business has being coming up from what we called emerging regions outside of Asia has been growing at about 38%. Countries like Russia, countries like Poland has been buying a significant amount of tools in their efforts to growing their science and technology.

And this has actually helped us to expand and grow our revenue base fairly significantly. Over a next couple of years, I am sure, we will see that occupying more than half of the FEI business. When you look at actually, if you look at Japan and put it under Asia, actually last year already 50% of our business was coming from Asia. So it’s a very significant development.

Just some simple numbers on China, five years ago, China was nobody. It wasn’t on our list top five countries, and at the end of last year China became the second biggest country for us, just after the U.S. And when you drilled down a little bit, you will see that the U.S. was still our biggest country because most of the major semiconductor players were there. You have Intel, Global Foundries, Micron, IBM they were all there. So, a large part of the semiconductor business was still coming from the U.S.

We actually took a fairly long-term view of China. We started moving to new office in 2007 fairly big office. And we decided to have a NanoPort there. So that we can do demonstrations, we can do training that opened in early in 2008. And then, over the years, it just seems that the business has been growing at a pace, which was fantastic and we continuously hire new people.

I think today, we are at above 75 or 80 people and as of last year we did about $80 million, so fairly significant growth. Now what’s even more interesting is when drill out one step further, you will see that -- if you pick the Audi electronic business, China is actually our biggest country.

So China today is the single most, is the one country that we sell most in terms of Material Science and Life Science. And there are some reasons, which when we look back and meet -- I would say a successful of course the market is growing. But I think we have a capture the significant portion of the growth there.

Before, I move on to some other thing, it’s also interesting to see here that we have also increased let’s say, our share in Japan. A country, which has been stagnant for almost a last five years, in 2006, we were $600 million company, in 2011, we were $813 million. So even with that increase, we increase actually to a sudden to a large extent our market share in Japan, which is significant because two of all biggest competitors are sitting there.

So coming back to China again, when I speak to our sales people in China or when I ask the customers, five years ago for them to get a funding of let’s say, $0.5 million was a big thing.

Today, the ASPs of the tools that we sell are usually in the million dollar range, which means that the Chinese government has been very generous in funding the universities and the institutes in their effort to try to really jump on the science and technology (inaudible) because that’s one way that they can increase their economic value added. And they have put a lot of emphasis.

The latest five year plan from the Chinese government basically says that they are targeting 4% of GDP on higher education. That’s a significant amount of money. But that’s what they will do.

So not only is the volume growing, but we’re also seeing that they are buying more expensive products as compared to before. And one of the reasons, why we have been successful -- I go back to an earlier slide, where we say that we stay close to the customers in the developed countries and we try to get closer to the customers in the emerging countries, that has paid off for us in a big way.

When you look at the Chinese University is buying expensive tools from us, our solutions from us, like Titans, Krios and so on, which are in the range of several million dollars each. There is always -- behind that purchase, there is always somebody who is the professor from let’s say, the U.S. or from Europe who is advising them. And because of our technology and our market share in North America and also in Europe, we have been able to capitalize very significant beyond that.

Just name a couple of examples, the names may not mean anything to you, but we have numerous examples, for example, a famous Life Science Professor, Professor Hong Zhou at the UCLA. He was advisor for one of the university starting EM facility in China. And of course, we were recommended. Professor (inaudible) at Georgia Tech University, when they wanted to build a new Material Science lab at (inaudible) University, it was basically us, no competition and so on and so forth.

Many, many such cases even in a country, which is not really that emerging South Korea, when they build the new EM lab at UNIST, which is the Ulsan National Institute of Science and Technology, the professor also got his recommendation from UC Berkeley and guess what we were at Berkeley we had great relationships. So in that sense we have been very fortunate that our close relationships with the customers in the advanced economy has really, really worked towards our advantage.

China is in many ways going to continue to expand. Some of you may have heard about the 1,000 talent program from the Chinese government. So what we are trying to do is, they are trying to attract 1,000 scholars back home. And they actually fill the quota for the first 1000. The last I heard is, they are at 1,141 or something and they gave very, very significant, I would say, benefits, incentives to these scholars who are willing to come back. And it’s going to be a very significant for us going forward, good for us that we have very good relationships with these customers both in North America and Europe.

The next part of my presentation is going to be. I’m going to touch a little bit on two of our core businesses, one is Material Science and the other one Service. But to start off the Material Science presentation we have short video first.


So the Material Science business, it is actually the most established evolved businesses but it is by far by no means, one which is let say not interesting, in fact, I think, we are looking at certain, we are pushing certain limits which is going to make even Material Science extremely interesting going forward. It may not be growing at the kind of pace where the other three businesses are growing, but we are still growing above average.

So how does it, what is Material Science and how does it really start, usually start an idea or problem, a thesis and then you need to do a characterization, through the workflow solutions that we provide, make samples, cross sectioning, do NanoCharacterization, nanoprobing.

And then as we go on even more advance we do elemental analysis and what’s very interesting is of course what we have today which is the, what we call environmental let say in C2 kind of analysis.

And finally results in some kind of solution, let say a new break through which is then presented or paper that file or certain nano devices are form, which are then using industrial applications.

So one example I can just pick up from the back of my mind is, some of you may know that, last month in Japan, they opened the, what they called SKY3, the tower, the huge tower, some of the steel structures were actually developed by our customers, and on our Titan tools. So it’s always interesting and sometimes for me proud to be able to tell my kids, you know what, that, we had share in that, actually we didn’t do anything, we only sold them the equipment.

But that’s okay, like I said, the SAM is not growing as big as or as fast as the others, but it is still growing, and we look at the SAM for Material Science growing at about 7% to 8% a year, which means by 2015, this is actually a $1.1 billion market space for us. And the growth, a lot of this is going to be driven by let’s say the emerging countries and also in the near area of chemistry. I think we have what could be something which is going to make all chemists really, really excited. I think some of them are already very excited.

The strategy that we have, we have a tremendous year of growth in the 2011, part of it was because, we had significant backlog going from ‘10 to ’11, but part of it was also we just essentially want, what we call the resolution rate.

In the past it was really about resolution how small can you see, and I think until today we are still the only one who has really proven commercially that we can do 0.5 Angstrom, some of our competitors claim that they can do that in the lab, in their own lab, total time and so on. I have not really seen a paper that comes from using the equipment taking about 0.5 Angstrom. We are the proven entity.

So we won the resolution rate and there is really no point seeing even small then 0.5 Angstrom, that’s about, as small as you want to see. I mean, what really is the next step is, is the analytics, is how to capture the information, how to analyze things and make those useful, let say to the, for the scientist.

Share and margin gain, we have also increased significantly, let say the gross margin for this business and the way that we have done that focus is we focus on the markets that are attracted to us, the emerging markets. We also focus on where we have solutions that we can leverage upon, because we are the, let say industry and technology leader, this is in the area of small DualBeams and TM.

And going forward, I think what is going to be really interesting for us is in the dynamic microscopy or chemistry area that’s one, and another area, which we are starting to embark upon and trying to, let’s say put together workflow solutions is in multi scale which I will explain a little bit on the next page.

So it is no longer enough when you try to analyze and fix a program just to look at it either on one single whether it’s the nanoscale or whether it’s the microscale or whether it’s the macroscale, more and more, you find that in order to really find a comprehensive solution you need to look at this from all different scales.

And this where I think we would come in strongly, we could, we have a lot of experience both in Life Science and to some extend in Natural Resources, developing or correlative workflow solutions. We can use this also for our Material Science business, so that we could envision, let’s say whole suite of solutions starting from the light microscope down on to the electron microscope, so that’s a something that we will be embarking on very soon.

And this must excite the chemists to be able to see the atoms move on the all kinds of, let say, external stimulus whether heat, pressure, electricity or anything. I mean, this must really, it must really have kick of this.

And in this area, I’m proud to say we lead the market, nobody else, if you can afford it and you want a tool that can let you do all this environmental TEM, look no further, we are the one. No competition.

Next I would just touch a little bit on service. I think just to allude to what Ray has mentioned. The -- my colleague, Jim Fetterman who is not here today did a fantastic job over the last four years in brining up our service margins. We were the struggling 20 plus kind of margin and today we are at, last year we end at 33 and we are shooting for the year high 30s over the next two, three years.

And the way that we have done this is we have streamline service delivery. We have made operational improvement, service is one area where we have invested a lot in IT, because it is the most transactional oriented business, part of our business.

It maybe have like you know several tons of thousands of transactions every year whether it’s a service order whether it’s a parts, or whether it’s a volunteer agreements, they have many, many different transactions.

And going into the next couple of years into the future, what they are looking at is? So how can we sort of have into the installed base that we have and we have a huge installed base. We have like an installed base of maybe last count was 10,000 tools in the field and its still growing every year by, 5 or 600 tools a year. So it’s a huge installed base.

And what they are trying to do is, so what else can we provide to the installed base that can help us gather incremental revenue and also sort of at the same time increase customer satisfaction saying, well, we are not just there to sell them the tool, we care about how they use the tool and this continues support. So that’s a very successful part of our business.

In summary, I think the emerging geographies and where they are investing the money in science and technology to jump on the science and technology then that its all good for us. And we have the right solutions portfolio and we are basically working in all the right, I would say marketing areas.

And in the core businesses, whether it’s a Material Science or service, I think we are also doing everything that is right, Material Science in leveraging higher gross margins, and moving into the next step which is multi scale and also the chemistry, and in service I’m trying to add more value added services.

So, with that, I would like to introduce my colleague Rudy Kellner who is responsible for the Electronics business.

Rudy Kellner

Thanks Benjamin. I would also start with the movie, so we’ve got a similar movie to show you and give you bit of understanding of our business. We’ve been here now couple of times talking about electronics and this will give you some more color regarding where we play and how this works.


Okay. So we’re not give us talk last year. The first thing I told you was, the thing that changes the most from 2010 was our ambition about this business. I said that, we are much more ambitious this business than we ever were.

And the thing I tell you now and hoped the thought that sticks today is that we are realizing the ambition and results now. And it doesn’t mean we are no longer ambitious of course, and I’ll tell you why we are very ambitious and more so than ever but 2011 was about results and 2012 will be about even more results from this business.

And the picture I’ll paint for you today is how we get there and why we believe with such conviction that it will continue to grow to and it will continue to provide a very profitable growth for FEI.

But first to peel back, so what we do for our customers and some of you may not be very familiar with our operation in this area. So I’ll kind of give you the whole workflow here. So basically what, where we are today are, we are in the cellular analysis laboratory, the supporting laboratories of our customers manufacturing operations.

So how a request starts and where life starts for us is, something goes wrong, right. It something goes wrong or you’re doing Advanced Material Science for the next generation technology development as many of customers are today for 22 and sub 20-nanometer products.

Something goes wrong and a defect or a defected part get shifts to a laboratory and then our tools are utilizing laboratory to analyze, the defect or analyze the structure that has been claim to be defected and somehow and someway.

We provide and to our laboratories a sweet of solutions we don’t sell point solutions anymore. We provide TM preparation solutions, we provide defect location solutions, and we take them from, we have a problem we start giving them zoom levels to their program, and giving them more and more information as they progress through the FEI workflow and ultimately where they end most likely is the TEM.

And I’ll explain to you why this is good for FEI and being as a TM is good, and why it’s required by the customers. In the past they could end with the simple optical picture or scanning electron picture, it was quick and easy relatively inexpensive, and now the requirements are to end with the very resolution TEM image or other TEM data. And I’ll walk you through why that’s very, very good for us.

But ultimately this is what we do, we provide answer either in data form, critical dimensions or in some image form be it picture or elemental information, the chemistry material.

And then ultimately, the end game for our customers is two ways, number one, there is an immediate yield benefit that they are after and number two, they are reducing the time to market and also tell you that that is becoming a major driver for us is helping our customers their time to market. So that is the big picture.

Let’s talk about SAM as well, we count SAM as being about 550 million at the end of 2011. in our space we had revenue in the high 200s last year, so you could do your market share calculation there.

In general we believe that the SAM growth in this business will outpace microscopy SAM growth and I’ll show you why. Where we believe will be by 2015 is a SAM $750 million. We believe we can grow our SAM at least 8% and actually we expect to be growing our business at a greater eclipse because we do expect to be making more market share gains over that time period.

When you look at semiconductor IC equipment growth. We really only looking at a 2% ’11 to ’15 growth rate, I know there was a numbers published this week by Semi, they are very bullish on the second half of ’12 and 2013, but really when you look at the ’11 to ’15 timeframe, it’s about 2% growth. So we believe we’ll be significantly outpacing the semiconductor equipment growth rate in that time period and you should be convinced of this and understand exactly why by the time I’m done today.

What we call our future and here is the proof here is cyclical growth. There will be up quarters, there will be down quarters. There will be up years and there will be down years as with any semiconductor manufacturing provider.

But when you look at our history, we had 30% peak-to-peak growth and when you look at the trough in 2009, we were about 35% to 40% less more shallow then our peers were and then the industry was, right.

So we believe in this, there are data to support this and this is the way, we look at our business, the fundamental reason is that the organic lab growth, the requirements on these laboratories are really just outpacing any other investments in terms of percentage that percentage growth that our customers are making, right. They need more of this data, and there is really no other way to get it effectively. So this is our sort of long-term view on the industry cyclical growth.

When I talk about the ambition being now realized into results, I’ll you kind of what’s happening with the mechanics of our business are, there is really two parts of our business, the lab piece which is the traditional part of our business, serving the lab managers who buy all sorts of analytical equipment.

We continue to gain share in those areas, they are buying more and more TEM imaging equipment, higher end imaging equipment and we are very strong in preparing those samples and selling that equipment into that market. We think the SAM in that space will grow about a 100 million between now and 2015.

In the near line space which I talk a lot about last year and that was kind of set up the ambitious piece was near line that’s really the big growth area for our business. It’s also going to grow about -- by about 100 million by 2015, but our base line there is actually very low. We don’t do much business there today. In fact however, four out of the five major semi manufacturers purchased near line equipment from us in the last couple of quarters, so that’s really growing.

The base line is very low. When I was here last I told you this is ambitious future piece and now it’s the real piece that’s driving growth in our business today. The key to that business is getting customers data quickly, as I’ll show you there are no longer satisfied with weighing days or potentially weeks to get data points from their internal laboratories.

This people, this yield managers, this defect managers want to own the capability to get them answer today, they don’t want to outsourcer this internally. And there is a huge change in our industry.

What’s really happening in the space is the value of information is increasing tremendously and reason really is that the cost of doing R&D at the advanced notes is tremendous.

When you look at how the cost has scaled over the last two notes call it from 32 to 22 and now looking at 14, the most advanced manufacturers are starting path finding our 40-nanometer products, they are steering at billions of dollars of R&D builds to be able to generate the new structures.

The reason is of course you no longer are just scaling. You also introducing different architectures, they are introducing 3D transistors for example and those are very, very difficult to manufacture and it’s actually quite a Material Science problem and to be able to make them in a first place just in the development lab, the development laboratories.

So the leaders who were very, very closely aligned with are spending a tremendous amount of money and fundamentally they need eyesight. They need eyes. They can’t do what they do without eyes and where their eyes. There are other techniques to get this data but they are all mostly indirect techniques. There are scatterometry, optical CD techniques for example to give you model data.

But the Material Science problems are so difficult now that model data, indirect data is no longer good enough. Our customers want to see pictures. They tell us all the time we want to see pictures and we want to see as spreadsheet and this indirect model message don’t give you that.

They give very large error bars which no longer meet our customers need. So the value of this kind of information is really being accelerated by the cost of development, difficulty of development of these structures.

And of course, the semiconductor in this room will know why this is happening. The number of materials and structures today has grown at a tremendous space compared to over the last couple of generations and now we are not looking at transistor level, let say, gate level development, it’s everywhere, it’s in the package, right. It’s in the silicon, it’s really throughout the manufacturing process where scaling have to happen.

You hear lot about more than more right, more than more means, you are not just doing transition for this any more, you are doing whole devices up to sometime the PCB level. So this is a good thing for us because we can help our customer in all these spaces. And interconnect patterning everywhere and packaging as well and that will come in the future.

Why this is good thing for FEI is to simplify the resolution requirements and the time requirements effectively mandate that you use TEM information as being the final arbiter of what’s good and what’s bad, right. We are extremely does it from this activity or a metrology standpoint.

And the reason is getting for FEI is, making samples for TEM is a very difficult process which requires a lot of preparation equipment and we are market share leaders in this equipment and it also happens to be our highest gross margin product area in the company.

So in the past, where you could sell an SEM to solve this problem, let’s call it $1 million SEM sale you now need a couple of $2 million preparation tools, you need a $3 million TEM and when you put it all together, you are looking at greater than 5x, let’s solution cost to get you that same level of data, relative to your requirement.

So really the cost of solution and is a biggest driver for revenue and ultimately gross margin for us, right. This is high gross margin stuff that they effectively need, all being driven by architectural changes and equipment message brings.

When you look at our segment and we get this question a lot from our investors right and of course you, what are our segments? So we look at our segments is when you do a market logic and foundry and they all need slightly different things.

For example, in the foundry space, it’s been well published foundry had a lot of problem ramping 2x nanometer production and part of the reason is they have historically under spend in technology, right. They’ve just being grinding parts out. It’s been working but now since you have this 3D finfet and this new world that they are entering they can no longer afford to under spend.

So our foundry business has estimate, has been very, very healthy, I was visiting one of our biggest customers in Taiwan couple of weeks ago and we are looking at their org chart, we talk to these lab managers and I was looking at their org chart and this customer has grown their FA lab operation by 2x, double the amount the people, staff they have in their FA lab in the last 18 months, which is tremendous, those happen everyday, and the reason is, they are realizing over behind and we simply catch up, and they way catch up is through R&D and through the laboratories which directly impacts us. So that’s the thing.

On the logic side, of course, logic is driving technology, you saw Intel’s announcement on IV Bridge and Sandy Bridge and you know what’s going on with their 3D efforts. Those 3D efforts require, high level of transmission electron microscopy, you can’t make those advances without it.

And TEM memory, memory is now doing pass finding in the sub 29 nanometer range and the volume of memory being driven by smartphones and by consumer electronics, the volumes are tremendous and as Semi published again this week, they expected the large growth areas are Korea, right. It was memory. Taiwan, basically it was foundries and North America, which it was logic, so you can kind of map it on to the leaders, and really the answer is leaders are spending all the money and we are very well aligned to those leaders.

So to show vectorial form what’s been happening and how this is helping us, I showed virtually the slide last year as well but basically you’ve got your SEM domain. This is probably now low level, inexpensive and relatively low gross margins type of stuff.

And as technology progresses, your structures and the information that you need now is starting to dip into the TEM domain. Things are smaller. Things weren’t more difficult. SEM doesn’t give you the sort of elemental information. It can't tell you which material is rich.

And then as you look forward and as we are starting to do some pathfinding efforts with customers in the 40, 50 nanometer space, the problem only worsens, meaning our opportunity gets only greater, okay. So there is real conviction behind this. And there is real confidence that this will only continue. And just think right in the 50 nanometer space, we are only starting to path find. There is no production. There is really no even real R&D yet, it’s just pathfinding.

So now zoom forward a couple of years, and think about the future right, and that’s what really excite to us is this is just starting. We’re just scratching the surface on how much of the stuff will be required for our customers to do their jobs.

Our basic business premise is things are getting smaller, more complex. That’s all good but really the big strategic premises that we have to make this valuable laboratory technology much more. We need to bring closer to the real demand for this data and affectively closer to the money, and that’s what we’re doing.

When you look at us relative to our competitors, nobody else is making the kind of investments for near line solutions, wafer level solutions, microscope that could fit in-fabs or could sit near line, very close adjacent to these factories. Nobody has that on their road maps.

We’re very, very differentiated in this space. I think we were first to see this because of our internal relationships with the leaders and we are definitely the first to act on it. So really the basic thing is bringing this technology near to the line, closer to the money.

To give you another customer’s story, neurologic space would be -- couple leaders out there and in the past three, four years ago, we would -- I meet with these guys all the time. I meet with them once every quarter and I meet with only the lab manager, every quarter lab manager, we work in our business into our thing.

And in the last 12 months, I have not met with the lab manager once and have been meeting with fab yield management every other month, right. So the scope of our conversation, the scope of our business relationship is changing completely.

We’re really -- not that we’re ignoring the laboratories, but they become effectively marginalized inside of our customer sites and the power, and the money has been given to the yield and manufacturing people. And as you know, just look at Pele in applied results, the chunk of money available there, is much greater than the chunk of money available in the laboratories. It’s quite simple.

So really where we want to go is take this rival lab technology and bring it your line and make it much more credit, make it much more mainstream and easier. The investments that we have on our roadmap all involved throughput, faster right. We believe that giving customer this information faster and doing it easier. So that they could only higher low trained operators and not PhD. We’ll stimulate even more application growth in all the spaces.

It will take us from if you had couple of applications let’s say, (inaudible) niche to a much broader set of applications that cover the whole of semiconductor manufacturing process.

So we already have products now that do this. Our competitors don’t and you will see in our product announcements in the last -- in the next couple of years, we were really --pulling a tremendous amount of our R&D resources into productivity, speed ease of use, to the tool matching for example. Are you getting the same result on this tool as it was for this tool, nobody else in microscopy is doing this and not even speaking about this. So we are already acting on it now.

So to summarize our business here, the comprehensive characterization of these structures is no longer, it’s no longer a -- can have or should have for customers, it’s a must have. It’s a need to have to survive. They have to have this information to survive in the 2X domain. 32 and 45, you could do really techniques in the 2X and below domain. Are you -- there is really no other way to get these direct images in these direct measurements.

From a full solutions in workflow standpoint, I think we are -- I know we are thoughts leaders. We are the only company providing a localization, preparation and imaging solution. Nobody else can do all that together. People continue to sell a little pieces here and there but they don’t talk to one another.

And that people need tools and yield people tools to talk to one another. They don’t want to buy microscope. They understood to buy microscope. So they are effectively want to the buy yield improvements.

Customer intimacy comes with being first and being tight with leadership and leadership is where the money is being spent. And of course, we expect to see the financial, significant financial return as a result of all these things moving away.

So that’s summary of electronic next up is Dominique Hubert. He is a General Manager for Life Science.

Dominique Hubert

Thank you, Rudy. Good morning, I would like to introduce you to the Life Science following the next movie giving to a flavor of what we are doing.


Life Sciences represents an exciting market for growth for FEI. And the reason is very simple the trends are our friends. What we see there is an increasing needs for 3D imaging solutions to visualize sales but also sell components, organelles and actually even the building box of life to proteins.

And the information that we provide is meaningful, is valuable and is impactful. Impactful to help developing data protocols for the diagnostics and also for therapeutics. What we do with FEI, we provide workflow solutions to maximize customer value and we have very proud that most and best results are actually obtained by our customer using our tools.

The plan for our growth is to connect to new customers, so go adjacent, go to areas where money is being spent today and take a ship. And we want to deliver additional value, complimentary value but certainly also the level of unique whether those traditional techniques fail.

Our approach here is to go adjacent, connect the new customers, expand the searched available markets and help doing this by focusing on strategic collaboration initiatives that we called living less.

So let me walk you through the market segmentation. The sub segmentation in Life Sciences. We focused on two important segments one is structural biology, the other one is cell biology. Structural biology what people are looking for is the structure of the proteins or the structure of the viruses. And why because they beliefs and it’s known that if you understand the structure you can also understand the function. And it’s also very important for drug based and for drug development.

Typically, you get to this type of information by using XRD and NMR techniques, but also with prior EM. And actually, we really want to show and explain to the market that there is a unique value of using Krios here. And we want to grow in this segment by going adjacent and going adjacent in the fields of XRD and NMR and expand the service available market.

And Cell Biology, the information that’s requested is understanding where the proteins are. The localization of the proteins in the context of the cell. And why is this important, really important to understand the pathways of diseases. How to people get through this information. Today it’s being combination of optical microscopy and electro microscopy. And very key here to really half is to most and get the best information is to combine those two modalities and combines those two worlds.

And again here for us to grow the served available market is go adjacent expand and in this case it’s about growing to optical. So we do see an increased penetration of electro microscopy solutions, not only as a complimentary technique but also as a competing technique to these techniques that I just mentioned. So that’s the central theorem of our growth, expand to adjacencies. Deliver unique value and also deliver complimentary value.

As I said we deliver workflow solutions. This is an example of the structural biology. It’s start with proteins, solutions of proteins even proteins in context of cells for example solutions of pyrosis. Information that the scientists that offer is a 3D structure of this protein, 3D structure of this virus and the workflows that we provide is a full workflow solution. It is sample prep. It is automated data acquisition and even the analysis of the data to get to the 3D structure of these proteins and of these viruses.

On the left hand side, you will see three examples. The first example on the left is the spike of HIV virus. This information can not be obtained by any other technique that I just mentioned not by XRD, not by NMR.

The other one in the middle is SARS and on the right hand side is an example of very important protein complex which is ribosome. These structures are relevant again to unravel the structure function relationship to really help understand disease and help but also develop drugs.

We have the roadmap that focuses on higher throughput and this of course translates to a lower cost per structure. But we also have a roadmap to get to more details and see more details in the structures. And as I said in the beginning, we do have a full workflow solution in the area of structural biology.

Cell biology, it all starts with cell assets, living cells or biopsys from tissues and the information that’s really relevant and valuable is to get an understanding of the localization of the proteins where are which proteins and especially in the context of the cell. And what’s needed here in this workflow is to combine information from two wells. Information obtained from light microscopy which gives you these colorful images that tell you where the proteins are, but you missed the context you missed the cellular complex.

And the workflow that we offer is combining light microscopy and electro microscopy and having software that actually allows to go to sample back and forth to navigate between those two wells and actually to combine that information.

And you can see an example on the left hand side, lower side, in the square where the combination of light microscopy and electro microscopy actually deliver the information that allowed in this case to really put the right diagnosis about this muscle disease.

And the combination of this information is essential just one technique here will not give you that type of conclusion. And also here we focus on higher throughput and we focus on more information. So our business strategy as I said in the beginning it’s about growing adjacent, it’s about expanding our served available market.

So the focus is on growth and expansion, served available market expansion. The margin we do by focusing on workflows and the focus or acceleration is through living labs and I will give you an example later on.

In the structural biology, it is about to expand our solutions for 3D workflows for 3D structure analysis. It’s also about exploiting our ground-breaking results that we have with our flex shape Krios and it’s about breaking into the adjacent field of XRD and NMR. And we do this through also accelerating through corporation with NIH for the living lab for structural biology.

And cell biology, it’s about developing workflow solutions, routine solutions, combining light, and electron optical information. We add light microscopy capability and also as Don said in the beginning, we’ve acquired the company TILL Photonics last year and this has added our competence in this field. The focus is to create in all FEI solution for correlative microscopy.

And also here we found and important partnership through the partnership with OHSU to accelerate this adoption. So we approach here is to grow adjacent expand the served available market and with this we plan to triple our served available market by 2015. So this would give us ample room to sustain a Life Science business growth in mid teams.

So this is another way of showing the served available market and the market expansion to just in keep in mind for our structural biology we need to go adjacent in XRD and NMR and then cell biology it’s about growing adjacent in light microscopy. So last year we drove the strategy into actions and what we did in structural biology, we found the partner, we found the partner in NIH.

This will help us to grow into the area of XRD and NMR. We’ve acquired TILL helping us to get into the field of light microscopy and with a key release of software like MAPS, we’re able to do this is a in a very convincing way and the leadership or the partnership with OHSU is also helping us here to focus and accelerate.

And with this I set we aim to triple the served available market to a number which is around $1.2 billion in 2015. A key thing here again is growing adjacent. So let’s talk a little bit about credibility and how to get there and do we see the right science and all we having in the right time for doing this. Then I’d say yes, so let’s look at this data and the effect.

So if we look at the EM based so electro microscopy based structure that are deposited in the PDB, the protein data bank. We see that these structures EM based as the highest growth rate so that this technique is gaining in popularity very strongly and it’s also serving a very important set of classes which are electricity far more pharmacological and biological relevant.

If you then look into those structure that are deposited in the PDB, the vast majority of those results have been obtained by our tools, 75% is obtained with FEI tools. Another interesting thing is that yet we have another record last year and our customers could break a very meaningful resolution barrier, again meaningful to have the hand shake with XRD and the NMR. There are many top level papers inside and nature that actually could deliver information that again can not be served by XRD and NMR.

It’s about seeing the real thing and also whole thing. And the examples are giving on the right to about a structure of the spikes of HIV or about the structure of a virus that’s actually transcribing RNA. These are real structure in the latest states and there is no other technique that actually supports this type of information then drive EM.

And this is very important because this information again is impactful to developed better therapeutics and diagnostics and also keep in mind there is a shift also in Pharma to go from small molecules to biomolecules to protein-based drugs. And therefore this is also going to be a key technology for delivering information.

So are we well-positioned, well-positioned for this. I don’t think the answer is yes. So we do see traction, we do see traction in our roadmap and the results of that roadmap it also for customers. So we said that we -- in the beginning I said we would focus on higher throughput and see more details.

Well, we have an example here that we have actually last year able to break another resolution barrier to see more details but also get a higher throughput we could actually doubled the throughput and then example is giving on the right and this was obtained to just in a demo. So we had the customer from Switzerland coming over for demo in two days. And in two days, this customer could get to this groundbreaking result seeing more details and this was actually kind of a testimony again of us delivering and seeing more details as well as improving the throughput.

So trial also opens up. So our workflow solution opens up a whole new regime of samples that we can analyze. And that’s the class of the large complexes. So under now a lot of structural analysis has been done on small complexes. But pharmacologically and biologically relevant structures are bigger complexes and also complexes which are and captured in membranes.

So this is an important area where our solution can play and will play an important role. And then the other thing which is very important, also is approved is what we do see that our sales pipeline is showing a growing content of opportunities coming from the adjacencies. So this week, I had the series of meetings with the scientist from China who was setting up a Krios EM lab in a facility which is now completely dedicated to XRD.

So yes, we do see the traction. In 2012, the focus is to further accelerate the cycle of adoption and it’s also what we said last year. We would invest in a living lab. And the good thing is we found the living lab partner last year in NIH. So with the government NHI facility in Bethesda.

And this is a partnership in collaboration with core members and the core members are not just TEM people but our XRD people and our NRM people biologist. Any here what he wants to do is to accelerate our learning but also to accelerate getting to workflows that can be complimentary to those techniques but also serving a certain unique value.

It’s important for us to expand our credibility into adjacent field XRD and NMR but also establish the workflows on variable biological questions. Status is we sign to create that, we have the tools in installation and the next six months we are going for the first results and also the first publications.

We’ve identified a couple of themes which we all believe. So FEI as well as to partner to be most relevant from a pharmacological point of view as well as from a biological point of view. And what we want to do is to focus on the real thing. So on classes which are 3D structures, unmodified in the native states, you might say why do I emphasize, there is about unmodified the native states and something that we will also learnt from the XRD experts in this cooperation.

They said we can get to high resolution information about the structures but the trick we have to do is we have to trim and cut the protein until it crystallizes. Then the key thing is really, does it really represent the true state of the protein. Am I -- my answer is I don’t think so. So what we need to do is to see how we can actually deliver the additional value but also the unique value as I just mentioned in that example.

In cell biology, it’s all about value of correlation, is bringing information together from the world of optical microscopy and the world of electro microscopy. So as I said, the light microscopy, optical microscopy gives you the images like on the right hand side the lower image gives you colorful images about where proteins are. That you completely missed the context where those proteins are exactly in the cell or what organelles of our membrane.

And this is very important to have that information to actually understand the pathway of disease. So combining this information is relevant that is important. So the requirement to become critical here is to own optical microscopy as a further developed optical microscopy under competence. Developed for workflow solutions and bridge those two wells and to focused on software to actually correlate that data as well as to allow navigation between those modalities.

And also as I mentioned before last year in the November, we acquired TILL Photonics, even better TILL Photonics into the Life Science division and with this, we now have one-stop-shop for our cell biology customers. We can go from live cell imaging whether is live cells or live tissue, down to imaging the membrane.

So we have to wait now to start with the differentiated set of solutions that we have in optical microscopy as we so -- as we can see here at the upper half and connect them to our differentiated set of solutions in electro microscopy.

And we have come up with the glue. So the hardware and the software that bring this together and allows customers to go back and forth between this modality. And this year we’ve launched the series of workflow products. We will open up a series of those workflow lines and we will be therefore leveraging existing products bringing them together but also come up with a new series of product.

The key thing again here is workflow solutions. We want to connect biological question to the biological answer and if the customer is away to navigate and correlate in a convenient way.

We’ve also found a strategic partner for cell biology and that’s the OHSU. So the Oregon Health and Sciences University in Portland together with the Knight Cancer Center and this is collaboration with experts in a domain of light microscopy, electro microscopy but also about fields of cancer software, chemistry and biochemistry.

And here we want to further accelerate our learning but also focus on setting up the workflows that allow us to further accelerate the adoption of higher correlative microscopy, correlative solutions. We want to establish image-based solutions to study the signal of signal networks of disease and normal tissue, of cancerous tissue and normal tissue and again we want to focus on pharmacologically important problems.

So we’re about to ship this suite of tools and we’re also about to make the first results. Important to realize here is that OHSU will be our launching partner for another important new product that we will release which is the Island, which is an integrated light and electro microscope. And this is not a product that we are having high expectations from because it’s really a dedicated tool to even speed up the workflow between correlation between electro microscopy and light microscopy.

So just to summarize the business strategy is to expand our served available market, go adjacent where money is being spent today, to leave a complementary value but also demand the value where we are unique. And we do this through workflow solutions. And the focus here is for us to accelerate those options is to work with strategic partnerships that we called living labs.

And with this, I would like to thank you for your attention and I would like to introduce Paul Scagnetti, General Manager of the Natural Resources business.

Paul Scagnetti

Great. Thanks Dominique. So I’m going to be presenting a last of the business units and it is a business unit you’ll see that has some similarities to the rest of the businesses but a lot of differences. It’s Natural Resources and they are fundamentally different.

One thing or many things, I want to get across but one of them is, this is fundamentally about helping our customers make more money. That’s the main thing that we see as our mission. This is not fundamentally a research business for us. It is openly about helping them in their exploration to become more efficient.

I met -- for those of you I haven’t met -- I met (inaudible) FEI 10 years, came from, from Intel, proud to be at the company because we chose to view our business not as microscopes and as simple gear but as work flows helping our customer do amazing things an that’s definitely the case here in Natural Resources.

So I’ll start with it a short video like the other group.


So we are the first FEI solution on offshore insulation, not that hasn’t happened before in places like the rain forest have a popular beginning. This is of course the business that some of you thought about from -- it was started four year ago from a strategy that Don put together of investing in a completely new business unit. And it didn’t start as we are going to develop a business in mining or we’re going to develop business in oil and gas. It started as we’re going to develop another solution oriented business that has it demonstrated or alive for customers.

Natural resources was that time a very promising business for us because we were selling -- we were selling some systems for the mining companies. It developed partly because it was so obvious to us that these companies have major challenges but they are dealing with and that there is an opportunity for microanalysis if its presented the correct way for these customers.

So I’m going start by talking about what we do just to make sure it’s clear and then talk about where this is going in the future. It is different from what we do today. To start with, we analyze rocks that’s the core of the business. And we do it in a unique way. There are -- if you‘re interested in geology, if you’re at a mining company or at an oil and gas company, you analyze rocks in lot of different ways because that the core part of your business.

What’s unique about what we do is we analyze at the micron scale but we do that a million times in a reasonable period of time and put that picture together for the customers. So that’s the way to think of it. You can get bulk in information if you’re looking at rocks or order like picture on the top left. You can get aggregate measurements with other technologies. What’s harder to get is what happening at that detail level. And that is important in a couple of key cases and that’s what we do.

What we ultimately do is put that into context of a mine operation and exploration project and that should enable customers to do their exploration and their production more efficiently. So it’s ultimately micron scale information that’s at the relevant -- put in a relevant context of people who are honestly digging out tons and tons of material per hour.

So you have to think of truck loads of stuff and you’re trying to get answer on it by looking at a very precise carefully demonstrated sample. I’ll start by saying what are the underpinnings of the business, Natural Resources. Every time I present the business externally, I sort of rhetorically ask the question is there anybody here who thinks resource demand in the next 10 years is going to go down, may be some other way.

But usually people don’t, almost every economical approach shows that over the next 10 years. The two trends are going to hit the resource companies one is the global, the population increases and the increasing standard of living or driving resources both oil and gas, the energy demand and also metals but you see another trend which is more difficult for these companies.

So that was the case, it would just be -- that was the trend by itself. It would just be great. There is more business but the other is that it’s getting more and more expensive to go after the reserves that are left. So on top left, I could show a similar chart for mining but this is a success rate and the cost to do exploration project and it’s going up dramatically.

I mean, as the population over the last 200 years since has been very wide scale resource extraction, we’ve done sort of what you would expect to do which is you go after the easy thing first and then you go after the harder things later. So that means the companies that left mining projects, they would explore in area, that’s not so good 50 years ago or coming back to those sites because there’s a increase need and because that’s what left.

So the economist tell you resource demand is increasing, the geologist and the exploration people say it’s getting more difficult and the squeeze in between is how do we do it more cleverly and that’s our part or that’s part of that, we’re part of that equation ultimately helping them being more clever.

The way to think of it in terms of addressable market is what we said in the video which is that these technologies that we’re presenting to the companies are -- have been around actually for more than a decade in the laboratory form. And so there are two things that drives the same growth from where we were last year when we really -- last two years when we really get formed as a business units to where we would be in 2015.

One is just making them available, making them known globally. These were niche businesses that were started to serve a select set of mining companies and we’re now presenting them to all the mining companies, all the oil and gas companies in the world. And that might sound like a very obvious thing but it’s a very important thing.

There are hundreds and hundreds of mining in oil and gas companies around the world. And that in itself is a way that we’re going to increase our addressable market. But the other way, we just pointed to in this slide is make analysis that use to take a month happen in an hour and make it happen after site where people are actually doing the work.

So most resources aren’t mined in places like New York city. They are in far fetched places in the world. And so the choice that people would have had for detailed analysis up until a year ago when we launched the WellSite Solution is send the sample back to a city, major center, your company central research lab, get an answer back and that’s roughly a four-week turnaround depending on the companies, it’s a $1000 measurement four weeks.

What we have done which will greatly increase the market opportunity for us is make that available in these places which are mostly fly-in, fly-out kind of operations where people go to remote site in Africa or in distant parts of Australia or other places make this analysis available to them within an hour.

That’s the largest way that we can grow the business and it will happened both on the oil and gas and on the mining side. And I’m going to talk a little bit about what the actual measurement is, what the value is for customers. So simple summary, the analysis that we’ve done is we can go from a SEM that was sort of niche $50 million market last year to an opportunity that’s $500 million in the next few years. That’s what the analysis is.

These three market segments, that I think off, I put in the slide all off mining together. Of course, there are different opportunities within mining. There is exploration. There is concentration. There are different things that go on. They think of mining as really two things. It’s how to optimize a plant on -- in a way that will enable them to reduce their energy cost and still do the same amount of throughput that they have been doing -- that they have been doing previously.

So it’s effectively a plant optimization opportunity where these plants operate in tremendous amounts of energy to extract what is for example one of our customers there, that are now concentrating when they pulled a copper out of the ground. It’s less than 1%. So it’s an important thing to remember.

They take a truckload of material and they roughly get a basketball size end result of copper. Our job is to help them do that according to something called liberation, which is a technical term but it roughly means how is the good stuff held by the 99% stuff that you want to get away. And if it’s held in little, the tiny particles, you might do something different as processor compared to if it’s larger things. You might not grind as much. You might save same energy along the away.

So that’s the mining opportunity. And oil and gas, we think of it as two different segments. One is the opportunity at WellSite, where we’re effectively helping them understand where they are in their drilling sequence. Ultimately it’s about reducing lifting the cost of getting the hydrocarbon valve and what we’re doing is telling them where they are in that drilling sequence.

But there is also a live opportunity, a lot of you probably have heard about shale. Shale gases as a global trend and this is driving people to understand the scale at which shale which gas is held in shale rockers, you hear about cracking and other technologies. Is that the skill that these companies haven’t dealt with before. It’s literally pours and pockets that are well below micron.

So what we’re doing there is providing the ability for them to understand those rocks. And this is something that’s happened over a short period of time but they are really coming to -- trying to come to terms with -- this is fundamentally different geology that they have dealt with on a production basis, 4, 5 or 10 years ago.

Now, if it wasn’t around, all these things happened obviously periods of time but in terms of exploiting them as resources, it’s really become a major global trend in the last five years. Those are our segment that’s the way we think of the business. I mentioned it before, if you look at wire -- it's just a microscope wires, why is this more than -- why do we call it a workflow.

We call it a workflow because the opportunity for us is to provide information that is happening at a small scale but I say a lot of times that if at we did is help people, show them 1,000 micrographs, well that’s not so, that’s not really all that interesting. You get blurry eyesight, if you look at all the particulars on the left hand side and you don’t really extract all that much information.

Our real job is to collect million and millions of data points and boil that down into something that’s useful and that happens on both the oil and gas and the mining side but in different ways. It turns out on that right hand side. Even Dominique, I think mentioned MAPS, which is a software product that was developed for Life Sciences. It’s effectively like a Google Earth kind of an application where you can look over a large piece of rock and then determine that’s the point that’s represented because this is the key thing.

How do you look at a small area and make sure that it’s representative of the features and things that you want to sort out. So we use sort of a scanning technology on the right side. On the left for mineralogy, we essentially have the ability to boil down a lot of different chemical and elemental information very quickly. Very quickly that’s the key. Thanks.

So customers will say things like well, FEI, they don’t really say so much FEI helps us look at detail things and say FEI helps us look at our larger amount of material in a very detailed way, that’s the touch.

Business strategy, it’s important to remember. This is ultimately about one hand at this stage of business growth about developing a team. We’ve grown nicely from a little start-up to something less small but still the smallest business unit within FEI. And we’ve done that by creating a team that is primarily geoscience and software. This is an application and expertise kind of a business.

If five years from now, I can bottle more and more of the brains of geoscientists in the world, we’ll have a better business and that’s the direction, we’re going, It’s not more and more powerful optics or more and more powerful hardware.

Hardware plays a role that is more about boiling down expertise, software, application, understanding, knowledge those kinds of thing. That’s where the value is. You look at what we’ve accomplished in the last year. We’ve gone from last time, I presented here which is the first time we presented the business.

We were saying we were in the middle of starting field trials. We’ve concluded those and now we’re onto the next page, which is the initial commercial contracts for WellSite and those are significant less from a company revenue standpoint, more from a standpoint, you learn different things about the value proposition.

Why is this important to the customer and how valuable is it to the customer. And you learn that really by the initial commercial contract. So we’ve technically gone from weeks to less than an hour.

We’ve demonstrated the ability to look at multiple length scale at the same time and where it’s going in terms of commercial businesses, first initial WellSite contract. We’re going to take the same WellSite technology that we tested last year in Papua New Guinea and in the Arabian Gulf.

And we’re going to apply that back to mining. We thought and still believe oil and gas has the first opportunity to be at the site but there is a similar opportunity in mining to provide information at concentrators, at leaching facilities. These are the places where that 1% copper turns into 50% for us to be able to provide near real-time information and we’ve just started another round of field trial there.

So think about as staggering about a year behind oil and gas in terms of our -- in terms of our development time line. I think ultimately both are going to be extremely good opportunities. I have two groups actually -- one group thinking of mining and another thinking of oil and gas because they’re different businesses in some respect but we started all oil and gas a little ahead of the MineSite development.

The way to think of it in terms, I know for this group, you're primarily thinking of it is how do you model whether this is significant for FEI. The way to think of it that we’re going to go from an addressable market of about 50 to 500 over a four-year time frame. It’s a very large jump and really it comes from going from niche laboratories to the thousands of WellSite and MineSites over the world.

So business growth target is more than 20% and same will grow a lot faster than that. Effectively, we’re moving into the large market of oil and gas services and mining –MineSite, metallurgical analytical services. That’s we grow the same best. To be specific -- more specific about what we’ve done at the WellSite.

We have concluded trials that show that technically the product can survive being in -- the being in a not so nice environment that was sort of one period that we need to pass. But the bigger thing, intellectually I think for the business is, what’s the value, where does this fit into the billions of dollars that are spent in oil and gas exploration, how does that help people ultimately make more money.

And I don’t want to get into a lot of details about the about the value proposition, some of it is proprietary, some of it is what we are – we’re spending a lot of our hardened time to understand but in the big picture, where it fits into is all the measurements that are made at WellSite effectively help produce uncertainty.

You want -- you are spending $500,000 a day which is roughly the amount of, one of he wells that we were -- that we were at and you need to piece together, the right pieces of information to decide, is this is a good one or is it just a bad one. Remember the graph that I showed a few slides ago, roughly 10% of the wells, actually become commercially viable. So it’s a very low odds of explored well due to the good one.

So you’re trying to patch together, right pieces of information to make the judgment as quickly as you can to either keep going or stop. So we fit roughly when you talk to our customers into the thing of reducing uncertainty similar to other technologies that you might hear about like wireline and another core analysis technologies as well.

The second is to actually guide drilling decisions. As we move into a sub one hour measurement, there have been cases already in the sites that we been in and there will be more where our information can help them understand exactly where they are in the lithology.

So as they drill down, they're going through different layers of rock and trying to find, there is a particular formation that is the most profitable and they are trying to see is this that or this something completely different. Is this 9out of 10, is this one out of 10 that I really want -- that I really want to go for.

And they make decisions day-by-day. Do they keep going faster, do they turn? It is like a steering project literally. So we can also help in the sense of making sure they understand where they are due to guide their times and they are spending hundreds of thousands of dollars a day.

The next steps are to qualify and to begin to commercialize. This year is all about proving that people will pay and proving that there is something longer-term that involve dozens hundred of installation. So we proved out technical kit. That's great.

That’s one milestone. The next is understand why and understand how valuable this is to people. We have a good pipeline of opportunities. We closed opportunities and so we’re going to be actually in commercial projects this year and at the end of the year, what we want to come out with is yes. Okay, we had some revenue and as a small business that’s good but more this is why people are willing to pay to engage to use this technology at the WellSites.

And I think the only thing I would say that the value proposition right now is we know we have a much better understanding in terms of the segmentation of different kinds of wells. What somebody is doing in an offshore opportunity is very different than shale.

The economics are different and the value proposition ultimately the way we present QEMSCAN is going to be different. There are ultimately segments within the WellSite opportunity. I’ll switch over and talk about mining briefly which is to say the business today, the lab system, it is ultimately about analyzing materials either for exploration or for large capital projects that are going on at our MineSite.

So the way that the analysis is used today is very specific project-oriented analyses where either somebody is saying I want to determine if this exploration project looks as promising as we think it does or if they’re considering adding capital to an existing facility and they want additional information. Well, they can take their time to do that.

They can take months and weeks and that is one opportunity. I think it will always be an opportunity for us. The growth opportunity in this business which is the existing lab business is for us to make sure every single mining company every single small, medium and large sized company is using the technology. And they use it sometimes directly by buying it from us, and at other times, they buy the service through companies like SGS, ALS, large global analytical suppliers.

A lot of the major companies are already customers and would be familiar if you met somebody from one of their technical offices, they’d be familiar with QEMSCAN or MLA is. But it is a niche laboratory technology that’s used for very high value capital projects in mining companies.

And therein lies the opportunity because you know if we can do this, improved it, that for a given customer. So, for example Anglo Platinum published a paper at -- this international conference last year saying they had done this approach over a series of years and shown that by grinding in a different way, they could increase recovery, recovery for those of you that cover semiconductor companies effectively like yield.

And so I think of it this way, typical concentrator would be putting out roughly a $1 billion or more than $1 billion in revenue per year. 1% increase is $10 million, 2% -- 20%. Well, this particular paper showed that they increased their recovery by 6% at some of the Bushveld Concentrators in South Africa.

Now, we don’t get to take credit for all of that right. There is a gentlemen, Robert Schouwstra is one of our great customers at Anglo Platinum, brilliant guy and he and his team, there is a lot of thinking, there is a lot of other kinds of technology that go into making those judgments but the massive, the economics are massive. That’s the real point is that when we do add to a decision like that, it's not too difficult to justify FEI’s analytical equipment.

The opportunity there is this. If it is one customer, and you guys ask, it’s nice to hear nice things about your products. But then you ask me, why aren’t you doing 10 times more and one plant metalurgist put it to me this way. Well, it sort of like reading a newspaper from two months ago some times.

I mean, I like it for large capital projects but I like to read today’s newspaper and so the opportunity that we’re going to test that mine site is, what is the plant metallurgist, who is dealing with problems and dealing with issues on a day-by-day basis thinks when they can get that information, eight hours later about what happened a shift ago.

There are all kinds of simple decisions, simple example is blending. They have different words that behave differently from different parts of the mind and they can choose to put those through in different sequences to get different recovery level. It hasn't been possible to make those kinds of judgment on the fly and that’s what we’re testing. That’s what’s we’re testing today.

So the value proposition is either, that will reduce energy costs with the same revenue or no experience increased recovery if they mix now their decisions. But it’s all about giving them that information within a shift.

So the way I summarize it and the way I ask you think of it is that we have a massive opportunity to expand our addressable market. I'm comfortable with the idea that as we move from a laboratory technology that’s well respected and well-established to on-site, the economics get a whole lot more interesting for our customers and ultimately the value that gets a lot more interesting.

So that’s the story. So with that, I’m going to bring back Don Kania. Thank you.

Don Kania

Thanks Paul. I’d like to thank all the presenters and before we jump into the Q&A which will come up here. The cool thing to highlight is that we’re going to partying with National Geographic. We have signed a deal with them. They are going to be making a 3D IMAX movie about imaging things from the large scale to the small scale. We're the exclusive partner for the small scale and so you'll – hopefully I think it's in 13, it's supposed to roll out, you'll be able to take your family and friend and – say hey, I know, I have invested in that company, I made a lot of money and see the fruits of labor.

But this is really part of our brand building process of getting that kind of – that recognition within the industry outside the industry as the premier nano scale imaging company in the world. And in addition if you want to test yourselves later, John, we – there's a game that goes with this – this is an iPad based game, you get to guess about what the pictures that we show you are and guess what's how big it is. There's a iPad game in the back, you can get – you can test yourselves. I know this is a very competitive group, so you can actually get a score and post on there. And we can see who is any good that this.

So we're encouraged by this. It's pretty exciting and with that, again I think all our speakers have put a lot of effort into this, I hope you appreciate the work they've done, I hope you appreciate the book we put out for you know, we thought it'd be nice to give away rather than usual bad pan or something, you know bad baggage to throw away. It's something you might take home put on a coffee table, show it to the family and friends and say, you know this is cool stuff so. With that Q&A. I'm going to try to repeat the questions for the people online and then I'll redirect as appropriate. So Jim…

Question-and-Answer Session

Unidentified Analyst

In the last quarter you saw those traffic – looking to come back – which ways – it gives me an update – over activity (Inaudible).

Don Kania

Yeah, but we don't want to go – you know, overtly specific on the near term in this meeting. But I think we're standing by what we said previously, which was, we expect quarters to uptick in this quarter, in that segment and Dominique assures me that will be the case.

Unidentified Analyst

(Inaudible) presentation it was mentioned that – (Inaudible)?

Don Kania

Yeah, so Rudy why don't you step up here real quick. The question is about foundry adoption of our technology in the semi space, yeah and I'll let Rudy answer that one.

Rudy Kellner

Yeah, so historically our foundry business has been hovered somewhere around 15% of overall semiconductor bookings. And we've seen that nearly double in the last, let's call it, two to three quarters, do we expect – that to continue to double, probably now that's too aggressive but as I said earlier, the foundry that they – they've self-recognized, that they've under spent the technology, and they've got some catch-up to do. And they're – the competition between global foundry CSMC right is creating technological, the technology is the ammunition now, it's not only cost per sample or overall output, but they're competing our technology.

Unidentified Analyst


Don Kania

Yeah, the second question was regarding 3D manufacturing and also (Inaudible) as being an opportunity, so. I think on a through silicon side I think it's a later things, when you look at the global amount of capital being spent on 3D packaging and through silicon packaging, it's still very very small amount. It's only penetrating in some of the very highest, higher density and highest technology applications. So that's the future application on the 3D transistor on the FinFair transistor that's starting now and that will be a significant driver for us.

Unidentified Analyst


Don Kania

Yeah, the question was about margin and in some of these newer applications under 3DIC under 3D transistor the finfet side absolutely. The key issue there is you need to very precisely locate the structure. When it was 2D you've got a large playing field, when it's 3D now you need – XYZ locations and we're very very good that that. And our dual beams do that and that's our highest gross margins product. Yep.

Unidentified Analyst

It's one of the questions I get from investors about the technology, basically having been achieved (Inaudible), you get the resolution, when there's only, you're not – you can't go subatomic obviously for a solution of it. So the question becomes how far is the competitors behind, how easier it's going to be catch-up, you've got a – technology.

Don Kania

So the question is since we've declared victory in the resolution space. I think it's the way to think about it. How does that competitive environment then evolved, really. And I think we've been very attentive to some major, we view the marketplaces very differently. One, you've heard a lot about workflows today, right, solution that embrace everything from the sample prep to the data analysis, and that's a major differentiator against our competitors.

And that's a big lead, if you think about Paul's business, I mean we've spent years now building up a team of experts and things that have nothing to do with electron microscopes, yet are critical for us to get paid well in this business segment, same with Life Sciences. That's one piece, the other is we've continually shift to the competitive piece of the technology, from resolution to, fast analytics was the latest things that we did. So which – there's atoms there but which atoms are which and (Inaudible) that we introduced last year, 50 times faster than the previous generation product anybody else could use so.

Now we're going to continue to shift that till we got more things up our sleeve I think Benjamin referred to the fact that chemistry, time resolution, looking at environment, those are areas that require tremendous investments, in terms of getting the microscopes to be able to do those things. And the learning that goes along with that – gives us I think a pretty big lead like the – there is no competitors of the cryo's today. We've spent several painful years developing that technology to automate that system. So those are the areas in the future which will keep FEI at the forefront.

Here about you see half an atom who cares, I mean you can see smaller but we just don't think you're going to be able to pay for it, so that we've just then jumped out of that space. So that it, we really do carefully look at how to maintain that separation so all these things play to continue technology leadership is just different technology.

Unidentified Analyst


Don Kania

I'll let Rudy answer that.

Rudy Kellner

The question is regarding the increased exposure to let's say more fab-oriented buyers and how that may increase our cyclicality. I think fundamentally if you had – if you – if I had to answer yes or no, I would say yes, of course, right. But there are much more – there's a lot more layering on that. The fact is our baseline right now is very low in that space, so even if we do a sort of more cyclicality, on top of that baseline, it's a base line that's – it's a low baseline I'm trying to grow a lot – I think I mentioned that – we expect to at least double our footprint in that space. So well that still going to be a little more bit more cyclical than our traditional laboratory footprint, yes. But it carries much greater gross margin, and it ultimately carries much greater size anyway and you know ultimately we will be closer to the money and I think there's significant gross margin upside there for us as we develop that piece of the market.

Unidentified Analyst


Rudy Kellner

Right, the question is about the CAGR on the CAGR that reported, there's 2% CAGR is global semiconductor capital equipment, it's not FEI CAGR, that's the global semi conductor report in number. Our CAGR is 8% from a SEM standpoint, and that leads to 10% from our business and a revenue standpoint. Next.

Don Kania

I would just make, I'd like to make a couple of comments on the cyclicality too, though that's the – I think there's a couple of other trends you have to think about – one is being in that lab business, while with different cyclicality than the capacity side as we – if we get more and into the factories overall so I think there will be some new benefits from that. And the other piece which is maybe not so obvious is the service tail in those – in the semi business is extremely lucrative and long and so that will help on the service business side, though you know it's a slow grower but it's a very steady grower, a big piece of that is penetration into the semi CapEx group. So let me just go back over here.

Unidentified Analyst


Don Kania

Yeah, so the question is growth of SEM exceeds the greater than 12%, I think, there's two sides of that puzzle, one we don't want to appear to be overly aggressive. But the other side of the puzzle is we enter the – some of these new SEMs with zero market share, right. So you know, you've got to give us the chance to go win, so let's see where it takes.

Unidentified Analyst

Could you turn slides on page 15, I have a (Inaudible).

Don Kania

Shouldn't have pointed over there. 17.

Unidentified Analyst

Has to do with revenue growth for last year was – (Inaudible) fantastic and 30%

Don Kania

That's correct.

Unidentified Analyst

And for this year – 69%.

Don Kania


Unidentified Analyst

So my question is how should I think about that, should I think in a way that you're sandbagging on conversation (Inaudible) which would many companies know, because the typical analyst is going to say, well you grew 30% last year, that was a banner year. You ought to grow 20% this year. Or in fact as you believe good business than including the first 2012 into 2011, I mean how can you even picture about that?

Don Kania

So the question is we grew 30% in '11, we're guiding the world to a lower number – significantly lower number in '12. How should you think about that and it's really not pulled from the forward what we did was – we were slowing ramping volumes – revenues as outpaced that. So last year we burned through some backlog to achieve those high revenue numbers, and so sort of overshot maybe slightly would be one way to think about it. But – we're not – I don't think we're being shy, 69% in the current, is a pretty good growth rate now, we're pretty proud of that too. So it's really I think you need to take that step back – we took a bit step up in order rate, we piled up some backlog, burned through a little bit of that which pushed the growth rate in '11 up. But go back to there's a – I guess, he's not in this – but our standard investor presentation look at the compound annual growth of a company since 98, it's 12%.

And there is some volatility in that, you know these new products Titan droves us with a big spike at our four years ago, we kind of – we took a step up, now we took another step up, we'll continue to push forward.

Unidentified Analyst

Another short, Dan, is we were above trend there in '11 and then we're somewhat below trend in (Inaudible).

Don Kania

Yes, yeah, that's fair. And now if you listen carefully, we've got these two strong emergers, we believe strongly in Life Sciences and Natural Resources. Difficult to call those on a – right now, how quickly they're going to grow, we think over time, if you think about the numbers we talked about in 15 in terms of that served market, we think these are going to grow pretty aggressively. But it's hard right now, because we're early in both of those pieces, especially in the Natural Resources space. Gerrit?

Unidentified Analyst


Don Kania

Yeah, okay. So the question is why did Hitachi buy SEIKO. Okay so, Hitachi Hitech, one of our competitors bought of a piece of SEIKO which has a variety of technologies in it, which were losing money. So SEIKO sold because it was a disaster, they weren't making money there was a lot of technologies included in their products and technologies, one piece was there's they have a ion beam technology, which we believe that Hitachi's lacking. So we think that's part of the play but not the only play. They really wanted to agglomerate, instrumentation into their space.

So we'll have to stay tuned on that front, we've looked at the intellectual property that will flow in – that's of interest in our space, to miners, so you know I think it's a broad-based move to add more bulk to them in many spaces, they do get one piece in some ion beam technology. How it plays out it's hard to tell, Hitachi has not been particularly effective of late, more focused in this area. When Rudy refers to the fact that they used to do top down SEMs to do the business that he's doing today, that was Hitachi's business. It is now our business.

Unidentified Analyst


Don Kania

Yeah, okay. So the first question is about – and I'll may Rudy – I'll make you have a comment on EUV which is – I don't think make s a lot of difference to FEI. And as long as they keep shrinking products and make it more complicated that's all we care about. And how they make them from a lithographic perspective is a secondary importance not primary importance.

And then the other question was about how we think about M&A and you know our principles are pretty much we're looking at what I think the jargon, everybody likes to jargon of talking relatively modest size either have a technology content that's very interesting to us, either broadly based or in a particular segment, or profit enhancing in some way for us, we do a very disciplined return on investment approach using a discounted cash flow analysis, and risk-weighted cost of capital so we try to be very diligent about that when we approach M&A. And probably not prudent to say much more than that.

Then we go to somewhere in the middle.

Unidentified Analyst

Don, how much of the (Inaudible)

Don Kania

Yeah, right. So the current view is includes a little bit of things we see very near that, Ray alluded to but nothing beyond that.

Unidentified Analyst

And maybe (Inaudible)

Don Kania


Unidentified Analyst

And talk about being (Inaudible)

Don Kania

Oh, yeah, well so the question is let's just answer the second question first which is – really our Life Sciences approach is to reach in and go get other people's money. Right we don't need the market places to grow we don't have to run as scared as others are from say NIH budgets because there's – don't make (Inaudible) like $600 million, right we think every year. We just – we want new competitors, we want to compete with [Brooks and Ashland] and these other characters and we want to get some of that spend in the FEI camp because we bring a better miles strap into this space. So that's our view of what we're trying to accomplish with that SEM expansion, I forgot the first part of your question.

Unidentified Analyst

(Inaudible) optical.

Don Kania

Oh, optical, I think Dominique would you mind answering that, you have to come up to the mic though so, keep one to [Erik] will hear you and repeat the question.

Dominique Hubert

So the question is how much of the contribution of the growth is optical versus electromicroscopy right? So the growth in cell biology is really above the combination of both, so we do believe that it's a growing the electromicroscopy part and adding a substantial part of the optical. So think today we are having a share of – we have to say in cell biology there is about I think 20% of optical versus electromicroscopy and we want to really get it to it at least 50-50 share.

Unidentified Analyst

Don I had one follow up, as we think about next year (Inaudible), the Natural Resources, talk about the margin profile there, (Inaudible) service required – and you know the freshness in other markets to (Inaudible) you can relate to it (Inaudible)?

Don Kania

I'll comment and let Paul follow-up a probably a bit detail. I would say from the see – the question is about the margin profiles mine-site well site. And I think our analysis as we look forward into that is that the margins should be the highest margins in the company over time. We have to build up a certain critical mass but we've mined the service support aspects of it, and the pricing power we think we can achieve whether it's a fee-for-service model, or selling the equipments directly in mining and oil and gas may have different models, just because that's what the industries want.

But both should be from a gross margin perspective very lucrative. And I'll let Paul, he knows a lot more than I do.

Paul Scagnetti

You've actually covered it pretty well.

Don Kania


Paul Scagnetti

You only have –

Don Kania

Go ahead, jump in.

Paul Scagnetti

The only other thing to realize I think we've talked about it is, that the model that we're going in with in well site and mine site is not selling the equipment, right, it's leasing and so that has a different margin profile to begin with, right so it's different than selling upfront it's a much higher – it's a recurring revenue model. But it should be, it should be good margins if we do, if we do our job right.

Don Kania

How about back – we've been working, maybe it's because I'm right here and what we have here, yeah.

Unidentified Analyst


Don Kania

Off the top of my head, Benjamin, do you have a – probably a better lock on that, I'll let Benjamin answer that.

Benjamin Loh

Oh the one that (Inaudible) question, so the percentage of business that is the government funded against private?

Unidentified Analyst


Benjamin Loh

Okay. I think you'll find that the Material Sciences and the Life Sciences business is largely government funded, so the one number that – I can definitely remember is – if you look at China and then you try to find out okay for materials sciences and Life Sciences how much of debt is government funded, it's about close to 90% and 10% is private. But when you go into the other businesses like Paul's and Rudy's business, it's predominantly private, there's no government funding, it has very little, almost no government funding for them.

And then when you go into the geographical diversity that again has a little bit of difference but you know, it's more market I would say spread, or let's say compared to rather than – you know the geographic spreads. I hope that answers your question.

Unidentified Analyst


Benjamin Loh

In terms of our let's say overall business?

Unidentified Analyst


Benjamin Loh

Again from a country perspective it's kind of difficult. Because if we look at America, which in terms of let's say bookings is still our biggest country, but I would say that maybe half of it is a the electronics business and the other half is – from the Material Science, Life Sciences and to some extent Natural Resources. So there it is – I would say the amount of funding it's probably not so much. We don't have that – really break down into different areas.

Unidentified Analyst


Don Kania

We've talked a little about government funding numbers and last year looking at the consolidated total the U.S. government piece was less than 3% of our orders. And in the first quarter the number was smaller than that, so we said the U.S. business isn't good from those research, we still set record orders in Q1.

Unidentified Analyst


Don Kania

So in the instruments, so Life Sciences, Material Sciences, how much is replacement, how much is new customers? Benjamin you want to take stab at that anyone, I'll make something up but you're closer to the truth.

Benjamin Loh

Sorry, which business are you referring to?

Unidentified Analyst


Benjamin Loh

That's a – we do have some statistics, but I don't have, because we're trying for example who is actually a new customer. But I guess your question is even deeper than that, you want to know in general, replacement. I think for Materials Science there's very little replacement, because when the professionals buy a piece of equipment they try to use it for years.

Similarly for probably Life Science, I think for electronics, yes, it's probably the one where we see most in terms of replacement because of the technology changes, you don't have a choice, and in terms of percentage it's kind of difficult to give that whether it's a replacement of all tools and so on. It's probably not that big but in electronics it's probably the biggest, the rest, I would say very very limited. Some of all university customers they use the equipment for really, like 20, 25 years. I've seen some of them they are really really old.

Unidentified Analyst


Don Kania

(Inaudible) just took your answer.

Benjamin Loh


Don Kania

But I'm not going to tell you, is he okay, he can tell his guys no, okay. That's good. No, so the question is about pricing on the well site, the service contracts and I have to say, unfortunately, it's a competitive situation and I wouldn't be surprised if some of the people on the web are interested in that same question, and so there I have to be demure.

The other question which is about the SEM, is how do we model that. And there I can say we looked at, you start globally as a TEM at number of well sites, number of concentrators and in the mining side it's concentrators and leaching facilities, but two ways that they extract metals out of rock. And so you start with that, but then you hone down to which ones are really realistic for us to play a role in. And it's not all of them, right, I mean there are some mining operations, where we just really don't have a very strong value proposition, and then in the same case in – oil and gas.

In oil and gas I think it is – it's early – so we're learning but I think that there are a couple specific segments we called out in a high-temperature, high-pressure, and shale, where we think we have probably a very strong starting value proposition. So that's the way the SEM is done and then it's calculated then based on how many days of the year we think the systems will be used and how many sites so that's something.

Let's see who…

Unidentified Analyst


Don Kania

So the question refers to the aspects business, which makes the rugged microscopes, that we talked about earlier, that we acquired, as early this year. How should we think about, there are other customers, one, will maintain those customers, and what you should think and what we should think are probably different things, okay.

We bought it on the basis of put in Paul's business, and I would just say we're examining whether there are other industrials opportunities for that platform, TBD. So don't model anything and we'll have a conversation probably next year about that.

Unidentified Analyst


Don Kania

But the customers – the competitive in the sense of we're talking to customers about what we're going to charge them for it and different customers may –

Unidentified Analyst


Don Kania

Well, look there's two aspects to it, one of course, you know, we ramped up our pricing, generally about what we do. But the competition is, there's the old way versus what we're offering, okay. They – our customers are transparent to that, and they part two is that (Inaudible) and others are purporting to be in the business, and we claim that they're really don't have the capability to be in the business and we don't want to entice them or direct them to what kind of models will be successful.

Unidentified Analyst

Given that more and more manufacturing is (Inaudible) specifically (Inaudible), how you're going to protect your intellectual property?

Don Kania

The question is about protecting our intellectual property, well we feel very comfortable with our EU and EU related countries in terms of intellectual property so we don't feel that we're putting ourselves at risk by having more activities in a place like the Czech Republic.

Certainly the U.S. and the Netherlands we feel similarly about, I think as we look to the rest of the world, over time, then we may have to expand into some of those regions, intellectual property is important to our business, but ultimately – it's speed. It's all about how fast we develop new things and intellectual is important but it's really the know-how the capabilities think about Life Sciences, think about Natural Resources those are important things that require an end to end support structure.

So we filed for patents we execute we try – we do our best to protect, all those things – but I really like my personal view is over the long-run you've got to meet faster you've got to better and – that's a piece of puzzle but as I've learned in my career, litigation, even in those areas where IP is well respect it's still a crack shoot. And you just don't want to play – that's not a game you want to play unless you have to. More questions.

Unidentified Analyst


Don Kania

So the question is – un Natural Resources that we feel like we have a solution, available and I would say the answer is yes, we have a solution and we think it – as Paul described in the served market expansion, we see roots to show that that solution holds value to the customer.

Now we think about our cash management strategy, we also see in this process that they're maybe some other things that you want to wrap around this to provide even a more complete solution to the customers, maybe measuring some other things and we don't want to comment on what those are, but I would say, don't be surprised over time to see us add to the space but not in the sense of – in the sense of expanding our footprint, along with the solutions that we've already identified.

Unidentified Analyst


Don Kania

All I'll say is in terms of – the question is about looking at things around the surface logging that we do. We're actively doing that and that's all I'm going to say. You probably can't tell them no.

Unidentified Analyst


Don Kania

Yeah, I think you should see, particularly that that new long-term mile, well it's really a little bit a big fraction of that's paced by that – expansion of the Czech Republic factory so that will really be a bit back-end loaded. And so I think, so when you look at Ray's breakout, and if Ray if you want to jump in please do, but that's probably one of the major drivers and then the timing is – if you think about it's really two quarters after we finished loading the factory, so back-end loaded.

Unidentified Analyst


Don Kania

It will be lumpy but if you look at our – I think history is probably a pretty good predictor, so if you look at our revenue growth over the years, you know there's – symbolitility around that 12% line, I – it's probably could be something like that – that's a hard call, past is probably the best.

Unidentified Analyst

Collaborate on the (Inaudible) without giving me a number, how do you think about it

Don Kania

Well, I think we certainly have a view of the value of the company and on then a regular exercise at the board level, we bring in an occasionally an outside banker to tell – you know tell us their view, I'm not allowed that comment, really, we just get a pure independent view how from a discounted cash flow multiple, peers, you know all that kind of – what the stock price kind of shakes out to be, so we have a sense of what the value should be and w use that in guiding how we said an internal metrics of buybacks versus price.

Unidentified Analyst


Don Kania

Yes, we did consider that and we chose this particular approach. The question was – did we consider a special dividend and the answer is we considered it.

Unidentified Analyst


Don Kania

So the question is would we consider a split to make it psychologically more attractive.

Unidentified Analyst


Don Kania

Yeah, and…

Unidentified Analyst


Don Kania

Yeah, it's not on the radar screen is what I'll say and it's that – we might put a little more intellectual effort into it by (Inaudible), I think there's lot of stocks out there that have, pretty high – three digits in their pricing – right now I think it's high on the list of things to focus on.

Unidentified Analyst


Don Kania

Yeah. We've got to be a little bit, obviously there's proprietary and unsolved issues there, the question is about IP cross-licensing agreement, if you read our disclosure materials, you'll some little more input, why (Inaudible) you'll get some insights into that that really means. But I'm really not going to comment further here. Other questions? In the back?

Unidentified Analyst


Don Kania

So you want to talk to Paul not to me is that?

Unidentified Analyst


Don Kania

Paul, why don't you.

Paul Scagnetti

So there's a couple of companies mentioned in and – what them familiar with the other – honestly I'm not --

Unidentified Analyst


Paul Scagnetti

Yeah, so the question is about what are the competitors and other – there are a variety of technologies that come together to create a model of a reservoir when exploration projects are going on.

So we are certainly not the only – the only technology that's used – and I can give you more, I could probably elaborate more on how – what I always say, when people say what's the unique thing, I say it's petro-graphic analysis which technically means we're actually looking at the rocks there are a variety of other techniques like seismic, wireline, that go into giving responses to what people thing is under the ground.

So that's the rough relationship is that – there'll be many things to map in area and then this is actually looking at the rocks that are coming up through the drill.

Unidentified Analyst


Paul Scagnetti


Don Kania

Why don't you take it offline.

Paul Scagnetti


Don Kania

What I want to suggest is you take it offline, with Paul. And I'd like to close this though, we're a little bit afternoon, and I'd like to remind you there's games to be played with Mr. Williams in the corner if you want to test your skill at identifying imagery. There's lunch for everyone, don't say there's no free lunch, there's a free lunch here today for everybody. And again I would like to thank all of you for taking the time and attention to come visit. I'd like to thank FEI's management who will be available for further discussions for the next hour or so. So thank you all very much for coming today. Thank you for dialing in and listening if you're online and enjoy your lunch for those who are here. Thank you.

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